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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended July 31, 1997
Commission File Number 0-10061
AMERICAN VANTAGE COMPANIES
(Name of Small Business Issuer in its charter)
Nevada 04-2709807
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
6787 West Tropicana, Suite 200, Las Vegas, Nevada 89103
(Address of principal executive offices) (zip code)
(702) 227-9800
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.01 per share
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 no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of 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. [X]
State issuer's revenues for its most recent fiscal year. $9,050,000.
The aggregate market value of the 12,845,872 shares of Common Stock held
by non-affiliates of the Registrant computed by reference to the closing sale
price of $1.50 for the Company's Common Stock, as reported by NASDAQ for October
17, 1997, was $19,268,808 (assuming for purposes of such calculation that all
officers and directors of the Issuer are affiliates).
The number of shares outstanding of the Registrant's Common Stock at
October 17, 1997 was 14,867,958.
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PART I
Item 1. Description of Business
Development of Business
American Vantage Companies (the "Company"), a gaming consulting company,
is currently engaged in providing consulting services to Table Mountain Casino &
Bingo, a tribal gaming enterprise on a Federal Indian Rancheria in Friant,
California (the "Table Mountain Casino"). The Company is also a majority
participant in a joint venture which is providing consulting services and
assisting in the development of a proposed tribal gaming facility for the United
Auburn Indian Community (the "Auburn Tribe") in Auburn, California. In addition,
in May 1997, the Company acquired approximately 40 acres of undeveloped land in
North Las Vegas, Nevada which the Company intends to develop as a funeral home
and cemetery.
The Company was incorporated in Nevada in 1979, under the name Western
Casinos, Inc. The Company changed its name to American Casino Enterprises, Inc.
in 1993 and then changed its name to American Vantage Companies in March 1997.
The Company was originally formed to engage in the business of recreational and
leisure time activities, including casino gaming. In January 1991, the Company
completed the purchase of all of the capital stock of Millerton Games, Inc.,
which held a management consulting contract for the Table Mountain Casino.
The Company signed a new contract with the Table Mountain Band of Indians
(the "Table Mountain Tribe") on February 1, 1996, for a 27 month term, to serve
as a consultant to the Table Mountain Casino. In June 1997, the consulting
agreement was amended retroactive to May 1, 1997, to provide a revised
consulting fee schedule.
In March 1996, the Company formed a joint venture with the Table Mountain
Tribe to provide consulting services to the Auburn Tribe. The joint venture will
assist in the development of a Class II casino proposed to be built and owned by
the Auburn Tribe near Sacramento, California.
On February 1, 1996, the Company entered into a settlement agreement of an
administrative proceeding commenced against the Company by the National Indian
Gaming Commission (the "NIGC"). The settlement agreement resolved all issues
associated with the Notice of Violation and a Notice to Show Cause issued by the
NIGC against the Company on July 15, 1994. The Notice of Violation charged that
the Company was in violation of certain provisions of the Indian Gaming
Regulatory Act and the NIGC's regulations. See "Table Mountain Consulting
Contract" below.
The Company is actively pursuing similar consulting contracts with other
Indian tribes as well as ownership of casinos and other gaming opportunities and
casino ventures outside of the Indian community, and, also, opportunities in the
recreation, entertainment and leisure time industries. There can be no
assurance, however, that the Company will be successful in any of these efforts.
All references herein to the Company refer to the Company and its
subsidiaries unless the context otherwise requires. The Company's principal
executive offices are located at 6787 West Tropicana, Suite 200, Las Vegas,
Nevada 89103, and its telephone number is (702) 227-9800.
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Table Mountain Casino & Bingo
On January 16, 1991, the Company completed the purchase from Maritime
Resorts International, Inc. ("Maritime"), a publicly held Utah corporation, of
100% of the outstanding stock of Millerton Games, Inc. ("Millerton"), a
California corporation which held a management consulting contract with
the Table Mountain Casino. The Company issued 2,257,630 shares of its Common
Stock to Maritime in January 1991. An additional 1,500,000 shares of Common
Stock and a note payable ($75,763) were issued to Maritime in January 1992 to
satisfy all provisions of the agreement.
The Table Mountain Casino, opened in 1987, is a high-stakes bingo and
gaming casino which is located on The Table Mountain Tribe's Rancheria in
Friant, California, approximately 17 miles north of Fresno. The Table Mountain
Casino contains approximately 800 bingo seats, seven conventional card tables,
five Asian card tables (where Pai Gow, Asian poker and Super Pan 9 are played),
23 stand-up card tables for Table Mountain Jackpot-21, a non-banking form of
blackjack, and approximately 830 electronic video gaming devices.
