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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File No.
September 30, 1999 0-8698
CONCORDE GAMING CORPORATION
(Name of small business issuer in its charter)
Colorado 84-0716683
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3290 Lien Street, Rapid City, South Dakota 57702
(Address of principal executive offices)
Issuer's telephone number: (605) 341-7738
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.01 par value per share
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for the most recent fiscal year. $ 19,033,658
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of December 18, 1999 was $1,864,589. This calculation is
based upon the average of the bid ($0.24) and asked ($0.30) price of the voting
stock on December 18, 1999.
The number of outstanding shares of the issuer's $.01 par value common
stock was 24,010,402 as of December 18, 1999.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Concorde Gaming Corporation (the "Company" or the "Registrant"),
through a wholly owned subsidiary, Concorde Cripple Creek, Inc., a Colorado
corporation ("Concorde Cripple Creek"), owns and operates the Golden Gates
Casino ("Golden Gates Casino"), a limited stakes casino in Black Hawk, Colorado,
and, through wholly owned subsidiaries, Concorde Cruises, Inc., a South Dakota
corporation ("Concorde Cruises") and Conami, Inc., a Florida corporation
("Conami") owns an 80% interest in two joint ventures, Bayfront Ventures, a
Florida general partnership which conducts business under the name Casino
Princesa (the "Casino Princesa") and Princesa Partners, a Florida general
partnership ("Princesa Partners"), which owns and operates an offshore gaming
vessel (the "Princesa") from Bayfront Park, Miami, Florida. Concorde Cruises
owns an 80% interest in Casino Princesa and Conami owns an 80% interest in
Princesa Partners. Princesa Partners owns the Princesa and pursuant to a Charter
Agreement (the "Charter") dated October 2, 1998, charters the Princesa to Casino
Princesa which operates the Princesa. The Princesa commenced operations in
October, 1998.
Prior to June 1997, the Company was primarily engaged in the operation
of a video lottery route operation in South Dakota and prior to February 1997,
the Company also managed the 4 Bears Casino and Lodge (the "4 Bears Casino") in
North Dakota. The Company was incorporated as a Colorado corporation on
September 1, 1976.
BUSINESS DEVELOPMENTS
CASINO PRINCESA
LEG Agreement. On August 5, 1997, the Company and Leo Equity Group,
Inc. ("LEG"), a Florida corporation, entered into an agreement ("LEG Agreement")
whereby LEG assigned to the Company all of its interest in Casino Princesa,
formed for the purpose of constructing, owning, operating and managing an
offshore gaming vessel from dockage at Bayfront Park in Miami, Florida (the
"Project"). Pursuant to the LEG Agreement, the Company acquired all of LEG's
right, title and interest in Casino Princesa for $650,000 plus payments equal to
2% of Casino Princesa's "gaming win" per operating year for the first three
years of operations (subject to a minimum of $175,000 and a maximum of
$400,000). The Company owns an 80% interest in Casino Princesa and Goldcoast
Entertainment Cruises, Inc., an unaffiliated Florida corporation ("Goldcoast"),
owns the remaining 20%. See "MANAGEMENT'S DISCUSSION AND ANALYSIS--Liquidity and
Capital Resources."
Bayfront Joint Venture Agreement. On August 27, 1997, the Company and
Goldcoast entered into a joint venture agreement ("Bayfront Agreement") to
construct and operate an offshore gaming vessel. Pursuant to a Bill of Sale and
Assignment and Assumption Agreement dated as of July 6, 1998 between the Company
and its wholly owned subsidiary, Concorde Cruises, the Company assigned its
interest in Casino Princesa to Concorde Cruises and Concorde Cruises assumed all
liabilities related thereto. Pursuant to the Bayfront Agreement, the Company
contributed $6,405,000 to Casino Princesa for the construction and other
start-up costs
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of Casino Princesa related to the Project. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS--Liquidity and Capital Resources."
Use Agreement. On June 25, 1997, Casino Princesa entered into a Use
Agreement ("Use Agreement") with Bayfront Park Management Trust, a limited
agency and instrumentality of the City of Miami, Florida (the "Trust"). The Use
Agreement was amended on August 29, 1997. The Use Agreement grants Casino
Princesa the exclusive right to use the Trust's docking facilities at Bayfront
Park for the purpose of docking vessels, including an offshore gaming vessel.
The initial term ("Use Initial Term") of the Use Agreement, as amended, is for
five years commencing October 1, 1997 with the option to extend for one
additional five-year term ("Extension Term"). Casino Princesa has a right of
first refusal to extend the Extension Term for one additional five year term
provided the Trust in its sole discretion has determined to permit the continued
use of the Trust's docking facilities by a gaming vessel and there has been no
event of default under the Use Agreement that was caused by Casino Princesa. The
Use Agreement provides that Casino Princesa shall pay the Trust annual fees
during the Use Initial Term as follows: $400,000 in year one, $450,000 in each
of years 2 and 3, and $475,000 in each of years 4 and 5. The Company is also
required to provide an irrevocable letter of credit on behalf of Casino Princesa
for the benefit of the Trust to secure payment of the annual fees to the Trust
for the next two years throughout the term of the Use Agreement, in an amount
equal to the next two years' annual fees. As of September 30, 1999, the Company
has provided a $950,000 irrevocable letter of credit (the "Letter of Credit") to
the Trust. See "MANAGEMENT'S DISCUSSION AND ANALYSIS--Liquidity and Capital
Resources."
Vessel Construction Agreement. On August 26, 1997, Casino Princesa
entered into a vessel construction agreement ("Vessel Construction Agreement")
with Keith Marine, Inc. to build the Princesa. On September 30, 1998, Casino
Princesa assigned its interest in and to the Vessel Construction Agreement to
Princesa Partners. The vessel was completed and commenced operations in October,
1998. See "MANAGEMENT'S DISCUSSION AND ANALYSIS--Liquidity and Capital
Resources."
Princesa Partners Joint Venture Agreement. On October 22, 1998,
Goldcoast and Conami entered into a joint venture agreement (the "Princesa
Agreement") the purpose of which was to own and charter the Princesa to Casino
Princesa. Conami owns an 80% interest in Princesa Partners and Goldcoast owns a
20% interest.
FINANCING
Princesa Partners entered into a Loan and Security Agreement with a
number of lenders (the "Lenders"), to obtain permanent financing (the "Vessel
Loan") for the Princesa. Proceeds of the Vessel Loan were used to pay in full
the loan for construction financing with respect to the Princesa, to acquire
equipment (including gaming equipment) for the Princesa and for other project
costs. The Vessel Loan is secured by a first Preferred Ship Mortgage (the "Ship
Mortgage") dated October 15, 1998. Also, Casino Princesa and Princesa Partners
granted to the Lenders, pursuant to a Security Agreement (the "Security
Agreement") dated as of October 22, 1998, a security interest in all furniture,
furnishings, machinery and equipment (including gaming equipment) owned by
Casino Princesa or Princesa Partners and used in connection with or located on
the Princesa.
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Pursuant to the Vessel Loan, Casino Princesa and the Company guaranteed
the obligations of Princesa Partners pursuant to a Guaranty, Subordination
Agreement, Security Agreement and Indemnity dated October 22, 1998 (the
"Bayfront Guaranty") and to a Guaranty dated October 22, 1998, respectively. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS--Liquidity and Capital Resources."
MANAGEMENT AGREEMENT
On September 27, 1996, Bruce H. Lien Company, a wholly owned subsidiary
of the Company ("BHL"), and the Three Affiliated Tribes ("TAT") entered into a
settlement agreement (the "Settlement Agreement") to resolve disputes arising
out of the management agreement (the "Management Agreement") between BHL and
TAT, pursuant to which BHL managed the 4 Bears Casino. Pursuant to the terms of
the Settlement Agreement, on February 13, 1997, TAT paid the Company $8.65
million in consideration for the termination of the Management Agreement, which
resulted in a gain to the Company of $2,819,250 during fiscal 1997. BHL was
dissolved during the 1997 fiscal year.
GOLDEN GATES CASINO
North Star Asset Exchange Agreement. Pursuant to the terms of an Asset
Exchange Agreement dated June 12, 1997 by and among North Star Casino Limited
Liability Company ("North Star"), the Company and its wholly owned subsidiaries
Midwest Gaming, Inc., Concorde Cripple Creek and Concorde Gaming of South
Dakota, Inc., the Company exchanged substantially all of the assets related to
its video lottery route operations in South Dakota (the "Video Lottery Assets")
for substantially all of North Star's assets used in its business of owning and
operating the Golden Gates Casino (the "Casino Assets"). Additionally, the
Company paid North Star approximately $480,000 in cash, assumed approximately
$773,000 in liabilities related to the Casino Assets and issued 1,743,333 shares
of the Company's common stock, $.01 par value ("Common Stock"). The transfers
were completed in July 1997.
Parking Garage Agreement. Concorde Cripple Creek, Elevation E8000+, LLC
("E8000") and KMM Parking L.L.C., a Colorado limited liability company ("KMM")
entered into an agreement dated October 22, 1997 (the "Parking Garage
Agreement") to subject certain property located in Black Hawk, Colorado to a
condominium regime. Pursuant to the Parking Garage Agreement, the parties
contributed parcels of land adjacent or near the Golden Gates Casino for
construction of a 450-stall parking garage ("Parking Garage"). Under the Parking
Garage Agreement, KMM is to obtain a loan (the "Loan") for approximately
$10,000,000 to finance construction of the Parking Garage with the Loan to be
repaid solely by KMM. Collateral for the Loan shall initially include the
parties' contributed property, provided, that upon completion of the Parking
Garage, only KMM's ownership interest in the Parking Garage may be used as
collateral. KMM has obtained such a loan and construction is underway. The first
level of the Parking Garage is anticipated to be opened in February 2000. Upon
completion of the Parking Garage, the parties will enter into a condominium
declaration whereby each party will receive a proportionate share of the parking
spaces based on each party's contribution of property, provided however,
Concorde Cripple Creek will own a minimum of 34 parking spaces. In addition,
Concorde Cripple Creek will be required to lease E8000's parking spaces, which
will
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be a minimum of 41 parking spaces. The Parking Garage Agreement was amended on
February 2, 1998, July 6, 1998 and October 19, 1998.
COLORADO OPERATIONS
Colorado law permits limited stakes casino gaming ($5.00 or less per
wager) in three historic mining towns, Black Hawk and Central City, adjacent
towns located approximately 40 miles west of Denver, and Cripple Creek,
approximately 90 miles south of Denver. Black Hawk and Central City form the
primary gaming market in Colorado, and competition within these markets is
intense.
The Golden Gates Casino is located on Main Street in Black Hawk,
Colorado directly across from the Richman Street Bridge, which bridge provides
access onto Main Street from U.S. Highway 119. The Golden Gates Casino offers 3
blackjack tables, 1 poker table, and 216 gaming machines on approximately 3,800
square feet of gaming floor space and also features a 50-seat restaurant, a full
service liquor bar and furnishes nightly valet parking for its gaming patrons in
the adjacent parking lot.
The Golden Gates Casino depends primarily upon "day-tripper" visitor
traffic from Denver metropolitan area residents for its customer base. Denver,
and its surrounding communities, have an approximate population of 1.8 million.
Approximately three million people live within a 100-mile radius of the Black
Hawk/Central City area.
COMPETITION
The primary competition for the Golden Gates Casino is from other
casinos operating in Black Hawk and Central City, of which there were
approximately 30 as of September 30, 1999, and, secondarily, casinos operating
in Cripple Creek of which there were approximately 18 as of September 30, 1999.
The Company believes that the primary competitive factors in the Black
Hawk-Central City market are location, availability and convenience of parking,
number of gaming machines and tables, types and pricing of amenities, name
recognition, and overall atmosphere.
In June 1998, the Lodge Casino at Black Hawk opened across the street
from Golden Gates Casino. In late December of 1998, a new casino, the Isle of
Capri, opened in Black Hawk and added approximately 1,100 gaming devices to the
Black Hawk gaming market. In addition, other casino projects are reported to be
in various stages of planning or have commenced construction in Black Hawk. The
Black Hawk Mardi Gras L.L.C. is currently under construction directly across
Main Street from the Golden Gates Casino and is expected to open in March 2000.
More experienced, nationally recognized casino operators from other areas of the
country have entered, or announced plans to enter, the Colorado gaming market,
including Harvey's Hyatt Black Hawk Hotel & Casino, Anchor Gaming, Fitzgerald's,
and Riviera, many of which have substantially greater financial and marketing
resources than the Company or Concorde Cripple Creek. Because Colorado does not
limit the total number of gaming licenses available for issuance in Colorado and
there are no minimum facility size requirements, the Company expects the number
of gaming facilities to continue to increase.
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While it is difficult to assess the development and timing of competing
projects and the likelihood of whether any or all of the announced projects will
eventually be built and at what size, it is reasonably likely that at least some
of the announced projects will be completed and opened to the public. The
Company believes the opening of the Lodge Casino at Black Hawk across the street
from the Golden Gates Casino has increased the number of casino patrons and
increased revenues over prior years results. However, should any of the
announced casino projects open, the increased competition may adversely affect
the Golden Gates Casino's operations.
On November 4, 1999, Central City property owners approved by a 5 to 1
margin the Business Improvement District's financing for the construction of a
southern access road (commonly referred to as the South Access) to Interstate
70. This road, if constructed, would provide a faster route for gamblers to
drive to Central City off of I-70. Were this southern access to be built, it
would likely have a negative impact on the Golden Gates Casino. Central City is
located adjacent to Black Hawk and currently provides the primary competition to
the gaming establishments in Black Hawk, with 12 casinos and approximately 3,200
gaming devices. Black Hawk has historically enjoyed an advantage over Central
City in large part because access to the area by State Highway 119 (currently
the only major access to Black Hawk from the Denver metropolitan area and
Interstate 70) requires customers to drive by and, in part, through Black Hawk
to reach Central City. A Central City property owner who has previously sued
Central City, challenging its formation of a general improvement district to
finance this project, has again threatened legal proceedings questioning the
validity of the most recent election results.
A decline in the Denver economy, a decline in the Black Hawk gaming
market, or increased competition for Denver metropolitan area residents from
other gaming jurisdictions both inside and outside Colorado, could have a
material adverse effect on the Company's results of operations, financial
position and cash flows.
In addition to competing with other gaming facilities in Colorado as
described above, the Golden Gates Casino competes, to a lesser degree, for
customers with gaming facilities nationwide, including casinos in Nevada and
Atlantic City and casinos operated on Native American lands in various Western
states, including Colorado. Many of these competitors have substantially greater
financial resources and experience in the gaming business. The Golden Gates
Casino also competes with other forms of gaming on both a local and national
level, including state-sponsored lotteries, charitable gaming and pari-mutuel
wagering, among others, and competes for entertainment dollars generally with
other forms of entertainment. Further expansion of legalized casino gaming to
new jurisdictions throughout the United States may also affect competitive
conditions.
SEASONAL FLUCTUATION AND INCLEMENT WEATHER
Because the Golden Gates Casino is located in the Rocky Mountains,
sudden and severe winter storms impact operations. Access to Black Hawk, which
is located ten miles from Interstate 70, is via a two-lane secondary road. In
bad weather, and in the winter months generally, this access road is difficult
to traverse, reducing the number of patrons traveling to Black Hawk and
negatively affecting the Company's operating results during these periods. In
addition, bad weather can result in a loss of services to the Golden Gates
Casino which also
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negatively affects the Company's operating results. As a result, the Golden
Gates Casino's business tends to be seasonal, with the highest level of activity
occurring during the summer months.
DIFFICULTY IN ATTRACTING AND RETAINING QUALIFIED EMPLOYEES
The operation of the Golden Gates Casino requires qualified managers
and skilled employees with gaming industry experience and qualifications
necessary to obtain the requisite licenses. The Company believes that a shortage
of skilled labor which exists in the gaming industry will make it increasingly
difficult and expensive to attract and retain qualified employees. Increasing
competition in the Black Hawk market for qualified employees may lead to higher
costs in order to retain and attract qualified employees. While the Company
believes that the Golden Gates Casino will be able to attract and retain
qualified employees, there can be no assurance that the Golden Gates Casino will
be able to do so. If the Golden Gates Casino is not able to attract and retain
qualified employees or if labor costs increase in connection therewith, there
could be an adverse impact on the Company's results of operation.
