<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 OF THE
SECURITIES ACT OF 1934
For the Fiscal Year Ended
JUNE 30, 1999
COMMISSION FILE NO. 0-22191
CCA COMPANIES INCORPORATED
(exact name of Company as specified in its charter)
Delaware IRS NO. 65-0675901
(State of Incorporation) (IRS Employer Identification)
9130 SOUTH DADELAND BLVD., SUITE 1602 MIAMI, FLORIDA 33156
(Address of principal executive offices)
(305) 670-3838
(Company's telephone number, including area code)
--------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each Class: Common Stock $0.001 par value
Indicate by check mark whether the Company (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act during the
preceding 12 months (or for such shorter period that the Company was required to
file such reports) and (2) has been subject to such filing requirements for the
past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers in response
to Item 405 of Regulation S-K of Section 299.405 of this chapter is not
contained herein, and will not be contained, to the best of the Company's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the Company's common stock held by
non-affiliates (all persons other than executive officers or directors) of the
Company on May 23, 2000 was $1,736,223.
The Company's common stock outstanding at May 23, 2000 was 16,326,666
shares.
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I
Page
----
<S> <C> <C>
Item 1. Business............................................................................................... 4
Company Overview....................................................................................... 4
Divisional Overviews................................................................................... 6
Casino Division........................................................................................ 6
Hotel Management Division.............................................................................. 7
Sakhalin Project....................................................................................... 9
Food Preservation Technology...........................................................................12
Insurance..............................................................................................12
Employees..............................................................................................12
Segments/foreign operations............................................................................12
Item 2. Properties.............................................................................................12
Item 3. Legal Proceedings......................................................................................12
Item 4. Submission of Matters to a Vote of Securities Holders..................................................14
PART II
Item 5. Market for Common Equity and Related Stockholder Matters...............................................15
Item 6. Selected Financial Data................................................................................17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..................18
Change in Fiscal Year..................................................................................18
Results of Operations..................................................................................19
Liquidity and Capital Resources........................................................................23
Subsequent Events......................................................................................24
Year 2000 Compliance...................................................................................25
New Accounting Standards...............................................................................25
Item 7a. Market Risk............................................................................................26
Item 8. Financial Statements...................................................................................26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................26
PART III
Item 10. Directors and Executive Officers of the Registrant.....................................................27
Compliance with Section 16(a) of the Securities Exchange Act of 1934...................................30
Item 11. Executive Compensation.................................................................................30
Summary Compensation Table.............................................................................31
Option Grants for the Twelve Months Ended June 30, 1999................................................32
Item 12. Security Ownership of Certain Beneficial Owners and Management.........................................35
Item 13. Certain Relationships and Related Transactions.........................................................37
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART IV
<S> <C> <C>
Item 14. Exhibits, Financial Statements and Schedules, and Reports on Form 8-K..................................40
Financial Statements...................................................................................40
Exhibits...............................................................................................40
Signatures.............................................................................................44
</TABLE>
3
<PAGE>
This Annual Report on Form 10-K contains "forward looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All statements
other than statements of historical fact included in this document regarding the
Company's strategies, plans, objectives, expectations, and future operating
results are forward-looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable at this
time, it can give no assurance that such expectations will prove to have been
correct. Actual results could differ materially based upon a number of factors
including but not limited to, development stage company, working capital
deficit, accumulated deficit; significant capital requirements; need for
additional financing; going concern qualifications; risks associated with
geographic expansion and new lines of business; risks inherent in international
operations, risks relating to the Sakhalin Project; lack of a gaming license,
possible change in control; political and economic factors; risks of foreign
legal systems; business infrastructure issues; potential conflicts with other
stockholders in the Company's projects; restrictions and controls on foreign
investments and acquisitions of majority interests; government regulation;
construction risks, nature of hospitality and gaming industry; dependence on
successful hotel and gaming operations; collectability of casino receivables;
effects of inflation, currency fluctuations; competition; reliance on advances
and dividends from subsidiaries; dependence on personnel associated with
developing the Sakhalin Project; lack of key man insurance; volatility of prices
of shares; potential adverse impact on market price of shares, shares eligible
for future sale, additional registered securities; potential adverse effect of
future issuances of authorized preferred stock; potential adverse effect of
Underwriter's Warrants and other Warrants; classified board of directors;
limited public market and liquidity, and other risks detailed in the Company's
Securities and Exchange Commission filings.
Item 1. Business
COMPANY OVERVIEW
CCA Companies Incorporated was incorporated under the laws of the State
of Delaware on March 6, 1996 as Conserver Corporation of America and changed its
name on December 2, 1997. The current active business of CCA Companies
Incorporated (with its subsidiaries, the "Company") is (i) operation of a gaming
casino in Suriname 50% owned by the Company, and (ii) development of a casino
and hotel project in Sakhalin in the Russian Federation.
The Company's original principal business was food preservation
technology. In November 1999, however, the Company's Board of Directors
determined that it would discontinue activities and efforts with respect to the
Company's food preservation business.
After mid-1997 the Company entered into various agreements (i) to
acquire and operate gaming casinos in Hungary and Suriname; (ii) to obtain (over
about two years) eight hotel management operating contracts, mostly for hotels
in Asia (all of which have been terminated); and (iii) to build and then to own
and operate, a hotel and casino in Sakhalin, a Russian Federation island just
north of Japan (the "Sakhalin Project").
4
<PAGE>
In September 1998 the Company acquired a fully operating casino in
Budapest, Hungary. This casino was closed in October 1999 upon the expiration of
its license. A Suriname casino, owned by a 50% joint venture of the Company, is
now operating in permanent quarters in the hotel where the Company previously
maintained temporary facilities for its casino operation. The Company is also
seeking to acquire, develop and/or operate other casinos abroad.
Until November 1998, the Company held hotel operating contracts for
three open hotels with a total of approximately 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 received operating
fees for one of the open hotels commencing in January 1998 and for two of the
open hotels commencing in March 1998.
As a result of the failure of the other parties to the hotel management
agreements to deliver to the Company physical control and practical management
power over two open hotels, and their notice to the Company that renovation or
construction of five other hotels was deferred and being reviewed, the Company
began negotiations with those parties over the status of the hotel management
agreements. In November 1998, the Company reached a settlement, described below,
terminating the hotel management agreements and all then existing hotel
operating contracts, and exchanging mutual releases of related obligations. The
Company received $450,000 cash, was returned 700,000 shares of its Common Stock,
retained $1,625,000 in payments of management fees and loans, and the other
parties agreed to assume other obligations of the Company's hotel management
operation estimated at approximately $350,000. Consequently, as of November 4,
1998 the Company had no active hotel management or operation business.
Until March 1998 the Company was for accounting purposes deemed a
development stage company. Receipt of revenues, primarily from hotel management
operations, technically ended that status. However, the Company's operations are
still subject to all of the risks inherent in the establishment of new business
enterprises, including the need to obtain financing, and the uncertainty of
market acceptance of its products and services. The Company has incurred losses
since inception. From March 1996 to June 1997 the Company did not have any
revenues. During the year ended June 30, 1998 the Company had revenues of
approximately $640,000 attributable to its hotel management operations commenced
in January 1998 and discontinued in November 1998. During the year ended June
30, 1999 the Company had revenues of $5.9 million of which approximately $5.5
million was attributable to the Company's casino operations in Suriname and
Budapest with the remainder attributable to the Company's discontinued hotel
management operations. The Company's accumulated deficit at June 30, 1999 was
$27.1 million (which included $7.6 million of non-cash compensation charges
related to the value attributed to stock options and warrants issued by the
Company).
In September 1999, the Company's cash flow began to improve. Increasing
revenue commencing with the March 31, 1999 grand opening of the Company's
permanent Suriname Palace Casino allowed the Company to pay in full its casino
construction contractor and in August 1999, to repay in full a $750,000 short
term loan provided by its joint venture partner.
5
<PAGE>
Repayment of the loan, which had been accruing interest at a rate of four
percent (4%) per month, made future operational net cash flow from the casino
available for other purposes (including payments to the Company for accrued
management fees and other obligations). Consequently, from September 1999
through April 2000, the Suriname joint venture has paid to the Company on a
monthly basis an average of approximately $300,000 for accrued management fees
and other obligations.
The Sakhalin Project is currently in the development stage and requires
the Company to obtain substantial financing to progress further. Sakhalin Island
is a Russian territory located just north of Japan. This new hotel/casino is
intended to attract gaming clientele from Japan, China, Korea, and the Russian
mainland. The Sakhalin Project involves plans to develop a $140 million dollar
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.
The related casino would initially have 70 tables and 350 slot machines.
On November 16, 1999 the Company's securities were delisted from the
Nasdaq SmallCap Market. The Company's Common Stock is currently traded in the
Pink Sheets of the National Quotation Bureau.
DIVISIONAL OVERVIEWS
Casino Division
The Company's subsidiary and joint venture are currently operating one
casino in Suriname. The Company anticipates eventually operating the casino in
the Sakhalin Project, if and when that project is built and licensed, and is
also seeking to operate or acquire interests in other casinos outside the U.S.
The Company has one officer (Mr. David Hartley) and 234 employees engaged
directly in casino operations.
The Company's Suriname casino, part of a joint venture, occupies two
leased floors totaling about 20,000 square feet in the Plaza Hotel, which is a
downtown hotel in the capital city of Paramaribo. The Company began operations
of its Suriname casino in October 1998 in temporary quarters. The permanent
casino was completed and became operational in March 1999. The casino has 20
gaming tables, 161 slot machines and a 50-seat restaurant. There are other
casinos in Paramaribo, the capital city, but only two compete with the Company
for the same local gaming clientele.
The Suriname casino was constructed by the Company pursuant to an
agreement with a local company that owned the casino license, and the casino
license is now held by a local joint venture company owned 50% by the Company.
The joint venture company entered into a Suriname Casino Management Agreement in
April 1998 for the Company to operate the Casino for fifteen years at a base fee
equal to 3% of gross revenues calculated on an annual basis and payable monthly,
plus an incentive fee of ten percent of gross operating profits. The joint
venture company leased the casino premises from the hotel owner, its joint
venture partner, for fifteen years beginning February 1998 for $200,000 per
year, subject to locally based escalation.
6
<PAGE>
The Orfeum Casino in Budapest, Hungary was acquired in September of
1998 when the Company's subsidiary Dorsett Hotels and Resorts, Inc. acquired a
95% equity interest in Roulette Kft. ("Roulette"), the local company that owned
the rights to the casino. 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 issued 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 the September
1998 closing.
In December 1998, the Company entered into an agreement with A.G.M.
International LTD ("AGM"), an 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 received 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 was due to
expire, and (v) provide for the management and operation of the casino through
November 1, 1999.
During 1999, the Hungarian Gaming Board made a decision to reduce the
number of casino licenses to three, down from the nine existing licenses which
existed at the time the Company acquired its interest in the Orfeum casino. The
Company together with AGM submitted an application during 1999 in an attempt to
obtain one of the three licenses that the gaming board would be granting, but
was unsuccessful. Consequently, the casino was closed at the end of October
1999. At June 30, 1999, the Company fully reserved the balance of its loans to
Roulette Kft. which totaled approximately $610,000.
The Company's Budapest Casino occupied approximately 5,000 leased
square feet in the downtown Beke Radisson Hotel. The casino was in full
operation with about 11 gaming tables and 20 slot machines until its gaming
license expired in November 1999. The Company has not had any operations in
Hungary since November 1999 and none are currently contemplated.
Hotel Management Division
Until November 1998, the Company had one officer (Mr. Kai Michaelsen)
and three employees engaged directly in hotel management and had hotel operating
contracts for three open hotels, only one of which it actively managed (the
Dorsett Regency Hotel in Kuala Lumpur, Malaysia) because the owner failed to
turn over the other hotels to the Company for management. The Company's
management office was located in leased offices in Kuala Lumpur. Mr. Michaelsen
was previously employed by the hotel owners.
7
<PAGE>
When the Company settled and terminated its hotel management agreements
in November 1998, various obligations related to its hotel management operations
were taken over by others.
To make its initial entry into the hotel management and operating
business, from mid-1997 and into early 1998 the Company entered into two hotel
management agreements (as amended). One was with Dorsett Hotels and
International Ltd. ("DHI"), a company represented to be owned by David Chiu, and
one with Far East Consortium International Ltd. ("FEC"). Under these agreements,
the Company was granted the right (directly or through a subsidiary) to be the
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 hotel operating
contracts to be entered into with the owners of the various hotels.
In July 1998, FEC advanced the Company $500,000 which the Company
treated as a loan to be repaid in six months together with interest at a rate of
prime plus 1%. In the alternative the principal and interest could have been
repaid by way of an offset against management fees. In July 1998, FEC 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 DHI 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 entered into for the services of Mr.
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 independent review of Mr.
Michaelsen's performance as the President of the Company's hotel management
division including an extensive investigation into the allegations
8
<PAGE>
made by FEC, Mr. Michaelsen's employment was officially terminated in April
1999. See "Item 3 - Legal Proceedings."
Other Agreements
In August 1997, the Company entered into a two-year Casino Consulting
Agreement with Star Casinos Limited ("Star") as consultant, primarily to obtain
the services of Mr. David Hartley who is an experienced casino consultant. He is
now the full-time President of the Company's Casino Division. Star is owned and
controlled by Mr. Hartley. The active term of the agreement began in October
1997 and ended in December 1999 pursuant to which the Company paid an annual
consideration of $250,000 per year. In October 1997, the Company granted to Star
Plan options to purchase 100,000 shares of Common Stock at a price of $6.50 per
share, which was reduced to $1.50 per share in September 1998 and then to $.25
per share in December 1999. The options vested and became exercisable in 2 equal
installments, on each succeeding October anniversary. The agreement imposed
non-compete and non-solicitation restrictions on Star for two years after the
term. Upon the expiration of the Consulting Agreement, the Company issued Star
250,000 shares of Stock in lieu of a $250,000 cash bonus payment which Star was
entitled to receive under the terms of such agreement. The Company currently
continues to engage Star on a month-to-month basis to maintain Mr. Hartley's
services, for which the Company pays $250,000 per year.
Sakhalin Project
The Company entered into a stock purchase agreement on October 24,
1997, (the "Sakhalin Agreement") with Sakhalin General Trading Investments
Limited ("SGTI") and an assignment agreement with Sovereign Gaming and Leisure
Limited ("Sovereign") on December 12, 1997, each a limited liability company
organized under the laws of Cyprus. Pursuant to the Sakhalin Agreement, the
Company would acquire all of the outstanding shares of SGTI and SGTI's rights
and interest in a project to develop the Sakhalin Project, and SGTI's ownership
interest in 65% of Sakhalin City Center Ltd. ("SCC"). SCC is a closed joint
stock company incorporated under the laws of the Russian Federation that holds
certain rights, including a guarantee by the city of Yuzhno-Sakhalinsk (the
"City") to issue a gaming license to SCC. In addition, the assignment agreement
calls for all rights and interest to or in the Sakhalin Project held by
Sovereign, including certain operating and project management agreements with
respect to the Sakhalin Project (collectively, the "Shares and Rights") be
conveyed to the Company.
On December 12, 1997, the Company completed the acquisition of 100% of
the shares of SGTI in exchange for 2,000,000 shares of its common stock. In
addition the Company acquired all rights and interests of Sovereign in exchange
for 200,000 shares of common stock to the owners of Sovereign.
In addition, two former directors of the Company were granted options
to purchase 300,000 and 200,000 shares of common stock at an exercise price
equal to $6.125 per share in exchange for their services in connection with the
acquisition of the Sakhalin project ("Sakhalin Options"). The Sakhalin Options
subsequently expired without being exercised.
9
<PAGE>
Pursuant to the Sakhalin Agreement, SCC will develop, subject to
obtaining financing, a $140 million dollar 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. The related casino would
initially have 70 tables and 350 slot machines. The City will provide the land
and an existing ski resort under a 101-year lease, at no annual cost. Dorsett
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.
Although, there are currently several small casinos operating on the
island, the City has committed contractually that it will not permit them to
increase their floor areas or extend the range of their operations without the
written approval of SCC. In addition, the Company will also have certain rights
to participate in the development and management of any future casinos within
the jurisdiction of the City of Yuzhno-Sakhalinsk.
The Sakhalin Agreement provides that, upon request of the Company,
Sovereign agrees to become project manager during the construction phase of the
Sakhalin project, subject to an agreement on reasonable compensation for such
services, which shall not exceed the lesser of 5% of the construction cost of
the Sakhalin Project or $5,000,000. Subsequent to the Sakhalin agreement, Mr.
Dallas Dempster a paid consultant to Sovereign was recruited to be the President
and CEO of CCA. Accordingly it is the Company's current intent not to employ
Sovereign and to manage the construction phase of the Sakhalin project directly.
On October 2, 1997, the Company entered into an agreement (the
"Development Services Agreement") with Mr. David Chiu for certain development
services by Mr. Chiu to the Company in connection with the Sakhalin Project,
including using his best efforts to procure or secure the necessary debt
financing and guarantees for the complete turnkey construction of the Sakhalin
Project. The Development Service Agreement expired in August 1998 without Mr.
Chiu rendering any services.
On September 23, 1998, the Company entered into a letter of intent with
JSC Rosneftegazstroy ("RNGS"), which is a large Russian construction company.
The letter of intent was aimed at RNGS guaranteeing the financing of a turnkey
construction contract on Sakhalin Project and acting as a subcontractor. The
Company and RNGS never contractually acted on the letter of intent and it
subsequently was abandoned.
The Company is currently party to an agreement dated June 25, 1999
contemplating reorganization of the ownership structure of SCC if its current
loan application for financing of the Sakhalin Project is approved. The proposed
restructuring assumes one hundred percent (100%) ownership of the Sakhalin
Project by SCC. SGTI's equity interest in SCC will be increased to eighty
percent (80%), and the remaining SCC equity will be held by the City and the
surrounding regional authority, the Sakhalin Oblast Administration ("Oblast").
The City and Oblast will not be involved in management of SCC or the Sakhalin
Project.
The Company will share management and ownership of SGTI, and thus SCC,
with Arter Group Limited ("Arter") and Valmet S.A.("Valmet"). The Company will
own 50% of SGTI and effective ownership of 40% of SCC. Arter and Valmet will be
responsible for negotiating with
10
<PAGE>
financial, governmental, regulatory and other entities and institutions on
behalf of the Company. Arter, whose focus will be entities within the Russian
Federation, will own 31.25% of SGTI and effective ownership of 25% of SCC, while
Valmet, who will concentrate on those outside the Russian Federation, will own
18.75% and effective ownership of 15% of SCC. Oblast and the City will own the
remaining 20% of SCC. SGTI will have a five-member board of directors. Two
directors will be chosen by the Company, two by Arter and one by Valmet. The
Valmet director will act as chair, although such director will not be allowed to
vote in the event of a tie. The Company, Arter and Valmet will bear their own
expenses under the proposed arrangements, although the Company will be
responsible for most payments to third parties. Until adequate funding is
achieved, which is defined as 70% of the total estimated cost of the Sakhalin
Project, the Company has the right to terminate the proposed arrangements upon
sixty days notice. The proposed arrangements will be effective from the day of
acceptance of adequate funding for the project and following signing of the
agreement memorializing the arrangements by all parties.
When the Company acquired the stock in SGTI, its subsidiary SCC, and
Sovereign Gaming and Leisure Ltd., a Cyprus company, already had a 1994
Construction Management Agreement (for Sovereign to manage the construction of
the Sakhalin Project) and a 1994 Operation Management Agreement (for it to
operate the Project). As part of the SGTI transaction, Sovereign assigned both
agreements to the Company, along with Sovereign's other rights relating to the
Project, and received 200,000 shares of the Company's Common Stock. The Common
Stock was valued at $5.25 per share and thus the value attributed to the shares
was $1,050,000. Consequently, the Company is currently the holder of the rights
to manage the development and construction of the Sakhalin Project, and upon its
completion, to operate and manage it. Under the 1994 Construction Management
Agreement, SCC is to pay the Company a project management fee of 5% of the
estimated cost of the Project for its general office expenses and management
supervision, a significant portion of which may be paid to the entity that
ultimately constructs the Sakhalin Project.
The Sakhalin Project (other than its financing) has been managed by SCC
in Sakhalin City, primarily by Mr. Valery Mozolevsky, who has had long-term
employment with SCC and is experienced in the Project. In August 1998, the
Company retained the services of an experienced project manager that will
oversee and manage the project with Mr. Mozolevsky. If the Sakhalin Project
substantially proceeds, SCC (and the Company) may have to substantially expand
relevant management and staff, and obtain consultants and contractors for
project design, construction and management. Mr. Dallas Dempster was, and still
is, one of two Executive Directors of SCC. Mr. Valery Mozolevsky was, and still
is, the other Executive Director.