The casino is open 24 hours a day, seven days a week. Bingo is offered
Wednesday through Saturday evenings and Sunday afternoons. Cards and electronic
video machines are offered 24 hours a day, seven days a week.
The Table Mountain Casino is currently authorized by Tribal Ordinance
under the National Indian Gaming Act as a Class II enterprise. On February 1,
1996, the Company was granted a new 27-month consulting contract by the Table
Mountain Tribe, which gives the Company the exclusive right to provide
consulting services for a Class III gaming casino, when and if the Table
Mountain Tribe enters into a Class III gaming compact with the State of
California which would allow the Table Mountain Casino to engage in expanded
casino gaming. In 1992, the National Indian Gaming Commission (the "NIGC")
promulgated regulations stating that Indian casinos could not offer certain
games, classified as Class III games including electronic gaming machines such
as the Tribe's electronic video pull-tab gaming devices and keno, without state
approval under tribal-state compacts. In July 1993, a Federal District Court in
California, in response to a lawsuit brought against the State of California by
the Table Mountain Tribe and other tribes seeking a declaratory judgment, ruled
that the state is obligated to negotiate in good faith to enter into a
tribal-state compact which includes slot-type electronic gaming machines, as
well as to negotiate the types of banked card games Indian casinos may offer.
The judgment of the Federal District Court was subsequently upheld on appeal.
See "Item 3. Legal Proceedings."
The Table Mountain Casino also operates two concessions providing fast
food and non-alcoholic drinks on a 24 hour basis. In addition, the Table
Mountain Casino opened a full-service, 150 seat restaurant in September 1994
which is open for business 24 hours per day. There is a population of
approximately one million people located within 100 miles of the Table Mountain
Casino. The Table Mountain Casino attracts players not only from the Fresno
area, but also from other parts of Northern and Central California.
In response to the success of the Table Mountain Casino and customer
demand, the Table Mountain Casino was renovated between 1993 and 1995 and
expanded to its current size. Other improvements include a new facade and
signage, an improved air conditioning and ventilation system to aid in making
the facility as smoke free as possible, improved septic and restroom facilities,
installation of fire safety features and expanded parking areas.
Table Mountain Consulting Contract
On February 1, 1996, the Company entered into a termination agreement with
the Table Mountain Tribe (the "Termination Agreement") which terminated the
Company's 1993 consulting agreement (the "1993 Agreement") and
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simultaneously entered into a new consulting agreement (the "1996 Agreement").
Under the conditions of the Termination Agreement, commencing February 1, 1996,
the Table Mountain Tribe is required to pay the Company 48 monthly installments
of $350,000 in consideration for termination of the 1993 Agreement. However, no
payment is required for any month in which the net revenue of the casino does
not equal or exceed $1 Million. The term of the Termination Agreement shall be
automatically extended by one month for each month that no payment is required
thereunder, for up to a maximum of 12 months.
The 1996 Agreement requires the Company to consult and provide technical
assistance, training and advice to the Table Mountain Tribe concerning all
matters relating to the operation and business activities of the casino,
including but not limited to organization and administration, planning and
development, gaming activities, internal controls and accounting procedures,
cage operations, engineering and maintenance, housekeeping, human resources,
management information services, marketing and advertising, purchasing,
surveillance, security and food and beverage operations. The 1996 Agreement was
amended in June 1997. The term of the 1996 Agreement ends May 1998. For its
services under the 1996 Agreement, as amended, the Company will receive minimum
monthly payments through April 30, 1998 of $60,000. The Table Mountain Tribe is
also required to pay the Company additional monies for certain increments of
monthly casino net revenue in excess of the first $1.5 million of net revenue
from casino operations.
Selected tribal members participate in a management training program
developed by the Company. Tribal members currently hold key management
positions with the Table Mountain Casino. No employee of the Company holds
an employment position with the Table Mountain Casino.
Under the terms of the 1993 Agreement, the consulting fee was 35 percent
of each month's net profits for the first five years and 30 percent for the last
two years with the balance to the Table Mountain Tribe. In September 1995, the
Company and the Table Mountain Tribe executed a letter agreement (the
"Amendment") which amended the 1993 Agreement. The Amendment modified the 1993
Agreement by providing that the Company would pay a concession to the Table
Mountain Tribe for the period from June 19, 1995 through June 19, 1996 equal to
seven percent (7%) of the net profit of the casino before consulting fees paid
to the Company. Net profits under the 1993 Agreement were defined as the
difference between total casino revenues and expenses, excluding consulting
fees. The 1993 Agreement, as amended, was terminated by the Termination
Agreement.
Under the revised consulting fee structure, assuming operations for the
nine month period ending April 30, 1998 (the end of the contract period) are at
the same level as in the nine month period ended April 30, 1997, projected
consulting fee revenues for the Company in the 1998 period would be $410,000
lower than in the 1997 period.