LEGISLATIVE ISSUES
In August 1996, President Clinton signed a bill creating the National
Gambling Impact and Policy Commission ("NGIPC") to conduct a comprehensive study
of all matters relating to the economic and social impact of gaming in the
United States. The NGIPC issued its report June 18, 1999. The report provides a
comprehensive legal and factual study of the social and economic impacts of
gambling on federal, state, local, and Native American tribal governments; and
on communities and social institutions. The report provides governmental
officials with a number of recommendations regarding the regulation of gambling.
Additional federal regulation may occur due to NGIPC's findings. Any new federal
or state legislation could adversely affect the business of the Golden Gates
Casino.
COLORADO GAMING REGULATIONS
Under Colorado law and regulations (the "Colorado Regulations"), the
ownership and operation of casino facilities, including matters such as hours of
operation and the square footage of a casino that can be used for gaming
activities, are subject to regulation by the Colorado Division of Gaming, which
is supervised by the five-member Colorado Limited Gaming Control Commission (the
"Gaming Commission").
The Gaming Commission requires various licenses, findings of
suitability, registrations, permits and approvals to be held by the Company and
its subsidiaries. The Gaming Commission may, among other things, limit,
condition, suspend or revoke a license to operate for any cause deemed
reasonable. Substantial fines or forfeiture of assets may be levied against
Concorde Cripple Creek and the persons involved for violations of gaming laws or
regulations, In addition, the actions of persons associated with Concorde
Cripple Creek and its management employees, over which Concorde Cripple Creek
may have little or no control, could jeopardize any licenses held by Concorde
Cripple Creek in Colorado. The suspension or revocation of any of Concorde
Cripple Creek's licenses or the levy on Concorde Cripple Creek of substantial
fines or forfeiture of assets would have a material adverse effect on the
Company.
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To date, Concorde Cripple Creek has obtained all governmental licenses,
findings of suitability, registrations, permits and approvals necessary for the
operation of the Golden Gates Casino. However, gaming licenses and related
approvals are deemed to be privileges under Colorado law, and no assurances can
be given that any new licenses, permits and approvals that may be required in
the future will be given or that existing licenses, permits or approvals will
not be revoked or not renewed. The current retail gaming license for Golden
Gates Casino expires in July 2000. Renewal is subject to, among other things,
continued satisfaction of suitability requirements. There can be no assurance
that the Company can successfully renew its licenses in a timely manner or at
all.
Under the Colorado Regulations, no person can have an "interest" in
more than three gaming retailer/operator licenses. Concorde Cripple Creek
currently has one license. Accordingly, any expansion opportunities that the
Company or Concorde Cripple Creek may have in Colorado may be limited.
Under Colorado Regulations, the definition of an "interest" in a gaming
license excludes ownership of less than 5% of the "publicly traded" company such
as the Company. To enable the Company to comply with the Colorado Regulations
and secure and maintain the business and other regulatory approvals necessary
for operating a gaming-related business in Colorado, the Company's Articles of
Incorporation provide that the Company may not issue voting securities except in
compliance with the rules of any gaming authority, that all transfers of voting
securities of the Company must be in compliance with applicable gaming authority
rules, and that if any gaming authority issues an order disqualifying a person
from owning voting securities, the Company may redeem the securities of the
disqualified holder unless the voting securities are transferred to a person
found by the Gaming Commission to be suitable within 60 days from the date of
the finding of unsuitability.
Any person or group of related persons that acquire beneficial
ownership of between 5% and 9.99% of the Company's voting securities must report
the acquisition to the Gaming Commission within ten days of acquiring such
interest and may be required to provide additional information to the Gaming
Commission and be found suitable. Any person or group of related persons that
acquire beneficial ownership of 10% (or, with respect to institutional
investors, 15%) or more of the Company's voting securities must apply to the
Gaming Commission within 45 days after acquiring such interest and submit to
investigation for suitability by the Gaming Commission. Certain qualifying
institutional investors, at the Gaming Commission's discretion, may acquire up
to 15% ownership before a finding of suitability is required if such investors
provide certain information to the Gaming Commission regarding investment intent
and other matters. In order to be found suitable, a stockholder must be a person
of good moral character, honesty, integrity, and, in general terms, must be free
from previous criminal or unsavory convictions or similar acts. The Gaming
Commission may require substantial information in connection with a suitability
investigation, including personal background and financial information, source
of funding information, and a sworn statement that such person or entity is not
holding the stock for any other party, and may require fingerprints.
The Company may not make a public offering of its securities without
notifying the Gaming Commission. The notification must occur within 10 business
days after the initial filing of a registration statement with the Securities
and Exchange Commission or, if the offering will
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not be registered with the Securities and Exchange Commission, 10 days prior to
the public use or distribution of any offering document. The notification
procedures apply to any offering by the Company where the proceeds will be used
or intended for use (i) in constructing gaming facilities in Colorado; (ii)
financing the operation of Colorado gaming facilities; (iii) acquiring any
direct or indirect interest in Colorado gaming facilities; or (iv) in retiring
or extending obligations incurred for any of the above purposes. The
notification must disclose, among other things, a description of the securities
to be offered, the proposed terms of the offering, its anticipated gross and net
proceeds, and the use of the proceeds.
LIQUOR REGULATION
The sale of alcoholic beverages is subject to licensing, control and
regulation by certain Colorado state and local agencies (the "Liquor Agencies").
Subject to certain exceptions, all persons who directly or indirectly own 5% or
more of Concorde Cripple Creek must file applications with and are subject to
investigation by the Liquor Agencies. The Liquor Agencies also may investigate
persons who, directly or indirectly, loan money to liquor licensees. All liquor
licenses are subject to renewal, are revocable and are not transferable. The
Liquor Agencies have broad powers to limit, condition, suspend or revoke any
liquor license. Any disciplinary action could, and any failure to renew or other
revocation of any of Concorde Cripple Creek's liquor licenses would, have a
material adverse effect upon the operations of the Company and Concorde Cripple
Creek.
TAXATION
Concorde Cripple Creek's operations are subject to taxes imposed upon
gaming operators by the Gaming Commission and the municipality of Black Hawk.
Taxes currently levied on Concorde Cripple Creek's operations include taxes,
payable monthly, on adjusted gross proceeds ("AGP" is defined by Colorado law as
amount wagered minus the total amount paid out in prizes) and annual gaming
device fees. Such taxes and fees are subject to revision from time to time.
Effective July 1, 1999 the Gaming Commission lowered the annual tax rates. The
annual tax rates in effect for the 12 months beginning July 1, 1999 are .25% of
the first $2.0 million of AGP, 2% from $2.0 million to $4.0 million, 4% from
$4.0 million to $5.0 million, 11% from $5.0 million to $10.0 million, 16% from
$10.0 million to $15.0 million, and 20% of amounts in excess of $15.0 million of
AGP. Under the Colorado Constitution, the Gaming Commission is authorized to
increase the gaming tax rate to as much as 40% of AGP.
In addition, a "device fee" is required for each gaming device (i.e.
each gaming machine and gaming table). The State of Colorado eliminated the
annual fee of $75 per device effective July 1, 1999. The City of Black Hawk
currently imposes an annual fee of $750 per device. Black Hawk also imposes
liquor licensing fees, transportation fees and other fees that are imposed per
device. Significant increases in the applicable fees, or the imposition of new
taxes or fees, could have an adverse effect on the Company, and there can be no
assurance that such fees will not be increased or additional taxes or fees be
imposed, which could have an adverse impact on the Company's operations.
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FLORIDA OPERATIONS
Casino Princesa is one of the newest day cruise operators in the United
States. Casino Princesa currently employs approximately 200 people and operates
the new state-of-the-art gaming vessel, the Princesa. Casino Princesa operates
so-called "cruises to nowhere" where passengers board the Princesa and travel
into international waters before gaming activities can commence. Each cruise to
nowhere is approximately four and one-half hours in length, including the travel
time to and from international waters. The Princesa departs from docks in
Bayfront Park, adjacent to Bayside Marketplace in Biscayne Bay, Miami, Florida.
The Princesa was completed in early October 1998 and is a United States
registered vessel operating under a Certificate of Inspection from the United
States Coast Guard. The Princesa is approximately 100 gross registered tons in
size, 200 feet in length and 40 feet in width, and has four decks, three of
which are enclosed. It has a capacity for 600 passengers in addition to the
crew. The Princesa features over 10,000 square feet of gaming area with
approximately 450 gaming positions, including approximately 223 slot and video
gaming machines and 36 table games including blackjack, craps, roulette, stud
poker, pai gow, mini baccarat and other games. Other amenities include fine
dining, dancing and entertainment and cocktail lounges. The Princesa was
designed specifically for the offshore gaming industry and includes an internal
stabilization system for passenger comfort.
COMPETITION
Casino Princesa competes primarily with one other cruise to nowhere
operator within the Miami market and, in Southern Florida, with numerous other
day-cruise vessels and pari-mutuel facilities, racetracks and Jai-Alai frontons.
Casino Princesa competes principally on the basis of location, range and pricing
of amenities, gaming mix, and overall atmosphere. Casino Princesa also faces
substantial competition with Native American casinos located in Southern
Florida. Casino Princesa must adjust its passenger fares to remain competitive.
The current prices for the cruises range from $15.00 to $23.00 depending on the
day of the week, the time of day, and other factors. Casino Princesa also offers
various special fares and complimentary fare programs for its rated casino
patrons. The Princesa may be used for convention meetings, continuing education
programs, weddings and various other group gatherings.
In addition, the Company competes with a variety of other non-gaming
vacation activities in the area where it operates its vessel. These include, but
are not limited to, short-term cruises, resort attractions, various sporting
activities and numerous other recreation activities.
SEASONAL FLUCTUATIONS AND INCLEMENT WEATHER
Revenues from the Casino Princesa are adversely affected by inclement
weather. Inclement weather has a direct effect on the number of cruises
conducted and on passenger counts. In addition, passenger counts are
historically lower immediately before and immediately after inclement weather
conditions. During Fiscal 1999, the Casino Princesa conducted 827 cruises and
carried a total of 135,923 passengers. The Casino Princesa cancelled 10 cruises
due to inclement weather and 15 cruises due to maintenance and repairs during
this time period. The
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cruise to nowhere industry in Florida is also subject to seasonal fluctuations
with the highest levels of activities occurring during the months of January
through April.
SALES AND MARKETING
Casino Princesa focuses its sales and marketing efforts within a
twenty-mile radius of Miami. Casino Princesa must attract passengers from both
the local population and the tourist population to survive the seasonal
fluctuations that are known to occur in the Florida tourist industry. Casino
Princesa focuses its efforts on local markets and on tourists visiting the local
markets on vacation and promotes its cruises through general advertising, direct
mailings, travel agents and it's own sales force.
REGULATORY
The Princesa's operation as a United States registered cruise to
nowhere vessel was made possible by 1992 legislation that, for the first time,
allowed U.S. registered vessels to carry gambling equipment to and from U.S.
ports for use in international waters. Under Florida law no gambling may occur
while the ship is in Florida's waters, and gambling activities on the Princesa
are conducted solely in international waters.
In November of 1994, Florida voters rejected an amendment to the
Florida Constitution that would have authorized casinos throughout the State of
Florida at existing and operating pari-mutuel facilities, including race tracks
and Jai-Alai frontons and at up to seven other casinos in the state (but not
more than one per county) as authorized by the Florida Legislature. It is likely
that the gaming industry will continue to pursue the legalization of land-based
gaming in Florida. The Company believes that the legalization of land-based or
dockside gaming in Florida would have a material adverse impact on the Company's
operations.
In the past three years, various legislation has been proposed in
Florida that would have adversely impacted the cruise to nowhere industry. To
date, no such legislation has become law. There can be no assurance that further
legislation will be introduced and become law in the future that could adversely
affect the business of the Casino Princesa.
LITIGATION RELATING TO THE DAY-CRUISE INDUSTRY
On July 2, 1997, Robert A. Butterworth, the Attorney General for the
State of Florida, and Neil Perry, Sheriff of St. Johns County, Florida
("Plaintiffs") filed a Complaint for Injunctive Relief Against the Illegal
Possession of Slot Machines and the Continuance of a Public Nuisance against
Chances Casino Cruises, Inc. and Mark Morrow, ("Defendants") operators of the
Royal Princess, in the Circuit Court of the Seventh Judicial Circuit In and For
St. Johns County, Florida (Case No. CIV-97-1088). The Plaintiffs sought a
temporary and permanent injunction restraining the Defendants from continuing to
possess slot machines in the State of Florida. On July 2, 1997, the Plaintiffs
filed a Motion for a Temporary Injunction. The Florida Day Cruise Association of
Florida, Inc., of which Europa Cruises Corporation is a member, filed a Motion
to Appear as Amicus Curiae and a Memorandum in Opposition to the Motion for
Temporary Injunction. On July 22, 1997, the Court denied the Plaintiffs' Motion
for Temporary Injunction, without prejudice to a final adjudication on the
merits. The Court also granted the Defendants' Motion to stay enforcement by
Plaintiffs and subordinate agencies
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through criminal process of the "slot machine" issue raised. On November 26,
1997, as a result of the cessation of the business which was the subject of this
suit, the Court entered an Order for Dismissal Without Prejudice granting the
Defendants' Motion to Dismiss for Mootness and dismissed all counterclaims
without prejudice to Plaintiffs. There can be no assurance that further
litigation will not be instituted in the State of Florida or elsewhere which
could adversely affect the business of the Company or the ability of the Company
to continue operating cruises-to-nowhere out of Florida ports.
In addition, in 1998, the Attorney General for the State of Florida had
several vessels of several companies or the equipment thereon seized for various
alleged civil and criminal violations of law. There can be no assurance that the
Attorney General for the State of Florida will not seize additional vessels in
the future for alleged civil and criminal violations of law.
On July 6, 1999, the United States Court of Appeals for the Fourth
District (the "Court") determined that the gambling laws of South Carolina
prohibiting gambling cruises from a port in South Carolina were not preempted by
the 1992 Amendments (the "1992 Amendments") to the Johnson Act (an act that,
among other things, regulates maritime gambling). Before this decision, it was
generally believed that the 1992 Amendments preempted state laws governing
gambling on day cruises of the type currently conducted by the Company on the
Princesa. The 1992 Amendments authorize such gambling day cruises, provided
certain requirements are met. The Court did not decide the issue on whether
states must reenact its laws against gambling in order to make it a federal
crime to operate a gambling day cruise. A Florida State court has previously
determined, however, that Florida must reenact its laws to make it a federal
crime to operate a gambling day cruise. The effect, if any, of the Court's
decision on the Company's operations cannot be determined at this time.
EMPLOYEES
As of December 18, 1999, the Company, and its subsidiaries, employed
approximately 330 people, with approximately 250 employed full time. None is
covered by a collective bargaining agreement. The Company believes that it has
satisfactory employee relations.
ENVIRONMENTAL MATTERS
Compliance with federal, state and local law regarding the discharge of
materials into the environment or otherwise relating to the protection of the
environment has not had, and is not expected by the Company to have, any adverse
effect upon capital expenditures, earnings or the competitive position of the
Company. The Company is not presently a party to any litigation or
administrative proceeding with respect to its compliance with such environmental
standards.
Certain areas within the Black Hawk/Central City region have been
designated superfund sites by the Environmental Protection Agency as a result of
contamination from historic mining activities in the area. The Company does not
believe the real estate owned or leased by Concorde Cripple Creek in Black Hawk
has any environmental contamination or other environmental issues associated
with the real estate.
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FACTORS AFFECTING THE COMPANY'S BUSINESS AND PROSPECTS
There are many factors that affect the Company's business and the
results of its operations, some of which are beyond the control of the Company.