The casino and hotel project in Sakhalin requires the Company to get
substantial financing to progress further. The Company has continued 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. In November
1999, the Company submitted a loan application for financing of the Sakhalin
Project to Sberbank - Savings Bank of the Russian Federation, which is currently
being processed.
11
<PAGE>
Food Preservation Technology
The Company's initial business involved developing a product to extend
the life of harvested fresh fruits, vegetables and flowers. In November 1999,
however, the Company's Board of Directors determined that it would discontinue
all activities and efforts with respect to the Company's food preservation
business. The Board determined that the Company could not effectively develop a
sufficient market with the Company's food preservation technology.
Insurance
The Company currently maintains comprehensive general liability
insurance with coverage of $1,000,000 per occurrence and umbrella insurance of
$2,000,000 per occurrence. There can be no assurance that the Company's coverage
will be adequate to protect the Company from all potential losses.
Employees
As of March 31, 2000 the Company had 240 employees, including its 3
executive officers.
Segments/foreign operations
See Note 12 to the Company's consolidated financial statements.
Item 2. Properties
The Company maintains its principal executive offices at 9130 S.
Dadeland Boulevard, Suite 1602, Miami, Florida 33156. This office space occupies
approximately 1000 square feet, and is subject to a 3-year lease, commenced
August 1999, at a monthly rental of $2,000.
The Company's Sakhalin Project is managed from a 450 square foot leased
office in Sakhalin City pursuant to a one-year lease which expires on March 31,
2000. The monthly rental for the office is $1,050. The Company believes its
existing facilities are adequate to meet current needs. The Company's casino
properties are described above. See "Casino Division."
The Company believes its existing facilities are adequate to meet
current needs.
Item 3. Legal Proceedings
Except as otherwise described below, there are no material pending
legal proceedings to which the Company or any of its subsidiaries is a party or
to which any of their material property is subject. The Company knows of no such
proceedings contemplated by any government authorities, or of any material legal
proceeding to which a director, officer or affiliate of the Company or any owner
of record or beneficially of more than 5% of its Common Stock (or any
12
<PAGE>
associate of any of the same) is a party adverse to the Company or any of its
subsidiaries or in which any such person has a material adverse interest to the
Company.
On termination of the Company's hotel operating contracts, FEC agreed
to assume any and all future financial obligations with respect to the
employment and consulting agreements the Company entered into for the services
of Mr. 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. 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
AAA demanding a payment of $250,000 from the Company as a liquidated damages
fee. Fox Haven alleges that the Company breached a letter of agreement by
failing to secure adequate collateral for the proposed
13
<PAGE>
loan according to the terms of that 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 that 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 Company believes, in reliance upon its counsel, that Fox Haven's
claims against the Company have no merit. The arbitration hearings are expected
to commence in July of 2000.
Item 4. Submission of Matters to a Vote of Securities Holders
No matters were submitted by the Company to a vote of security holders,
through the solicitation of proxies or otherwise, during the last quarter of the
fiscal year ended June 30, 1999.
14
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Price Range of Common Stock. Between June 6, 1997 (the date the Common
Stock was first listed), and November 16, 1999 the Common Stock was quoted on
the Nasdaq SmallCap market under the symbol "RIPE" or "RIPEE". Prior to June 6,
1997, there was no market for the Company's Common Stock. Since November 16,
1999, and prior to that date, the Company's Common Stock has been traded on the
Pink Sheets of the National Quotation Service.
The following sets forth, for the quarterly periods indicated, high and
low per share bid information for the Common Stock reported by Nasdaq on the
Nasdaq SmallCap market:
For the Quarterly Periods
Beginning July 1, 1997
ending December 31, 1999
High Low
---- ---
July 1--Sept. 30, 1997...................................$11.00 $5.50
Oct. 1--Dec. 31, 1997.................................... 11.625 5.375
Jan. 1--March 31, 1998................................... 8.8125 4.50
April 1--June 30, 1998................................... 8.00 4.00
July 1--Sept. 30, 1998................................... 4.125 1.25
Oct. 1--Dec. 31, 1998.................................... 1.9375 0.28125
Jan. 1--March 31, 1999................................... 1.1875 0.4375
April 1--June 30, 1999................................... 0.75 1.375
July 1, 1998--Sept. 30, 1999............................. 1.0938 0.375
Oct. 1 - Nov. 16, 1999................................... 0.625 0.28125
The high and low per share closing price information for the Common
Stock reported on the Pink Sheets (i) during the period commencing November 17,
1999 and ending December 31, 1999 was $.37 (High) and $.12 (Low), (ii) during
the period commencing January 1, 2000 and ending March 31, 2000 was $.40 (High)
and $.13 (Low), and (ii) during the period commencing April 1, 2000 and ending
May 23, 2000 was $.35 (High) and $.13 (Low)..
(The above prices reflect inter-dealer prices, without retail mark-up,
markdown or commission, and may not represent actual transactions. Beginning in
1998 the Small Cap market began quoting on the decimal system.)
On November 16, 1999 the Company's securities were delisted from the
Nasdaq SmallCap Market. The Company's Common Stock is currently traded in the
Pink Sheets of the National Quotation Bureau.
Approximate Number of Security Holders. As of March 31, 2000, the
Company had approximately 775 registered holders of record of its Common Stock.
15
<PAGE>
Dividend Information. The Company has not paid any cash dividends to
date and does not anticipate or contemplate paying dividends in the foreseeable
future. It is the present intention of management to utilize all available funds
and profits, if any, in the development of the Company's business.
Sale of Unregistered Securities. Information required by Item 701 of
Regulation S-K (as to unregistered equity securities sold during fiscal 1999),
was previously reported in the Company's Quarterly Reports on Form 10-Q for the
quarterly periods ended December 31, 1998 and March 31, 1999.
The following information is furnished in connection with unregistered
securities sold or issued by the Company since the filing of the Company's Form
10-Q for the quarter ended March 31, 1999 and prior to June 30, 1999:
On May 15, 1999, the Company issued 116,813 unregistered shares of its
Common Stock to Casino Bahia de Cadiz ("Cadiz") and Teresa Juste Picon ("Picon")
pursuant to the terms of an agreement dated April 3, 1998 as amended on June 5,
1998 and September 16, 1998 (the "Agreement). The Agreement provided that
additional shares would be issued to Cadiz and Picon if the average market price
for the Company's shares for the 10-day period preceding March 1, 1999 was less
than $7.00 per share. The Agreement also provided that the total market value of
the additional shares to be issued plus the shares previously issued to Cadiz
and Picon at the September 10, 1998 closing was to be equal to $125,000.
Consequently, since the average market price for the 10-day period preceding
March 1, 1999 was $0.9282, Cadiz and Picon were entitled to a total of 134,670
shares of the Company's Common Stock. Cadiz and Picon previously held 17,857
shares and were therefore entitled to receive an additional 116,813 shares of
Common Stock.
On May 10, 1999, the Company sold 200,000 unregistered shares of its
Common Stock at a purchase price of $0.75 per share to Mr. William Rouhana which
was under the $.94 closing market price of the shares on the previous day. Mr.
Rouhana also received warrants to purchase 100,000 shares of Common Stock at an
exercise price of $1.00 per share exercisable at any time prior to May 9, 2000.
On June 4, 1999, the Company sold 100,000 unregistered shares of Common
Stock to Mr. Mark Reed at a purchase price of $1.00 per share which was under of
the $1.19 closing market price of the shares on the previous day. Mr. Reed also
received warrants to purchase 50,000 shares of Common Stock at an exercise price
of $1.00 per share exercisable at any time prior to the completion of one year
after the date that the resale of the underlying shares is registered with the
SEC.
On June 15, 1999, the Company sold 66,667 unregistered shares of Common
Stock to Mr. Robert Flynn at a purchase price of $.75 per share which was under
the market price of the shares on that date. Mr. Flynn also received warrants to
purchase 66,667 shares of Common Stock at an exercise price of $1.00 per share
exercisable at any time prior to June 14, 2002.
16
<PAGE>
On June 22, 1999, the Company issued to Valmet S.A. 300,000
unregistered shares of Common Stock and the warrants to purchase 150,000 shares
of Common Stock as described below as full and final payment on all amounts due
totaling $300,000 for services provided and expenses incurred by Valmet S.A. up
to June 22, 1999. The value of the shares and warrants recorded by the Company
was $250,000 calculated as follows:
(i) 150,000 warrants (with an exercised price of $1.00 per share)
which had a Black Scholes value of $25,000; and
(ii) 300,000 shares at the June 22, 1999 market price of $.75 per
share which had a value of $225,000.
On December 2, 1999, the Company issued 250,000 shares of Common Stock
to Star in lieu of a $250,000 cash bonus payment which Star was entitled to
receive under the terms of a consulting agreement by and between Star and the
Company. The market price of a share of the Company's Common Stock on such date
was $.13.
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 6. Selected Financial Data
The selected financial data set forth below have been derived from the
audited consolidated financial statements of the Company, certain of which are
included elsewhere in this Report, and should be read in conjunction with those
consolidated financial statements (including the notes thereto) and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" also included elsewhere herein.
17
<PAGE>
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
For the
Ten Month
Period Ended Year Ended Year Ended
June 30, 1997(1) June 30, 1998 June 30, 1999
---------------- ------------- -------------
<S> <C> <C> <C>
Revenues............................ -- -- $5,534,249
Operating expenses:
Marketing and promotion......... -- -- 360,572
General and administrative expenses -- 3,397,974 7,566,040
Compensation charges in connection
with issuance of stock options and warrants -- 921,569 783,000
------------ ---------- ---------
Loss from operations................ -- (4,319,543) (3,175,363)
Other income (expenses):
Write-down of assets -- -- (609,833)
Interest income (expense), net.............. (356,166) 213,840 (433,991)
------------ ---------- ---------
Loss from Continuing Operations before
Minority Interest.............................. (356,166) (4,105,703) (4,219,187)
Minority Interest.............................. -- -- (89,278)
------------ ---------- ---------
Loss from Continuing Operations................ (356,166) (4,105,703) (4,308,465)
------------ ---------- ---------
Gain (Loss) from Discontinued Operations
Food Preservation.......................... (8,205,901) (2,878,863) (425,175)
Hotel Management........................... -- (5,558,506) 141,550
------------ ---------- ---------
(8,205,901) (8,437,369) (283,625)
------------ ---------- ---------
Net Loss (8,562,067) (12,543,072) (4,592,090)
------------ ---------- ---------
Loss per Share of Common Stock:
Basic and diluted:
Loss from continuing operations (.08) (.45) (.34)
Loss from discontinued operations (1.75) (.92) (.02)
------------ ---------- ---------
Net Loss per share............................. (1.83) (1.37) (.36)
------------ ---------- ---------
Weighted average number of common shares outstanding. 4,667,490 9,175,536 12,607,037
------------ ---------- ----------
</TABLE>
----------
(1) The Company was incorporated on March 6, 1996 and initially adopted a fiscal
year ending August 31. During the 1997 year, the Company elected to change its
fiscal year end to June 30.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Change in Fiscal Year
The Company initially adopted a fiscal year ending August 31. During
the 1997 calendar year, the Company elected to change its fiscal year end to
June 30. Accordingly, the following discussion of the Company's results for the
year ended June 30, 1998 is compared to the ten months ended June 30, 1997.
18
<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 fund its
organizational expenses and the development and initial implementation of its
business plan for its food technology business. Commencing in August 1997, the
Company's activities also included organizational and fund raising efforts
relating to its entrance into the business of managing and owning hotels and
casinos. From March 6, 1996 to June 30, 1997 the Company had no revenues. During
the year ended June 30, 1998 the Company had limited revenues of $649,620
primarily attributable to the January 1998 commencement of its hotel management
operations.
On November 4, 1998, the Company reached a settlement agreement
terminating its hotel operating contracts with FEC and DHI and subsequently in
April 1999, dismissed all of its hotel management employees. Consequently, as of
April 1999 the Company had no active hotel management operating business.
Additionally, in November 1999 the Company's Board of Directors determined that
it would discontinue all activities and efforts with respect to the Company's
food preservation business since the Company could not effectively develop a
sufficient market with the Company's food preservation technology. Accordingly,
for the years ended June 30, 1999 and 1998 and for the ten-month period ended
June 30, 1997, the Company has reported all activities related to its food
division and hotel management operations separately as gains or losses from
discontinued operations. Consequently, the activities reflected in the
statements of operations as revenues and expenses from continuing operations
represent those revenues and expenses which are directly related or apportioned
to the Company's casino operations.
Results of Operations for the Year Ended June 30, 1999 as compared with the Year
Ended June 30, 1998
Loss from Continued Operations. The Company incurred a loss from its
continuing operations of $4,308,465 or $.34 per share during the year ended June
30, 1999 as compared to a loss of $4,105,703 or $.45 per share for the year
ended June 30, 1998. The increase in loss during the current year resulted from
the write-off of loans totaling approximately $610,000 made to the Budapest
casino which was closed in October 1999. This was partially offset by profitable
operations of the Company's Suriname casino which opened in October 1998 and
reductions in general corporate overhead expenses.
Revenues. During the year ended June 30, 1999, the Company generated
revenues of $5,534,249 attributable to its casino operations in Suriname and
Budapest which generated $4,864,989 and $669,260, respectively. For the year
ended June 30, 1998, the Company had no revenues attributable to its casino
operations. The Company's Budapest and Suriname casinos began operations in
September and October 1998, respectively.
19
<PAGE>
Marketing and Promotion. During the year ended June 30, 1999, the
Company incurred $360,572 in marketing and promotional expenses in connection
with its casino operations. The Company's Budapest and Suriname casinos began
operations in September and October 1998, respectively. Accordingly, the Company
had no such expenses for the year ended June 30, 1998.
General and Administrative Expenses. General and administrative
expenses were $7,566,040 for the year ended June 30, 1999 as compared to
$3,397,974 for the year ended June 30, 1998. Included in the current year's
expenses were $3,758,233 of operating expenses associated with the Company's
Suriname and Budapest casinos opened or acquired during the current year and
$3,807,807 for general corporate overhead including salaries, consulting,
professional fees and travel. The prior year expenses were attributable to
general corporate overhead after reclassification of approximately $2.8 million
related to expenses directly related or apportioned to the discontinued food and
hotel management operations.
Compensation Charges. During the year ended June 30, 1999, the Company
recorded non-cash compensation charges of $783,000 attributable to the (i)
reduction in exercise price of certain stock options and warrants previously
issued to officers, directors and employees and (ii) the issuance of stock
options to purchase 500,000 shares of Common Stock. For the year ended June 30,
1998, non-cash compensation charges were $921,569 related to the issuance of
stock options to purchase 390,000 shares of Common Stock and warrants to
purchase 100,000 shares of Common Stock.
Write-down of Assets. During 1999, the Hungarian Gaming Board made a
decision to reduce the number of casino licenses in Budapest to three. After the
Company's submission of an application for a new license was unsuccessful, the
casino was closed in October 1999 when its then current license expired. At June
30, 1999, the Company wrote off the balance of its outstanding loans to Roulette
Kft. totaling approximately $610,000.
Interest Income. For the year ended June 30, 1999, interest income was
$11,114, compared to $288,518 for the year ended June 30, 1998. This decrease in
the current year was due to additional cash being available for investment
during the prior year from the proceeds of the Company's public and private
offerings.
Interest Expense. For the year ended June 30, 1999, interest expense
amounted to $445,105 compared to $74,678 for the year ended June 30, 1998. The
current year's expense was primarily attributable to interest accrued on loans
made to the Suriname casino joint venture by the Company's joint venture
partner. The prior years expense related to amortization of debt discount
recorded for the value of Common Stock shares issued to convertible
debentureholders.
Minority Interest. The Company's Suriname casino joint venture began
operations during the current fiscal year. The Company controls the management
of the joint venture company and has a 50% equity interest. The casino's
operations are consolidated with those of the Company and after combining the
casino's current year operating results with the casino's prior year operating
loss attributable to pre-opening expenses, a minority interest has been recorded
for the current fiscal year of $89,278.
20
<PAGE>
Loss from Discontinued Operations of Food Division. In November 1999
the Company's Board of Directors determined that it would discontinue all
activities and efforts with respect to the Company's food preservation business
since the Company could not effectively develop a sufficient market with the
Company's food preservation technology. During the year ended June 30, 1999, the
Company had no revenues from its food division operations while expenses related
to efforts to sell or joint venture the food division were $425,175. The prior
year's period included nominal revenues of $9,879 and marketing and
administrative expenses of $2,888,742, including a $1.62 million provision for
bad debt on loans made for inventory purchases and other obligations related to
its food technology product.
Gain (Loss) from Discontinued Operations of Hotel Management. During
the year ended June 30, 1999, the Company had revenues of $363,301 from its
hotel management contracts which commenced January 1998 and were terminated on
November 4, 1998. Related marketing and administrative expenses during the 1999
period were $221,751. The prior years period included revenues of $639,741 and
marketing, administrative and other expenses of $6,198,247, including a $4.2
million write-down in the value of hotel management contracts. Subsequent to
June 30, 1998, the Company entered into a settlement agreement with FEC, Dorsett
and Mr. David Chiu in which both parities withdrew from and released all parties
to the Hotel Management Agreements. At June 30, 1998, the carrying value of the
related assets was reduced to the fair value based on the terms of the
settlement agreement, and accordingly, the Company recorded a charge of
$4,200,000 to write down the carrying amount of the management contract
agreements, trade names, and deposit on assets. Expenses during the 1998 period
also included amortization of management contracts, direct expenses of operating
the hotel management division and indirect expenses related to general corporate
overhead apportioned to the division.
Results of Operations for the Year Ended June 30, 1998 as compared to the Ten
Months Ended June 30, 1997
Loss from Continued Operations. The Company incurred a loss from
continuing operations of $4,105,703 or $.45 per share, for the year ended June
30, 1998. Included in the loss for the year were non-cash compensation charges
of $921,569 recorded in connection with the value attributed to stock options
and warrants issued by the Company, general and administrative expenses of
$3,397,974 and interest income net of interest expense of $213,840. The loss for
the ten months ended June 30, 1997 was attributable to net interest expense
which amounted to $356,166, or $.08 per share. During the 1997 period, the
Company's activities were primarily limited to organizational efforts and
raising public and private capital to fund its organizational expenses and the
development and initial implementation of its business plan for its now
discontinued food technology business. Consequently, all activities for the 1997
period have been reported as losses from discontinued operations of the
Company's food division.
General and Administrative Expenses. General and administrative
expenses related to continuing operations, which included travel expenses,
salaries and professional and consulting fees, were $3,397,974 for the year
ended June 30, 1998. During the 1997 period, all activities were primarily
limited to organizational efforts and raising public and private capital to fund
21
<PAGE>
initial marketing and research and development expenses for the Company's
discontinued food technology business. Consequently, all general and
administrative expenses incurred during the 1997 period have been included and
reported in losses from discontinued operations of the Company's food division.
Compensation Charges. During the year ended June 30, 1998, non-cash
compensation charges were $921,569 for the issuance of stock options to purchase
390,000 shares of Common Stock and of warrants to purchase 100,000 shares of
Common Stock. During the 1997 period, all activities were primarily limited to
organizational efforts and raising public and private capital to fund initial
marketing and research and development expenses for the Company's discontinued
food technology business. Consequently, compensation charges related to the
issuance of stock options during the 1997 period have been included and reported
in losses from discontinued operations of the Company's food division.
Interest Income. For the year ended June 30, 1998, interest income was
$288,518, compared to $51,180 for the ten months ended June 30, 1997. This
increase was due to additional cash being available for investment from the
proceeds of the Company's public and private offerings.
Interest Expense. For the year ended June 30, 1998, interest expense
including amortization of debt discount, was $74,678 compared to $407,346 for
the ten months ended June 30, 1997. These amounts included non-cash charges
related to the amortization of $60,328 and $252,000, respectively, on debt
discount recorded for the value of shares of Common Stock issued to convertible
debentureholders. The decrease in other interest expenses from $155,346 in the
prior period to $14,350 in the current period was the result of the repayment of
certain outstanding obligations by the Company from the proceeds of its June
1997 initial public offering.
Loss from Discontinued Operations of Food Division. As noted above, in
November 1999 the Company's Board of Directors determined that it would
discontinue all activities and efforts with respect to the Company's food
preservation business since the Company could not effectively develop a
sufficient market with the Company's food preservation technology. During the
year ended June 30, 1998, the Company had nominal revenues of $9,879 from its
food division operations and marketing and administrative expenses directly
related or apportioned to the food division totaled $2,888,742, including a
$1.62 million provision for bad debt. The prior year's period generated no
revenues and had expenses of $8,205,901 including (i) non-cash compensation
charges of $4,995,106 recorded in connection with the value attributed to stock
options and warrants issued by the Company to purchase 2,385,000 shares of
Common Stock, (ii) marketing, general and administrative expenses of $1,854,995,
(iii) a $1,000,000 charge for provision for bad debt related to advances made to
the Company's previous Conserver 21 (Trademark) supplier under the terms of a
distribution agreement which was subsequently terminated, and (iv) a $355,800
write-down of unmarketable Conserver 21(Trademark) inventory.