On July 15, 1994, the Chairman of the NIGC issued a Notice of Violation
and a separate Notice to Show Cause to the Company. The Notice of Violation
charged that the Company was in violation of certain provisions of the Indian
Gaming Regulatory Act ("IGRA") and the NIGC's regulations, in that the Company
had allegedly (i) engaged in management of the Table Mountain Casino without an
approved management contract beginning on November 1, 1990 and (ii) operated
illegal video gaming devices and house-banked blackjack games without a Class
III gaming compact with the State of California.
On February 1, 1996, the Company entered into a settlement agreement with
NIGC. The settlement agreement resolved all issues associated with the Notice of
Violation and the Notice to Show Cause. The NIGC agreed to fully withdraw all
allegations and claims against the Company. In turn, the Company, without
admitting or denying the NIGC allegations, agreed to pay a civil fine of
$500,000 and to terminate the 1993 Agreement.
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The 1996 Agreement is terminable for cause by either party. Under the 1996
Agreement, all casino decisions, policies and procedures are formulated by or
subject to the approval of a board of directors (the "Casino Board of
Directors"). During Fiscal 1995, the Casino Board of Directors consisted of four
representatives of the Company and five representatives of the Table Mountain
Tribe. In September 1995, the four representatives of the Company resigned from
the Casino Board of Directors. A General Manager serves at the pleasure of the
Casino Board of Directors and is vested with initial responsibility and
authority for the daily operations of the casino, subject to the approval of the
Casino Board of Directors. The Table Mountain Tribe has waived its sovereign
immunity to a limited extent to permit a direct action by the Company for money
damages, specific performance, injunctive relief and/or declaratory relief in
the event that the Table Mountain Tribe breaches the contract.
Development of Gaming Facility in Placer County, California
In February 1996, the Company formed a joint venture with the Table
Mountain Tribe to provide consulting services to the Auburn Tribe. The joint
venture will assist in the development of a Class II casino to be built and
owned by the Auburn Tribe in Placer County, near Sacramento, California. The
joint venture will also train tribal members in operating the casino. The
Company has an 80% interest in the joint venture.
Compensation to the joint venture for the consulting agreement is
structured as a base consulting fee of $150,000 per month, with additional fees
of $37,500 paid for each increment of $250,000 of net income between $1,000,000
and $3,000,000 and $31,250 paid for each increment of $250,000 of net income in
excess of $3,000,000. The five year term of the agreement will commence when the
casino becomes operational.
The joint venture is committed to finance the Auburn Tribe with capital
for land acquisition, pre-development costs and Tribal needs. The Auburn Tribe
is in the process of acquiring land for the casino. After its acquisition,
subject to the consent of the Secretary of the Interior, the land will be placed
into trust by the Bureau of Indian Affairs, a process which will take an
undetermined amount of time. At the time the land is placed into trust, a
one-time fee of $125,000 will be paid by the joint venture to the Auburn Tribe
and the Auburn Tribe will receive options to acquire 150,000 shares of the
Company's Common Stock at the then current market price. In the interim, a
monthly payment of $22,500 is being made by the joint venture to the Auburn
Tribe until the gaming facility is operational.
Amounts advanced to the Auburn Tribe for pre-developmental costs, land
acquisition and related costs, including land option costs and casino
construction costs, not including the monthly payment discussed in the previous
paragraph, will begin to be repaid with interest after the casino begins
operation.
Formation of New Subsidiary
In September 1996, the Company formed a new subsidiary, G & L Acquisition
Corp. ("G & L"). G & L will pursue business opportunities involving the
establishment or acquisition of a California card room, a gaming business
located on a ship which sails to international waters from home ports in the
United States or elsewhere and/or a leisure business ("Target Business"). The
Company owns approximately 64% of the outstanding shares of G & L.
Acquisition and Sale of Las Vegas, Nevada Property
On October 9, 1996, the Company purchased approximately 160 acres of
undeveloped land (the "Property") in Las Vegas, Nevada from Victorson &
Associates and Fred Victorson (the "Sellers"). The Sellers were and continue
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to be unrelated to the Company. The total purchase price paid by the Company for
the Property was $5,200,000. The purchase price was comprised of a cash payment
of $3,600,000 and the assumption of a $1,600,000 note (the "Note") and related
mortgage on the Property. The Company used working capital generated from its
operations to pay the cash portion of the purchase price. In connection with the
purchase, the Company granted an option to the Sellers to repurchase the land.
The Sellers exercised the option to repurchase the land in February 1997 and the
Company recognized a gain of approximately $182,000 on the sale.
Acquisition of North Las Vegas, Nevada Property
In May 1997, the Company bought a 40 acre parcel of land in North Las
Vegas, Nevada for approximately $3,500,000 in cash. The Company intends to begin
immediate development of the property as a funeral home and cemetery.