The following is a description of some of the important factors that may cause
the actual results of the Company's operations in future periods to differ from
those currently expected or desired.
o The Company has incurred a significant amount of indebtedness and,
although the Company's cash flow from operations is currently
sufficient to fund debt service related thereto, it can give no
assurances that its debt service will continue to be funded.
o Due to the current indebtedness, the Company's ability to obtain
additional financing in the future and the Company's flexibility in
reacting to changes in the industry and economic conditions generally
may be limited.
o The Company's success is partially dependent on its ability to
anticipate changing products and amenities and to efficiently develop
and introduce new products and amenities that will gain customer
acceptance. If the Company is unable to anticipate and introduce such
products and amenities, such inability may have an adverse effect on
the Company's business.
o Claims have been brought against the Company and its subsidiaries in
various legal proceedings, and additional legal and tax claims arise
from time to time. It is possible that the Company's cash flows and
results of operations could be affected by the resolution of these
claims.
o The Company operates in a very competitive environment, particularly in
Colorado. The growth in the number of slot machines inventory in Black
Hawk, Colorado, which may increase sharply in 2000, and the spread of
legalized gaming in other states and countries, could negatively affect
our operating results.
o The Company's gaming operations in Colorado are highly regulated by
governmental authorities. The Company will also be subject to
regulation in Florida if it decides to regulate the day-cruise
industry. In such an event, Native American gaming would also become
more competitive. If the Company conducts gaming activities in any
other jurisdiction, the authorities in that jurisdiction may also
subject the Company to additional regulation. Changes in applicable
laws or regulations could have a significant effect on our operations.
o The Company's business is affected by changes in local, national and
international general economic and market conditions in the locations
where it operates and where its customers live. The Casino Princesa is
particularly affected by the economic situation in Latin America and
South America. Changes in economic conditions could have a material
adverse effect on the Company's business.
o Any plans for future construction to the Golden Gates Casino may be
affected by a number of factors, including time delays in obtaining
necessary governmental permits
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and approvals and legal challenges. After beginning such a construction
project, the Company may make changes in project scope, budgets and
schedules for competitive, aesthetic or other reasons, and these
changes may also result from circumstances beyond the Company's
control. These circumstances include weather interference, shortages of
materials and labor, work stoppages, labor disputes, unforeseen
engineering, environmental or geological problems and unanticipated
cost increases. Any of these circumstances could give rise to delays or
cost overruns.
o From time to time, various state and federal legislators and officials
have proposed changes in tax laws, or in the administration of the law,
affecting the gaming industry. It is not possible to determine with
certainty the likelihood of possible changes in tax law or its
administration. These changes, if adopted, could have a material
negative effect on the Company's operating results.
o The Company's success is partially dependent on attracting and
retaining highly qualified management and gaming personnel. The
Company's inability to recruit or retain such personnel could adversely
affect its business.
o The weather in Florida is a daily risk consideration. Air temperature,
rain, high seas caused by winds, hurricanes and tropical storms effect
daily passenger counts and may cause the cancellation of cruises.
o If the Company fails to identify or correct Year 2000 problems in its
critical systems, its operations could be impacted.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company leases approximately 4,500 square feet of office space
located in Rapid City, South Dakota under a lease whose term expired September
30, 1999 from BHL Capital Corporation ("BHL Capital"), a corporation controlled
by Brustuen "Bruce" H. Lien, the majority shareholder, director and chairman of
the board of the Company. The Company currently leases this office space on
month-to-month basis. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
Casino Princesa has the right to use dock space in Biscayne Bay with
respect to the Princesa from the Trust pursuant to the terms of the Use
Agreement. The term of the Use Agreement is for five years commencing October
1997 with one option to renew the Agreement for five years. Casino Princesa has
the first right of refusal to extend the Use Agreement for an additional five
years if the Trust decides to continue the use of the docks for gaming vessels.
See "DESCRIPTION OF BUSINESS--Business Developments--Use Agreement."
Effective July 21, 1997, Concorde Cripple Creek and E8000 entered into
a lease for the Golden Gates Casino ("Casino Lease"). The Casino Lease is for an
initial term (the "Initial Term") of five years and Concorde Cripple Creek has
two 5-year options to renew. The base rent is $15,000 per month during the first
year of the Initial Term and increases to $16,000 per month during the second
year and $17,000 per month for the remainder of the Initial Term. In addition to
the base rent, Concorde Cripple Creek is required to pay E8000 additional rent
("Percentage Rent") equal to a percentage of the Golden Gates Casino's adjusted
net gaming revenue ("ANGR"). The Percentage Rent shall be payable monthly based
on annual ANGR as follows: 2% of the first $2,000,000 ANGR; plus 4% of the
second $2,000,000 ANGR; plus 6% of the third $2,000,000 ANGR; plus 8% of the
ANGR in excess of $6,000,000. During the third,
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<PAGE> 15
fourth and fifth years of the Initial Term, Concorde Cripple Creek has the
option to purchase the Golden Gates Casino and E8000's 50% interest in two
adjacent properties (which includes the Parking Lot) for the following
respective exercise prices: $5,800,000; $5,974,000; and $6,153,220.
Concorde Cripple Creek owns an undivided 50% interest in two parcels of
land near, or adjacent to, the Golden Gates Casino. The first property is an
undeveloped small lot ("Vacant Lot") located behind the Golden Gates Casino. The
second property is a 50-space parking lot ("Parking Lot") located adjacent to
the Golden Gates Casino on Main Street. As of September 30, 1998, the Parking
Lot was subject to a mortgage with a principal balance of $296,802 and monthly
payments of $5,220, including interest equal to prime plus 2%. The mortgage was
paid in full on December 31, 1998 with the proceeds of a loan from a third-party
lender secured by certain contract rights of Concorde Cripple Creek.
Concorde Cripple Creek and E8000 have entered into a parking lot lease
("Parking Lot Lease") whereby Concorde Cripple Creek agreed to lease from E8000
its 50% interest in the Parking Lot adjacent to the Golden Gates Casino.
Concorde Cripple Creek owns the other 50% interest in the Parking Lot. The
Parking Lot Lease has an initial term of five (5) years and Concorde Cripple
Creek has two 5-year options to renew. The lease rate is $6,200 per month during
the initial term; $6,510 per month during the first option term and $6,835 per
month during the second option term.
E8000 and Concorde Cripple Creek are parties to a Co-Ownership
Agreement dated August 14, 1997 ("Co-Ownership Agreement") with respect to the
Parking Lot (of which E8000 and Concorde Cripple Creek each own an undivided
fifty percent (50%) interest), and with respect to certain other real property
(hereafter called the "Backus Property") (of which E8000 and Concorde Cripple
Creek each own an undivided fifty percent (50%) interest). Furthermore, E8000,
Concorde Cripple Creek and KMM Parking, L.L.C., a Colorado limited liability
company ("KMM") are parties to that certain Agreement to subject Property to
Condominium Regime dated October 22, 1997, as amended ("Condominium Agreement"),
with respect to a portion of the Golden Gates Casino property, the Parking Lot,
the Backus Property, and certain other real property (on all of which the
Parking Garage is being constructed). The Condominium Agreement provides that
certain modifications to the Casino Lease, Parking Lot Lease and Co-Ownership
Agreement previously discussed must be agreed upon by E8000 and Concorde Cripple
Creek as a condition to the agreements and undertakings reflected in the
Condominium Agreement. Consequently, on January 1, 1999, E8000 and Concorde
Cripple Creek amended the Casino Lease (the "Amendment") and canceled the
Parking Lot Lease and Co-Ownership Agreement. The Amendment now provides for,
among other things, a base rent of $22,200 per month. This base rent will be
increased to $24,000 per month once the Parking Garage is completed. Upon
completion of the Parking Garage, the Company is required to contribute land
with a book value of $1,097,080 to a third party. In addition, the Amendment
increased the purchase prices at which Concorde Cripple Creek may exercise its
option to purchase the Casino and E8000's interest in the Parking Garage. The
increases are as follows: 1) during the third lease year, the exercise price
shall be $5,941,500; 2) during the fourth lease year, the exercise price shall
be $6,115,500; and 3), during the fifth lease year, the exercise price shall be
$6,294,720.
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The Company believes that the above facilities and equipment are well
maintained and in good operating condition and will satisfy its current needs.
ITEM 3. LEGAL PROCEEDINGS.
Association for Disabled Americans, Inc., Coral Springs Advocacy
Committee for the Handicapped, Inc., Daniel Ruiz and Jorge Luis Rodriguez v.
Concorde Gaming Corporation and Goldcoast Entertainment Cruises, Inc. (United
States District Court for the Southern District of Florida, Miami Division,
Civil Action No. 99-1056). On April 15, 1999, the Association for Disabled
Americans, Inc., et. al (the "Plaintiffs"), sued the Company and Goldcoast (the
"Defendants") for injunctive relief pursuant to the Americans With Disabilities
Act. The Plaintiffs claim, in part, that the Defendants have discriminated
against them by denying them access to and full and equal enjoyment of services,
facilities, accommodations, the Princesa and that the Defendants have failed to
remove architectural barriers and erect certain architecturally required
improvements. The Plaintiffs have requested that the Court issue a permanent
injunction enjoining the Defendants from continuing its alleged discriminatory
practices, ordering the Defendants to alter the subject vessel and premises,
close the subject vessel and premises until the alleged required modifications
are completed and to award Plaintiffs attorneys' fees, costs and expenses
incurred. The Company intends to vigorously defend this action.
The Company is also involved in routine litigation arising in the
ordinary course of the Casino Princesa's business. These matters are believed by
the Company to be covered by appropriate insurance policies.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders of the Company
during the quarter ended September 30, 1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is no established public trading market for the Company's Common
Stock. The following market information is based upon the bid and asked price of
the stock as reported by the OTC Bulletin Board. Such quotations reflect
interdealer prices, without retail mark-up, mark-down or commission, and may not
necessarily represent actual transactions.
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<TABLE>
<CAPTION>
High Bid Low Bid
-------- -------
<S> <C> <C>
Fiscal Year ended September 30, 1999
First Quarter $ 0.31 $0.10
Second Quarter 0.22 0.07
Third Quarter 0.48 0.08
Fourth Quarter 0.37 0.10
Fiscal Year ended September 30, 1998
First Quarter $0.125 $0.0625
Second Quarter 0.0975 0.0625
Third Quarter 0.09375 0.0625
Fourth Quarter 0.125 0.09375
</TABLE>
As of December 18, 1999, there were approximately 144 registered
holders and approximately 172 beneficial owners of record of Common Stock.
DIVIDENDS
The Board of Directors of the Company currently anticipates that it
will retain all available funds for use in the operation of the business and
does not anticipate paying any dividends in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with the
financial statements and notes thereto filed with this report. As used herein,
the term "Fiscal 1999" refers to the fiscal year ending September 30, 1999, and
the term "Fiscal 1998" refers to the fiscal year ending September 30, 1998.
The statements contained in this report, if not historical, are forward
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995, and involve risks and uncertainties that could cause actual
results to differ materially from the financial results described in such
forward looking statements. These risks and uncertainties include, but are not
limited to, changes in gaming regulations and tax rates in Colorado, Florida,
and other jurisdictions that could impact the Company's operations, changes in
economic conditions, declining popularity of gaming, competition in Colorado and
Florida and other jurisdictions, and the level and rate of growth in the
Company's operations. The success of the Company's business operations is
dependent on factors such as the effectiveness of the Company's marketing
strategies to grow its customer base and improve customer response rates,
general competitive conditions within the gaming industry and general economic
conditions. Further, any forward looking statement or statements speak only as
of the date on which such statement was made, and the Company undertakes no
obligation to update any forward looking statement or statements to reflect
events or circumstances after the date on which such statement is made or to
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<PAGE> 18
reflect the occurrence of unanticipated events. Therefore, forward-looking
statements should not be relied upon as a prediction of actual future results.
RESULTS OF OPERATIONS
Year Ended September 30, 1999 Compared to Year Ended September 30, 1998
Revenues. Net revenues increased 350.3% to $19,033,658 for Fiscal 1999,
compared to $4,226,687 for Fiscal 1998, primarily as a result of the
commencement of operations of the Casino Princesa in October 1998. The Casino
Princesa had revenues of $14,644,864 for Fiscal 1999. Golden Gates Casino
revenues increased 5.4% to $4,388,794 for Fiscal 1999, compared to $4,165,055
for Fiscal 1998. This increase was primarily attributed to a mild Colorado
winter. Food and beverage revenues were $1,944,153 for Fiscal 1999, compared to
$301,271 for Fiscal 1998. Other revenues were $1,755,186 for Fiscal 1999,
compared to $18,322 for Fiscal 1998. Gross revenues were reduced for promotional
allowances by $2,680,743, compared to $94,440 for promotional allowances for
Fiscal 1998. The increases in food and beverage revenues, other revenues and
promotional allowances are attributed to the commencement of operations for the
Casino Princesa.
Costs and Expenses. Total costs and expenses increased 183% to
$18,171,778 for Fiscal 1999, compared to $6,421,150 for Fiscal 1998, primarily
as a result of the commencement of operations of the Princesa in October 1998.
Casino expenses for the Casino Princesa were $4,174,388 for the Fiscal 1999.
Casino expenses for Golden Gates Casino increased 3.6% to $2,632,578 for Fiscal
1999, compared to $2,541,533 for Fiscal 1998 due to an increased rent expense
and gaming taxes resulting from an increase in revenue. Food and beverage
expenses increased 669.7% to $1,508,177 for Fiscal 1999, compared to $195,933
for Fiscal 1998, primarily as a result of commencement of operations of the
Casino Princesa. Food and beverage expenses for the Casino Princesa were
$1,329,763 for Fiscal 1999. Food and beverage expenses for Golden Gates Casino
decreased to $178,414 for Fiscal 1999 compared to $191,680 for Fiscal 1998, due
to the restaurant being subleased and operated by a third party for most of
Fiscal 1999. Management fees, which represent payments made to Goldcoast
Entertainment Cruises, Inc. ("Goldcoast") related to the Casino Princesa,
increased to $367,916 for Fiscal 1999 compared to $260,000 for Fiscal 1998.
Business development costs decreased 97.8% to $3,844 for Fiscal 1999, compared
to $175,169 for Fiscal 1998, primarily as a result of the focus on current
operations. Selling, general and administrative expenses increased 435.1% to
$7,695,599 for Fiscal 1999, compared to $1,438,195 for Fiscal 1998, due
primarily to the commencement of operations of the Casino Princesa. Selling,
general and administrative expenses for the Casino Princesa were $5,914,265 for
Fiscal 1999. Selling, general and administrative expenses for Golden Gates
Casino increase to $1,001,467 for Fiscal 1999 compared to $663,848 for Fiscal
1998, due to increased marketing efforts. Depreciation and amortization
increased 187.3% to $996,517 for Fiscal 1999, compared to $346,800 for Fiscal
1998, primarily as a result of the commencement of operations of the Casino
Princesa. Loss on sale of equipment increased to $74,484 for Fiscal 1999,
compared to $2,852, primarily due to the sale of outdated slot machines at
Golden Gates Casino. Pre-opening and start-up costs, primarily related to Casino
Princesa, were $718,275 for Fiscal 1999, compared to $1,391,170 for Fiscal 1998,
due to the commencement of operations of the Casino Princesa.
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Other Income and Expense. Interest expense and financing costs to
related parties, net of capitalized interest, increased to $1,105,221 for Fiscal
1999, compared to $127,726 for Fiscal 1998. Other interest expense and financing
costs, net of capitalized interest, increased to $944,746 for Fiscal 1999,
compared to $196,313 for Fiscal 1998. The overall increase in interest expense
and financing costs for Fiscal 1999 compared to Fiscal 1998 was due primarily to
loan fees associated with the financing for the Casino Princesa and fees
associated with a letter of credit for Casino Princesa. No interest was
capitalized in Fiscal 1999. The Company capitalized $460,555 of interest in
Fiscal 1998 related to the construction of the Princesa.
Federal and State Income Taxes. The Company recorded a Federal and
State income tax benefit of $100,700 for Fiscal 1999, compared to $285,000 for
Fiscal 1998. The Company records an income tax benefit using the estimated
effective tax rate for the fiscal year if the amount of loss incurred is
reasonably expected to be offset by future income or is available for carry back
to previous years. The income tax benefit for Fiscal 1998 was increased by a
valuation allowance adjustment of $52,000. The Company recorded a valuation
allowance of $632,000 for Fiscal 1999, compared to $684,000 for Fiscal 1998. The
valuation allowance is for future income benefits associated with pre-opening
and start-up costs. The realization of this future benefit is contingent upon
the future profitability of the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $2,066,840 at September
30, 1999, compared to $714,764 at September 30, 1998, an increase of $1,352,076.
During Fiscal 1999, the Company used cash flows in operating activities
of $897,712, compared to $813,555 in Fiscal 1998.
Investing Activities. Investing activities used cash of $236,009 in
Fiscal 1999 compared to using cash of $7,519,612 in Fiscal 1998, primarily due
to a reduction of need for capital outlays on the new Princesa. The Company used
$418,706 in Fiscal 1999 for the acquisition of property and equipment compared
with $7,711,619 in Fiscal 1998.