Gain (Loss) from Discontinued Operations of Hotel Management. During
the year ended June 30, 1998, the Company had revenues of $639,741 and
marketing, administrative and other
22
<PAGE>
expenses of $6,198,247, including a $4.2 million write-down in the value of
hotel management contracts. Subsequent to June 30, 1998, the Company entered
into a settlement agreement with FEC, Dorsett and Mr. David Chiu in which both
parities withdrew from and released all of the Hotel Management Agreements. At
June 30, 1998, the carrying value of the related assets was reduced to the fair
value based on the terms of the settlement agreement, and accordingly, the
Company recorded a charge of $4,200,000 to write down the carrying amount of the
management contract agreements, trade names, and deposit on assets. Expenses
during the period also included amortization of management contracts, direct
expenses of operating the hotel management division and indirect expenses
related to general corporate overhead apportioned to the division. There were no
hotel management operations during the prior 1997 period.
Income Taxes. For the ten months ended June 30, 1997, the Company, for
tax purposes, did not have any operations, or net operating losses. The
Company's expenses were preoperating and therefore, are capitalized and will be
amortized starting on the date operations commenced.
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.
At June 30, 1999, the Company had a working capital deficit of $1.3
million. The Company has continued to seek financing for both discharging
current payment obligations and for working capital. At June 30, 1999 the
Company had approximately $425,000 in 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 late 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
Suriname casino joint venture partner in December 1998. The Company has received
an average of approximately $300,000 per month in cash distributions from casino
profits during the seven months of September 1999 through March 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 operating expenses, fund its
loan obligations and make payments on any of its remaining past due 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. Primarily as a result of the delinquent
filing of this Form 10-K, the Company has been delisted by Nasdaq from its
SmallCap Market. The Company currently trades on the OTC pink sheets and expects
to have its securities traded on the OTC bulletin board upon the filing of this
Form 10-K.
23
<PAGE>
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.
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. See
Item 13 "Certain Relationships and Related Transactions."
On March 1, 2000, Galileo Capital LLC provided a $150,000 convertible
loan to the Company with interest at 10% per annum. The loan provides for
payment terms and is due in full on October 31, 2000. As part of the
consideration for making the loan to the Company, Galileo Capital LLC was
granted warrants to purchase 150,000 shares of the Company's Common Stock at an
exercise price of $.25 per share. Further, the loan is convertible into shares
of the Company's Common Stock at $.25 per share at any time during the term of
the loan on all or a portion of the then outstanding principal and interest
balance. In the event all or a portion of the loan is converted, the Company
will issue additional warrants to purchase one (1) share of its Common Stock for
each four (4) shares issued to Galileo Capital under its conversion option. The
warrants will be exercisable at $.25 per share.
Prior Financing
The Company was a development stage company through March 1998. The
Company's activities since its inception in March 1996 while in the development
stage was primarily focused on raising both debt and equity financing (public
and private), organizing and developing its food preservation technology
business, and, since mid-1997, organizing and developing its hotel management
business and casino business. The Company has incurred losses since its
inception, and, as of June 30, 1999, the Company's accumulated deficit was $27.1
million.
From March 1996 through February 1998, the Company raised capital
necessary for its business development through debt and equity private
placements. In 1996 it had a private offering of Common Stock and convertible
debentures in which it raised about $4.9 million. In June 1997, while the
Company was developing its food preservation technology business, the Company
completed an initial underwritten public offering (the "Initial Public
Offering") in which it received net proceeds of about $10,306,000 from the sale
of 2,530,000 shares of its Common Stock at a per share price of $5.00. At that
time the Common Stock began being quoted on the Nasdaq SmallCap market. In
November 1997 through February 1998 the Company began and completed another
private offering of Common Stock (the "1997 Private Offering") in which
24
<PAGE>
it received net proceeds of about $8.9 million from the sale of 2,044,763 shares
of its Common Stock at $5.14 per share. The 1997 Private Offering was largely
intended by the Company to raise cash for its initial expenditures for its new
hotel and casino businesses. The Company's stockholders at a meeting in December
1997 approved entry into those businesses. As of June 30, 1998, the Company had
spent all proceeds of the 1997 Private Offering directly for those initial
expenditures.
The Company's accumulated deficit at June 30, 1999 included $7.6
million of non-cash compensation charges related to the value attributed to
stock options and warrants issued by the Company. The Company has historically
made extensive use of options granted under its 1996 Stock Option Plan (the
"Plan") and of non-Plan options and warrants. By November 30, 1998 the closing
bid market price of the Company's Common Stock had fallen from a 1998 high of
$8.813 to a new low of $.469 on November 10, 1998. On September 14, 1998 the
Board of Directors and its Compensation Committee expressed their concern that
during future critical times the Company might face problems with maintaining
the loyalty and diligence of key personnel. The Board voted on such date to
reduce the exercise price to $1.50 of all Plan and non-Plan options and warrants
held by any then-current directors, officers or employees of the Company, and of
persons associated with principal London counsel on such date. About 80,000
non-Plan options, 325,000 warrants and 1,502,500 Plan options for Common Stock
were so affected. In addition, the Board voted to grant non-Plan and Plan
options at market price to seven officers or directors to purchase 1.5 million
shares. As a result of effecting the reductions and grants, the Company recorded
$783,000 in non-cash compensation charges in the fiscal year ending June 30,
1999. The Board subsequently determined on December 22, 1999 to further reduce
the price of options and warrants held by current officers, directors and key
employees to $.25 per share in consideration for services rendered and as an
incentive for maintaining continued efforts for the success of the Company. On
December 22, 1999, the Board also granted four-year options to purchase an
additional one million shares of Common Stock at an exercise price of $.25 per
share to a nominee of the Company's President, Mr. Dallas Dempster.
Year 2000 Impact on Business Operations
As of March 31, 2000, the Company has not experienced any significant
Year 2000 impact on its business operations.
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
25
<PAGE>
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.
Item 7a. Quantitative and Qualitative Disclosure About Market Risk
The Company held no material market risk sensitive financial
instruments or interest therein, and held none at June 30, 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, a part of the Company's routine daily foreign operations are
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 U.S. dollars. All
foreign currency is normally converted within 24 to 48 hours of receipt except
for that portion of such funds used for payment of operating expenses requiring
local currency. The Company has not entered into any exchange rate protection
arrangements.
Item 8. Financial Statements and Supplementary Data
See pages F-1 through F-44 contained herein as part of this Form 10-K
annual report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
See "Exhibits, Financial Schedule and Reports on Form 8-K - Reports on
Form 8-K."
26
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Company
The Board of Directors is divided into three classes, the terms of
which expire successively over a three-year period. At each annual meeting of
stockholders, successors to directors whose terms expire at that meeting are to
be elected for three-year terms. The current directors and officers of the
Company are as follows:
<TABLE>
<CAPTION>
Name Age Position And Office Held
<S> <C>
Dallas Dempster...................58(1) President, Chief Executive Officer and Director
Charles H. Stein..................71(2) Chairman of the Board of Directors
James V. Stanton..................67(1)(2) Vice Chairman of the Board of Directors
Miles R. Greenberg................43 Chief Financial Officer and Secretary
David A. Hartley..................52 President of Casino Division
</TABLE>
----------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Class A Director
DALLAS DEMPSTER was elected to the Board and also elected President and
Chief Executive Officer on July 20, 1998. Since its inception he has been one of
the two executive directors of the entity developing the Sakhalin Project, and
is a founder of that project. From 1985 to 1991 Mr. Dempster was the Chairman
and Managing Director of Burswood Resort Complex, of which he was the founder.
Burswood is the largest tourist destination resort development in Western
Australia, costing A$320 million, employing over 2,700 employees, and with
revenues in excess of A$400 million. Between 1983 and 1990 he was Chairman of
the Rottnest Island Authority on behalf of the Western Australia government. Mr.
Dempster was principal project director and/or owner of substantial other
property development projects in Sydney and Perth, a member of the Airline
Deregulation Committee, and a member of the Board of the Aboriginal Enterprise
Company Limited. In October 1993 an Australian Court found that in 1986 Mr.
Dempster failed to disclose to a co-venturer with his family company a payment
to be made to him upon the co-venturer's withdrawal from the co-venture project.
The co-venturer was awarded A$22 million judgment against Mr. Dempster and his
family company. The family company had received A$50 million from the sale of
the project several years after the withdrawal. The family company paid A$11
million in settlement, and in 1997 Mr. Dempster filed for voluntary bankruptcy
in Australia, which has since been annulled on his reaching an agreed settlement
of A$1.0 million. The Company has been provided with a legal opinion that under
applicable Australian law the effect of the annulment of Mr. Dempster's
bankruptcy is to retrospectively annihilate the bankruptcy and its consequences
at law and to treat it as if it never happened (except that all acts done by the
trustee or Court before the annulment shall be deemed to have been validly made
or done). Mr. Dempster worked as an independent consultant since 1991 until
joining the Company in July 1998.
27
<PAGE>
Class B Director
JAMES V. STANTON has been a director of the Company since its inception
and Vice Chairman of the Company since 1998. Mr. Stanton has his own law and
lobbying firm, Stanton & Associates, in Washington, D.C. From 1971 to 1978, Mr.
Stanton represented the 20th Congressional District of Ohio in the United States
House of Representatives. While in Congress Mr. Stanton served on the Select
Committee on Intelligence, the Government Operations Committee, and the Public
Works and Transportation Committee. Mr. Stanton has held a wide variety of
public service positions, including service as the youngest City Council
President in the history of Cleveland, Ohio and membership on the Board of
Regents of the Catholic University of America in Washington, D.C. Mr. Stanton is
also former Executive Vice President of Delaware North, a privately held
international company which, during Mr. Stanton's tenure, had annual sales of
over $1 billion and became the leading pari-mutuel wagering company in the
United States, with worldwide operations including horse racing, harness racing,
dog racing, and Jai-Lai. Delaware North also owned the Boston Garden and the
Boston Bruins hockey team. From 1985 to 1994 Mr. Stanton was a principal and
co-founder of Western Entertainment Corporation, which pioneered one of the
first Indian gaming operations in the United States, a 90,000 square foot bingo
and casino gaming operation located on the San Manuel Indian Reservation in
California, which generated annual revenues in excess of $50 million. Mr.
Stanton also serves on the boards of MTR Gaming Group, Inc. and Saf T Lok, Inc..
Class C Director
CHARLES H. STEIN was the Chairman, President and Chief Executive
Officer of the Company from its inception in March 1996 through July 20, 1998,
since which he has been Chairman. From June 1994 until March 1996, Mr. Stein was
a private investor and consultant. From October 1993 until June 1994, Mr. Stein
was Chairman of HMI International Ltd., a Florida based wholesaler and retailer
of resale products. From 1985 to 1987, he was President and Chief Executive
Officer of Night Hawk Resources, Ltd. (Vancouver Stock Exchange) which was
engaged in oil and gas exploration in Texas and Alaska. Prior to that time and
from 1987, Mr. Stein was a private investor. Early in his career, Mr. Stein
pioneered the concept of packing fresh orange juice in "milk-type" cartons,
which concept was sold to Kraft Foods, Inc. From December 1968 to October 1983,
Mr. Stein was Chairman and Chief Executive Officer of Hardwicke Companies Inc.
(Nasdaq), which built, developed, or operated more than 50 restaurants
(including Tavern on the Green, Maxwell's Plum, and Benihana), health spas,
theme parks in North America, Europe and Asia (including Great Adventure in New
Jersey), and duty-free shops. Prior to 1968, he was President and Chief
Executive Officer of Kitchens of Sara Lee, the world's largest bakery, as well
as a director, member of the Executive Committee, and a Vice President of
Consolidated Foods Corporation (NYSE), the parent company of Sara Lee. Mr. Stein
has notified the Company that he intends to resign from his position as a
director as soon as his replacement becomes a member of the Board.
The Company currently has authorized five directorships, two of which
are vacant due to Mr. Jay M. Haft's and Mr. Jonathan M. Caplan's resignations.
In 1997, the Company amended its Certificate of Incorporation to provide for a
classified Board of Directors. The Company's
28
<PAGE>
Board of Directors is divided into three classes. Class A has two directorships,
of which one is held by Mr. Dempster and one of which is vacant and previously
held by Mr. Haft. Mr. Dempster was elected a director in July 1998 by the Board
of Directors, to replace a director who had resigned. Class B has two
directorships, one of which is now held by Mr. Stanton and the other which was
held by Mr. Caplan. Mr. Caplan was elected a director on December 2, 1997 by the
Board of Directors to replace Mr. Brian J. Bryce, who had resigned. Class C
consists of one directorship, now held by Mr. Stein. Except for Mr. Dempster,
stockholders elected all the current directors in 1997 when the Company's
stockholders first approved a classified board. At each annual stockholder
meeting commencing with the 1998 annual meeting, the successors to directors
whose terms then expire will be elected to serve from the time of election and
qualification until the third annual meeting following election and until their
successors have been duly elected and qualified. Any additional directorships
resulting from an increase in the number of directors will be distributed among
the three classes so that, as nearly as possible, such class will consist of an
equal number of directors. All stockholders of the Company's Common Stock are
entitled to vote in elections for the directors of each Class.
The Company has agreed that, for a period of five years from June 6,
1997, Janssen/Meyers Associates, L.P. ("J/M") may designate one person to be
elected to the Board of Directors of the Company subject to Board approval or,
in the alternative, J/M may designate one person to attend all meetings of the
Company's Board of Directors and to receive all notices of meetings of the
Company's Board of Directors and all other correspondence and communications
sent by the Company to members of its Board of Directors. Such designee may be
an officer or director of J/M. If J/M's designee is elected to the Board of
Directors, such designee will sit on the Company's Audit Committee. J/M has not
designated an individual to serve in such capacity. J/M was the Company's
underwriter in the June 1997 initial public offering.
Identification of Executive Officers Who Are Not Directors and Key Employee
MILES R. GREENBERG was appointed Vice President and Chief Financial
Officer upon joining the Company in September 1996 and appointed Senior Vice
President on January 18, 1997. From 1994 until joining the Company, Mr.
Greenberg served as Vice President and Chief Financial Officer of F3 Software
Corporation ("F3"), a developer and marketer of electronic forms composition and
automation software. From 1992 until assuming his positions at F3, he served as
Controller of BLOC Development Corporation (former parent company of F3), a
publicly held entity primarily engaged in the development, publishing and direct
marketing of computer software and hardware products. From 1985 to 1992, Mr.
Greenberg served as Vice President and Chief Financial Officer of The Levenshon
Companies, Inc. and its affiliates, a diversified financial services company.
Mr. Greenberg is a Certified Public Accountant formerly with KPMG Peat Marwick.
DAVID A. HARTLEY has been President of the Casino Division since
October 1997. Mr. Hartley has spent the past 20 years in the casino gaming
industry. Originally trained as a Clinical Psychologist, he has had extensive
experience in virtually all aspects of casino operations, from the Queen
Elizabeth II cruise ship, to six London-based casinos. After serving as the
Manager of the Ritz Casino Club in London, he was appointed Gaming Executive
29
<PAGE>
in charge of management development and training. He served in several positions
at London Clubs International Ltd., where he was responsible for that company's
expansion outside the United Kingdom. This involved researching and evaluating
prospective markets, acquiring new casino licenses, and other related activity.
Subsequent to that, he joined Regency Casinos Limited in 1992, where, until
joining the Company, he held several positions, and was most recently Chairman.
In this employment he negotiated a joint venture with Hyatt International
Corporation to establish an international casino management company, and
organized several international casinos. These included Regency Casino
Thessaloniki, a US$120 million project, including a new hotel, which is the
largest casino in Europe with gross gaming win approaching US$140 million. Also
included was a Regency Casino Baku Azerbaijan, constructed within the Hyatt
Hotel, at a project cost of US$15 million, including the hotel, casino,
restaurants and business facilities, as well as the Mimosa Regency Casino,
Philippines, with a project cost of US$5 million. Mr. Hartley has also been
responsible for the establishment and planning and development strategy for
several other casinos, including projects in Cape Town, South Africa and a
second operation in Baku. Mr. Hartley is a hands-on manager with the background,
experience, and knowledge of the casino industry in emerging markets.
Section 16(a) Beneficial Ownership Reporting Compliance
Under the provisions of Section 16(a) of the Exchange Act, the
Company's officers, directors and 10% beneficial stockholders are required to
file reports of their transactions in the Company's securities with the
Commission. Based solely on a review of the Forms 3 and 4 and amendments thereto
furnished to the Company during its most recent fiscal year and Forms 5 and
amendments thereto furnished to the Company with respect to its most recent
fiscal year, the Company believes that as of May 23, 2000, all of its executive
officers, directors and greater than 10% beneficial stockholders were in
compliance with all filing requirements applicable to them during the fiscal
year ending June 30, 1999.
Item 11. Executive Compensation
The following table sets forth the compensation awarded to, or paid to,
or earned by, the Company's Chairman (now former Chief Executive Officer and
former Chief Operating Officer) and three others ("Named Executive Officers")
during the period March 1996 to June 30, 1999. No other executive officer of the
Company serving as an executive officer on June 30, 1999 received a total salary
and bonus of $100,000 for the periods specified. Accordingly, no information is
reported for such persons.
30
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Annual
Compensation Long Term Compensation
------------ ----------------------
Awards Payouts
------ -------
Securities Restricted Securities
Underlying Stock Underlying LTIP All Other
Name and Principal Position Fiscal Year Salary ($) Options(#) Awards Options/SARs(3) Payouts Compensation
--------------------------- ----------- ---------- ---------- -------- --------------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Charles H. Stein........... July 1, 1998 to (1) -- -- 100,000 -- $40,000(2)
now Chairman, former Chief June 30, 1999 (1) --
Executive Officer, July 1, 1997 to
President and Director June 30, 1998 -- --
March 6, 1996 to
June 30, 1997
Dallas Dempster............ August 1, 1998 $275,000 1,000,000(3) -- -- -- --
President, Chief Executive to June 30, 1999
Officer and Director
Miles R. Greenberg......... July 1, 1998 to $115,000 75,000(3) -- -- -- --
Chief Financial Officer June 30, 1999
and Secretary July 1, 1997 to * 10,000(3) -- -- -- --
June 30, 1998
Sept. 16, 1996 to * 90,000(3) -- -- -- --
June 30, 1997
David Hartley, July 1, 1998 to $250,000 -- -- -- -- --
President................... June 30, 1999
Casino Division October 1997 to $189,000 100,000(3) -- -- -- --
June 30, 1998
</TABLE>
----------
*Less than $100,000
(1) As of June 30, 1998 Mr. Stein had waived (not merely deferred) his
right to any annual salary and, as of the date of this report, has
continued to waive this right. The Board of Directors has accepted Mr.
Stein's waiver, but has reserved the right to award Mr. Stein, in its
sole discretion, the amounts so waived. During the 12-month period
ended June 30, 1998 the Company recorded non-cash compensation charges
of $90,000 for services contributed by Mr. Stein.
(2) The Company purchased a life insurance policy for Mr. Stein's benefit,
paying a premium of about $40,000.
(3) Reflects shares underlying options that were repriced in September 1998
(to $1.50 per share) and in December 1999 (to $.25 per share).
31
<PAGE>
The Company has no defined benefit plan, actuarial plan, pension plan
or long-term incentive plan.
After the Company acquired a 65% interest in SGTI in December 1997,
SGTI continued to pay Sovereign Gaming and Leisure Ltd. consulting fees of
$15,000 per month through July 1998. Mr. Dempster was paid by Sovereign
consulting fees in a similar amount for the same services, or other services,
during the same seven-month period.
OPTION GRANTS
In September 1998 the Board of Directors: (i) reduced the exercise
price of all Plan and non-Plan Options (and any warrants) previously granted any
officer, director, or employee to the then market price of $1.50 (which was
subsequently reduced to $.25 per share in December 1999); and (ii) granted seven
persons and entities new Plan and non-Plan options to purchase 1,500,000 shares
at an exercise price of $1.50 per share (which was subsequently reduced to $.25
per share in December 1999).
The following table provides certain information regarding the stock
options granted during the 12 month period ended June 30, 1999 to the Named
Executive Officers named in the Summary Compensation Table.