Financing Activities. Financing activities provided cash of $2,485,797
in Fiscal 1999, compared to cash provided in financing activities of $7,974,021
in Fiscal 1998. Long-term borrowings from related parties provided $2,545,000 in
Fiscal 1999, compared to $3,225,000 in Fiscal 1998. Long-term borrowings from
other sources provided $10,853,097 in Fiscal 1999, compared to $4,706,025 in
Fiscal 1998. Short-term borrowings were reduced by $490,500 in Fiscal 1999,
while short-term borrowings provided $490,500 in Fiscal 1998. Principal payments
on long-term debt used cash of $9,226,534 in Fiscal 1999, compared to $577,336
in Fiscal 1998. Payments received on a stock subscription provided $0 in 1999,
compared to $129,832 in Fiscal 1998. This decrease is a result of the sale of
the promissory note recorded as a stock subscription for $110,000 to BHL
Capital. The sales price of this promissory note was approximately $8,000 less
than the remaining balance and as a result, additional paid-in capital was
reduced by this amount.
Obligations to Casino Princesa. The Bayfront Agreement requires a
minimum capital contribution of $6,405,000 (the "Capital Contribution") from the
Company. At September 30,
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1998, the Company had contributed approximately $4,813,600 to Casino Princesa,
and subsequent to September 30, 1998, the Company contributed the remaining
amount of the minimum capital contribution.
Bank Financing. In accordance with the Use Agreement in September 1998,
the Company provided the Trust with a letter of credit in the principal amount
of $925,000 to secure payment of the annual fees for the third and fourth years
of the Use Agreement. In September 1999, the $925,000 letter of credit expired
and was replaced with a letter of credit in the principal amount of $950,000 to
secure payment of the annual fees for the fourth and fifth years of the Use
Agreement. The $925,000 letter of credit was and the $950,000 letter of credit
is secured by the personal guaranty of Mr. Lien and a mortgage on certain real
estate owned by BHL Capital, a company owned by Mr. Lien. The Casino Princesa is
required to pay BHL Capital an annual fee of $28,500 for so long as the real
estate is collateral for the letter of credit in Fiscal 2000. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS"
In March 1998 the Casino Princesa obtained a line of credit for $5.0
million (the "Construction Line of Credit") from BNC Financial Corporation to
fund the remaining construction costs of the Princesa. The Construction Line of
Credit bears interest at an adjustable rate equal to 3.75% per annum above the
prime rate, as published in the Wall Street Journal (12% at September 30, 1998).
The Construction Line of Credit was secured by, among other things, a First
Preferred Ship Mortgage on the Princesa and the guaranties of Mr. Lien, Mrs.
Lien, the Company, Goldcoast and certain other individuals. The Construction
Line of Credit was paid in full upon the closing of the Vessel Loan.
In October, 1998, Princesa Partners entered into the Vessel Loan, a
Loan Agreement and Security Agreement with a group of lenders which provided
$8,400,000 in financing for the Princesa, related equipment and working capital.
The Vessel Loan is secured by a ship mortgage and all related furniture,
furnishings, machinery and equipment (including gaming equipment) owned by
Casino Princesa or Princesa Partners. In addition, Casino Princesa, the Company,
Goldcoast and certain individuals, including Mr. Lien, guaranteed the Vessel
Loan. The Vessel Loan bears interest at 10.375% per annum with interest only
payments through January 1999. Monthly payments of $130,258, including interest,
commenced February 1999 for sixty consecutive months, with the remaining balance
due January 2004. The Vessel Loan also requires mandatory prepayment of
principal in an amount equal to 12% of the amount of Excess Revenue (as defined
below) for each fiscal year, commencing January 2000. Excess Revenue as defined
in the Vessel Loan is the excess of (i) the combined earnings of Princesa
Partners and Casino Princesa before taxes, depreciation and amortization minus
the principal and interest paid on the Vessel Loan during the fiscal year, over
(ii) $4,000,000. The Vessel Loan contains typical covenants with respect to
Princesa Partners and Casino Princesa, including net worth restrictions, debt
service requirements and limitations on the amount of debt that can be incurred.
In May 1999 the Company's wholly owned subsidiary, Concorde Cripple
Creek, entered into a loan agreement with a lender (the "Loan Agreement"). The
Loan Agreement provides for a short-term line of credit in an amount not to
exceed $150,000, which is evidenced by a promissory note due and payable on May
15, 2000. The promissory note bears interest at the prime rate plus
three-quarters percent. As of September 30, 1999, no amount was outstanding
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<PAGE> 21
under the short-term line of credit. The Loan Agreement also provides for a term
commitment loan of up to $850,000 (the "Term Loan"). The Term Loan is evidenced
by a promissory note payable in thirty-five (35) monthly installments of $10,119
plus interest, commencing on May 31, 1999 with the final installment due and
payable in September 2002. Advances under the Term Loan bear interest at the
prime rate plus three-quarters percent. As of September 30, 1999, the Term Loan
had an outstanding principal balance of $809,524. The assets of Concorde Cripple
Creek secure the obligations of Concorde Cripple Creek under the Loan Agreement.
In addition, the Company has agreed to guarantee the obligations of Concorde
Cripple Creek under the Loan Agreement.
Related Party Financing. The Company has relied upon loans from Mr.
Brustuen "Bruce" H. Lien and BHL Capital in order to obtain the necessary
capital to develop the offshore gaming project in Miami and to complete the
Princesa. In addition, Mr. Lien has been required to provide personal guarantees
in order for the Company to obtain such financing, including the Vessel Loan.
From November 1997 through March 1998, the Company borrowed $1,440,000
from Mr. Lien and BHL Capital in order to meet its obligations under the
Bayfront Agreement and for working capital. The amounts were borrowed pursuant
to promissory notes that were due on demand and bear interest at 18% per annum.
In March 1998, the Company borrowed an additional $500,000 from Mr.
Lien to repay a bank term note that was due in June 1998 and for working
capital. This loan is evidenced by a promissory note which is due in March 1999
and bears interest at 12% per annum. The note requires monthly payments of
$8,500. In conjunction with this loan, the Company was required to pledge all of
the Golden Gates Casino's assets to a third party lender of Mr. Lien's. This
loan was paid off by the Term Loan in May 1999.
In April 1998, BHL Capital agreed to provide the Company with a line of
credit in the amount of $3,000,000 (the "Project Line of Credit"), which was
used by the Company to fund its commitment to Casino Princesa for the
development of the offshore gaming project in Miami. Advances under the Project
Line of Credit bear interest at a rate of 18% per annum. At September 30, 1998,
$1,835,000 had been borrowed under the Project Line of Credit, and subsequent to
September 30, 1998, the Company had borrowed the entire $3,000,000 available
under the Project Line of Credit.
Also in April 1998, Mr. Lien signed a commitment letter whereby he
agreed to provide additional working capital to the Company in an amount not to
exceed $500,000 (the "Working Capital Line of Credit"), the terms of any
borrowings under the Working Capital Line of Credit would be negotiated in the
event these funds were required by the Company. Subsequent to September 30,
1998, BHL Capital and the Company signed a promissory note in conjunction with
this commitment letter. The promissory note allows for advances up to $500,000,
is due on demand, and bears interest at 18%.
In consideration of the Project Line of Credit, the Working Capital
Line of Credit and the guaranty by Mr. Lien under the Construction Line of
Credit, the Company granted Mr. Lien an option (the "Option") to purchase all or
a portion of the Company's interest in Casino Princesa,
21
<PAGE> 22
pursuant to an option agreement dated April 1998. The Option was subsequently
cancelled by the parties in November 1998.
In November 1998, the Company and BHL Capital signed a promissory note
for advances up to $5,000,000 (the "Promissory Note") which superceded and
replaced the borrowings from Mr. Lien and BHL Capital for $1,440,000, the
Project Line of Credit and the Working Capital Line of Credit. The Promissory
Note is due on demand with interest paid monthly at the rate of 18% per annum.
BHL Capital has waived its right to demand payment of the Promissory Note until
after January 1, 2001. As a result of this waiver, all borrowings at September
30, 1999 that were subsequently superceded and replaced with the Promissory Note
were reclassified as long-term. See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS"
In November 1999, the Company and BHL Capital signed a promissory note
for advances up to $1,000,000 (the "BHL Line of Credit") which will provide the
Company with a line of credit to meet its working capital needs. The BHL Line of
Credit is due one year and one day after demand, with interest due on demand and
at the rate of 18% per annum. The Company has not drawn on the BHL Line of
Credit. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS".
FUTURE OPERATIONS
The Company's ability to meet its working capital requirements is
dependent upon the future operations of the Casino Princesa, which commenced
operations in October 1998. The Company believes that cash flow from the Casino
Princesa and the Golden Gates Casino combined with its existing financing
arrangements will be sufficient to meet its current working capital
requirements.
YEAR 2000
Like other business organizations, the Company could be adversely
affected if its information technology ("IT") and non-IT systems and those of
other businesses with which the Company interacts do not properly process and
calculate date-related information beginning in the Year 2000 (the "Year 2000
Problem"). Therefore, the Company is taking steps that it believes are
reasonably designed to address any Year 2000 Problems with respect to the IT and
non-IT systems that it uses and to obtain satisfactory assurances that
comparable steps are being taken by material vendors and other business
partners.
IT and Non-IT Systems. The IT systems maintained by the Company consist
primarily of its core accounting software application system and local area
networks ("LANs") in Rapid
22
<PAGE> 23
City, South Dakota, Miami, Florida, and Black Hawk, Colorado. The design,
installation and maintenance of the LAN's are provided by contracted IT
personnel who also manage the basic support and configurations for the systems.
Non-IT systems include slot machines, embedded circuitry found in
telephone equipment, surveillance, security and alarm systems, copiers, fax
machines, heating and air conditioning systems and other infrastructure systems
that are used by the Company in connection with the operation of its business.
Year 2000 Program. The Company has implemented a Year 2000 program
which includes the following phases: awareness, assessment, testing/validation
and implementation (the "Year 2000 Program"). The Year 2000 Program applies to
all IT and non-IT systems, as well as any providers who service and maintain
these systems.
Awareness Phase. During the awareness phase, which has been completed,
the Company defined the Year 2000 Program, gained executive level support for
the commitment of resources necessary to perform Year 2000 compliance work, and
developed an overall strategy encompassing all material in-house IT and non-IT
systems and equipment, outsourced systems, customers and vendors.
Assessment Phase. During the assessment phase, which has been
completed, the Company performed an assessment of the size and complexity of the
Year 2000 issue, identified (i) all material hardware, software, networks, other
processing platforms, (ii) established deadlines for Year 2000 Program phases,
(iii) identified those systems considered "mission critical" (i.e., applications
or systems considered vital to the successful continuance of any of the
Company's core business activities), (iv) communicated with vendors and
suppliers to determine their state of readiness relating to Year 2000 Problems
and the Company's exposure to third party Year 2000 issues, and (v) outlined a
contingency plan to be implemented in the event internal or external systems are
not ready for the Year 2000.
The Company has received initial assurances from certain of these third
parties that their ability to perform their obligations to the Company are not
expected to be materially adversely affected by the Year 2000 problem.
Specifically, the Company has received assurances from its major supplier of
gaming equipment that such equipment does not have a Year 2000 Problem.
Testing/Validation and Implementation. The testing/validation phase has
been completed. As of September 30, 1999, testing of non-mission critical
systems and the implementation stage has been completed. The objective of the
testing is to minimize business risk due to operational failures. This phase is
considered to be the most critical phase of the Year 2000 Program.
According to vendor certifications, the Company believes its core
software applications at all locations are currently Year 2000 compliant. In
addition, management believes that the Company's non-IT systems are Year 2000
compliant based upon vendor certifications and limited validation testing
performed to date.
23
<PAGE> 24
All costs related to the Company's Year 2000 Problem are expensed as
incurred, provided, however, that the cost of new hardware or software is
capitalized and amortized over its expected useful life. To date, the costs
related to the Year 2000 Problem have been funded from cash flow from
operations. The costs associated with Year 2000 compliance have not been and are
not anticipated to be material to the Company's financial position or results of
operations.
Risks. The major risks posed by the Year 2000 Problem are separated by
operational unit.
o In Black Hawk, Colorado, failure of surveillance equipment would
close table games and slot machines according to Colorado law.
Year 2000 Problems in slot machines should be limited to coin
reporting data, not mechanical failure or inability for the
machine to operate normally to the user. Inaccurate reporting of
data, however, would require the shutdown of the slot machines
under Colorado law. Utility and telecommunications failures would
also impact the Company (for example, a source of power
(electrical or natural gas) is crucial to the running
surveillance, heating slot machines for our land based casino in
Black Hawk).
o In Miami, failure of surveillance equipment would close table
games and slot machines until internal staff surveillance of games
could be established.
In addition, while the Company has been in close communication with
vendors and other intermediaries, it has no control over the efforts of these
third parties with whom it has material business relationships. There can be no
guarantee that the systems of other companies on which the Company's systems
rely will be timely converted, or that representations made to the Company by
third parties are in fact accurate. As a result, the failure of a major vendor
or supplier to adequately address their Year 2000 Problem could have a material
adverse effect on the operations of the Company.
Contingency Plan. The Company's contingency plan, designed to handle
the most reasonably likely worst case Year 2000 scenarios, is substantially
complete. Phases of this plan included business impact analysis, Year 2000
business resumption planning and testing. The Year 2000 contingency plan is
intended to provide assurance that the Company's mission critical functions will
continue if one or more systems fail. In developing the plan, the Company has
taken into consideration the impact of external systems, including those of
service providers, financial institutions, business partners and infrastructure
providers such as suppliers of power and telecommunications.
Key components of the Company's contingency plan include, but are not
limited to, the following:
o A plan for back-up generators at the Company's casino in Black
Hawk, Colorado to power the Company's phone system, mainframe
computer system, other computers and computer networks, security
systems, lights and to provide for other electrical power
capabilities in the event of interruptions in the power supply.
o Back-up staff available on and around December 31, 1999 to
provide surveillance on the Princesa in the event surveillance
systems fail.
24
<PAGE> 25
o Limited vacation for information systems and operations staff for
the months of November and December 1999 and January 2000 and for
all other staff from December 15, 1999 through January 15, 2000.
In addition, manual back-up procedures are being considered in specific areas
such as accounting to ensure continuity of essential business operations.
The Company has not incurred any additional costs nor discovered any
material adverse effects on the operations of the Company stemming from the Year
2000 Problem. While the Company continues to believe the Year 2000 issues will
not materially affect its consolidated financial position or results of
operations, it remains uncertain as to what extent, if any, the Company may be
impacted.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements of the Company required by Regulation S-B are
attached to this Report. Reference is made to page F-1 of this Report for an
index to the financial statements and financial statement schedules.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Effective August 25, 1998, the Company dismissed KPMG Peat Marwick LLP
("KPMG") as its independent accountant. During the past two fiscal years, KPMG's
report on the Company's financial statements contained no adverse opinion or
disclaimer of opinion, and was not qualified or modified as to uncertainty,
audit scope, or accounting principles. The Company's decision was approved by
the Board of Directors on August 25, 1998. During the past two fiscal years and
for each subsequent interim period, the Company experienced no disagreement with
KPMG on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not resolved
to the satisfaction of KPMG, would have had a connection with its report.
Effective August 25, 1998, the Company engaged McGladrey & Pullen LLP
as the Company's independent accountant. During the two fiscal years preceding
their appointment as the Company's independent accountant, McGladrey & Pullen
LLP did not consult with the Company on any matter.
25
<PAGE> 26
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
The directors and executive officers of the Company and their ages are
as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Brustuen "Bruce" H. Lien(1)(2)(3) 72 Chairman of the Board of Directors
Jerry L. Baum(2) 50 President, Chief Executive Officer, Chief Operating
Officer and Director
Deanna B. Lien(1)(2)(3) 56 Director
Robert F. Drew 46 Director of Finance
George J. Nelson 38 Vice President, Corporate Counsel and Secretary
</TABLE>
- ---------------
(1) Member of the Compensation Committee.
(2) Member of the Executive Committee.
(3) Member of the Stock Option Committee.
At each annual meeting of shareholders, each director is elected to
hold office until the next succeeding annual meeting or until their successor is
duly elected and qualified. Two of the directors, Brustuen "Bruce" H. Lien and
Deanna B. Lien are husband and wife. None of the other directors or officers of
the Company bears any family relationship to any other director or officer. Each
executive officer of the Company is elected for a term of one year and serves
until a successor is elected and qualified.
Brustuen "Bruce" H. Lien. Chairman of the Board of Directors since
August 10, 1990. Mr. Lien previously served as Chief Executive Officer and
President of the Company. Mr. Lien is also a principal and director of BHL
Capital, a private investment company, and of Pete Lien & Sons, Inc., a private
company that is a regional leader in the construction materials industry in the
upper Midwest.
Jerry L. Baum. Chief Executive Officer since March 1997, President
since June 1995 and Chief Operating Officer since April 1995. Mr. Baum was
elected a director in November 1995. From October 1, 1993 to February 1995, Mr.
Baum served as Project Director of the 4 Bears Casino. Mr. Baum was Manager of
Operations from March through October 1993 at the Royal River Casino, an Indian
casino owned by the Flandreau Santee Sioux Tribe. Previously, Mr. Baum was
Director of Criminal Investigation for the State of South Dakota from February
1987 to 1991.
Deanna B. Lien. Director since August 10, 1990. Ms. Lien previously
served as Vice President and Treasurer of the Company. Ms. Lien is also a
principal and director of Diggers Auto Salvage, Inc., a private company.
26
<PAGE> 27
Robert F. Drew. Director of Finance since January 1999. Mr. Drew
previously served as a chief financial officer and marketing director for a
computer software development firm from 1986 to 1994. Mr. Drew also was vice
president and general manager for a computer furniture manufacturing company
from 1978 to 1985. After obtaining his bachelor's degree in accounting from the
University of South Dakota in 1976, he became a CPA and worked as an auditor for
Deloitte & Touche until 1978.
George J. Nelson. Vice President and Corporate Counsel since September
1993 and Secretary since September 1995. From March 1990 to August 1993, Mr.
Nelson was the General Manager of First Gold Hotel and Casino in Deadwood, South
Dakota. Mr. Nelson was a Deputy States Attorney from November 1986 to March 1990
in Rapid City.
SECTION 16(a) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 and the rules
thereunder require the Company's officers and directors, and persons who
beneficially own more than ten percent of a registered class of the Company's
equity securities, to file reports of ownership and changes in ownership with
the Securities and Exchange Commission and to furnish the Company with copies.
Based on its review of the copies of the Section 16(a) forms received
by it, or written representations from certain reporting persons, the Company
believes that, during the last fiscal year, all Section 16(a) filing
requirements applicable to its officers, directors and greater than ten-percent
beneficial owners were complied with, except that Mr. Drew was inadvertently
late in filing a Form 3 when he became an officer of the Company.
ITEM 10. EXECUTIVE COMPENSATION.
CASH COMPENSATION
The following table sets forth certain information concerning
compensation paid by the Company to the Chief Executive Officer and any
executive officer whose total annual salary and bonus exceeded $100,000 for the
last fiscal year.
27
<PAGE> 28
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION AWARDS
Securities Underlying
Name and Options/SARs (#)
Principal Position Year Salary ($) Bonus ($) Options (#)
------------------ ---- ---------- --------- -----------
<S> <C> <C> <C> <C>
Jerry L. Baum 1999 120,000 100,000 -0-
President and Chief Executive 1998 120,000 -0- 100,000
Officer 1997 120,000 -0- 400,000
</TABLE>
- --------------
The foregoing compensation tables do not include certain fringe
benefits made available on a nondiscriminatory basis to all Company employees
such as group health insurance, dental insurance, long-term disability
insurance, vacation and sick leave. In addition, some benefits which are made
available only to certain of the Company's officers, such as the use of a
Company vehicle, are not described, as the monetary value of such benefits is
less than 10 percent of each of the named executive officer's annual salary and
bonus.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Value of Unexercised
Number of Securities Underlying In-the-Money Options at
Unexercised Options at FY-End (#) FY-End ($)(1)
Name Exercisable/Unexercisable Exercisable/Unexercisable
---- ------------------------- -------------------------
<S> <C> <C>
Jerry L. Baum 477,792/371,948 $0/$0
</TABLE>
- -----------------
(1) Based on the bid price of the Common Stock on September 30, 1999.
COMPENSATION PURSUANT TO PLANS
The Company has adopted a Performance Stock Option Plan (the "Plan"),
approved by the Shareholders, for the benefit of certain employees, officers and
directors of the Company. The Stock Option Committee of the Board of Directors
selects the optionees and determines the terms and conditions of the stock
options granted pursuant to the Plan. No options to purchase Common Stock were
granted pursuant to the Plan during Fiscal 1999. As of September 30, 1999,
options to purchase 1,456,230 shares of Common Stock were outstanding pursuant
to the Plan, 769,984 of which were vested at September 30, 1999.
28
<PAGE> 29
COMPENSATION OF DIRECTORS
The Company does not compensate its directors for their services as
directors or pursuant to any other arrangements. The Company reimburses its
directors for expenses incurred related to their services as directors.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding beneficial
ownership of outstanding shares of Common Stock as of December 18, 1999 by (i)
each person who is known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock; (ii) the Company's directors; (iii) all
executive officers named in the Summary Compensation Table; and (iv) all
directors and executive officers as a group.
<TABLE>
<CAPTION>
Shares
Name Beneficially Owned(1) Percent of Class
---- --------------------- ----------------
<S> <C> <C>
Brustuen "Bruce" H. Lien...................... 18,387,500(2)(4) 69.4%
3290 Lien Street
Rapid City, SD 57702
Deanna B. Lien(2)............................. 18,387,500(3)(4) 69.4%
3290 Lien Street
Rapid City, SD 57702
University of Wyoming Foundation.............. 1,900,000 7.1%
P. O. Box 3963
Laramie, WY 82071
Jerry L. Baum................................. 600,000(5) 2.2%
3290 Lien Street
Rapid City, SD 57702
All executive officers and directors as a
group (5 persons)............................. 19,229,100(4)(6) 72.2%
</TABLE>
- ---------------
(1) Shares are considered beneficially owned, for purposes of this table, if
held by the person indicated, if such person, directly or indirectly,
through any contract, arrangement, understanding, relationship or otherwise
has or shares the power to vote, to direct the voting of and/or to dispose
of or to direct the disposition of, such securities, or if the person has
the right to acquire beneficial ownership within sixty days, unless
otherwise indicated.
(2) This number includes the shares of Common Stock which are beneficially
owned, or which may be deemed to be beneficially owned, by Brustuen "Bruce"
H. Lien. For purposes of this table, the same shares may be deemed to be
beneficially owned by Mr. Lien's wife, Deanna B. Lien.
29
<PAGE> 30
(3) For purposes of this table, Deanna B. Lien is deemed to be the beneficial
owner of the shares of Common Stock which may be deemed to be beneficially
owned by her husband, Brustuen "Bruce" H. Lien.
(4) This number includes 2,000,000 shares of Common Stock which may be acquired
pursuant to a currently exercisable warrant.
(5) This number includes 477,792 shares of Common Stock which may be acquired
pursuant to currently exercisable stock options.
(6) This number includes 631,984 shares of Common Stock which may be acquired
pursuant to currently exercisable stock options.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During 1999 and 1998, Mr. Lien and BHL Capital loaned money to the
Company under various promissory notes. These amounts loaned varied from month
to month and carried an interest rate ranging from prime rate plus 2% to 18% per
annum. The Company incurred interest expense and financing costs, including
interest that was capitalized, relating to these notes payable of $1,087,221 and
$394,278, for Fiscal 1999 and Fiscal 1998, respectively. In November 1999, the
Company and BHL Capital signed a promissory note for advances up to $1,000,000
(the "BHL Line of Credit") which will provide the Company with a line of credit
to meet its working capital needs. The BHL Line of Credit is due one year and
one day after demand, with interest due on demand and at the rate of 18% per
annum. The Company has not drawn on the BHL Line of Credit. This line of credit
is in addition to the Promissory Note signed in November 1998 between the
Company and BHL Capital for advances up to $5,000,000 (the "Promissory Note").
The Promissory Note superceded and replaced the borrowings from Mr. Lien and BHL
Capital for $1,440,000, the Project Line of Credit and the Working Capital Line
of Credit. The Promissory Note is due on demand with interest paid monthly at
the rate of 18% per annum. BHL Capital has waived its right to demand payment of
the Promissory Note until after January 1, 2001. As a result of this waiver, all
borrowings at September 30, 1999 that were subsequently superceded and replaced
with the Promissory Note were reclassified as long-term.
In March 1998, the Company borrowed an additional $500,000 from Mr.
Lien to repay a bank term note that was due in June 1998 and for working
capital. This loan is evidenced by a promissory note which is due in March 1999
and bears interest at 12%. The note requires monthly payments of $8,500. In
conjunction with this loan, the Company was required to pledge all of the Golden
Gates Casino's assets to a third party lender of Mr. Lien's. This loan was paid
off by the Term Loan in May 1999.
Mr. Lien has pledged assets and/or personally guaranteed loans in order
for the Company to obtain financing which otherwise may not have been available
to the Company, as follows:
(a) Personal guarantee of a $8,400,000 note payable to a bank,
date October 23, 1998. The balance on the note at September 30, 1999
was $7,938,835.
(b) Personal guarantee of a $100,000 conditional line of
credit to a bank, dated May 1997. The conditional line of credit
expired in May 1998.
30
<PAGE> 31
(c) Personal guarantee of a $950,000 letter of credit dated
September 16, 1999 relating to the Use Agreement.
(d) Personal guarantee of a $925,000 letter of credit dated
September 28, 1998 relating to the Use Agreement. This letter of credit
expired September 30, 1999.
(e) Personal guarantee of the Construction Line of Credit. The
balance on the Construction Line of Credit at September 30, 1998 was
$4,616,336 and was subsequently paid in full on October 22, 1998.
In consideration for previous pledges and guarantees, on January 26,
1994 the Company issued a warrant to Mr. Lien for 2,000,000 shares of Common
Stock at an exercise price of $1.00 per share. This warrant expires in January
2004. In addition, the Company entered into an indemnification agreement with
Mr. Lien whereby the Company agreed to indemnify Mr. Lien from all losses,
claims, damages and expenses relating to any guarantees and/or pledges of
collateral made by Mr. Lien on behalf of the Company.
The Company leases approximately 4,500 square feet of office space
located in Rapid City, South Dakota from BHL Capital pursuant to a
month-to-month lease. The monthly lease payment, including real estate taxes and
utilities, is $2,597.
The Company also leases an airplane, on an as needed basis, from BHL
Capital. The Company incurred lease payments related to the airplane of $2,146
and $26,678 during Fiscal 1998 and Fiscal 1997, respectively. The Company did
not lease the airplane during Fiscal 1999.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
The following exhibits are filed as a part of this Report, with each
exhibit that consists of or includes a management contract or compensatory plan
or arrangement being identified with an asterisk.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
3.1 Amended and Restated Articles of Incorporation.(1)
3.2 Third Amended and Restated Bylaws.(1)
10.1* 1992 Performance Stock Option Plan.(2)
10.2 Indemnification Agreement between the Company and Bruce
H. Lien.(1)
10.3 Lease between Elevation 8000+ and Concorde Cripple
Creek, Inc. dated July 21, 1997.(3)
</TABLE>
31
<PAGE> 32
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
10.4 Agreement dated August 5, 1997, by and between Leo
Equity Group, Inc. and Concorde Gaming Corporation.(3)
10.5 Use Agreement dated June 25, 1997, by and between Casino
Princesa and Bayfront Park Management Trust.(3)
10.6 Joint Venture Agreement dated August 27, 1997, by and
between Concorde Gaming Corporation and Goldcoast
Entertainment Cruises, Inc.(3)
10.7 Vessel Construction Agreement dated August 26, 1997, by
and between Keith Marine, Inc. and Casino Princesa.(3)
10.8 Waiver Agreement dated March 20, 1998, by and between
Goldcoast Entertainment Cruises, Inc. and Concorde
Gaming Corporation.(3)
10.9 Option Agreement dated April 20, 1998 between Concorde
Gaming Corporation and Bruce H. Lien.(3)
10.10 Promissory Note in the aggregate principal amount of
$3,000,000 executed by Concorde Gaming Corporation and
BHL Capital Corporation.(3)
10.11 Loan Agreement between Princesa Partners and the lenders
named therein dated as of October 22, 1998.(4)
10.12 Servicing and Intercreditor Agreement between Princesa
Partners, The National City Bank of Evansville, as
servicer, and the lenders set forth therein dated as of
October 22, 1998.(4)
10.13 Security Agreement between Princesa Partners, Casino
Princesa and the lenders named therein dated as of
October 22, 1998.(4)
10.14 Guaranty, Subordination Agreement, Security Agreement
and Indemnity by Casino Princesa for the benefit of the
lenders named therein, dated as of October 22, 1998.(4)
10.15 First Preferred Ship Mortgage by Princesa Partners in
favor of The National City Bank of Evansville,
individually and as agent for certain lenders, dated as
of October 15, 1998.(4)
10.16 Guaranty by the Company for the benefit of the lenders
named therein dated as of October 22, 1998.(4)
10.17 Princesa Partners Joint Venture Agreement between
Goldcoast Entertainment Cruises, Inc. and Conami, Inc.
dated as of October 22, 1998.(4)
</TABLE>
32
<PAGE> 33
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
10.18 Promissory Note to the order of BHL Capital Corporation
in the principal amount of $5,000,000 dated November 13,
1998.(4)
10.19 First Amendment to Lease between Concorde Cripple Creek
and Elevation 8000+ LLC, dated as of January 1, 1999.
(5)
10.20 Loan Agreement between Concorde Cripple Creek, Inc. and
BNC National Bank of Minnesota, dated as of May 21,
1999. (6)
10.21 Security Agreement between Concorde Cripple Creek, Inc.
and BNC National Bank of Minnesota, dated as of May 21,
1999.(6)
10.22 Guaranty Agreement between the Company and BNC National
Bank of Minnesota, dated as of May 21, 1999. (6)
10.23 Waiver of Interest, Assignment of Lease and Agreement
Concerning Assumption of Lease among Concorde Cripple
Creek, Inc., BNC National Bank of Minnesota, and
Elevation 8000+ LLC, dated May 21, 1999. (6)
10.24 Short-Term Revolving Note to the order of BNC National
Bank dated May 21, 1999. (6)
10.25 Term Note to the order of BNC National Bank of Minnesota
dated May 21, 1999. (6)
16 Letter re Change in Certifying Accountant.(7)
21 Subsidiaries of the Registrant.(4)
23 Consent of Independent Auditors'.(+)
27 Financial Data Schedule.(+)
</TABLE>
- ------------------------
(+) Filed herewith
(1) Previously filed with the Securities and Exchange Commission as an exhibit
to the Company's Annual Report on Form 10-KSB for the year ended September
30, 1995 (File No. 0-8698) and incorporated herein by this reference.
(2) Previously filed with the Securities and Exchange Commission by the Company
on September 24, 1992 as Exhibit 10 to the Registration Statement on Form
S-8, (File No. 33-52388) and incorporated herein by this reference.
(3) Previously filed with the Securities and Exchange Commission by the Company
as an exhibit to its Annual Report on Form 10-KSB for the year ended
September 30, 1997 (File No. 0-8698) and incorporated herein by this
reference.
33
<PAGE> 34
(4) Previously filed with the Securities and Exchange Commission by the Company
as an exhibit to its Annual Report on Form 10-KSB for the year ended
September 30, 1998 (File No. 0-8698) and incorporated herein by this
reference.
(5) Previously filed with the Securities and Exchange Commission as an exhibit
to the Company's Quarterly Report on Form 10-QSB for the quarter ended
December 31, 1998 (File No. 0-8698) and incorporated herein by this
reference.
(6) Previously filed with the Securities and Exchange Commission as an exhibit
to the Company's Quarterly Report on Form 10-QSB for the quarter ended June
30, 1999 (File No. 0-8698) and incorporated herein by this reference.
(7) Previously filed with the Securities and Exchange Commission by the Company
as an exhibit to its Current Report on Form 8-K dated August 25, 1998 and
incorporated herein by this reference.
(b) Reports on Form 8-K:
No current reports on Form 8-K were filed during the last quarter of the
period covered by this report.