OPTION GRANTS FOR THE TWELVE-MONTH PERIOD ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Potential Realized
Value at Assumed
Annual Rates of
Number of % of Total Stock Price
Securities Options Appreciation for
Underlying Granted to Exercise or Option Term(2)
Options Employees in Base Price Expiration -------------------
Name Granted(#)(1) Fiscal Period $/Share(1)(4) Date 5% 10%
---- -------- ------------- ------------ ---------- -- ---
<S> <C> <C> <C> <C> <C> <C>
Charles H. Stein......... 100,000 8% $1.50 September 2002 2,000 $ 33,000
Dallas Dempster 1,000,000 81% $1.50 September 2002 20,000 $330,000
Miles R. Greenberg 75,000 6% $1.50 September 2002 1,500 $ 24,750
David Hartley(1) 0 0% -- --
</TABLE>
(1) On September 14, 1998 the Board approved a reduction of the exercise price
to $1.50 as part of a more general reduction in exercise prices of previously
granted options held by officers, directors and employees.
(2) In accordance with the rules of the Securities and Exchange Commission,
"Potential Realizable Value" has been calculated assuming annual appreciation
over the option term of the fair market value of the Company's common stock on
the date of the grant at annual compounded rates of 5% and 10%, respectively.
(3) In December 1999, the Board granted Tilden Park Limited, a nominee of Mr.
Dempster, a four-year option to purchase an additional 1,000,000 shares of
Common Stock at an exercise price of $.25 per share.
No other option was granted to any of the Named Executive Officers
under the 1996 Stock Option Plan, or otherwise granted to any such officer
during the year ended June 30, 1999, and no
32
<PAGE>
options were exercised by any of them during that period. The unexercised
options held by the executive officers named had no value at June 30, 1999 as
the exercise prices exceeded the fair market value closing price of the common
stock on such date.
(4) These options were repriced to $.25 per share when the market value of the
shares was $.13 per share. There would be no potential realizable value at the
5% and 10% appreciation rates.
33
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
The following table sets forth information regarding the number and
value of options held by each of the Company's executive officers named in the
Summary Compensation Table as of June 30, 1999.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised in-the-Money
Options at Fiscal Year End Options at Year End($)(1)
----------------------------- -------------------------------
Shares
Acquired on Value
Name Exercise (#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Charles H. Stein 0 --- 100,000 0 0 ---
Dallas Dempster 0 --- 1,000,000 0 0 ---
Miles R. Greenberg 0 --- 175,000 0 0 ---
David Hartley 0 --- 100,000 0 0 ---
</TABLE>
-----------
(1) Based on the market price of the Company's Common Stock of $.875 on
June 30, 1999, as reported by Nasdaq.
The Company's outstanding options at June 30, 1999 totaled 4,062,619.
The Company uses the Black-Scholes option pricing model to value options issued
to non-employee directors and consultants. Other options issued are valued using
APB 25. See Note 10 to the Consolidated Financial Statements included in this
10-K.
Directors Compensation
Since August 1998, non-employee directors have waived all fee
compensation. No other compensation was paid to non-employee directors in the
twelve months ended June 30, 1999. Directors who are employees of the Company
receive no additional compensation for their services rendered as directors. All
directors are reimbursed for reasonable expenses incurred in connection with
their services rendered as directors.
In June 1997, the Board voted to form an executive compensation
committee which currently consists of Messrs. Dempster and Stanton (the
"Committee"). The Committee is authorized to review all compensation matters
involving directors and executive officers and Committee approval is required
for any compensation to be paid to executive officers or directors who are
employees of the Company. As a matter of policy and to assure compliance with
Rule 16b-3(d)(1) of the Securities Exchange Act of 1934, the decisions of the
Compensation Committee are subject to ratification by a majority of the Board.
Indemnification of Directors and Officers and Related Matters
The Company's Certificate of Incorporation limits, to the maximum
extent permitted by the Delaware General Corporation Law ("DGCL"), the personal
liability of directors and officers for monetary damages for breach of their
fiduciary duties as directors and officers (other than liabilities arising from
acts or omissions which involve intentional misconduct, fraud or knowing
34
<PAGE>
violations of law or the payment of distributions in violation of the DGCL). The
Certificate of Incorporation provides further that the Company shall indemnify
to the fullest extent permitted by the DGCL any person made a party to an action
or proceeding by reason of the fact that such person was a director, officer,
employee or agent of the Company. Subject to the Company's Certificate of
Incorporation, the By-laws provide that the Company shall indemnify directors
and officers for all costs reasonably incurred in connection with any action,
suit or proceeding in which such director or officer is made a party by virtue
of his being an officer or director of the Company, except where such director
or officer is finally adjudged to have been derelict in the performance of his
duties as such a director or officer.
The Company expects to enter into separate indemnification agreements
with its officers and directors containing provisions which are in some respects
broader than the specific indemnification provisions contained in the Company's
Certificate of Incorporation and By-laws. The indemnification agreements may
require the Company, among other things, to indemnify such directors and
officers against certain liabilities that may arise by reason of their status as
directors and officers (other than liabilities arising from willful misconduct
of a culpable nature), to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified, and to obtain
directors' and officers' insurance, if available on reasonable terms. The
Company believes these agreements are necessary to attract and retain qualified
persons as directors and officers.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of May 23, 2000, to the
best of the Company's knowledge, with respect to each person (including any
"group" as that term is used in Section 13(d)(3) of the Securities Exchange Act
of 1934, known to the Company to be the beneficial owner of more than 5% of the
Company's Common Stock. The percentage of shares outstanding is based on the
Company's shares of Common Stock outstanding as of May 23, 2000, as adjusted in
each case pursuant to Rule 13-3(d)1 under the Securities and Exchange Act of
1934. As of May 23, 2000, there were 16,326,666 shares of Common Stock
outstanding.
<TABLE>
<CAPTION>
Number of Shares
Percentage of Total
Name and Address of Stockholder Beneficially Owned Voting Shares*
------------------------------- ---------------------------------
<S> <C> <C>
Charles Stein Inter Vivos Trust (1)............. 900,000 5.5%
c/o CCA Companies Incorporated
James V. Stanton (2)............................. 1,326,844 7.6%
c/o CCA Companies Incorporated
Dallas Dempster................................... 2,000,000 10.9%
c/o CCA Companies Incorporated (3)
Peter Janssen (4).................................... 2,411,719 13.6%
</TABLE>
35
<PAGE>
<TABLE>
<S> <C> <C>
c/o Janssen Partners
1345 Old Northern Blvd.
Roslyn, N.Y. 11576
Miles R. Greenberg--Senior Vice
President-Finance, Treasurer and
Chief Financial Officer(5)...................... 175,000 1.1%
David A. Hartley--President--Casino
Division(6)........................................ 350,000 2.1%
All executive officers and directors as a
group (5 persons).............................. 4,751,844 24.0%
</TABLE>
*Represents beneficial ownership of less than 1% of the Common Stock.
----------
(1) Represents 800,000 shares held by the Charles Stein Inter Vivos Trust for
the benefit of Mr. Stein's spouse and children. Mr. Stein, Chairman of the
Company disclaims voting and investment power with respect to those shares. Mr.
Stein currently has an exercisable option to purchase 100,000 shares of Common
Stock at $.25 per share.
(2) Includes 20,000 shares of Common Stock which are held by Mr. Stanton, a
Director of the Company, as joint tenant with his wife, Margaret M. Stanton,
currently exercisable warrants to purchase 650,000 shares of Common Stock at a
price equal to $.25 per share, and currently exercisable options to purchase
500,000 shares and 23,644 shares of Common Stock at $.25 and $2.00 per share,
respectively. Does not include shares of Common Stock owned by Michael J.
Stanton, Bridget M. Stanton, Richard P. Stanton and Joseph M. Stanton each of
whom are adult children of Mr. James Stanton and each of whom own 20,000 shares
of Common Stock. Mr. Stanton denies beneficial ownership of such 80,000 shares.
(3) Represents currently exercisable non-Plan options granted in September 1998
to purchase 1,000,000 shares at $.25 and Plan options granted in December 1999
to purchase 1,000,000 shares at $.25 in the name of Tilden Park Limited for the
benefit of Mr. Dempster's family.
(4) Includes currently exercisable warrants to purchase 73,269 shares at $8.25
per share; warrants to purchase 235,453 shares at $5.135 per share; warrants to
purchase 666,667 shares at $1.00 per share; and warrants to purchase 450,000
shares at $.50 per share.
(5) Represents currently exercisable options to purchase 175,000 shares of
Common Stock at $.25 per share.
(6) Includes currently exercisable options to purchase 100,000 shares at $.25
per share.
As used in the table above, "beneficial ownership" means the sole or
shared power to vote or direct the voting or to dispose, or direct the
disposition of any security. A person is deemed to have "beneficial ownership"
of any security that such person has a right to acquire within 60 days of the
date of the above table. Any security that any person named above has the right
to acquire within 60 days is deemed to be outstanding for purposes of
calculating the ownership of such person but is not deemed to be outstanding for
purposes of calculating the
36
<PAGE>
ownership percentage of any other person. Unless otherwise noted, each person
listed is believed by the Company to have the sole power to vote, or direct the
voting of, and power to dispose, or direct the disposition of all such shares.
The amount of outstanding shares of Common Stock is the amount actually
outstanding plus shares deemed outstanding pursuant to Rule 13d-3(d)(1) under
the Securities and Exchange Act of 1934.
In acquiring Sakhalin General Trading and Investments Limited ("SGTI")
the Company issued 2,000,000 shares to the former stockholders in SGTI. The
Company does not know the ultimate beneficial ownership of these shares.
As described in Item 1 above under the heading "Common Stock and Hotel
Management Agreements" and elsewhere in this report, 250,000 shares that were to
be delivered to FEC are subject to a voting proxy given to the Company's Board
which will remain in effect until February 2001.
Item 13. Certain Relationships and Related Transactions
During the year ended June 30, 1998, the Company entered into hotel
management agreements with Dorsett International and FEC and into hotel
operating contracts with other hotel owners. The Company believes that Mr. David
Chiu was then the beneficial owner of the stock in Dorsett International. These
agreements were settled and terminated by the November Settlement Agreement
dated November 4, 1998. See "Business-Hotel Management Division". Mr. Chiu is
also a party to the development services agreement relating to the Sakhalin
Project. The Company believes Mr. Chiu was a beneficial owner of stock in
Dorsett International when the Company acquired it and its subsidiaries for
$500,000. He was the assignee of certain of Dorsett International rights under
that agreement. The Company believes FEC, Mr. Chiu, his relatives or their
associates may hold interests in hotel owners with whom the Company had or might
have entered into hotel operating contracts.
Mr. Dallas Dempster was a paid consultant to Sovereign Gaming and
Leisure Ltd., which assigned to the Company its 1994 Construction Management
Agreement and 1994 Operation Management Agreement with SCC. The Company believes
that he held, and currently holds, no beneficial interest in stock in Sovereign.
In September 1998, Mr. Dempster's nominee, Dabus International Limited, for the
benefit of his family, was granted non-Plan options to purchase 1,000,000 shares
of the Company's common stock at $1.50 per share which have been repriced to
$.25 per share. In December 1999, Mr. Dempster's nominee, Tilden Park Limited
for the benefit of his family, was granted plan options to purchase 1,000,000
shares of the Company's Common Stock at $.25 per share. Additionally, Tilden
Park Limited was transferred on such date by Dabus International Limited the
non-plan options to purchase 1,000,000 shares of common stock previously issued
to Dabus International Limited described above. Sovereign was a consultant to
SGTI. Mr. Dempster was a consultant to Sovereign and received $15,000 per month
from January through July 1998.
The Company believes Mr. David Hartley controls Star and holds a
substantial interest in it. Star is a party with the Company to the Casino
Consulting Agreement, and was granted options in October 1992 to purchase shares
of the Company's Common Stock. See "Management-Option Grants." The Company
issued 250,000 shares of Common Stock to Star in December 1999 in lieu
37
<PAGE>
of a cash bonus payment which Star was entitled to receive pursuant to a
consulting agreement between Star and the Company.
Janssen-Myers Associates, the underwriter of the Company's initial
public offering in June 1997 (the "Underwriter") was also the placement agent in
the Company's November 1997 Private Offering. Messrs. Janssen and Meyers are
principals in the Underwriter and received their Company warrants from the
Underwriter. Pursuant to the placement agreement relating to the November 1997
Private Offering, the Company agreed to pay the Underwriter, as placement agent,
a fee equal to 10% of the "gross proceeds" of that offering. In addition, the
Company agreed to pay the Underwriter a non-accountable expense allowance equal
to 3% of the "gross proceeds" from the sale of shares in that offering and to
reimburse certain accountable expenses of the Underwriter. The Company also
agreed to indemnify the Underwriter against certain liabilities incurred under
the Securities Act in connection with the November 1997 offering in which the
Underwriter was placement agent. The Company also granted the Underwriter, for a
period of one year after the final closing date of the Private Offering, a right
of first refusal to purchase, or to sell for the account of the Company, any
securities of the Company which the Company may seek to sell through an
underwriter, placement agent or broker-dealer. A number of principal
stockholders in the Company granted the Underwriter a similar right in any such
sale by those stockholders of the Company, its subsidiaries and successors.
In addition, Peter Janssen, a principal of Janssen Myers Associates,
completed the following acquisition of Company securities: (i) On December 3,
1998 he purchased 133,334 shares at $.75 per share and received four-year
warrants to purchase 66,667 shares of Common Stock at an exercise price of $1.00
per share; (ii) on March 1, 1999 he purchased 200,000 shares at $.50 per share
and received four-year warrants to purchase 250,000 shares of Common Stock at an
exercise price of $1.00 per share; (iii) on April 9, 1999 he purchased 150,000
shares at $.67 per share and received four-year warrants to purchase 350,000
shares of Common Stock at an exercise price $1.00 per share; and (iv) on
December 22, 1999, in consideration of certain consulting services rendered to
the Company, he received three-year warrants to purchase 450,000 shares of
Common Stock at an exercise price of $.50 per share.
In June 1997, and from December 1997 through February 1998, the Company
issued to the Underwriter for nominal consideration, the Underwriter's Warrant
to purchase 220,000 shares at $8.25 per share and to purchase 715,668 shares at
various prices based on the market price of the Company's shares in 1997-1998.
The warrants were issued in connection with the Company's initial public
offering completed in June 1997, and the Company's private offering which began
in November 1997 and was completed in February 1998. They are exercisable for a
period of four years from issue. Sale of shares by the Company at less than the
then current average market price or less than the exercise price will trigger
anti-dilution provisions in all the Warrants held by the Underwriter. No
anti-dilution adjustment is made under any series of such warrants for issuance
of securities (i) in the same offering as the Warrant series was issued, or (ii)
upon exercise of Warrants of that series or of any other warrants or options
outstanding on the date that series of Warrants was issued. In the case of the
1997 Placement Agent Warrants, no adjustment is made for issuance of securities
(i) in contemplated transactions described in the related Private Placement
Memorandum, but not in excess of 5,500,000 shares, (ii) under the Company's 1996
Stock Option Plan as it may be amended from time to time, or (iii) upon merger
or acquisition with unaffiliated third parties.
38
<PAGE>
The Company has been advised that Mr. Peter Janssen and Mr. Bruce
Meyers, principals of the Underwriter, purchased an aggregate of 58,422 shares
in the 1997 Private Offering. In connection with the Company's initial public
offering, the Company entered into an agreement whereby it (i) agreed to employ
the Underwriter as its investment banker and financial consultant for three
years for an aggregate fee of $100,000 paid at the closing of the Company's
initial public offering; and (ii) for a period of five years, agreed to pay the
Underwriter a fee equal to five percent of the amount up to $5 million, and
2 1/2% of the excess, if any, over $5 million, of the consideration in any
transaction consummated by the Company with a party introduced to the Company by
the Underwriter.
In January 2000, Mr. Stanton loaned the Company $300,000 which the
Company used to repay past due obligations. The loan bears interest at the bank
prime rate to be calculated and billed monthly by the National City Bank of
Cleveland, Ohio. The loan is to be repaid on December 31, 2000. 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. Mr. Stanton
also converted a $75,000 loan he had made to the Company in October 1998 into
153,200 shares at a conversion price of $.50 per share on January 25, 1999 (The
loan amount of $75,000 in principal plus $1,600 in interest were converted into
shares).
39
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements & Schedules, and Reports Form 8-K
(a)(1) Financial Statements
Reports of Independent Certified Public Accountants (F-2)
Consolidated Balance Sheets as of June 30, 1999 and
1998 (F-5)
Consolidated Statements of Operations for the years
ended June 30, 1999, June 30, 1998 and for the
ten-month period ended June 30, 1997, (F-7)
Consolidated Statements of Stockholders' Equity for
the years ended June 30, 1999, June 30, 1998
and for the ten-month period ended June 30,
1997, (F-8)
Consolidated Statements of Cash Flows for the years
ended June 30, 1999, June 30, 1998 and for the
ten-month period ended June 30, 1997, (F-11)
Notes to Consolidated Financial Statements (F-13)
Exhibit No. Item Title
----------- ----------
2.1 Contract on the Extension of the Concession Period for
the Operation of a Casino dated 21 July 1997 issued by
the Minister of Finance in favor of Roulette; Loan
Agreement dated 9 April 1998 between Roulette and
Dorsett providing for a US $420,000 loan to Roulette;
Amendment No.1 dated 5 June 1998 to the Agreement dated
3 April 1998 between CBC, Juste and Dorsett
(incorporated by reference to the Company's Form 10-Q
for the period ended September 30, 1998)...................
3.1 Certificate of Incorporation and amendments thereto
(incorporated herein by reference to the Company's
Registration Statement on Form S-1 (File No. 333-16571))...
40
<PAGE>
3.2 Amendment to Company's Certificate of Incorporation
(incorporated herein by reference to the Company's
Registration Statement on Form S-1 (File No.
333-16571), Amendment No. 5)...............................
3.3 Amendment to Company's Certificate of Incorporation
(incorporated herein by reference to the Company's
Proxy Statement dated November 27, 1997)...................
3.4 By-law of Company (incorporated herein by reference to
the Company's Registration Statement on Form S-1 (File
No. 333-16571).............................................
4.2 Form of certificate evidencing shares of Common Stock
(incorporated herein by reference to the Company's
Registration Statement on Form S-1 (File No.
333-16571), Amendment No. 2)...............................
4.3 Form of Underwriter's Warrant Agreement between Company
and the Underwriter Janssen-Meyers Associates L.P.
(including form of Underwriter's Warrant) (incorporated
herein by reference to the Company's Registration
Statement on Form S-1 (File No. 333-16571), Amendment
No. 5).....................................................
4.5 Amendatory Agreement dated November 6, 1996 between the
Company and the SES Family Investment and Trading
Partnership, L.P. (incorporated herein by reference to
the Company's Registration Statement on Form S-1 (File
No. 333-16571))............................................
4.6 Form of 10% Debenture dated September 1996
(incorporated herein by reference to the Company's
Registration Statement on Form S-1 (File No.
333-16571))................................................
4.7 Form of 10% Convertible Debenture dated November 1996
(incorporated herein by reference to the Company's
Registration Statement on Form S-1 (File No.
333-16571))................................................
10.1 1996 Stock Option Plan, as amended and restated
(incorporated herein by reference to the Company's
Registration Statement on Form S-1 (File No.
333-16571))................................................
10.2 Form of Stock Option Agreement (incorporated herein by
reference to the Company's Registration Statement on
Form S-1 (File No. 333-16571)).............................
41
<PAGE>
10.3 Distribution Agreement dated October 9, 1996 between
Company and Agrotech 2000, S.L. (incorporated herein by
reference to the Company's Registration Statement on
Form S-1 (File No. 333-16571), Amendment No. 4)............
10.4 Employment Agreement between Charles H. Stein and the
Company, effective as of June 13, 1997.....................
10.5 Form of $5.00 Warrant Agreement dated August 1996
(incorporated herein by reference to the Company's
Registration Statement on Form S-1 (File No. 333-16571))...
10.6 Loan Agreement dated October 9, 1996 between Company
and Conserver Purchasing Corporation ("CPU"), as
amended by Letter Agreement dated December 31, 1996
between Company and CPC (incorporated herein by
reference to the Company's Registration Statement on
Form S-1 (File No. 333-16571), Amendment No. 2)............
10.7 Form of Financial Consulting Agreement between Company
and Underwriter (incorporated herein by reference to
the Company's Registration Statement on Form S-1 (File
No. 333-16571), Amendment No. 5)...........................
10.8 Agreement dated as of August 12, 1997 by and among the
Company, Sakhalin Trading and Investments Limited
("SGTI") and Sovereign Gaming and Leisure Limited
("Sovereign") (incorporated herein by reference to
Exhibit 10.8 to the Company's Form 10-K for the fiscal
year ended June 30, 1997)..................................
10.9 Amendment dated as of August 12, 1997 by and among the
Company, SGTI and Sovereign (incorporated herein by
reference to Exhibit 10.9 to the Company's Form 10-K
for the fiscal year ended June 30, 1997)...................