34
<PAGE> 35
INDEX TO FINANCIAL STATEMENTS
Financial Statements
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report for the Year Ended September 30, 1999..........................................F-2
Consolidated Balance Sheets at September 30, 1999 and 1998...................................................F-3
Consolidated Statements of Operations for the Years Ended
September 30, 1999 and 1998.............................................................................F-5
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 1999 and 1998.............................................................................F-6
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1999 and 1998............................................................................ F-7
Notes to Consolidated Financial Statements...................................................................F-8
</TABLE>
F-1
<PAGE> 36
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
CONCORDE GAMING CORPORATION
Rapid City, South Dakota
We have audited the accompanying consolidated balance sheets of CONCORDE GAMING
CORPORATION AND SUBSIDIARIES as of September 30, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CONCORDE GAMING
CORPORATION AND SUBSIDIARIES as of September 30, 1999 and 1998, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
McGladrey & Pullen, LLP
Rapid City, South Dakota
November 22, 1999, except for Note 14, as to which the date is November 30, 1999
F-2
<PAGE> 37
CONCORDE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
------------ ------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 2,066,840 $ 714,764
Current maturities of loan receivable (note 2) 31,667 --
Trade receivables , less allowance for uncollectable
accounts, $102,745 in 1999 and $3,113 in 1998 659,798 19,575
Inventory 79,957 39,304
Property held for sale -- 167,510
Prepaid expenses
Dock lease (note 10) 450,000 --
Other 354,273 100,203
Income tax refund claim 188,828 --
Deferred income taxes (note 6) 139,000 --
------------ ------------
TOTAL CURRENT ASSETS 3,970,363 1,041,356
------------ ------------
Investments and long-term receivables
Loan receivable from related party (note 2) 63,333 95,000
Investment in unconsolidated affiliate (note 3) -- 113,825
Deferred income taxes (note 6) -- 285,000
Other 231,633 146,730
------------ ------------
294,966 640,555
------------ ------------
Property and equipment
Land 1,097,080 1,097,080
Vessel 8,091,951 --
Gaming equipment, fixtures and furniture 3,746,809 3,506,871
Vehicles 41,320 58,274
Leasehold improvements 246,347 186,108
Vessel construction in progress -- 8,098,943
------------ ------------
13,223,507 12,947,276
Less accumulated depreciation and amortization (1,078,870) (279,670)
------------ ------------
12,144,637 12,667,606
------------ ------------
Intangibles and other
Dock rights, net (note 11) 284,008 319,504
Other, principally goodwill, net 702,967 569,090
Deferred financing costs, net 298,392 --
------------ ------------
1,285,367 888,594
------------ ------------
$ 17,695,333 $ 15,238,111
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 38
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
------------ ------------
<S> <C> <C>
Current liabilities
Notes payable to related party (note 4) $ -- $ 490,500
Current maturities of long-term debt (note 5) 908,065 597,540
Accounts payable 204,683 356,294
Accrued expenses
Payroll and payroll taxes 216,820 129,971
Accrued interest (notes 8 and 10) 217,300 400,550
Other 691,029 432,193
Income taxes payable -- 57,872
------------ ------------
TOTAL CURRENT LIABILITIES 2,237,897 2,464,920
------------ ------------
Long-term debt, less current maturities (note 5) 7,945,656 6,629,618
------------ ------------
Note payable to related party (note 4) 5,527,457 3,225,000
------------ ------------
Commitments and contingencies (notes 10 and 11)
Stockholders' equity
Common stock, par value $.01 per share, authorized
500,000,000 shares; issued and outstanding 24,010,402
at September 30, 1999 and 23,673,126 at September 30, 1998 240,104 236,731
Preferred stock, par value $.01 per share, authorized
standing at September 30, 1999 and 1998 -- --
Additional paid-in capital 3,887,176 3,855,246
Accumulated deficit (2,142,957) (1,173,404)
------------ ------------
1,984,323 2,918,573
------------ ------------
$ 17,695,333 $ 15,238,111
============ ============
</TABLE>
F-4
<PAGE> 39
CONCORDE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Revenues
Casino $ 18,015,062 $ 3,948,035
Food and beverage 1,944,153 301,271
Video lottery -- 53,499
Other 1,755,186 18,322
------------ ------------
GROSS REVENUES 21,714,401 4,321,127
Less: promotional allowance 2,680,743 94,440
------------ ------------
NET REVENUES 19,033,658 4,226,687
------------ ------------
Costs and expenses:
Casino 6,806,966 2,541,533
Food and beverage 1,508,177 195,933
Video lottery -- 69,498
Management fees, to minority partner, related party 367,916 260,000
Business development costs 3,844 175,169
Selling, general and administrative 7,695,599 1,438,195
Depreciation and amortization 996,517 346,800
Loss on sale of equipment 74,484 2,852
Pre-opening and start-up costs (note 1) 718,275 1,391,170
------------ ------------
18,171,778 6,421,150
------------ ------------
INCOME (LOSS) FROM OPERATIONS 861,880 (2,194,463)
------------ ------------
Other income (expense):
Interest income 34,285 19,482
Gain on sale of real estate held for sale 22,490 --
Gain on sale of interest in unconsolidated affiliate 41,591 --
Other income 19,468 19,060
Interest expense and financing costs:
Related parties (1,087,221) (127,726)
Other (962,746) (196,313)
------------ ------------
(1,932,133) (285,497)
------------ ------------
LOSS BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (1,070,253) (2,479,960)
Federal and state income tax benefit (note 6) (100,700) (285,000)
------------ ------------
LOSS BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE (969,553) (2,194,960)
Cumulative effect of change in accounting principle related to
pre-opening and start-up costs (notes 1 and 6) -- (259,181)
------------ ------------
NET LOSS $ (969,553) $ (2,454,141)
============ ============
Basic and diluted loss per share (note 1):
Loss before cumulative effect of accounting change $ (0.04) $ (0.09)
Cumulative effect of change in accounting principle -- (0.01)
------------ ------------
Net loss $ (0.04) $ (0.10)
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 40
CONCORDE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
Stock
subscription
in the form
of a note
Retained and related
Additional earnings accrued
Number Common paid-in (accumulated interest
of shares stock capital deficit) receivable Total
----------- ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance September 30, 1997 23,673,126 $ 236,731 $ 3,858,732 $ 1,280,737 $ (133,318) $ 5,242,882
Net loss -- -- -- (2,454,141) -- (2,454,141)
Sale of note receivable -- -- (7,975) -- 117,975 110,000
Interest earned on note
receivable -- -- 4,489 -- 1,343 5,832
Principal payments received
on note receivable -- -- -- -- 14,000 14,000
----------- ----------- ----------- ----------- ----------- -----------
Balance September 30, 1998 23,673,126 236,731 3,855,246 (1,173,404) -- 2,918,573
----------- ----------- ----------- ----------- ----------- -----------
Net loss -- -- -- (969,553) -- (969,553)
Issuance of 140,260 shares of common
stock relating to stock options exercised 140,260 1,403 19,636 -- -- 21,039
Issuance of 187,016 shares of common
stock relating to stock bonuses 187,016 1,870 10,894 -- -- 12,764
Issuance of 10,000 shares of common
stock relating to stock options exercised 10,000 100 1,400 -- -- 1,500
----------- ----------- ----------- ----------- ----------- -----------
Balance September 30, 1999 24,010,402 $ 240,104 $ 3,887,176 $(2,142,957) $ -- $ 1,984,323
=========== =========== =========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE> 41
CONCORDE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) $ (969,553) $ (2,454,141)
Adjustments to reconcile net (loss) to net cash flows
(used in) operating activities:
Note payable incurred for payment of accrued interest 627,243 --
Depreciation and amortization 996,517 346,800
Deferred income taxes 146,000 (219,000)
Provision for doubtful accounts 99,632 3,113
Gain on sale of interest in unconsolidated affiliate (41,591) --
Loss on disposal of property and equipment, real estate 51,994 2,852
Write-off of casino development costs and long-lived assets -- 259,181
Change in assets and liabilities:
(Increase) decrease in trade receivables and property held for sale (739,855) 38,193
Decrease (increase) in prepaid expenses and inventory (744,723) 449,902
Increase (decrease) in accounts payable and accrued expenses (76,676) 908,144
Increase in income tax refund claim (188,828) --
(Decrease) in income taxes payable (57,872) (148,599)
------------ ------------
NET CASH (USED IN) OPERATING ACTIVITIES (897,712) (813,555)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (418,706) (7,711,619)
Purchase of intangibles (87,500) (19,047)
Proceeds from sale of property and equipment, real estate 206,100 300
Distributions from unconsolidated affiliate 44,000 67,340
Proceeds from sale of unconsolidated affiliate 105,000 --
Decrease in restricted cash -- 288,894
(Increase) in other assets (84,903) (145,480)
------------ ------------
NET CASH (USED IN) INVESTING ACTIVITIES (236,009) (7,519,612)
------------ ------------
Cash flows from financing activities:
Net change in short-term borrowings, related parties (490,500) 490,500
Proceeds from long-term borrowings:
Related parties 2,545,000 3,225,000
Other 10,853,097 4,706,025
Principal payments on long-term borrowings, other (9,226,534) (577,336)
Principal payments on long-term borrowings, related parties (869,786) --
Payment of deferred financing costs (360,783) --
Proceeds from sale of stock 35,303 --
Payments received on stock subscription in the form of a note
and related accrued interest receivable -- 129,832
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,485,797 7,974,021
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,352,076 (359,146)
Cash and cash equivalents:
Beginning 714,764 1,073,910
------------ ------------
Ending $ 2,066,840 $ 714,764
============ ============
</TABLE>
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest, net of capitalized interest 1999 $0;1998 $29,589 $1,605,974 $ 256,123
Income taxes -- 82,599
</TABLE>
See Notes to Consolidated Financial Statements
F-7
<PAGE> 42
CONCORDE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations:
Concorde Gaming Corporation and its subsidiaries (the "Company") is a
diversified gaming company. Concorde currently owns and operates the Golden
Gates Casino in Black Hawk, Colorado and commenced operations of an offshore
gaming vessel from Miami, Florida in October 1998. Bayfront Ventures extends
credit to its customers, primarily on an unsecured basis, on terms that it
establishes for individual customers.
Principles of Consolidation:
The consolidated financial statements include the accounts of Concorde Gaming
Corporation and its majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. Subsidiaries at
September 30, 1999 include Concorde Cripple Creek, Inc. ("Concorde Cripple
Creek") (100% owned), Concorde Gaming of Missouri, Inc. (100%), Concorde
Cruises, Inc. (100%) and Conami, Inc. (100%). Through subsidiaries, the Company
owns an 80% interest in Bayfront Ventures and Princesa Partners, joint ventures
that own and operate the offshore gaming vessel in Miami, Florida. During fiscal
1998 the 100% owned subsidiary Midwest Gaming, Inc. ceased operations and was
dissolved.
Use of Estimates:
The preparation of consolidated financial statements in accordance 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. Actual results
could differ from those estimates.
Significant Accounting Policies:
Cash and Cash Equivalents:
Cash and cash equivalents include cash on hand, demand deposits, and short-term
investments with maturities of three months or less.
Inventories:
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
F-8
<PAGE> 43
CONCORDE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Allowance for Doubtful Accounts:
The allowance for doubtful accounts is maintained at a level considered adequate
to provide for possible future losses. Provisions for doubtful accounts
amounting to $99,632 and $3,113 were made during the years ended September 30,
1999 and 1998, respectively.
Property and Equipment:
Property and equipment are recorded at cost. Assets are depreciated over their
estimated useful lives or amortized over their lease terms using the
straight-line or accelerated methods. Estimated useful lives for furniture,
gaming equipment, and vehicles are 5 to 7 years, for leasehold improvements the
life of the underlying lease, for vessel and improvements 10 to 30 years, and
for buildings and improvements 39 years.
The Company's policy is to capitalize interest incurred on debt during the
course of qualifying construction projects. Such costs are amortized over the
related asset's estimated useful life. Capitalized interest totaled none and
$460,555 for the years ended September 30, 1999 and 1998, respectively.
Pre-opening and Start-up Costs:
The American Institute of Certified Public Accountants' Accounting Standards
Executive Committee issued SOP No. 98-5, Reporting on the Costs of Start-up
Activities. This standard provides guidance on the financial reporting for
start-up costs and requires that such costs be expensed as incurred. In
accordance with this standard the Company changed its method of accounting for
start-up costs and organizational costs in 1998. Previously, start-up activities
and organization costs were capitalized and amortized over 5 years. The effect
of this change for 1998 resulted in an increase in loss from operations of
$1,372,804 ($(.06) per common share). The cumulative effect of this change on
prior years of $259,181 ($(.01) per common share), has been included in 1998
operations. There was no tax effect as a result of this change.
Intangible Assets and Property Held for Sale:
Intangible assets, primarily goodwill (excess of purchase price over net assets
acquired) are amortized over estimated useful lifes of 10 to 15 years using the
straight-line method. Intangible assets are evaluated for recoverability under
the requirements of SFAS No. 121 Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of whenever impairment
indicators are present. The Company recorded charges to income for an impairment
of $270,897 during the year ended September 30, 1998, for casino development
costs and property and equipment that have been classified as property held for
sale. The property was sold during the year ended September 30, 1999.
F-9
<PAGE> 44
CONCORDE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Revenue Recognition:
The Company recognizes gaming revenues as the net win from gaming operations,
which is the difference between gaming wins and losses.
Promotional allowances consist primarily of food and beverage items and
admission furnished without charge to customers. The retail value of such items
is included in the respective revenue classification and is then deducted as
promotional allowances.
Deferred Financing Costs:
Deferred financing costs are amortized over the term of the related loan using
the straight-line method.
Advertising Costs:
The Company follows the policy of charging the costs of advertising to expense
as incurred. Included in selling, general and administrative expenses is
$1,041,645 and $108,647 of advertising expense for the years ended September 30,
1999 and 1998, respectively.
Income Taxes:
The Company provides for income taxes under SFAS No. 109 Accounting for Income
Taxes. Deferred tax assets and liabilities are recognized for the future tax
effects attributable to temporary differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
amounts. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized.
Earnings Per Share:
In 1998, the Company adopted the provisions of SFAS No. 128, Earnings per Share
which requires the reporting of basic earnings per share and diluted earnings
per share. Basic earnings per share is computed by dividing net earnings for the
period by the weighted average common shares outstanding for the period. Diluted
earnings per share amounts assume the conversion, exercise or issuance of all
potential common stock instruments unless the effect is to reduce the loss or
increase the income per common share. The provisions of SFAS No. 128 have been
applied to all periods presented in the accompanying financial statements. A
reconciliation of net income (loss) for basic and diluted earnings per share is
as follows:
F-10
<PAGE> 45
CONCORDE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Earnings Per Share (Continued):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1998
LOSS SHARES LOSS
(NUMERATOR) (DENOMINATOR) PER SHARE
------------ ------------- ------------
Basic EPS
<S> <C> <C> <C>
Net loss $ (969,553) 23,906,133 $ (0.04)
============ ============
Effect of dilutive securities
Options --
Diluted EPS
------------ ------------- ------------
Net loss plus assumed conversion of options $ (969,553) 23,906,133 $ (0.04)
============ ============ ============
</TABLE>
Options to purchase 1,456,230 shares of common stock ranging from $.15 to $.42
per share, 2,000,000 shares of common stock at $1 per share and 480,000 shares
of common stock at $.075 per share were outstanding during the year but were not
included in the computation of diluted EPS because the effect is anti-dilutive
or the exercise price was greater than the average market price of the common
shares.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1998
LOSS SHARES LOSS
(NUMERATOR) (DENOMINATOR) PER SHARE
------------ ------------- ------------
Basic EPS
Loss before cumulative effect
<S> <C> <C> <C>
of accounting change $ (2,194,960) $ (0.09)
Cumulative effect of accounting change (259,181) (0.01)
------------ ------------
Loss available to common stockholders $ (2,454,141) 23,673,126 $ (0.10)
============ ============
Effect of dilutive securities
Options --
Diluted EPS
Loss before cumulative effect
of accounting change $ (2,194,960) $ (0.09)
Cumulative effect of accounting change (259,181) (0.01)
Loss available to common stockholders
------------ ------------ ------------
plus assumed conversion of options $ (2,454,141) 23,673,126 $ (0.10)
============ ============ ============
</TABLE>
Options to purchase 2,200,000 shares of common stock ranging from $.15 to $.42
per share, 80,000 shares of common stock at $1.50 per share, 2,000,000 shares of
common stock at $1 per share and 960,000 shares of common stock ranging from
$.075 to $1 per share were outstanding during the year but were not included in
the computation of diluted EPS because the effect is anti-dilutive or the
exercise price was greater than the average market price of the common shares.