10.10 Development Services Agreement dated as of October 2,
1997 between the Company and Dato David Chiu
(incorporated herein by reference to Exhibit 10.10 to
the Company's Form 10-K for the fiscal year ended June
30, 1997)..................................................
10.11 Consulting Agreement effective as of August 14, 1997
between the Company and Star Casino Limited
(incorporated herein by reference to Exhibit 10.11 to
the Company's Form 10-K for the fiscal year ended June
30, 1997)..................................................
42
<PAGE>
10.12 Proposed form Pledge Agreement by and among the
Company, Brian J. Bryce, Jasmine Trustees, Ltd., Jay M.
Haft and James V. Stanton (incorporated herein by
reference to Exhibit 10.12 to the Company's Form 10-K
for the fiscal year ended June 30, 1997)...................
10.13 Hotel Management Agreement dated as of October 2, 1997
between the Company and Dorsett Hotels and Resorts
International Ltd. (incorporated herein by reference to
Exhibit 10.13 to the Company's Form 10-K for the fiscal
year ended June 30, 1997)..................................
10.15 Heads of Agreement dated October 3, 1997 between the
Company and Parbhoe's Handelmij N.V. (incorporated
herein by reference to Exhibit 10.15 to the Company's
Form 10-K for the fiscal year ended June 30, 1997).........
10.16 Agreement of Ownership Structure in the Sakhalin Palace
Resort Project dated as of June 25, 1999 between the
Company, Arter Capital Ltd. and Valmet S.A. (filed
herewith)..................................................
16.1 Letter regarding change in certifying accountant
(incorporated herein by reference to the Company's Form
8-K dated December 18, 1997 and Form 8-K dated June 16,
1998)......................................................
16.2 Letter regarding change in certifying accountant
(incorporated herein by reference to the Company's Form
8-K dated July 23, 1999 and Form 8-K dated October 13,
1999.......................................................
27.1 Financial Data Schedule (filed herewith)...................
(b) Reports on Form 8-K
Two reports on Form 8-K were filed by the Company dated July 23, 1999
and October 13, 1999 (incorporated by reference). They related to the
resignation of the Company's prior accountants and engagement of the Company's
current accountants.
43
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CCA COMPANIES INCORPORATED
By: /s/ MILES R. GREENBERG
----------------------
Miles R. Greenberg
Date: May 26, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ DALLAS R. DEMPSTER Chief Executive Officer, Chief Operating May 26, 2000
---------------------- Officer and President
Dallas R. Dempster (Principal Executive Officer),
Director
/s/ CHARLES H. STEIN Chairman and Director May 26, 2000
--------------------
Charles H. Stein
/s/ JAMES V. STANTON Vice Chairman and Director May 26, 2000
--------------------
James V. Stanton
/s/ MILES R. GREENBERG Chief Financial Officer (Principal May 26, 2000
---------------------- Financial Officer and
Miles R. Greenberg Chief Accounting Officer)
</TABLE>
44
<PAGE>
CCA COMPANIES INCORPORATED
CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants for June 30, 1999............................... F-2
Report of Independent Certified Public Accountants for June 30, 1998............................... F-3
Report of Independent Certified Public Accountants for June 30, 1997............................... F-4
Consolidated Balance Sheets as of June 30, 1999 and 1998........................................... F-5
Consolidated Statements of Operations for the years ended
June 30, 1999, and 1998, and for the ten months period
ended June 30, 1997............................................................................... F-7
Consolidated Statements of Stockholders' Equity for the years ended June 30,
1999, and 1998, and for the ten months period
ended June 30, 1997............................................................................... F-8
Consolidated Statements of Cash Flows for the years ended June 30, 1999, and
1998, and for the ten months period ended
June 30, 1997..................................................................................... F-11
Notes to Consolidated Financial Statements......................................................... F-13
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of CCA Companies Incorporated
We have audited the accompanying consolidated balance sheet of CCA Companies
Incorporated and subsidiaries as of June 30, 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CCA Companies
Incorporated and subsidiaries as of June 30, 1999, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
Spear, Safer, Harmon & Co.
Miami, Florida
March 31, 2000
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
CCA Companies Incorporated
We have audited the accompanying consolidated balance sheet of CCA Companies
Incorporated and subsidiaries as of June 30, 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CCA Companies
Incorporated and subsidiaries as of June 30, 1998, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the 1998
consolidated financial statements, the Company's dependence on outside
financing, recurring losses since inception and significant outflows of cash
from operations, raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are described in
Note 1 to the 1998 consolidated financial statements. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Miami, Florida
BDO SEIDMAN, LLP
December 15, 1998
F-3
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
CCA Companies Incorporated
Coconut Grove, Florida
We have audited the statements of operations, changes in stockholders' equity
and cash flows of Conserver Corporation of America (a development stage
company), for the ten months ended June 30, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the results of operations and cash flow of Conserver
Corporation of America for the ten months ended June 30, 1997 in conformity with
generally accepted accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
August 28, 1997
F-4
<PAGE>
CCA COMPANIES INCORPORATED
Consolidated Balance Sheets
June 30, 1999 and 1998
<TABLE>
<CAPTION>
A S S E T S
1999 1998
---------------- ----------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 425,662 $ 1,593,083
Accounts receivable 18,000 5,125
Prepaid and other current assets 165,262 513,279
Assets of Discontinued Operations:
Hotel Management - 450,709
---------------- ----------------
Total Current Assets 608,924 2,562,196
Loans receivable - long-term - 667,085
Deposits on gaming equipment - 422,015
Excess of cost over fair value of assets acquired, net
of accumulated amortization of $529,349 at June 30,
1999 and $177,874 at June 30, 1998 10,014,967 10,366,442
Property, equipment and leasehold improvements, net 11,382,535 7,344,462
Other assets 632,664 344,300
Assets of Discontinued Operations:
Hotel Management - 2,250,662
---------------- ----------------
$ 22,639,090 $ 23,957,162
================ ================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CCA COMPANIES INCORPORATED
Consolidated Balance Sheets
June 30, 1999 and 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Current Liabilities:
Accounts payable $ 363,018 $ 259,188
Accrued expenses 1,060,904 1,225,273
Current portion of long-term notes payable 500,000 -
Liabilities of Discontinued Operations:
Food 203,273 82,000
Hotel Management - 64,344
---------------- ----------------
Total Current Liabilities 2,127,195 1,630,805
---------------- ----------------
Long-term notes payable 600,000 -
---------------- ----------------
Minority interest in consolidated subsidiary 89,278 -
---------------- ----------------
Commitments and contingencies
Stockholders' Equity:
Preferred stock, par value $.01; 5,000,000 shares
authorized in 1999 and 1998, one junior preferred
stock, issued and outstanding at June 30, 1998,
cancelled in 1999 - -
Common stock, par value $.001; 50,000,000 shares
authorized in 1999 and 1998, 14,014,939 shares at
June 30, 1999 and 11,996,048 shares at June 30,
1998 issued and outstanding 14,016 11,997
Additional paid-in capital 46,892,901 44,806,570
Accumulated deficit (27,084,300) (22,492,210)
---------------- ----------------
Total Stockholders' Equity 19,822,617 22,326,357
---------------- ----------------
$ 22,639,090 $ 23,957,162
================ ================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
CCA COMPANIES INCORPORATED
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended Year Ended Ten Months Period
June 30, 1999 June 30, 1998 Ended June 30, 1997
------------------- ------------------- -------------------
<S> <C> <C> <C>
Revenues $ 5,534,249 $ - $ -
---------------- ---------------- ----------------
Operating Expenses:
Marketing and promotional 360,572 - -
General and administrative 7,566,040 3,397,974 -
Compensation paid by the issuance
of stock options and warrants 783,000 921,569 -
---------------- ---------------- ----------------
Total Operating Expenses 8,709,612 4,319,543 -
---------------- ---------------- ----------------
Loss from Operations (3,175,363) (4,319,543) -
---------------- ---------------- ----------------
Other Income (Expense):
Write-down of assets (609,833) - -
Interest income 11,114 288,518 51,180
Interest expense (445,105) (74,678) (407,346)
---------------- ---------------- ----------------
Total Other Income (Expense) (1,043,824) 213,840 (356,166)
---------------- ---------------- ----------------
Loss from Continuing Operations
Before Minority Interest (4,219,187) (4,105,703) (356,166)
Minority Interest (89,278) - -
---------------- ---------------- ----------------
Loss from Continued Operations (4,308,465) (4,105,703) (356,166)
---------------- ---------------- ----------------
Income (Loss) from Discontinued
Operations:
Food (425,175) (2,878,863) (8,205,901)
Hotel Management 141,550 (5,558,506) -
---------------- ---------------- ----------------
(283,625) (8,437,369) (8,205,901)
---------------- ---------------- ----------------
Net Loss $ (4,592,090) $ (12,543,072) $ (8,562,067)
================ ================ ================
Loss per Share of Common Stock:
Basic and Diluted:
Loss from continuing operations $ (0.34) $ (.45) $ (.08)
Loss from discontinued operations (0.02) (.92) (1.75)
---------------- ---------------- ----------------
Net Loss $ (.36) $ (1.37) $ (1.83)
================ ================ ================
Weighted Average Number of Common
Shares Outstanding 12,607,037 9,175,536 4,667,490
================ ================ ================
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
CCA COMPANIES INCORPORATED
Consolidated Statements of Stockholders' Equity
Years Ended June 30, 1999, 1998 and the Ten Month Period Ended
June 30, 1997
<TABLE>
<CAPTION>
Common Stock
Par Value $.001
---------------------------------
Subscriptions Additional
Shares Amount Receivable Paid-In Capital
---------------- --------------- ---------- ---------------
<S> <C> <C> <C> <C>
Balance - August 31, 1996 5,211,567 $ 5,212 $(2,741) $ 2,628,880
Repurchase and cancellations of shares
originally issued (1,366,667) (1,367) 1,367 (1,800,000)
Shares issued and treated as debt discount 62,504 63 -- 312,437
Sale of common stock ($5.00 per share) from
September 1 to November 7, 1996 303,000 303 -- 1,514,697
Legal services provided by stockholder
without charge -- -- -- 60,000
Collection of subscriptions receivable -- -- 1,374 --
Compensation charges paid by the
issuance of options and warrants -- -- -- 4,995,106
Services performed by Officer charged
to compensation and treated as a
contribution to capital -- -- -- 105,000
Net proceeds from issuance of common stock
in initial public offering 2,200,000 2,200 -- 8,856,527
Common stock contributed to treasury and
cancelled including an adjustment of
5,000 shares (25,000) (25) -- 25
Net loss for the period from September 1,
1996 through June 30, 1997 -- -- -- --
---------- ------- ------- ------------
Balance - June 30, 1997 6,385,404 6,386 -- 16,672,672
<CAPTION>
Junior
Preferred Accumulated
Stock Deficit Total
------------- -------------- ----------------
<S> <C> <C> <C>
Balance - August 31, 1996 $ -- $(1,387,071) $ 1,244,280
Repurchase and cancellations of shares
originally issued -- -- (1,800,000)
Shares issued and treated as debt discount -- -- 312,500
Sale of common stock ($5.00 per share) from
September 1 to November 7, 1996 -- -- 1,515,000
Legal services provided by stockholder
without charge -- -- 60,000
Collection of subscriptions receivable -- -- 1,374
Compensation charges paid by the
issuance of options and warrants -- -- 4,995,106
Services performed by Officer charged
to compensation and treated as a
contribution to capital -- -- 105,000
Net proceeds from issuance of common stock
in initial public offering -- -- 8,858,727
Common stock contributed to treasury and
cancelled including an adjustment of
5,000 shares -- -- --
Net loss for the period from September 1,
1996 through June 30, 1997 -- (8,562,067) (8,562,067)
------------- -------------- ----------------
-- (9,949,138) 6,729,920
Balance - June 30, 1997
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
CCA COMPANIES INCORPORATED
Consolidated Statements of Stockholders' Equity (Continued)
<TABLE>
<CAPTION>
Common Stock
Par Value $.001
------------------------- Subscriptions Additional
Shares Amount Receivable Paid-In Capital
---------- --------- ---------- ---------------
<S> <C> <C> <C> <C>
Net proceeds from exercise of over allotment
option 330,000 $ 330 $ - $ 1,447,239
Conversion of debentures 73,000 73 - 364,927
Issuance of common stock in exchange for
professional services 5,000 5 - 26,245
Issuance of common stock as part of the
Sakhalin business acquisition 2,000,000 2,000 - 10,398,000
Issuance of common stock in consideration
for rights and interests held by Sovereign 200,000 200 - 1,049,800
Issuance of common stock in consideration
for securing the Far East Consortium
Management Agreements 950,000 950 - 3,490,300
Sale of common stock ($5.14 per share) from
December 1997 to February 1998 2,044,763 2,045 - 8,952,625
Exercise of options at $2.00 per share 7,881 8 - 15,754
Options issued in consideration of the
acquisition of the Sakhalin business - - - 1,091,820
Options and warrants issued as compensation
for consulting services - - - 921,569
Options issued in exchange for legal services - - - 285,619
Services performed by Officer charged
to compensation and treated as a
contribution to capital - - - 90,000
Issuance of junior preferred stock -
(1 share outstanding) - - - -
Net loss for 1998 - - - -
------------- ----------- ------------ ------------
Balance - June 30, 1998 11,996,048 11,997 - 44,806,570
</TABLE>
<TABLE>
<CAPTION>
Junior
Preferred Accumulated
Stock Deficit Total
----- ------- -----
<S> <C> <C> <C>
Net proceeds from exercise of over allotment
option $ $ - $ 1,447,569
Conversion of debentures - - 365,000
Issuance of common stock in exchange for
professional services - - 26,250
Issuance of common stock as part of the
Sakhalin business acquisition - - 10,400,000
Issuance of common stock in consideration
for rights and interests held by Sovereign - - 1,050,000
Issuance of common stock in consideration
for securing the Far East Consortium
Management Agreements - - 3,491,250
Sale of common stock ($5.14 per share) from
December 1997 to February 1998 - - 8,954,670
Exercise of options at $2.00 per share - - 15,762
Options issued in consideration of the
acquisition of the Sakhalin business - - 1,091,820
Options and warrants issued as compensation
for consulting services - - 921,569
Options issued in exchange for legal services - - 285,619
Services performed by Officer charged
to compensation and treated as a
contribution to capital - - 90,000
Issuance of junior preferred stock -
(1 share outstanding) - - -
Net loss for 1998 - (12,543,072) (12,543,072)
--------- -------------- -------------
Balance - June 30, 1998 - (22,492,210) 22,326,357
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
CCA COMPANIES INCORPORATED
Consolidated Statements of Stockholders' Equity (Continued)
<TABLE>
<CAPTION>
Common Stock
Par Value $.001
------------------------- Subscriptions Additional
Shares Amount Receivable Paid-In Capital
---------- --------- ---------- ---------------
<S> <C> <C> <C> <C>
Cancellation of shares issued to FEC at $1.50
per share (700,000) $ (700) $ - $ (1,049,300)
Sale of common stock 2,053,201 2,053 - 1,674,547
Issuance of common stock in consideration
for the acquisition of Roulette 17,857 18 - 124,982
Issuance of additional stock, per Roulette
agreement, to compensate for fall in
stock price 116,813 117 - (117)
Issuance of shares in exchange for services
in acquisition of Roulette 7,143 7 - 49,993
Issuance of shares in exchange for
construction services in Suriname 89,000 89 - 200,161
Issuance of common stock in consideration
for the acquisition of food technology 127,877 128 - (128)
Exercise of options at $0.50 per share 7,000 7 - 3,493
Consulting services to Sakhalin project
paid by the Issuance of shares 300,000 300 - 224,700
Non-employee directors compensated by the
issuance of options - - - 233,000
Compensation charges incurred by reducing the
exercise price of 1,462,500 options and
warrants granted to directors and other - - - 550,000
Consulting services paid by the issuance
of warrants - - - 75,000
Cancellation of Junior Preferred Stock
(one share outstanding in 1998) - - - -
Net loss for 1999 - - - -
------------- ------------- ------------- --------------
Balance - June 30, 1999 14,014,939 $ 14,016 $ - $ 46,892,901
============= ============= ============= ==============
</TABLE>
<TABLE>
<CAPTION>
Junior
Preferred Accumulated
Stock Deficit Total
----- ------- ----------------
<S> <C> <C> <C>
Cancellation of shares issued to FEC at $1.50
per share $ - $ - $ (1,050,000)
Sale of common stock - - 1,676,600
Issuance of common stock in consideration
for the acquisition of Roulette - - 125,000
Issuance of additional stock, per Roulette
agreement, to compensate for fall in
stock price - - -
Issuance of shares in exchange for services
in acquisition of Roulette - - 50,000
Issuance of shares in exchange for
construction services in Suriname - - 200,250
Issuance of common stock in consideration
for the acquisition of food technology - - -
Exercise of options at $0.50 per share - - 3,500
Consulting services to Sakhalin project
paid by the Issuance of shares - - 225,000
Non-employee directors compensated by the
issuance of options - - 233,000
Compensation charges incurred by reducing the
exercise price of 1,462,500 options and
warrants granted to directors and other - - 550,000
Consulting services paid by the issuance
of warrants - - 75,000
Cancellation of Junior Preferred Stock
agreement to compensate for fall in
(one share outstanding in 1998) - - -
Net loss for 1999 - (4,592,090) (4,592,090)
------------ --------------- ---------------
Balance - June 30, 1999 $ - $ (27,084,300) $ 19,822,617
============ =============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
CCA COMPANIES INCORPORATED
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended Year Ended Ten Months Period
June 30, 1999 June 30, 1998 Ended June 30, 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Operating Activities:
Net loss $ (4,592,090) $ (12,543,072) $ (8,562,067)
Adjustments to reconcile net loss to net cash used in
operating activities, net of effect of acquisition -
Loss from discontinued operations 283,625 8,437,369 8,205,901
Minority interest 89,278 - -
Compensation paid by the issuance of
stock options and warrants 783,000 921,569 -
Write-down of assets 609,833 554,262 -
Depreciation and amortization 499,494 16,168 -
Services performed by Officer charged
to compensation and treated as a
contribution to capital - 90,000 -
Legal services provided by shareholder 114,619 171,000 -
Consulting services provided for
common stock 75,000 26,250 -
Amortization of goodwill 351,475 177,874 -
Changes in current assets and liabilities:
Accounts receivable (12,875) - -
Prepaid expenses and other current assets 348,017 (299,531) -
Accounts payable and accrued expenses (60,539) 1,429,461 -
---------------- ---------------- ----------------
Total Adjustments 3,080,927 11,524,422 8,205,901
---------------- ---------------- ----------------
Net Cash Used by Continuing Operations (1,511,163) (1,018,650) (356,166)
Net Cash Used by Discontinued Operations (355,322) (3,179,133) (1,171,978)
---------------- ---------------- ----------------
Net Cash Used by Operating Activities (1,866,485) (4,197,783) (1,528,144)
---------------- ---------------- ----------------
Investing Activities:
Property, equipment and leasehold
improvements (3,642,111) (2,250,193) (19,285)
Deposits on assets - (422,015) -
Project development costs and other (42,813) (4,308,637) -
Construction finance costs and other (313,364) (344,300) -
Cash from acquisition, net of funds acquired - 544,632 -
---------------- ---------------- ----------------
Net Cash Used for Continued Operations (3,998,288) (6,780,513) (19,285)
Net Cash Provided (Used) for
Discontinued Operations 1,810,000 (4,570,325) (1,375,800)
---------------- ---------------- ----------------
Net Cash Used in Investing Activities (2,188,288) (11,350,838) (1,395,085)
---------------- ---------------- ----------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
CCA COMPANIES INCORPORATED
Consolidated Statements of Cash Flows (Continued)
<TABLE>
<CAPTION>
Year Ended Year Ended Ten Months Period
June 30, 1999 June 30, 1998 Ended June 30, 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Financing Activities:
Subscriptions receivable $ -- $ -- $ 1,374
Subscription funds (returned) received -- -- (90,000)
Repurchase of shares of common stock -- -- (1,800,000)
Net proceeds from initial public offering -- 1,447,569 8,858,727
Proceeds from sale of common stock 1,603,500 8,970,432 1,515,000
Cash advance to Suriname Casino 50,000 -- --
Funds used for loans and notes receivable 57,252 (877,085) --
Borrowings 2,426,600 -- 1,250,000
Repayments of notes payable (1,250,000) (114,672) (1,500,000)
---------------- ---------------- ----------------
Net Cash Provided by Financing Activities 2,887,352 9,426,244 8,235,101
---------------- ---------------- ----------------
Net Increase (Decrease) in Cash and
Cash Equivalents (1,167,421) (6,122,377) 5,311,872
Cash and Cash Equivalents, Beginning of Year 1,593,083 7,715,460 2,403,588
---------------- ---------------- ----------------
Cash and Cash Equivalents, End of Year $ 425,662 $ 1,593,083 $ 7,715,460
================ ================ ================
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the period of interest $ -- $ -- $ 129,864
Non-cash transactions:
Issuance of common stock in order to
secure convertible debt 76,600 365,000 312,500
Common stock contributed to treasury and
cancelled (includes a $5 adjustment) -- -- 25
Cancellation of loan receivable in exchange
for inventory -- -- 375,800
Cancellation of subscription receivable in
exchange for shares of common stock -- -- 1,367
Issuance of common stock in consideration
for the Sakhalin Business Acquisition -- 10,400,000 --
Options issued in consideration for
the Sakhalin Business Acquisition -- 1,091,820 --
Issuance of common stock in consideration
for the acquisition of Sovereign's rights
and interests -- 1,050,000 --
Issuance of common stock to consultant for
services with respect to Sakhalin Project 225,000 -- --
Issuance of common stock in consideration
for the investment in Roulette 175,000 -- --
Issuance of common stock to construction
contractor of Suriname Casino 200,250 -- --
Cancellation of convertible debentures
against loan receivable -- 210,000 --
Stock issued in consideration for the
acquisition of agreements -- 3,491,250 --
Cancellation of common stock as part of
termination of the Hotel Management
Agreements (1,050,000) -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE>
CCA COMPANIES INCORPORATED
Notes to Consolidated Financial Statements (Continued)
Years Ended June 30, 1999, 1998 and Ten Month Period Ended June 30, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company - CCA Companies Incorporated, formerly known as
Conserver Corporation of America, (the "Company") is a Company
incorporated under the laws of the State of Delaware effective March
6, 1996. The Company initially adopted a fiscal year ending August
31 but elected to change its fiscal year end to June 30 during 1997.