F-11
<PAGE> 46
CONCORDE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2. LOAN RECEIVABLE FROM RELATED PARTY
Loan receivable from related party consist of:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Non-interest bearing loan receivable, quarterly payments
based on future distributions to minority partner in
Bayfront Ventures $ 95,000 95,000
Less current maturities (31,667) --
---------- ----------
$ 63,333 95,000
========== ==========
</TABLE>
NOTE 3. INVESTMENT IN UNCONSOLIDATED AFFILIATE
In February 1999, the Company sold its 38.5% interest in Bayou Gaming, Inc.,
which operates a video poker route in Louisiana. Under the agreement the sales
price totaled $105,000 in cash plus the future proceeds from the sale of 100,000
shares of the Company's common stock held by Bayou Gaming, Inc. less broker's
fees and Bayou Gaming, Inc.'s income tax on the gain. The Company received
$105,000 cash during the year ended September 30, 1999. Under the terms of the
agreement, Bayou Gaming, Inc. will attempt to sell the Company's 100,000 shares
of common stock at $1 per share within one year from the date of the agreement.
If the shares cannot be sold at $1 per share during this period, Bayou Gaming,
Inc. will sell the shares at the current market value. The future proceeds from
the sale of stock will be recognized when received. At September 30, 1998 the
Company's investment exceeded its underlying equity by $48,110 and was being
amortized over a remaining term of two years.
NOTE 4. NOTES PAYABLE
Notes payable to related parties consists of:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Unsecured notes payable to the Company's majority stockholder, paid off during
the year ended September 30, 1999. The Company pledged all of Concorde
Cripple Creek's assets to a third party lender of the Company's majority
stockholder $ -- $ 490,500
========== ==========
</TABLE>
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Unsecured notes payable to a company controlled by the Company's majority
stockholder with interest at 18%, due on demand. (A) $5,527,457 $3,225,000
Less current maturities -- --
---------- ----------
Long-term notes payable to related parties $5,527,457 $3,225,000
========== ==========
</TABLE>
F-12
<PAGE> 47
CONCORDE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4. NOTES PAYABLES (CONTINUED)
A. In November 1998, these notes payable to a company controlled by the
Company's majority stockholder were refinanced with one note payable to a
company controlled by the Company's majority stockholder. The interest
rate remains at 18% and the note is due on demand, however, the majority
stockholder has waived his rights to demand payment on the note until
after January 1, 2001. Therefore, these notes have been classified as
long-term at September 30, 1999.
In May, 1999 the Company's wholly-owned subsidiary, Concorde Cripple Creek,
Inc., entered into a loan agreement with a lender (the `Loan Agreement"). The
Loan Agreement provides for a short-term line of credit in an amount not to
exceed $150,000, which is evidenced by a promissory note due and payable on May
15, 2000. The promissory note bears interest at the prime rate plus
three-quarters percent. As of September 30, 1999, no amount was outstanding
under the short-term line of credit.
F-13
<PAGE> 48
CONCORDE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
10.375% note payable to a bank (Vessel Loan), monthly installments of
$130,258 including interest, due January 2004, secured by first
preferred ship mortgage, guaranteed by majority stockholder. (A) $ 7,938,835 $ --
Notepayable to a bank, with interest at prime plus .75%, monthly principal
payments of $10,119 plus interest through September 2002 when the
remaining balance is due, secured by equipment 809,524 --
10% note payable to a third party in monthly installments of $1,694
including interest, due October 2001, secured by equipment 45,300 52,473
Mortgages payable to third party paid off during the year ended September
30, 1999 -- 336,131
Note payable to a vendor paid off during the year ended September 30, 1999 -- 69,693
Notes payable to a bank paid off during the year ended September 30, 1999 -- 4,632,306
Accounts payable, property and equipment related, refinanced with long-term debt
during the year ended September 30, 1999 -- 2,051,746
Other notes, due in various monthly installments to March 2006, at various rates
from 6.5% to 10%, secured in part by property and equipment 60,062 84,809
------------ ------------
8,853,721 7,227,158
Less current maturities (908,065) (597,540)
------------ ------------
$ 7,945,656 $ 6,629,618
============ ============
</TABLE>
The prime interest rate at September 30, 1999 and 1998 was 8.25%.
F-14
<PAGE> 49
CONCORDE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5. LONG-TERM DEBT (CONTINUED)
(A). This Vessel Loan requires mandatory prepayment of principal in an
amount equal to 12% of the amount of Excess Revenue for each fiscal year,
commencing January 2000. Excess Revenue as defined in the Vessel Loan is the
excess of (i) the combined earnings of Princesa Partners and Casino Princesa
before taxes, depreciation and amortization minus the principal and interest
paid on the Vessel Loan during the fiscal year, over (ii) $4,000,000. The Vessel
Loan contains typical covenants with respect to Princesa Partners and Casino
Princesa, including net worth restrictions, debt service requirements and
limitations on the amount of debt that can be incurred.
The future aggregate annual maturities of long-term debt at September 30, 1999
are as follows:
<TABLE>
<CAPTION>
Fiscal year ending:
<S> <C>
2000 $ 908,065
2001 993,849
2002 1,511,163
2003 1,045,564
2004 4,379,609
Thereafter 15,471
----------
$8,853,721
==========
</TABLE>
NOTE 6. INCOME TAXES
The income tax provision (benefit) for the years ended September 30, 1999 and
1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Current, Federal and State $ (246,000) (66,000)
Deferred 146,000 (219,000)
---------- ----------
$ (100,700) (285,000)
========== ==========
</TABLE>
The income tax provision (benefit) differs from the amount of income tax
determined by applying the statutory tax rate to pretax income including
cumulative effect of change in accounting principle due to the following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Computed "expected" tax expense (benefit) $ (374,589) (931,300)
Valuation allowance (52,000) 684,000
Settlement of Internal Revenue Service examination 103,300 --
Minority interest loss recognized by parent company 44,993 --
Distributions to minority interest classified as
management fees 128,771 --
Other 48,825 (37,700)
========== ==========
$ (100,700) (285,000)
========== ==========
</TABLE>
F-15
<PAGE> 50
CONCORDE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6. INCOME TAXES (CONTINUED)
Net deferred tax asset (liabilities) are as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
Deferred tax assets:
<S> <C> <C>
Accrued expenses $ 74,000 $ --
Start-up costs 546,000 684,000
Net operating loss 285,000 324,000
Reserves not currently deductible 30,000 26,000
------------ ------------
935,000 1,034,000
Valuation allowance (632,000) (684,000)
------------ ------------
303,000 350,000
Deferred tax liabilities:
Intangibles (7,000) --
Investments (1,000) --
Property and equipment (156,000) (65,000)
------------ ------------
Net $ 139,000 $ 285,000
============ ============
</TABLE>
The deferred tax amounts mentioned above have been classified on the
accompanying balance sheets as of September 30, 1999 and 1998 as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Current assets $ 139,000 $ --
Noncurrent assets -- 285,000
------------ ------------
$ 139,000 285,000
============ ============
</TABLE>
During the years ended September 30, 1999 and 1998, the Company recorded a
valuation allowance of $632,000 and $684,000, respectively, on the deferred tax
assets to reduce the total to an amount that management believes will ultimately
be realized. Realization of deferred tax assets is dependent upon sufficient
future taxable income during the period that deductible temporary differences
and carryforwards are expected to be available to reduce taxable income. There
was no other activity in the valuation allowance account during 1999 or 1998.
Loss carryforwards for tax purposes of approximately $690,000 (federal) and
$1,465,000 (Colorado) as of September 30, 1999 expire beginning in the year
ended September 30, 2014.
F-16
<PAGE> 51
NOTE 7. STOCK OPTION PLAN AND STOCK WARRANTS ISSUED AS COMPENSATION
The Company has reserved 2,200,000 shares of its common stock for issuance under
the 1992 Performance Stock Option Plan (the "Plan"). The Plan allows for the
issuance of incentive stock options and nonqualified stock options to certain
officers, directors, and employees of the Company. Incentive stock options may
be granted at prices not less than fair market value on the date of grant, while
nonqualified stock options may be granted at prices less than fair market value
on the date of grant. At September 30, 1999, 1,456,230 incentive stock options
were issued and outstanding under the Plan. The options were granted at exercise
prices ranging from $0.15 to $0.42 per share and vest ratably over a five-year
period. Options for the purchase of 769,984 shares were vested at September 30,
1999. Options for the purchase of 150,260 shares were exercised during the year
ended September 30, 1999. Options for the purchase of 593,510 shares, issued in
fiscal years 1994 through 1998, were canceled in January and February 1999.
Summarized information for all options is as follows for the years ended
September 30:
<TABLE>
<CAPTION>
1999 1998
---------------------------- ----------------------------
WEIGHTED Weighted
AVERAGE Average
EXERCISE Exercise
Outstanding OPTIONS PRICE Options Price
-------------- ------------ --------------- -----------
<S> <C> <C> <C> <C>
Beginning of year 2,200,000 $ 0.25 1,860,000 $ 0.25
Granted - 440,000 $ 0.25
Exercised (150,260) $ 0.15 --
Cancelled (593,510) $ 0.23 (100,000) $ 0.28
-------------- ---------------
End of year 1,456,230 $ 0.27 2,200,000 $ 0.25
============== ===============
Exercisable at end of year 769,984 $ 0.28 921,612 $ 0.24
============== ===============
Options available for grant 593,510 --
============== ===============
</TABLE>
The following table summarizes information about the options outstanding at
September 30, 1999.
<TABLE>
<CAPTION>
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ----------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
$ 0.15 - $ 0.25 895,000 7.9 $ 0.18 411,000 $0.16
$ 0.40 - $ 0.42 561,230 7.2 $ 0.40 358,984 $0.40
----------- -----------
1,456,230 7.6 $ 0.27 769,984 $0.28
=========== ===========
</TABLE>
In January 1994, the Company granted its majority stockholder a warrant to
purchase 2,000,000 shares of the Company's common stock at $1 per share through
January 2004. The warrant was issued as consideration for the stockholder's
financial accommodations and guarantees of over $9,000,000 in Company debt.
F-17
<PAGE> 52
CONCORDE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7. STOCK OPTION PLAN AND STOCK WARRANTS ISSUED AS COMPENSATION (CONTINUED)
In December 1993, December 1994 and November 1995, the Company granted warrants
to purchase 960,000 common shares in conjunction with the terms of a note
payable to an individual. A warrant to purchase 480,000 common shares expired in
December 1998. The remaining warrants to purchase 480,000 common shares have an
exercise price of $0.75 per common share and expire between December 1999 and
November 2000.
The Company has adopted the disclosures-only provision of SFAS No. 123,
Accounting for Stock-Based Compensation. The Company applies APB Opinion No. 25
and related interpretations in accounting for its stock options. Under APB 25,
no compensation cost has been recognized in the financial statements for the
Stock Option Plan. The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model. Had compensation cost for
the stock option grants been determined based on the fair value at the date of
grant for awards consistent with the provisions of SFAS 123, the Company's net
income per common and common equivalent share would have been decreased to the
pro forma amounts below for the years ended September 30:
<TABLE>
<CAPTION>
1999 1998
---------- ------------
<S> <C> <C>
Net income (loss) - as reported $(969,553) $(2,454,141)
Net income (loss) - pro forma $(983,261) $(2,484,089)
Basic earnings per share - as reported $ (0.04) $ (0.10)
Basic earnings per share - pro forma $ (0.04) $ (0.10)
Diluted earnings per share - pro forma $ (0.04) $ (0.10)
Diluted earnings per share - pro forma $ (0.04) $ (0.10)
</TABLE>
No options were granted in fiscal year 1999. The fair value of each option
granted in fiscal year 1998 was estimated using the following assumptions for
the Black-Scholes option-pricing model: (i) no dividends, (ii) expected
volatility of 30%, (iii) risk free interest rate averaging 5.25% for 1998, and
(iv) the expected average life of 5 years. The weighted average fair value of
the options granted in 1998 was $0.07. Because the SFAS 123 method of accounting
has not been applied to options granted prior to October 31, 1995, the resulting
pro forma net income may not be representative of that to be expected in future
years.
Concurrent with the cancellation of stock options for 233,770 shares of common
stock in February, 1999, the Company granted stock bonuses for 187,016 shares of
common stock valued at $12,764.
F-18
<PAGE> 53
CONCORDE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8. RELATED PARTY TRANSACTIONS
Rent expense to a company controlled by the Company's majority stockholder
totaled $31,172 and $31,172 for 1999 and 1998, respectively, for an office space
lease that is leased month-to-month.
Interest expense including capitalized interest relating to notes payable to the
majority stockholder and a company controlled by the majority stockholder was
$1,087,221 and $394,278 for the years 1999 and 1998, respectively.
NOTE 9. CONCENTRATION OF CREDIT RISK
The Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such accounts. The Company believes it is not exposed to any significant credit
risk on cash and cash equivalents.
NOTE 10. COMMITMENTS
Use Agreement:
In June 1997, Bayfront Ventures entered into a Use Agreement ("Use Agreement")
with Bayfront Park Management Trust, a limited agency and instrumentality of the
City of Miami, Florida (the "Trust"). The Use Agreement grants Bayfront Ventures
the exclusive right to use the Trust's docking facilities at Bayfront Park for
the purpose of docking vessels, including an offshore gaming vessel.
The initial term of the Use Agreement is for five years commencing September 1,
1997 with the option to extend for one additional five year term ("Extension
Term"). The Use Agreement was amended in August 1997, to extend the commencement
date of the Use Agreement from September 1, 1997 to October 1, 1997.
Bayfront shall have a right of first refusal to extend the Extension Term, if
exercised, for one additional five year term provided the Trust in its sole
discretion has determined to permit the continued used of the Trust's docking
facilities by a gaming vessel and there has been no event of default under the
Use Agreement caused by Bayfront Ventures. The Use Agreement provides that
Bayfront Ventures shall pay the Trust annual fees as follows: $400,000 in year
one, $450,000 in years 2 and 3, and $475,000 in year 4 and 5. In addition, as of
September 30, 1999, Bayfront Ventures has provided a $950,000 irrevocable letter
of credit for the benefit of the Trust to secure the payment of the annual fees
for the third and fourth years of the Use Agreement.
F-19
<PAGE> 54
NOTE 10. COMMITMENTS (CONTINUED)
The letter of credit is secured by the personal guarantee of the majority
stockholder and a mortgage on certain real estate owned by a company controlled
by the majority stockholder. The Company was required to pay a fee of $350/day
for so long as the real estate is collateral for the letter of credit. Interest
and financing costs include $127,500 and $114,634 for the years ended September
30, 1999 and 1998, respectively. Included in accrued interest is $145,500 and
$114,634 at September 30, 1999 and 1998, respectively. As of October 1, 1999 the
annual fee was amended to $28,500 per year for as long as the real estate is
collateral for the letter of credit. Bayfront Ventures is required to provide a
letter of credit throughout the term of the Use Agreement, in an amount equal to
the next two years' annual fees.
Leases:
The Company has several noncancelable operating leases, primarily for dock and
casino property, that expire over the next five years. These leases generally
contain renewal options for periods ranging one to ten years and require the
Company to pay all executory costs such as maintenance and insurance. Rental
expense for operating leases during the years ended September 30, 1999 and 1998
was $944,200 and $447,302, respectively.
The future aggregate minimum lease payments as of September 30, 1999 are as
follows:
<TABLE>
<CAPTION>
Fiscal year ending:
<S> <C>
2000 $ 896,000
2001 857,000
2002 812,000
2003 820,000
2004 831,000
---------------
$ 4,216,000
===============
</TABLE>
The casino lease also requires the Company to pay additional rent based on a
percentage of adjusted net gaming revenue of Golden Gates Casino as set forth in
the casino lease agreement which was approximately $118,000 and $110,000 for
September 30, 1999 and 1998, respectively. Base rental payments under the
agreement are included in the minimum lease payments above.
Retirement Plan:
The Company has a defined contribution 401(k) profit sharing plan covering
substantially all eligible employees. Employer contributions under the Plan are
discretionary and vest ratably over a six-year period. Employer contributions
totaled $16,765 and $12,816 during the years ended September 30, 1999 and 1998,
respectively.