During the fiscal year ended June 30, 1998, the Company changed its
name to CCA Companies Incorporated. The Company was considered a
development stage Company until March 1998.
Subsidiaries- The consolidated financial statements include the
accounts of the Company and its subsidiaries. The subsidiaries are
Sakhalin General Trading and Investments Ltd. ("SGTI"), Sakhalin
City Center Ltd. ("SCC"), Dorsett Hotels and Resort International
(m)Snd. Bhd. ("DHRI"), Dorsett Hotel & Resorts Inc. ("Dorsett"),
Suriname Leisure Company A.V.V. ("SLC") and Roulette Kft.
("Roulette") (majority shareholding disposed of in December 1998)
and are based and operating in Cyprus, Russian Federation, Malaysia,
United States, Suriname and Hungary, respectively.
Nature of Operations - The Company's principal line of operations is
to provide gaming services through the ownership and management of a
Casino in Suriname. In addition, the Company is in the planning and
design stage relating to a Casino and mountain resort project on
Sakhalin Island.
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 to the date on
which CCA disposed of its majority interest, December 1998.
Inter-company transactions and balances have been eliminated in
consolidation.
SCC is currently generating losses and the minority shareholders are
not obligated to fund these losses. Accordingly, minority interest
held in SCC is not reflected in the financial statements.
Casino Revenue - Casino revenue is the net win from gaming
activities, which is the difference between gaming wins and losses.
Cash and Cash Equivalents - The Company considers investments with
original maturities of three months or less at the time of purchase
to be cash equivalents. At times, cash balances in the Company's
bank accounts in the United States may exceed federally insured
limits.
F-13
<PAGE>
CCA COMPANIES INCORPORATED
Notes to Consolidated Financial Statements (Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Financial Instruments - The carrying amounts of financial
instruments including loans receivable, accounts receivable,
accounts payable and debt approximates fair value.
Excess Cost over Fair Value of Assets Acquired - The excess of cost
over the fair value of the SGTI assets acquired is being amortized
on a straight-line basis, over the estimated future periods to be
benefited (30 years). The Company reviews the recoverability of the
excess cost over the fair value of assets acquired on an on going
basis.
Property, Equipment and Leasehold - 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.
Income Taxes - For the purpose of these financial statements the
Company has adopted the provisions of SFAS No. 109, "Accounting for
Income Taxes," for all periods presented. Under the asset and
liability method of SFAS 109, deferred taxes are recognized for
differences between financial statement and income tax bases of
assets and liabilities.
Preferred Stock - The Company is authorized to issue preferred
stock. Specific powers, preferences, rights, qualifications,
limitations and restrictions are to be designated by the Company's
Board of Directors at the time of issuance.
Stock Based Compensation - SFAS No. 123, "Accounting for Stock Based
Compensation." 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. (see Note 10)
Impairment of Long-Lived Assets - The Company utilizes 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.
F-14
<PAGE>
CCA COMPANIES INCORPORATED
Notes to Consolidated Financial Statements (Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company evaluates the recoverability of long-lived assets by
measuring the carrying amount of the assets against the estimated
un-discounted future cash flows associated with them. At the time
such evaluations indicate that the future un-discounted cash flows
of the Long-lived assets are not sufficient to recover the carrying
value of such assets, the assets are adjusted to their fair values.
The Company recorded charges of approximately $610,000 for the year
ended 1998 relating to Roulette and $4,200,000 for the year ended
June 30, 1999 relating to Dorsett (see Note 3) as a result of a
financial impairment of several of its long-lived assets.
Earnings Per Share - Effective December 31, 1997, the Company
adopted SFAS No. 128, "Earnings Per Share," which simplifies the
computation of earnings per share requiring the restatement of all
prior periods.
Basic net loss per share of common stock is based on the weighted
average number of common shares outstanding during each period.
Diluted loss per share of common stock is computed on the basis of
the weighted average number of common shares and common shares
equivalent securities outstanding. Securities having an
anti-dilutive effect are excluded from the calculation.
The weighted average number of common shares outstanding for all
periods presented retroactively reflects stock splits and reverse
stock splits effected by the Company.
Options amounting to 4,062,619 for the year ended June 30, 1999,
3,169,619 for the year ended June 30, 1998 and 1,970,000 for the ten
month period ended June 30, 1997 and warrants amounting to 3,819,012
for the year ended June 30, 1999, 2,260,678 for the year ended June
30, 1998 and 1,225,000 for the ten month period ended June 30, 1997
have not been included in the computation of net loss per common
stock-diluted because of their anti-dilutive effect.
Foreign Currency Translation - The statutory currencies in the
countries in which the Company operates are the Cyprus Pound, the
Russian Ruble, the Malaysian Ringgit, the United States Dollar, the
Suriname Guilder and the Hungarian Forints. The reporting currency
is the U.S. Dollar.
For 1999, the Company determined that the functional currency for
its 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,
SCC, is situated in a highly inflationary economy. Accordingly,
SCC's functional currency will be the U.S. Dollar.
F-15
<PAGE>
CCA COMPANIES INCORPORATED
Notes to Consolidated Financial Statements (Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
For 1998 and 1997, the financial statements for its 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 U.S. 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. As of June 30,
1998, the cumulative foreign currency translation adjustment was
insignificant and therefore not disclosed as a separate component of
stockholders' equity. Exchange losses of approximately $79,000 for
the year 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
period ended June 30, 1997.
Future Accounting Pronouncements - 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.
Reclassifications - Certain prior year balances have been
reclassified to conform to the 1999 presentation.
F-16
<PAGE>
CCA COMPANIES INCORPORATED
Notes to Consolidated Financial Statements (Continued)
NOTE 2 - INITIAL AND NEW LINES OF BUSINESS
The Company's original principal business was food preservation
technology. (See Note 3) Due to the Company's desire to enter
several new lines of business and its inability to market and
distribute Preservit(TM), its food technology product, in a
commercially viable fashion, the Company identified and explored
several business opportunities and entered into a number of new
lines of business.
In August 1997, the Company announced that it was diversifying
beyond its sole line of business of marketing, distributing and
otherwise commercially exploiting its food technology product and
was exploring a new line of business in the hotel and casino
industry (the "New Lines of Business"). At a Special Meeting of
Stockholders, which the Company held in December 1997, the Company's
stockholders voted on and approved various proposals regarding the
New Lines of Business and New Business Opportunities as described
herein.
Sakhalin Island Casino and Resort
In 1997, the Company focused on a gaming opportunity in Asia and is
currently in the 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. SCC
will develop a 140 million dollar 450-room hotel/casino complex on a
ten-acre site in the center of the City of Yuzhno-Sakhalinsk
("City") with further development planned at a nearby ski mountain.
The Company plans for the related casino to initially have 70 tables
and 350 slot machines with future plans to add additional gaming
equipment. The City 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 revenues, as defined, as well as an incentive fee of 10% of
gross profits.
Although, there are currently several small casinos operating on the
island, the City has committed contractually that it will not permit
them to increase their floor areas or extend the range of their
operations without the written approval of SCC. In addition, the
Company will also have certain rights to participate in the
development and management of any future casinos within the
jurisdiction of the City.
F-17
<PAGE>
CCA COMPANIES INCORPORATED
Notes to Consolidated Financial Statements (Continued)
NOTE 2 - INITIAL AND NEW LINES OF BUSINESS (Continued)
The Company, in October 1997, entered into a stock purchase
agreement (the "Sakhalin Agreement") with SGTI and in December 1997
executed an assignment agreement with Sovereign Gaming and Leisure
Limited ("Sovereign"). Pursuant to the Sakhalin Agreement, the
Company would acquire all of the outstanding shares of SGTI. SGTI
owns a 65% interest in SCC. SCC is a closed joint stock company
incorporated under the laws of the Russian Federation that holds
rights, including the necessary gaming licenses to operate, that
have been granted by various governmental units to develop a casino
in Sakhalin. In addition to the acquisition of SGTI, the Company
would acquire all rights and interest to or in the Sakhalin Project
held by Sovereign, which include certain operating and project
management agreements.
In December 1997, the Company completed the acquisition of 100% of
the shares of SGTI in exchange for 2,000,000 shares of its common
stock. The Company also acquired all rights and interests of
Sovereign in exchange for 200,000 shares of common stock to the
owners of Sovereign. In addition, two directors of the Company were
granted options to purchase 300,000 and 200,000 shares of common
stock at an exercise price equal to $6.125 per share in exchange for
their services relating to the acquisition of SGTI ("Sakhalin
Options"). The Sakhalin Options subsequently expired without being
exercised.
The Company's common stock was valued at $5.20 per share on the date
the acquisition was completed and as such, the value attributed to
the 2,000,000 shares of the Company's common stock issued to the
owners of SGTI was $10,400,000. The Sakhalin Options were valued at
$1,091,819 and capitalized as part of the purchase price of SGTI.
The Company's common stock issued to the owners of Sovereign were
valued at $5.25 per share on the date the assignment agreement was
entered into. Thus the value attributed to the shares was
$1,050,000.
As part of the Sakhalin Agreement, the Company paid $3,000,000 to
SGTI. The advance has been eliminated in consolidation as an
inter-company account.
The acquisition has been accounted for as a purchase and accordingly
the results of operations of SGTI have been included in the
Company's consolidated financial statements since the date of
acquisition.
F-18
<PAGE>
CCA COMPANIES INCORPORATED
Notes to Consolidated Financial Statements (Continued)
NOTE 2 - INITIAL AND NEW LINES OF BUSINESS (Continued)
The transaction was recorded as follows:
Common stock and options issued $ 11,491,819
Acquisition costs 193,885
------------
Purchase price 11,685,704
------------
Construction in progress acquired 3,638,957
Liabilities assumed (3,340,925)
Other assets 843,356
------------
Fair value of net assets acquired 1,141,388
------------
Excess of aggregate purchase price
over the fair market value of the
net assets acquired $ 10,544,316
============
The excess of the aggregate purchase price over the fair market value
of net assets acquired will be amortized over 30 years on a
straight-line basis. The Company believes that this is appropriate due
to the brick and mortar features of the Sakhalin Project and the aspect
that, if the project is successful, revenues will be generated over a
long period of time.
The following unaudited pro forma summary present the results of
operations of the Company as if the acquisition had occurred on
September 1, 1996:
<TABLE>
<CAPTION>
Year Ended Period Ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Revenues $ 649,620 $ -
================== ================
Net loss $ (12,716,676) $ (9,180,487)
================== ================
Net loss per share (1.26) (1.38)
================== ================
Weighted average number of
common shares outstanding 10,074,166 6,667,490
================== ================
</TABLE>
F-19
<PAGE>
CCA COMPANIES INCORPORATED
Notes to Consolidated Financial Statements (Continued)
NOTE 2 - INITIAL AND NEW LINES OF BUSINESS (Continued)
For the fiscal year ending June 30, 1999, SGTI and SCC were
subsidiaries of the Company. Accordingly, no pro forma summary for
the year ended June 30, 1999 is included above.
The Sakhalin Agreement provides that, upon request of the Company,
Sovereign may agree to become project manager during the
construction phase of the Sakhalin project, subject to reasonable
compensation for such services, which shall not exceed the lesser of
5% of the construction cost of the Sakhalin Project or $5,000,000.
Subsequent to the Sakhalin agreement, Mr. Dallas Dempster
("Dempster"), a paid consultant to Sovereign, was recruited to be
the President and Chief Executive Officer ("CEO") of CCA.
Accordingly, it is the Company's current intent not to employ
Sovereign and to manage the construction phase of the Sakhalin
project directly.
In October 1997, the Company entered into an agreement (the
"Development Services Agreement") with Mr. David Chiu ("Chiu") for
certain development services to be performed, including using his
best efforts to secure the necessary debt financing and guarantees
for the complete turnkey construction of the Sakhalin Project. The
Development Service Agreement expired in August 1998 without Chiu
rendering any services.
In September 1998, the Company entered into a letter of intent with
JSC Rosneftegazstroy ("RNGS"), a large Russian construction company.
The letter of intent was aimed at RNGS guaranteeing the financing of
a turnkey construction contract on Sakhalin Project and acting as a
subcontractor. The Company and RNGS never contractually acted on the
letter of intent and it subsequently was abandoned.
In June 1999, the Company entered into an agreement ("Financing
Agreement") with the Arter Group Limited ("Arter") and Valmet S.A.
("Valmet"). According to the agreement, Arter and Valmet will
negotiate on the Company's behalf to acquire financing of 70% of the
Sakhalin Project's total estimated cost. The remaining 30% is be
injected as equity financing arranged by the Company. In
consideration for the additional equity raised, the Company's
ownership in the SCC will increase to 80% (from the 65% the Company
currently owns). The Sakhalin Oblast Government and the City will
own the remaining 20% of SCC, subject to final negotiations. If
Arter and Valmet are successful, as defined by the agreement, the
Company would arrange to transfer a percentage of its interest in
SGTI to Arter and Valmet. The proposed structure of ownership shall
be as follows:
o CCA 50% shares of SGTI - effective ownership in the Sakhalin
project of 40%
o Arter 31.25% shares of SGTI - effective ownership in the Sakhalin
project of 25%
o Valmet 18.75% shares of SGTI - effective ownership in the
Sakhalin project of 15%
The agreement shall be effective the day there is a qualified
commitment for funding and the parties to the Financing Agreement
have accepted the terms of the financing.
F-20
<PAGE>
CCA COMPANIES INCORPORATED
Notes to Consolidated Financial Statements (Continued)
NOTE 2 - INITIAL AND NEW LINES OF BUSINESS (Continued)
The Sakhalin Project requires substantial financing to progress
further. In November 1999, the Company submitted a loan application
for financing to the Sberbank, a Russian Federation bank, for
financing of 106.8 million dollars. Currently, the application is
being considered. If financing is not obtained from the Sberbank,
the Company will have to seek financing elsewhere or abandon the
project. If the Company is forced to abandon the project due to a
lack of financing, the Company will attempt to market the plans,
licenses and rights in order to recover as much of the historic
expenditures as possible. The Company is unable at this time to
quantify what recoveries it will attain, if any.
To date, the Company has recorded assets (construction in progress
and intangibles) totaling 15.9 million dollars.
If the Company is successful in financing the Sakhalin Project, the
Company will have to design and set up infrastructure that is not
currently in place. In addition, the Company will have to employ a
significant number of people and retain consultants and contractors
to manage, design and construct the property, which will require
significant financial resources.
Hotel Management Agreement
During the fiscal year ending June 30, 1998, the Company entered
into two hotel management agreements (the "Hotel Management
Agreements"). One agreement with Dorsett Hotels and Resorts
International Ltd. ("DHR"), a company owned and controlled by David
Chiu, and the other with Far East Consortium International Ltd.
("FEC"). Under the agreements, the Company acquired the right to
(directly or through a subsidiary) exclusively manage and operate
three hotels that were in service and the right to manage and
operate five other hotels that were scheduled to open in the future.
The right to manage the properties was pursuant to long-term
contracts ("Hotel Operating Contracts") that had previously been
entered into with the owners of each of the hotels by DHR and FEC.
The Company paid consideration of 3 million dollars at the execution
of the Hotel Management Agreements in cash and further, a promise to
issue two million shares of the Company's common stock payable on a
pro-rata basis on the assignment of the hotel operating contracts
with each hotel. Subsequently, the Company issued 950,000 shares of
its common stock on the assignment of contracts with three operating
hotels.
During July 1998, the Company borrowed 1 million dollars from FEC
for six months and with interest at the prime rate plus 1%.
F-21
<PAGE>
CCA COMPANIES INCORPORATED
Notes to Consolidated Financial Statements (Continued)
NOTE 2 - INITIAL AND NEW LINES OF BUSINESS (Continued)
Through November 4, 1998, the Company held Hotel Operating Contracts
for the three operating hotels with a total of approximately 1,200
rooms. Contrary to the terms of the Hotel Operating Contracts, the
Company was not permitted to actively manage two of the Hotels. In
addition, the Company was notified that the renovation and/or
construction of the five hotels that were to be turned over to the
Company in the future had been stopped and that the projects were
being reviewed for financial efficacy.
As a result of the failure of FEC and DHR to comply with the terms
of the Hotel Management Agreements, the parties to the agreements
reached a settlement in November 1998 to terminate the agreements
and exchange mutual releases of related obligations. According to
the terms of the settlement, the Company received $450,000 in cash,
700,000 shares of the Company's common stock and retained $1,625,000
paid historically to the Company as management fees and loans. (See
Note 3)
The Suriname Casino and the Casino Lease
In April 1998, the Company entered into an agreement (the "Suriname
Casino Agreement") with Parbhoe Handelmij NV (Parbhoe), a Suriname
limited liability company. Under the agreement the parties formed
and each acquired a 50% interest in Suriname Leisure Company (SLC),
an Aruban limited liability company to develop a casino project (the
"Suriname Casino") in Paramaribo, the capital city of Suriname.
Pursuant to the Suriname Casino Agreement, the Company's fully owned
subsidiary Dorsett, entered into the "Suriname Casino Management
Agreement" with SLC to manage the Suriname Casino. As of June 30,
1999, the Company has advanced approximately 4.6 million dollars to
SLC for this project, of which approximately 4.0 million dollars was
spent for property, equipment and leasehold improvements. The
Company retains a lien and security interest in the property and
equipment until the advance is paid back by SLC.(See Note 7)
The Suriname Casino Management Agreement provides for fifteen years
exclusive operating rights of the Suriname Casino for a base fee
equal to three percent of revenues, as defined, plus an incentive
fee of ten percent of gross profits, as defined.
Initially, the Company operated a small temporary casino commencing
October 1998. The permanent casino facility was completed and opened
in March 1999, which is when the Company vacated the temporary
facility. The Suriname casino currently occupies two leased floors,
totaling about 20,000 square feet, in the Plaza Hotel, which is in
downtown Paramaribo. The casino has approximately 20 gaming tables,
approximately 160 slot machines and a 50-seat restaurant. The
Company leased the Casino premises from Parbhoe for fifteen years
ending in February 2013, for a yearly rent of $200,000, subject to
future increases based on the Suriname Consumer Price Index.
F-22
<PAGE>
CCA COMPANIES INCORPORATED
Notes to Consolidated Financial Statements (Continued)
NOTE 2 - INITIAL AND NEW LINES OF BUSINESS (Continued)
Budapest Casino
In April 1998, the Company's wholly owned subsidiary, Dorsett
entered into an agreement with Casino Bahia De Cadiz S.A. ("CBC")
and Mrs. Teresa Juste Picon, ("Juste") to purchase a 95% interest in
the equity of Roulette Kft. ("Roulette"), a Hungarian limited
liability company. Roulette owned and operated the Orfeum Casino in
Budapest. In addition and as part of the agreement, the Company
acquired receivables of 1.5 million dollars due to CBC and Juste
under loan agreements and lease agreements with Roulette (the
"Budapest Casino").
As of June 30, 1998, the Company paid $100,000 to the shareholders
of Roulette as a deposit toward the purchase. In addition, prior to
closing, the Company advanced additional funds of approximately
$608,000 to Roulette. At the closing of the acquisition in September
1998 the Company delivered to Cadiz and Juste 17,857 shares of the
Company's common stock based on a value of $7.00 per share or
$125,000 in total. In addition, the agreement required the issuance
of additional shares to make up any shortfall in value from the
$125,000 in value of shares delivered if the average stock price
subsequently declined. The 10-day average price proceeding March 1,
1999 was $0.93 and as a result the Company issued an additional
116,813 shares of its common stock to CBC and Juste in May 1999.
In December 1998, the Company entered into an agreement with A.G.M.
International LTD ("AGM"). AGM is an Israeli junket operator
experienced in organizing junket and premium casino player groups.
AGM was granted 50% ownership of Roulette by agreeing to pay the
Company $100,000 at closing and to pay an additional $100,000 if
Roulette was able to renew its gaming license, which was due to
expire November 1999, with the Hungarian Gaming Board. In addition,
the agreement required AGM, as part of the transaction, to fund
$100,000 of additional operating float needed in order to continue
and $50,000 for general improvements.
For arranging the transaction with AGM, the Company paid a minority
shareholder of Roulette a fee of $75,000 that was capitalized as
part of the Company's investment.
During 1999, the Hungarian Gaming Board made a decision to reduce
the number of casino licenses that existed at the time the Company
acquired its interest. Roulette was unsuccessful in its bid to
obtain one of the reduced number of gaming licenses available and
was forced to close the casino at the end of October 1999.
F-23
<PAGE>
CCA COMPANIES INCORPORATED
Notes to Consolidated Financial Statements (Continued)
NOTE 2 - INITIAL AND NEW LINES OF BUSINESS (Continued)
At June 30, 1999, the Company wrote off its entire investment in
Roulette as delineated below:
Investment in Roulette $ 300,000
Loans to Roulette 608,311
----------------
908,311
Less: Loss from the Roulette subsidiary (298,478)
----------------
609,833
Less: Balance of investment written off (609,833)
----------------
$ -
================
Business, Political and Economic Conditions
The Company's operating and construction activities are taking place
principally in the Russian Federation and in Suriname. Both the
Russian Federation and Suriname have experienced within the last
three years significant devaluations of their currencies. The
Banking industry in the Russian Federation has experienced several
major banking failures. Additionally, the Russian Federation is
currently experiencing consequential changes in its political
leadership.
Currency Exchange Controls
With regard to the activities taking place in the Russian Federation
and Suriname, it is management's belief that it will be able to
repatriate earnings without official impediments. There are currency
exchange controls in place in the Russian Federation, which the
Company is addressing in order to assure the ready ability to
transfer funds out of the country.
F-24
<PAGE>
CCA COMPANIES INCORPORATED
Notes to Consolidated Financial Statements (Continued)
NOTE 3 - DISCONTINUED OPERATIONS
Food Preservation Technology
In November 1999, the Company officially abandoned its food
preservation business and, accordingly, has reflected all losses
attributable to such business as discontinued operations. The assets
of the food preservation business consisted principally of fully
reserved loans to two companies, Agrotech and CPC. In addition, the
Company does not plan to exercise its option to acquire a
controlling equity interest in entities that possess other food
preservation technologies.
The results of operations of the food preservation business through
June 30, 1999 that have been classified as a loss from discontinued
operations are as follows:
<TABLE>
<CAPTION>
Year Ended June 30, Period Ended
----------------------- June 30,
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Revenues $ -- $ 9,879 $ --
Costs and Expenses 425,175 2,888,742 8,205,901
---------------- ---------------- ----------------
Loss from discontinued
operations $ 425,175 $ 2,878,863 $ 8,205,901
================ ================ ================
</TABLE>
No tax benefit due to the loss from discontinued operations has been
recorded due to the Company's uncertainty regarding future earnings.
Included in Costs and Expenses are reserves for loans made to the
Food Division of $1,620,830 in 1998 and $1,000,000 in 1997.
Hotel Management
As a result of the termination of the Hotel Management Agreements
between the Company, FEC and DHR in November 1998 and the subsequent
dismissal of the hotel management employees in April 1999, the
Company had no active hotel management operating business. The
Company discontinued this line of business and reflected the related
income, assets and liabilities as discontinued operations. The
Company recorded a charge of 4.2 million dollars in 1998 to write
down the carrying value of the Hotel Management Agreements, assets
and trade names.
F-25
<PAGE>
CCA COMPANIES INCORPORATED
Notes to Consolidated Financial Statements (Continued)
NOTE 3 - DISCONTINUED OPERATIONS (Continued)
The results of operations of the hotel management business through
June 30, 1999 that have been classified as a loss from discontinued
operations are as follows:
<TABLE>
<CAPTION>
Year Ended June 30, Period Ended
------------------------ June 30,
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues $ 363,301 $ 639,741 $ -
Costs and Expenses 221,751 6,198,247 -
-------------- -------------- --------------
Income (Loss) from
discontinued operations $ 141,550 $ (5,558,506) $ -
============== ============== ==============
</TABLE>
NOTE 4 - INITIAL PUBLIC OFFERING AND PRIVATE PLACEMENTS
From inception to November 1996, the Company raised capital
necessary for its business development through debt and equity
private placements.
In June 1997, the Company completed an initial public offering for
which it received net proceeds of approximately $8,859,000 from the
sale of 2,200,000 shares of its common stock, $0.001 par value (the
"common stock") at a per share price of $5.00. In July 1997, the
Company's underwriter exercised its over allotment option to
purchase an aggregate of 330,000 shares of common stock at $5.00 per
share, resulting in the Company receiving additional net proceeds of
approximately $1,448,000. Aggregate net proceeds to the Company from
the IPO amounted to approximately $10,307,000. At the time of the
IPO, the underwriters obtained Underwriters' Warrants to purchase
220,000 shares of common stock exercisable for a period of four
years at $8.25 per share.
In November 1997, the Company commenced efforts to raise additional
capital to fund its new lines of business and new business
opportunities. The Company completed its private placement offering
in February 1998 and received net proceeds in the aggregate of
approximately $8,955,000 from the sale of 2,044,763 shares of its
common stock at a per share price of $5.14. At the time of the
offering, the underwriters obtained Underwriters' Warrants to
purchase 715,678 shares of common stock exercisable for a period of
four years at $5.14 per share.
During the year ended June 30, 1999, the Company received $1,676,600
from the sale of 2,053,200 shares of common stock to private
investors. At the time of the sale of common stock, the Company
issued warrants to purchase 1,280,334 shares of the Company's common
stock exercisable for periods ranging from 1 to 4 years and at
exercise prices of $1.00. An additional 25,000 warrants with an
exercise period of one year and an exercise price of $2.00 per share
were issued. All warrant exercise prices exceed the market value of
the stock at the dates that they were issued.
F-26
<PAGE>
CCA COMPANIES INCORPORATED
Notes to Consolidated Financial Statements (Continued)
NOTE 5 - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
At June 30, property, equipment and leasehold improvements consist
of the following:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Office equipment and other assets $ 358,591 $ 239,698
Casino and restaurant equipment 1,856,678 1,010,644
Vehicle 6,500 6,500
Leasehold improvements 4,426,767 1,322,190
Construction in progress 5,251,396 4,783,333
----------------- -----------------
11,899,932 7,362,365
Less: Accumulated depreciation (517,397) (17,903)
----------------- -----------------
$ 11,382,535 $ 7,344,462
================= =================
</TABLE>
Depreciation expense is $499,494 for the year ended June 30, 1999,
$16,168 for the year ended June 30, 1998 and $1,678 for the ten
month period ended June 30, 1997.
NOTE 6 - INCOME TAXES
CCA and Dorsett
At June 30, 1999, the Company had net operating loss carryforwards
("NOL") of approximately $14,824,000 that expire through 2014. In
the event of a change in ownership of the Company, the utilization
of the NOL will be subject to limitation under certain provisions of
the United States Internal Revenue Code.
CCA, a U. S. Corporation, invested in DHRI a total of $99,665 and
invested in Roulette a total of $908,311. Due to DHRI and Roulette
discontinuing their operations, CCA is entitled to take capital
losses for investments in DHRI and Roulette. Under certain
provisions of the United States Internal Revenue Code capital losses
can only be used to offset capital gains. Unused capital losses are
carried forward indefinitely until they can be used against future
capital gains.
Dorsett is managing the Suriname Casino and will be managing the
Sakhalin Project. Management fees generated by Dorsett will be
subject to U.S. tax.
F-27
<PAGE>
CCA COMPANIES INCORPORATED
Notes to Consolidated Financial Statements (Continued)
NOTE 6 - INCOME TAXES (Continued)
Deferred income taxes is comprised of the following at June 30,
1999:
<TABLE>
<CAPTION>
<S> <C>
Start-up expenses capitalized for tax purposes $ 2,171,000
Compensation charges paid by issuance
of options and warrants 3,043,000
Capital loss carryforward 202,000
Net operating loss carryforward 5,930,000
------------------
Gross deferred tax asset 11,346,000
Deferred tax asset valuation allowance (11,346,000)
------------------
Net deferred tax asset $ -
==================
</TABLE>
Realization of any portion of the Company's deferred tax asset at
June 30, 1999 is dependent upon future earnings and capital gains.
Due to the uncertainty of future earnings and capital gains a
$11,346,000 valuation allowance has been provided.
DHRI and Roulette
The Company's subsidiaries DHRI and Roulette experienced substantial
losses. After closing operations and liquidating the net assets in
each entity, DHRI and Roulette are currently dormant. The Company
does not anticipate at this time any future earnings against which
losses may be applied. Accordingly, the Company has not provided for
deferred tax assets for DHRI and Roulette.
SCC
SCC will be subject to Russian Corporate tax on taxable profits once
the Sakhalin Project commences operations. Currently, the Federal
profit tax is 11% and the regional tax can be as high as 19%. In
addition, repatriation of profits generated by SCC in the Russian
Federation by CCA may be highly regulated by the Russian Central
Bank and the Taxing Authority. Any transfers of funds to entities
outside the Russian Federation require special authorization from
the Central Bank and the payment of dividends are subject to heavy
double taxation laws. The Company believes that once the Sakhalin
Project commences operations the Russian Central Bank and the Taxing
Authority will make profit repatriation concessions available.
F-28
<PAGE>
CCA COMPANIES INCORPORATED
Notes to Consolidated Financial Statements (Continued)
NOTE 6 - INCOME TAXES (Continued)
SGTI
SGTI, which holds the Company's investment in SCC, is incorporated
in Cyprus. Companies that are registered in Cyprus but are managed
and controlled outside of Cyprus are not liable for tax on income
occurring, derived and received outside of the country.
Suriname Casino
SLC has requested that the Government of Suriname grant it certain
concessions regarding the imposition of taxes and import duties. It
is the opinion of Company's counsel that based upon 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 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, on an 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.
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 that 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 duties have been made
with regard to the activities conducted by SLC.
Until June 30, 1998 the Company, for tax purposes, did not have any
operations and therefore no net operating loss. All of the expenses
incurred to that date were pre-operating and accordingly were
capitalized. Subsequent to the commencement of operations
capitalized expenses are being amortized over sixty months.
F-29
<PAGE>
CCA COMPANIES INCORPORATED
Notes to Consolidated Financial Statements (Continued)
NOTE 7 - LONG-TERM NOTES PAYABLE
In September 1998, the Company borrowed $600,000 from its 50%
co-owner, Parbhoe, in SLC for the construction of its permanent
casino facilities. Interest on the loan is calculated using an
interest rate of 3% per month.
In December 1998, the Company arranged to borrow an additional 1.0
million dollars from the 50% co-owner in SLC. Ultimately, only
$750,000 was advanced, which SLC used to complete the construction
of the casino. The loan is subject to 4% monthly interest and is
payable within six months of the disbursement. The loan was paid off
in full in August of 1999.
The outstanding balance of loans owing to Parbhoe is being paid out
of the excess cash flow generated by the operations of SLC. In
addition, when SLC repays the Company the funds it advanced,
principal payments of approximately $0.15 for every $0.85 of the
excess cash flow utilized to pay back the advances must be paid to
Parbhoe. (See Note 2}
NOTE 8 - RELATED PARTY TRANSACTIONS
Legal
The Company incurred legal fees of approximately $127,000 for the
year ended June 30, 1999, $546,000 for the year ended June 30, 1998
and $149,000 during the ten month period ended June 30, 1997 to
related parties. In addition, free legal services amounting to
$60,000, recorded as additional paid-in capital were provided by the
same related parties in the ten month period ended June 30, 1997
(none provided in 1999 and 1998).
The Company issued 187,500 options valued at approximately $285,619
in June 30, 1998 and 25,000 options valued at approximately $50,000
in June 30, 1997 against the fees described above. The value of the
options issued in 1998 has been amortized as legal expense as
counsel rendered services. Legal expense of $171,000 was charged
during the year ended June 30, 1998 and the balance, $115,000, was
charged during the year ended June 30, 1999.
Consultants
During the year ended June 30, 1999, the Company issued 300,000
shares of its common stock at $0.75 per share to Valmet, a
consultant, for services performed relating to the Sakhalin project.
At the same time, the Company issued 150,000 two year warrants to
Valmet with an exercise price of $1 and valued at $25,000.
F-30
<PAGE>
CCA COMPANIES INCORPORATED
Notes to Consolidated Financial Statements (Continued)
NOTE 8 - RELATED PARTY TRANSACTIONS (Continued)
In August 1997, the Company entered into an agreement (the "Casino
Consulting Agreement") with Star Casinos Limited, (the
"Consultant"). Under the Casino Consulting Agreement, the Consultant
agreed to provide consulting and technical services to the Company
and any affiliated entities for a period of two years. An individual
who subsequently became the president of the Casino Division of the
Company owns the Consultant. Under the terms of the Casino
Consulting Agreement, the Consultant will receive $250,000 annually
plus reimbursement of reasonable expenses. In addition, in October
1997 the Company granted the Consultant options to purchase 100,000
shares of the Company's common stock exercisable at $6.50 per share.
In September 1998 the exercise price of the option was reduced from
$6.50 to $1.50 per share (when the market price was $1.25) and then
subsequently in December 1999 the option price was further reduced
to $0.25 per share (when market price was $0.13). Fifty percent of
the options are exercisable on each of the first and second
anniversary dates of the commencement date and expires on the third
anniversary date. The options were valued at $140,000. The Company
has recorded a consulting charge for the issuance of these options.
At the end of the term of the agreement, provided that the
Consultant is not in breach of the Casino Consulting Agreement, the
Consultant will also be entitled to receive a $250,000 bonus.
The Company paid to the Consultant $187,000 and accrued an
additional $63,000 payable to the Consultant plus reimbursement of
reasonable expenses during the year ended June 30, 1999. The
agreement also binds the Consultant to a two-year non-compete,
non-solicitation provision after termination of the agreement.
Subsequent to year-end, the Consultant agreed to accept 250,000
shares of the Company's common stock in place of the $250,000 bonus
due to him at the expiration of the contract. In December 1999, when
the consulting contract expired, the stock was delivered (market
price per share - $0.13).
Although no new formal agreement has been entered, the Consultant
has agreed to continue providing the consulting services on a month
to month basis at an annualized rate of $250,000.
Construction Contractors
In September 1998, 89,000 shares of the Company's common stock were
issued to Maritime Services Corporation, the building contractor for
the Suriname casino. These shares were issued at a price of $2.25
per share or $200,250, which Maritime agreed to accept as
consideration and payment towards its construction contract with
SLC.
F-31
<PAGE>
CCA COMPANIES INCORPORATED
Notes to Consolidated Financial Statements (Continued)
NOTE 8 - RELATED PARTY TRANSACTIONS (Continued)
Directors
The Company entered into a three-year employment contract with
Charles H. Stein ("Stein"), the Chairman of the Board of Directors,
the President and Chief Executive Officer of the Company, that took
effect upon the consummation of the Company's initial public
offering of securities. The contract provided for an annual salary
of an amount not less than $125,000 and a three-year non-compete
clause upon termination. During the year ended June 30, 1998 and
during the ten month period ended June 30, 1997 Stein did not
receive a salary. Accordingly, the Company recorded compensation
charges in those periods for an amount based upon his employment
agreement as contribution to capital. Salary expense recorded was
$90,000 for the year ended June 30, 1998 and $105,000 for the ten
month period ended June 30, 1997. In addition, during the year ended
June 30, 1998, the Company purchased a life insurance policy for the
benefit of Stein and paid rent for two properties during 1999, 1998
and 1997 that Stein owned (see Note 9). The life insurance premium
of approximately $40,000 has been charged to operations (no premium
was incurred in 1999). Effective July of 1998 Stein was no longer
employed by the Company as its President and Chief Executive Officer
but continued in his capacity as Chairman of the Company.
In October of 1998, the Company borrowed $75,000 from Stanton &
Associates (lender) through two Promissory Notes. Mr. James Stanton
the owner of Stanton & Associates is also a director of the Company.
The loan was subject to interest at the rate of 8% per annum and was
payable along with accrued interest in a lump sum in January of
1999. In January 1999 the lender accepted 153,200 shares at $0.50
per share of the Company's common stock against the principal and
interest due of $76,600.
Officer
The Company's president and CEO, Dempster, was a paid consultant to
Sovereign which assigned to the Company its 1994 Construction
Management Agreement and 1994 Operation Management Agreement with
SCC. Dempster has represented to the company that he has never held
any beneficial interest in the stock of Sovereign. In September 1998
Dempster's nominee, Dabus International Limited, established for the
benefit of his family, was granted non-plan options to purchase
1,000,000 shares of the Company's common stock at $1.50 per share.
These Options were granted in consideration of Dempster joining the
Company in July of 1998. Subsequent to June 30, 1999, the exercise
price of the options issued to Dempster was changed from $1.50 to
$0.25.
F-32
<PAGE>
CCA COMPANIES INCORPORATED
Notes to Consolidated Financial Statements (Continued)
NOTE 9 - COMMITMENTS AND CONTINGENCIES
The Company rents office space and facilities under non-cancelable
leases through February 2013. The minimum future rental commitment
for leases in effect at June 30, 1999 approximates the following:
Years Ended
June 30,
-----------
2000 $ 236,194
2001 234,153
2002 234,424
2003 202,983
2004 200,000
Thereafter 1,733,334
----------------
$ 2,841,088
=================
Rent expense was $532,916 for the year ended June 30, 1999, $238,478
for the year ended June 30, 1998 and $127,574 for the ten month
period ended June 30, 1997.
Rent included payments of $6,921 for 1999, $91,000 for 1998 and
$70,000 for 1997 for two properties owned by the Chairman of the
Board that were used as offices by the Company in New York and
London.
Arbitration
Kai Michaelson ("Michaelson") and Zamora Investments Pte
Ltd. ("Zamora")
As a result of the termination of the Hotel Management Agreements in
November (See Note 3), FEC assumed any and all financial obligations
with respect to the employment of the President, Michaelsen, of the
Company's hotel management subsidiary, DHRI. After a thorough
independent review of Michaelsen's performance by FEC including an
extensive investigation into allegations regarding Michaelsen's
operating decisions, Michaelsen's employment was officially
terminated in April 1999. In April 1999, Michaelsen filed a claim
against CCA for a lump sum payment of approximately $240,000 for
past and future services under his employment and consulting
agreements and requested an arbitration hearing with the American
Arbitration Association.
F-33
<PAGE>
CCA COMPANIES INCORPORATED
Notes to Consolidated Financial Statements (Continued)
NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued)
The Company obtained a temporary restraining order staying the
arbitration and petitioned the New York Supreme Court for a
permanent stay of the hearing. It was the Company's contention that
there was no arbitration agreement between Michaelsen and CCA. On
March 31, 2000, the Court granted the Company's petition to
permanently stay the arbitration. Subsequent to the order of stay,
Michaelsen's Company, Zamora, filed a claim against Dorsett for
$80,000 in a new arbitration claim. The Company's counsel believes
that there are valid defenses to Michaelsen's claims.
Finally, if an adverse decision is rendered, it is the Company's
position that any award granted to Michaelsen will be the
responsibility of FEC under the terms of the November 1998
termination agreement. For this reason, the Company is currently
holding 250,000 shares that were issued but never delivered to FEC
pursuant to the November 1998 termination agreement until such time
as this matter is settled.
No provision has been made in the accounts regarding Michaelsen's
demands.
Fox Haven Capital Corporation and United Resources Partners
(collectively "Fox Haven")
During 1998 the Company utilized unsuccessfully the services of Fox
Haven to secure financing.
In August of 1999, Fox Haven filed a Demand for Arbitration before
the American Arbitration Association demanding a payment of $250,000
from the Company as liquidated damages fee. Fox Haven alleged 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. The Company has denied all material
allegations of the claim and has filed counterclaims of $250,000 and
is seeking to recover the $25,000 commitment fee paid to Fox Haven
alleging Fox Haven breached its obligations to the Company by
misrepresenting its abilities to secure of capital financing.