F-20
<PAGE> 55
CONCORDE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11. CONTINGENCIES
Association for Disabled Americans, Inc., Coral Springs Advocacy Committee for
the Handicapped, Inc., Daniel Ruiz and Jorge Luis Rodriguez v. Concorde Gaming
Corporation and Goldcoast Entertainment Cruises, Inc. (United States District
Court for the Southern District of Florida, Miami Division, Civil Action No.
99-1056). On April 15, 1999, the Association for Disabled Americans, Inc., et.
al, filed suit against the Company and Goldcoast (the "Defendants") for
injunctive relief pursuant to the Americans With Disabilities Act. The
Plaintiffs claim, in part, that the Defendants have discriminated against them
by denying them access to and full and equal enjoyment of services, facilities,
accommodations, the Princesa and that the Defendants have failed to remove
architectural barriers and erect certain architecturally required improvements.
The Plaintiffs have requested that the Court issue a permanent injunction
enjoining the Defendants from continuing its alleged discriminatory practices,
ordering the Defendants to alter the subject vessel and premises, close the
subject vessel and premises until the alleged required modifications are
completed and to award Plaintiffs attorney's fees, costs and expenses incurred.
The Company intends to vigorously defend this action.
The Internal Revenue Service ("IRS") has audited the income tax returns for
fiscal years 1995 and 1994. The IRS has proposed adjustments relating to the
contract termination costs related to third party financing for the Management
Agreement deducted by the Company in the 1994 return. The IRS proposes that
these costs be amortized over the life of the Management Agreement, rather than
expensed in 1994. The deficiency notice issued shows tax liabilities of
approximately $74,700 for 1994 and $379,200 for 1995, before interest. The
amortization of the contract termination costs would result in tax overpayments
in fiscal years 1996 and 1997, which would result in reducing the deficiencies
for 1994 and 1995 to approximately $67,000 of tax and approximately $62,000 of
interest. Management believes that adequate provision for income taxes and
interest has been made in the financial statements. No penalties are presently
being assessed and the IRS has not computed any interest due since fiscal years
1996 through 1998 have tax payments that would be applied to these deficiencies.
In August 1997, the Company acquired an 80% interest in Bayfront Ventures, a
Florida joint venture. The acquisition was accounted for as a purchase and the
operating results of the business have been included in the Company's
consolidated financial statements since the date of acquisition. The purchase
price of this business was an initial payment of $650,000 and future
consideration equal to 2% of Bayfront Venture's gaming win per operating year
for each of the first three operating years. The future payments will be a
minimum of $175,000 but not greater than $400,000. Once the actual payment is
determined for each of the first three operating years, the amount will be
recorded as goodwill and amortized using the straight-line method over the
remaining term of the dock lease. In 1999, additional goodwill of $175,000 has
been recorded. The $650,000 initial purchase price includes $355,000 of
intangible dock lease rights and is being amortized over the term of the dock
lease (10 years). The joint venture also has entered into an agreement to lease
dock space requiring annual payments ranging from $400,000 to $475,000.
F-21
<PAGE> 56
CONCORDE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11. CONTINGENCIES (CONTINUED)
The Company has an 80% interest in Princesa Partners, a Florida joint venture
created in 1998 to own the gaming vessel (the Princesa) and certain equipment
and improvements. All assets and liabilities related to the Princesa were
transferred from Bayfront Ventures to Princesa Partners. Bayfront Ventures has
entered into a lease for hire agreement with Princesa Partners whereby Bayfront
Ventures will lease the Princesa and related equipment and improvements.
In October 1997, the Company entered into a parking garage agreement for the
purpose of constructing a parking garage adjacent to Golden Gates Casino. This
agreement requires the Company to contribute land with a book value of
$1,097,080 to a third party. The Company has no additional commitments relating
to the construction of the parking garage. Contribution of this land is
contingent upon performance of contractual obligations by the third party as set
forth in the parking garage agreement. Once the parking garage is completed, the
parties to the parking garage agreement have agreed to enter into a Condominium
Declaration whereby each will receive a unit in said condominium. The Company
anticipates the parking garage will be completed by March 2000.
NOTE 12. DISCLOSURES ABOUT FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practical to estimate that
value:
The carrying amount of cash equivalents approximates fair value because of the
short maturity of those instruments.
The carrying amounts of trade accounts receivable, accounts payable and accrued
liabilities approximate fair value because of the short maturity of those
instruments.
Management estimates that the loan receivable and long-term debt approximate
fair value as they generally include variable interest rates and/or because of
the short term nature of the notes receivable and payable.
It was not practicable to estimate the fair value of the note payable to the
Company's majority stockholder. The stockholder has waived the right to demand
payment of the note for a period of fifteen months.
NOTE 13. SEGMENT INFORMATION
The Company's reportable segments are strategic business units that offer
similar products and services at separate geographical locations. They are
managed separately because each business requires different technology and
marketing strategies.
F-22
<PAGE> 57
NOTE 13. SEGMENT INFORMATION (CONTINUED)
There are two reportable segments: the Casino Princesa and Golden Gates Casino.
The Casino Princesa is an offshore gaming vessel which sails out of Miami,
Florida. The Golden Gates Casino is located in Black Hawk, Colorado.
The accounting policies applied to determine the segment information are the
same as those described in the summary of significant accounting policies. The
interest expense of each segment is specifically identifiable to debt directly
incurred to acquire the segment's assets. No intercompany allocations or
intersegment sales and transfers have been made.
Management evaluates the performance of each segment based on profit or loss
from operations before income taxes, exclusive of nonrecurring gains and losses.
Financial information in $1,000's with respect to the reportable segments is as
follows:
<TABLE>
<CAPTION>
CASINO PRINCESA GOLDEN GATES TOTAL
1999 1998 1999 1998 1999 1998
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Casino $ 13,763 $ -- $ 4,252 $ 3,948 $ 18,015 $ 3,948
Food and beverage 1,778 -- 166 294 1,944 294
Other income 1,708 -- 47 17 1,755 17
---------- ---------- ---------- ---------- ---------- ----------
Gross revenues 17,249 -- 4,465 4,259 21,714 4,259
Less:
Promo allowances 2,604 -- 76 94 2,680 94
---------- ---------- ---------- ---------- ---------- ----------
Net revenues 14,645 -- 4,389 4,165 19,034 4,165
---------- ---------- ---------- ---------- ---------- ----------
Costs and expenses
Casino 4,174 -- 2,632 2,542 6,806 2,542
Food and beverage 1,330 -- 178 192 1,508 192
Selling, general
and administrative 5,914 -- 1,001 664 6,915 664
Preopening costs 718 1,391 -- -- 718 1,391
Management fees 368 260 -- -- 368 260
Depreciation/amortization 660 -- 271 240 931 240
Loss on sale of equipment -- -- 75 3 75 3
Interest expense 1,016 -- 56 59 1,072 59
---------- ---------- ---------- ---------- ---------- ----------
Total costs and expenses
14,180 1,651 4,213 3,700 18,393 5,351
---------- ---------- ---------- ---------- ---------- ----------
Segment profit (loss) $ 465 $ (1,651) $ 176 465 $ 641 $ (1,186)
========== ========== ========== ========== ========== ==========
Segment assets $ 13,261 $ 10,234 $ 3,337 $ 3,679 $ 16,598 $ 13,913
========== ========== ========== ========== ========== ==========
Expenditure for segment
assets $ 231 $ 9,916 $ 188 $ 282 $ 419 $ 10,198
========== ========== ========== ========== ========== ==========
</TABLE>
F-23
<PAGE> 58
CONCORDE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13. SEGMENT INFORMATION (CONTINUED)
The following schedules are presented to reconcile amounts in the foregoing
segment information to the amounts reported in the Company's consolidated
financial statements.
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
REVENUE
Segment net revenue $ 19,034 $ 4,165
Other -- 62
------------ ------------
Consolidated net revenue $ 19,034 $ 4,227
============ ============
PROFIT
Total profit (loss) of reportable segments $ 641 $ (1,186)
------------ ------------
Unallocated amounts:
Income
Interest income 34 19
Other 84 19
------------ ------------
Total income items 118 38
------------ ------------
Expense
General and administrative 780 774
Business development 4 175
Other 66 119
Corporate interest 979 264
------------ ------------
Total expense items 1,829 1,332
------------ ------------
Consolidated net (loss) before income taxes and
cumulative effect of accounting change $ (1,070) $ (2,480)
============ ============
ASSETS
Assets of reportable segments $ 16,598 $ 13,913
Unallocated intangibles 284 319
Corporate cash and other 89 179
Corporate property and equipment 296 309
Property held for sale -- 168
Deferred income taxes 239 350
Corporate income taxes refund claim 189 --
------------ ------------
Consolidated assets $ 17,695 $ 15,238
============ ============
</TABLE>
F-24
<PAGE> 59
CONCORDE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 14. SUBSEQUENT EVENTS:
In November 1999, the Company and BHL Capital signed a promissory note for
advances up to $1,000,000 (the "BHL Line of Credit") which will provide the
Company with a line of credit to meet its working capital needs. The BHL Line of
Credit is due one year and one day after demand, with interest due on demand and
at the rate of 18% per annum. The Company has not drawn on the BHL Line of
Credit.
<PAGE> 60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CONCORDE GAMING CORPORATION
December 21, 1999 By: /s/ Jerry L. Baum
-----------------------------------------
Jerry L. Baum, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Bruce H. Lien Chairman of the Board December 21, 1999
- ------------------------------ of Directors
Brustuen "Bruce" H. Lien
/s/ Jerry L. Baum President, Chief Executive December 21, 1999
- ------------------------------ Officer and Director
Jerry L. Baum
/s/ Deanna B. Lien Director December 21, 1999
- ------------------------------
Deanna B. Lien
/s/ Robert Drew Director of Finance, December 21, 1999
- ------------------------------ Principal Accounting
Robert Drew Officer
</TABLE>
<PAGE> 61
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
3.1 Amended and Restated Articles of Incorporation.(1)
3.2 Third Amended and Restated Bylaws.(1)
10.1* 1992 Performance Stock Option Plan.(2)
10.2 Indemnification Agreement between the Company and Bruce
H. Lien.(1)
10.3 Lease between Elevation 8000+ and Concorde Cripple
Creek, Inc. dated July 21, 1997.(3)
10.4 Agreement dated August 5, 1997, by and between Leo
Equity Group, Inc. and Concorde Gaming Corporation.(3)
10.5 Use Agreement dated June 25, 1997, by and between Casino
Princesa and Bayfront Park Management Trust.(3)
10.6 Joint Venture Agreement dated August 27, 1997, by and
between Concorde Gaming Corporation and Goldcoast
Entertainment Cruises, Inc.(3)
10.7 Vessel Construction Agreement dated August 26, 1997, by
and between Keith Marine, Inc. and Casino Princesa.(3)
10.8 Waiver Agreement dated March 20, 1998, by and between
Goldcoast Entertainment Cruises, Inc. and Concorde
Gaming Corporation.(3)
10.9 Option Agreement dated April 20, 1998 between Concorde
Gaming Corporation and Bruce H. Lien.(3)
10.10 Promissory Note in the aggregate principal amount of
$3,000,000 executed by Concorde Gaming Corporation and
BHL Capital Corporation.(3)
10.11 Loan Agreement between Princesa Partners and the lenders
named therein dated as of October 22, 1998.(4)
10.12 Servicing and Intercreditor Agreement between Princesa
Partners, The National City Bank of Evansville, as
servicer, and the lenders set forth therein dated as of
October 22, 1998.(4)
10.13 Security Agreement between Princesa Partners, Casino
Princesa and the lenders named therein dated as of
October 22, 1998.(4)
10.14 Guaranty, Subordination Agreement, Security Agreement
and Indemnity by Casino Princesa for the benefit of the
lenders named therein, dated as of October 22, 1998.(4)
</TABLE>
<PAGE> 62
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
10.15 First Preferred Ship Mortgage by Princesa Partners in
favor of The National City Bank of Evansville,
individually and as agent for certain lenders, dated as
of October 15, 1998.(4)
10.16 Guaranty by the Company for the benefit of the lenders
named therein dated as of October 22, 1998.(4)
10.17 Princesa Partners Joint Venture Agreement between
Goldcoast Entertainment Cruises, Inc. and Conami, Inc.
dated as of October 22, 1998.(4)
10.18 Promissory Note to the order of BHL Capital Corporation
in the principal amount of $5,000,000 dated November 13,
1998.(4)
10.19 First Amendment to Lease between Concorde Cripple Creek
and Elevation 8000+ LLC, dated as of January 1, 1999.
(5)
10.20 Loan Agreement between Concorde Cripple Creek, Inc. and
BNC National Bank of Minnesota, dated as of May 21,
1999. (6)
10.21 Security Agreement between Concorde Cripple Creek, Inc.
and BNC National Bank of Minnesota, dated as of May 21,
1999.(6)
10.22 Guaranty Agreement between the Company and BNC National
Bank of Minnesota, dated as of May 21, 1999. (6)
10.23 Waiver of Interest, Assignment of Lease and Agreement
Concerning Assumption of Lease among Concorde Cripple
Creek, Inc., BNC National Bank of Minnesota, and
Elevation 8000+ LLC, dated May 21, 1999. (6)
10.24 Short-Term Revolving Note to the order of BNC National
Bank dated May 21, 1999. (6)
10.25 Term Note to the order of BNC National Bank of Minnesota
dated May 21, 1999. (6)
16 Letter re Change in Certifying Accountant.(7)
21 Subsidiaries of the Registrant.(4)
23 Consent of Independent Auditors'.(+)
27 Financial Data Schedule.(+)
- ------------------------------------
(+) Filed herewith
</TABLE>
<PAGE> 63
* Indicates an exhibit that consists of or includes a management contract or
compensatory plan or arrangement.
(1) Previously filed with the Securities and Exchange Commission as an exhibit
to the Company's Annual Report on Form 10-KSB for the year ended September
30, 1995 (File No. 0-8698) and incorporated herein by this reference.
(2) Previously filed with the Securities and Exchange Commission by the Company
on September 24, 1992 as Exhibit 10 to the Registration Statement on Form
S-8, (File No. 33-52388) and incorporated herein by this reference.
(3) Previously filed with the Securities and Exchange Commission by the Company
as an exhibit to its Annual Report on Form 10-KSB for the year ended
September 30, 1997 (File No. 0-8698) and incorporated herein by this
reference.
(4) Previously filed with the Securities and Exchange Commission by the Company
as an exhibit to its Annual Report on Form 10-KSB for the year ended
September 30, 1998 (File No. 0-8698) and incorporated herein by this
reference.
(5) Previously filed with the Securities and Exchange Commission as an exhibit
to the Company's Quarterly Report on Form 10-QSB for the quarter ended
December 31, 1998 (File No. 0-8698) and incorporated herein by this
reference.
(6) Previously filed with the Securities and Exchange Commission as an exhibit
to the Company's Quarterly Report on Form 10-QSB for the quarter ended June
30, 1999 (File No. 0-8698) and incorporated herein by this reference.
(7) Previously filed with the Securities and Exchange Commission by the Company
as an exhibit to its Current Report on Form 8-K dated August 25, 1998 and
incorporated herein by this reference.
<PAGE> 1
EXHIBIT 23
CONSENT OF MCGLADREY & PULLEN, LLP
We hereby consent to the incorporation in the Registration Statement on Form S-8
of our report, dated November 22,1999, except for Note 14 as to which the date
is November 30, 1999, relating to the consolidated financial statements of
Concorde Gaming Corporation and Subsidiaries, included in the Annual Report on
Form 10-KSB for the year ended September 30, 1999.
/s/ McGladrey & Pullen, LLP
Rapid City, South Dakota
December 22, 1999
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,066,840
<SECURITIES> 0
<RECEIVABLES> 691,465
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<INVENTORY> 79,957
<CURRENT-ASSETS> 3,970,363
<PP&E> 13,223,507
<DEPRECIATION> 1,078,870
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0
0
<COMMON> 240,104
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<TOTAL-LIABILITY-AND-EQUITY> 17,695,333
<SALES> 0
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<OTHER-EXPENSES> 1,932,133
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<INTEREST-EXPENSE> 2,049,967
<INCOME-PRETAX> (1,070,253)
<INCOME-TAX> (100,700)
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