The legal advisers of the Company are of the opinion that Fox
Haven's claims against the Company have no merit. According to
Counsel, 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. 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.
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 spring of 2000.
Consequentially the Company has made no provision in the financial
statements based on the uncertainty of the outcome of this
arbitration.
F-34
<PAGE>
CCA COMPANIES INCORPORATED
Notes to Consolidated Financial Statements (Continued)
NOTE 10 - STOCK OPTIONS AND WARRANTS
The Company applies APB Opinion 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for employee
stock options. Under APB Opinion 25, because the exercise price of
the Company's employee stock options equals or exceeds the market
price of the underlying stock on the date of grant, no compensation
cost is recognized.
Options that have been granted are exercisable either one-third
annually at each anniversary date from the date of grant or they are
exercisable immediately. In addition, they have maximum terms of not
more than four years and they are not transferable.
The Company estimates the fair value of each stock option or warrant
at the grant date by using the Black-Scholes option-pricing model.
Plan Options
The Company's 1996 Stock Option Plan (the "Plan") was adopted in
November 1996, and amended in December 1996, April 1997 and December
1997. The Plan provides for adjustments in the number and type of
shares covered by the Plan and options granted thereunder in the
event of any reorganization, merger, re-capitalization or certain
other transactions involving the Company. Under the Plan, which
authorizes the granting of incentive stock options or non-incentive
stock options the maximum number of shares of common stock for which
options may be granted is 5,000,000 shares. As of June 30, 1999,
2,172,500 options to purchase shares of common stock had been
granted under the Plan. The Company has set aside 2,827,500 shares
of common stock for future options that may be granted under the
Plan.
The Company granted a total of 500,000 options in 1999 to
non-employee directors that vested immediately and 350,000 options
in 1998 and 550,000 options in 1997 to non-employee directors,
one-third of which vested annually at each anniversary date from the
date of grant. All options issued to non-employee directors are
exercisable at $1.50 and expire four years after their issuance. The
Company has recorded a charge to operations with a corresponding
credit to additional paid-in capital for the issuance of the options
in the amounts of $233,000 in 1999, $386,000 in 1998 and $700,000 in
1997. Additionally in September 1998, the Company's Board of
Directors agreed to reprice the exercise price of 1,567,500 stock
options previously granted to directors, officers and
employees at prices ranging from $5.00 to $6.50, to $1.50. The
Company recorded an additional charge to operation of approximately
$335,000 on 900,000 options previously granted to the directors
and approximately $90,000 on 237,500 options previously granted to
consultants during the 1998 and 1997 fiscal years for the repricing.
F-35
<PAGE>
CCA COMPANIES INCORPORATED
Notes to Consolidated Financial Statements (Continued)
NOTE 10 - STOCK OPTIONS AND WARRANTS (Continued)
The Company granted a total of 1,130,000 options in 1999 to
employees that vested immediately and 215,000 options in 1998 and
125,000 options in 1997 employees one-third of which vested annually
at each anniversary date from the date of grant. The employee
options are exercisable at $1.50 per share.
Non Plan Options
In addition to the options granted under the plan, the Company has
issued an additional 1,890,119 non plan options.
The Company granted 352,500 options during the fiscal year 1998 and
660,000 options for the ten month period ended June 30, 1997 to
lawyers and consultants for services rendered or to be rendered.
Exercise prices for these options ranged from $5.00 to $6.50 per
share. These options expire four years after their issuance. The
Company has recorded a charge to consulting fees with a
corresponding credit to additional paid in capital for the issuance
of these options in the amount of $386,000 in 1998 and $513,000 in
1997. No options were issued to lawyers or consultants during the
fiscal year 1999.
The Company issued 500,000 options to investors at the time of
private placements done by the Company during the ten-month period
ended June 30, 1997. The exercise price for these options was $2.00
and they expire in April 2001. During the year ended June 30, 1998,
7,881 options out of the 500,000 options issued were exercised.
The Company also repriced 35,000 options issued to a consultant from
$5.00 to $1.50 and the exercise date was extended from August 1998
to August 1999.
FASB Statement 123, "Accounting for Stock-Based Compensation,"
requires the Company to provide pro forma information regarding net
income (loss) and net income (loss) per share as if compensation
cost for the Company's employee stock options had been determined in
accordance with the fair value based method prescribed in FASB
Statement 123.
The Company utilized the following weighted-average assumptions to
determine fair value:
<TABLE>
<CAPTION>
Year Ended June 30, Period Ended
---------------------------- June 30,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Risk free interest rate 6% 6% 7%
Expected life 4 years 3 - 4 years 4 years
Expected volatility 0.5 0.5 0.3
Dividend yield 0.0 0.0 0.0
</TABLE>
F-36
<PAGE>
CCA COMPANIES INCORPORATED
Notes to Consolidated Financial Statements (Continued)
NOTE 10 - STOCK OPTIONS AND WARRANTS (Continued)
Under the accounting provisions of FASB Statement 123, the Company's
pro forma net loss and loss per share would have been as follows:
<TABLE>
<CAPTION>
Year Ended June 30, Period Ended
-------------------------------------- June 30,
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net loss:
As reported $ (4,592,090) $ (12,543,072) $ (8,562,067)
================ ================ ================
Pro forma $ (5,149,789) $ (12,770,747) $ (8,599,459)
================ ================ ================
Net loss per common
share basic and diluted:
As reported (0.36) (1.37) (1.83)
Pro forma (0.41) (1.39) (1.84)
</TABLE>
A summary of the status of the Company's fixed stock option plan and
non plan options as of June 30, 1999, 1998 and 1997 and changes
during the years and period then ended is presented below:
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998 June 30, 1997
--------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------------- ----------- -------------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of period 3,169,619 $ 4.72 1,970,000 $ 4.02 135,000 $ 1.67
Granted 1,630,000 1.50 1,217,500 5.85 1,835,000 4.18
Exercised (7,000) 0.50 (7,881) 2.00 - -
Forfeited (730,000) 4.22 (10,000) 2.00 - -
-------------- ----------- -------------- ----------- -------------- -----------
Outstanding at end of
period 4,062,619 $ 1.99 3,169,619 $ 4.72 1,970,000 $ 4.02
============== =========== ============== =========== ============== ===========
Options exercisable at
end of period 3,824,287 $ 2.03 1,803,333 $ 4.18 1,408,333 $ 3.92
============== =========== ============== =========== ============== ===========
Weighted-average fair
value of options
granted during the
period $ 0.49 $ 2.08 $ 3.75
=========== =========== ===========
</TABLE>
F-37
<PAGE>
CCA COMPANIES INCORPORATED
Notes to Consolidated Financial Statements (Continued)
NOTE 10 - STOCK OPTIONS AND WARRANTS (Continued)
The following table presents information relating to stock options
outstanding at June 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- --------------------------------
Weighted Weighted
Average Average Average
Exercise Exercise Remaining Exercise
Price Shares Price Life in Years Shares Price
------------ ------------- ----------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
$0.50 118,000 $ 0.50 0.86 109,667 $ 0.50
$1.50 2,927,500 1.50 2.68 2,697,501 1.50
$2.00 492,119 2.00 1.83 492,119 2.00
$5.00 500,000 5.00 1.73 500,000 5.00
$6.50 25,000 6.50 2.83 25,000 6.50
------------- --------- -------- ------------ --------
4,062,619 $ 1.99 2.40 3,824,287 $ 2.03
============= ========= ======== ============ ========
</TABLE>
Warrants
At June 30, 1999, the Company had warrants amounting to 3,819,012
outstanding. No warrants have been exercised. All warrants were
exercisable on the day of grant. At August 15, 1999, 150,000
warrants issued to a director have expired.
During the year ended June 30, 1999 the Company issued to two
consultants three-year warrants to purchase 50,000 shares each of
the Company's common stock at $1.00 per share. For the year ended
June 30, 1998, the Company issued to one consultant four-year
warrants to purchase 100,000 shares of the Company's common stock at
$6.50 per share. The 1999 warrants were valued at $50,000 and the
1998 warrants were valued at $272,500. The Company's operations were
charged for the value of all warrants issued to consultants for
services at the time of issuance.
In August 1996, the Company issued three-year warrants to directors
and a consultant for services to purchase 325,000 shares of the
Company's common stock at $5.00 per share. The warrants were valued
at $457,201 and were charged to operations for the period ended
August 31, 1996. The warrants exercise price was changed to $1.50
per share in September 1998. The Company recorded an additional
charge to operations of approximately $125,000 on the warrants
previously granted to directors and the consultant for the
repricing. Subsequent to the year end 150,000 warrants out of the
325,000 warrants issued have expired.
The Company borrowed $1,000,000 in June 1997 and simultaneously
issued warrants to purchase 550,000 shares of common stock at $2.00
per share to the creditor and an affiliate. The warrants were valued
at approximately $2,040,000 and were charged to expense. At the time
the warrants were issued, 20,000 shares of previously issued common
stock were surrendered to the Company.
F-38
<PAGE>
CCA COMPANIES INCORPORATED
Notes to Consolidated Financial Statements (Continued)
NOTE 10 - STOCK OPTIONS AND WARRANTS (Continued)
The Company issued 1,308,334 warrants with exercise prices of $1.00
to $2.00 during the fiscal year ending 1999, 715,678 warrants with
an exercise price of $5.14 during the fiscal year ending 1998 and
220,000 warrants with an exercise price of $8.25 for the ten month
period ending June 30, 1997 at the time of its public offering and
private placement.
In June 1997, the Company issued warrants to consultants for
services to purchase 350,000 shares of common stock at $5.75 per
share. The warrants were valued at approximately $705,000 and were
charged to operations for the ten month period ended June 30, 1997.
In June 1999, the Company issued to a consultant for services
relating to the Sakhalin Project warrants to purchase 150,000 shares
of common stock at $1.00 per share. The warrants are valued at
$25,000 and are recorded as capitalized finance costs.
Common Stock Set Aside
Currently, the Company has reserved 7,881,631 shares of common stock
for exercise of options and warrants.
NOTE 11 - STOCKHOLDERS' EQUITY
In December 1997, at a special meeting of the stockholders, an
amendment to the Company's Certificate of Incorporation was approved
increasing the number of common shares authorized from 30,000,000
shares to 50,000,000 shares and increasing the number of preferred
shares authorized from 5,000 shares to 5,000,000 shares.
At the time of the organization of the Company, 1,666,667 shares of
common stock were subscribed to by Conserver Investments, S.A.
("Conserver"). In November 1996 the Company, in a series of
negotiated transactions, repurchased 1,366,667 shares of the
Conserver common stock for an aggregate sum of $1,800,000. As part
of the transaction, Conserver agreed to transfer the remaining
300,000 shares of common stock directly to two persons the Company
designated neither of whom were affiliated with the Company,
Conserver or any of their directors, officers or employees.
In November 1996, the Board of Directors approved a 2.128874 for 1
stock split. In December 1996, the Board of Directors approved a
1.066194 for 1 stock split. Subsequently, in April 1997, the Board
of Directors approved a reverse stock split to cancel the effect of
the aforementioned two stock splits. All of the above splits have
been retroactively reflected in the accompanying consolidated
financial statements.
F-39
<PAGE>
CCA COMPANIES INCORPORATED
Notes to Consolidated Financial Statements (Continued)
NOTE 12 - BUSINESS SEGMENT INFORMATION
The Company ceased operations of its food preservation and hotel
management business segments during the year ended June 30, 1999.
Accordingly, at June 30, 1999, the Company's only line of business
relates to its casino operations in Suriname and the Russian
Federation.
For the year ended June 30, 1998, the Company's operations have been
classified into three business segments: Food preservation, Hotel
management and Casino operations.
Food preservation includes the development, selling and marketing of
the product. The hotel management includes the management and
exclusive operations of certain hotels. Casino operations include
the development and management of certain casinos.
Operating loss by segment is total operating revenues less expenses
deemed to be related to the segment's operating revenue.
Identifiable assets by segment are those assets that are used in the
operation of that unit. Corporate assets consist principally of cash
and equivalents, prepaid expenses and leasehold improvements related
to the corporate unit.
Summarized financial information by business segment for the year
ended June 30, 1998 is as follows:
<TABLE>
<CAPTION>
Continuing Discontinued
Operations Operations
------------------ ------------------
<S> <C> <C>
Revenues by Segment:
Food preservation - $ 9,900
Hotel management - 639,700
Casino - -
Corporate - -
------------------ ------------------
Total Revenues - $ 649,600
================== ==================
</TABLE>
F-40
<PAGE>
CCA COMPANIES INCORPORATED
Notes to Consolidated Financial Statements (Continued)
NOTE 12 - BUSINESS SEGMENT INFORMATION (Continued)
<TABLE>
<CAPTION>
Continuing Discontinued
Operations Operations
------------------ ------------------
<S> <C> <C>
Operating Loss by Segment:
Food preservation $ - $ 2,878,800
Hotel management - 5,558,500
Casino 1,374,900 -
Corporate 2,944,700 -
------------------ ------------------
Total Operating Loss $ 4,319,600 $ 8,437,300
================== ==================
Depreciation and:
Amortization by Segment
Food preservation $ - $ -
Hotel management - 105,000
Casino 240,200 -
Corporate 32,800 -
------------------ ------------------
Total Depreciation
and Amortization $ 273,000 $ 105,000
================== ==================
Capital Additions by Segment:
Food preservation $ - $ -
Hotel management - 2,734,900
Casino 5,111,100 -
Corporate 86,800 -
------------------ ------------------
Total Capital Additions $ 5,197,900 $ 2,734,900
================== ==================
Identifiable Assets
by Segment:
Food preservation $ - $ -
Hotel management 9,274,400
Casino 45,112,500 -
Corporate - -
Eliminations (25,435,600) (6,573,000)
------------------ ------------------
Total Assets $ 21,255,800 $ 2,701,400
================== ==================
</TABLE>
F-41
<PAGE>
CCA COMPANIES INCORPORATED
Notes to Consolidated Financial Statements (Continued)
NOTE 12 - BUSINESS SEGMENT INFORMATION (Continued)
The Company's main operations are located in the following foreign
geographic regions: Cyprus, Russian Federation, Suriname and
Budapest.
At June 30, 1998, Identifiable assets by geographical region are as
follows:
<TABLE>
<CAPTION>
Continuing Discontinued
Operations Operations
------------------ ------------------
<S> <C> <C>
Russian Federation $ 16,033,589 $ -
Suriname 2,877,204 -
Other (net of eliminations) - 2,701,400
------------------ ------------------
$ 23,957,200 $ 2,701,400
================== ==================
</TABLE>
NOTE 13 - PROVISIONS FOR VALUATION ALLOWANCES AND ASSETS WRITTEN OFF
Allowances for Loans Receivables during the years ended June 30,
1999, 1998 and for the ten month period ended June 30, 1997 are as
follows:
<TABLE>
<CAPTION>
Year Ended June 30, Ten Month Period
------------------------------------- Ended June 30,
1999 1998 1997
---------------- --------------- ----------------
<S> <C> <C> <C>
Beginning balance $ 2,620,830 $ 1,000,000 $ -
Provision 608,311 1,620,830 1,000,000
Write-offs (3,229,141) - -
---------------- --------------- ----------------
Ending balance $ - $ 2,620,830 $ 1,000,000
================ =============== ================
</TABLE>
At June 30, 1997, the Company wrote off inventory of $355,800
relating to its food technology business.(See Note 2)
At June 30, 1998, based on the termination of the Hotel Management
Agreements, the carrying value of the management contracts, trade
names and a deposit on assets to be acquired was reduced to fair
value and the Company recorded a charge of $4,200,000. (See Note 2)
F-42
<PAGE>
CCA COMPANIES INCORPORATED
Notes to Consolidated Financial Statements (Continued)
NOTE 14 - SUBSEQUENT EVENTS
In July and August 1999, the Company received $125,000 from two
investors for the purchase of 166,667 shares of the Company's common
stock at market value ($0.75 per share). In addition, the Company
agreed to issue warrants to purchase 83,334 shares of the Company's
common stock, at $1.00 per share to these investors. Once issued,
the warrants are exercisable immediately and will expire in two to
three years from the issuance date.
In October 1999, the Company obtained financing through a
Convertible Note of $350,000 from Danville Investments Pty. Ltd.,
Australia ("Danville"). The loan is subject to interest at the rate
of 15% per annum, payable in full at the maturity of the loan in
April 2000. The Company is obligated to deposit on a monthly basis
no less than $30,000 in a separate bank account towards payment of
the loan. In addition, the Company has also issued to Danville
warrants to purchase 700,000 shares of the Company's common stock at
$0.25 per share. The warrants will expire in three years from the
grant date. Danville, during the term of the Note or until the full
amount of the loan has been repaid, has the option to convert the
outstanding principal plus the then accrued interest due on the loan
into shares of common stock of the Company. Such conversion shall be
at a price equal to the five-day average market closing price ending
on the day prior to the day of conversion. The Company pledged all
principal payments, interest and management fees due to the Company
from Suriname Leisure Company as security against the loan. Danville
in December 1999 exercised its option to convert the principal of
the loan plus accrued interest of $10,500 into 1,481,060 shares of
the Company's stock based on the five day average stock price of
$0.132 per share.
In November 1999, the Securities of the Company were delisted from
The NASDAQ Small Cap Market. The delisting occurred due to the
Company's failure to comply with certain NASDAQ Marketplace Rules
relating to the bid price and filing requirements. The NASDAQ was of
the opinion that the Company failed to present a definitive plan
which would enable it to attain compliance within a reasonable
period of time and then to sustain the compliance. The panel also
determined that it was unable to evaluate the true extent of the
Company's compliance with NASDAQ's continued listing standards in
the absence of accurate, complete and publicly filed audited
financial statements.
In November 1999, the Company, at its annual meeting of the
stockholders, granted the Board of Directors the authority to effect
a 1 for 10 reverse split of its common stock on or before March 28,
2000. The Board elected not to exercise its authority to effect the
reverse split and the expiration date for the action passed.
F-43
<PAGE>
CCA COMPANIES INCORPORATED
Notes to Consolidated Financial Statements (Continued)
NOTE 14 - SUBSEQUENT EVENTS (Continued)
In December 1999, the Company's Board of Directors agreed to reprice
the exercise price of 2,095,000 options and warrants previously
granted to current directors and executive officers from $1.50 to
$0.25 per share. Additionally, the Board of Directors also approved
the issuance of 1,000,000 options to acquire shares of common stock
of the Company at a price of $0.25 per share to Tilden Park Ltd., a
nominee of Dempster, the CEO, president and a Director of the
Company. These options expire four years from the grant date.
In December 1999, the Company issued warrants to an investor and
past underwriter for the Company to acquire 450,000 shares of common
stock for past services rendered at a price of $0.50 per share.
In January 2000, the Company's Board of Directors agreed to issue
150,000 shares of the Company's common stock at $0.13 per share to
one of its legal counsel for services rendered to the Company. The
Board of Directors also agreed to re-price the exercise price of
212,500 options previously granted to two of the Company's legal
counsel from $1.50 to $0.25 per share and approved the issuance of
additional warrants to acquire 225,000 shares of common stock of the
Company at a price of $0.25 per share.
In January 2000, the Company borrowed $300,000 from Stanton &
Associates ("Stanton"), a entity controlled by one of the Company's
Directors. Interest on the loan shall be calculated at the Wall
Street Journal prime rate, payable on a monthly basis. The terms of
the promissory note require that the Company repay the loan in four
monthly installments of $15,000 commencing February 2000, seven
monthly installments of $30,000 commencing June 2000, and a final
payment of $30,000 on or before December 31, 2000. The Company has
granted Stanton a security interest, subordinated to Danville's
interests, in all principal payments, interest and management fees
due to the Company from Suriname Leisure Company. In addition, the
Company has also issued Stanton warrants to purchase 500,000 shares
of the Company's common stock, at $0.25 per share. The warrants will
expire in four years from the grant date.
In March 2000, the Company borrowed $150,000 from Galileo Capital
LLC ("Galileo") utilizing convertible debt. The loan is subject to
interest at the rate of 10% per annum, payable in full at the
maturity of the loan in October 2000. The Company is required to pay
six equal monthly installments of $25,000 commencing May 2000.
During the term of the loan, Galileo has the option to convert the
outstanding principal plus any accrued interest due on the loan into
shares of the common stock of the Company. The conversion price is
$0.25 per share. If Galileo exercises the conversion option, it will
receive one warrant, exercisable at $0.25 per share, for every four
shares of common stock it acquires. Any warrants issued on
conversion of the loan as described above will terminate two years
from the date of issuance or the date the underlying shares are
registered, which ever is later. As additional consideration for the
loan, the Company issued 150,000 warrants to Galileo to purchase
shares of the Company's common stock. The warrants are exercisable
at $0.25 per share and expire in two years from the date that
underlying shares are registered.
F-44