Competition
There are presently casinos on Indian reservations in many states, and
tribes in other states have disclosed plans to open casinos. Under Federal law,
tribes can offer any games already legal in their state, although, among other
things, Indian casinos are not subject to state betting limits. Competition for
gaming customers in California also comes from casino-hotel operations in Nevada
and elsewhere, as well as other forms of wagering permitted in California, such
as card clubs, pari-mutual racing, lottery games and other gambling activities.
The Table Mountain Casino competes with one other Indian gaming operation
within a fifty mile radius of Fresno, California, which was opened by the Big
Sandy Rancheria Indian Tribe during Fiscal 1996. This casino contains
approximately 100 electronic video games. It is located in Auberry, California,
approximately 25 miles from the Table Mountain Casino and approximately 40 miles
from Fresno. Another Indian gaming operation is approximately 70 miles from the
Table Mountain Casino in Lemoore, California. At the Lemoore operation, bingo is
offered five days a week in the evening with seating of approximately 1,200
persons. Paper pull tab gaming devices and approximately 300 electronic video
games are available to its customers. The Lemoore operation does not offer card
games. The Table Mountain Casino competes with the Lemoore operation for
customers from the same geographic area. Management, however, believes the
variety of gaming offered by the Table Mountain Casino gives it a competitive
advantage over these two operations. The Company believes that the renovation
and expansion of the Table Mountain Casino has strengthened the Table Mountain
Casino's competitive position.
The Company expects the casino to encounter competition in the form of
state authorized card rooms, one of which was built in Fowler, California
(approximately 35 miles from the Table Mountain Casino), and one of which is
in operation in Fresno, and one is in operation in Clovis, a suburb of Fresno.
The Fowler facility, which ceased operations in January 1997, is permitted to
have up to 40 tables, the three Fresno facilities are permitted to have 50
tables in total. The Clovis operation has approximately 5 tables in operation;
the number of tables it is permitted is not known. Although these card rooms are
smaller than the Table Mountain Casino, the presence of such facilities has
diverted some of the Table Mountain Casino's card room business.
Government Regulation
The operation of the Table Mountain Casino is subject to regulation under
IGRA. The United States Supreme Court has declared that, once a state has
legalized any form of gambling, the Indians in that state have the right to
offer the same games, but without governmental restrictions. California v.
Cabazon Band of Mission Indians, 480 U.S. 202 (1987). The basic test under IGRA
has been interpreted to be that if anyone in the state can offer a form of
gambling, even though strictly limiting the game to charities and small wagers,
then tribes in that state can offer the same game with virtually no limits.
Thus, in California there is authorized off track pari-mutual horse race
wagering, bingo, lottery games (which the tribes believe includes video gaming)
and card rooms. The NIGC was established in 1988 to enforce IGRA.
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The forms of gambling that are considered to be social games and
traditional Indian games are called Class I and are left entirely under Indian
control. Class II games, which are subject to some regulation by the NIGC,
include bingo, non-banking card games, pull tabs, and other similar games
including any electronic or computerized aides used in connection with such
games. A sovereign Indian tribe can operate Class III games, which include all
forms of gaming not identified as Class I or II, including a race track, off
track pari-mutual horse racing or a lottery, only if it enters into a compact
with the state. The Table Mountain Tribe has promulgated an ordinance
authorizing the Table Mountain Casino to engage in Class II gaming activities.
The Table Mountain Tribe has applied for a Class III Gaming Compact in order to
engage in expanded casino gaming and will seek approval to conduct off track
pari-mutual horse race wagering. It expects to commence such operations when,
and if, a compact is signed with the State of California.
In May 1992, the NIGC promulgated regulations stating that Indian casinos
could not offer certain games, classified as Class III games, including
electronic gaming machines such as the electronic video pull tab gaming devices
at the Table Mountain Casino, without state approval under tribal-state
compacts. The Table Mountain Tribe is seeking a Class III gaming compact in
order to engage in expanded casino gambling. The Company is required to comply
with all applicable laws, rules and regulations promulgated to regulate the
Table Mountain Casino. Certain tribes have sued to require the State of
California to negotiate to permit certain electronic and card games. The case is
on appeal. See "Item 3. Legal Proceedings."
Employees
As of October 16, 1997, the Company and its subsidiaries employed seven
persons including its three executive officers, one person in gaming operations,
two full-time administrative employees and one of the Company's Directors as a
gaming consultant on a full-time basis. These persons do not include 820 persons
employed at the Table Mountain Casino, none of whom is on the Company's payroll.
Item 2. Description of Property
The Company's executive offices are located in leased office space at
6787 West Tropicana, Suite 200, Las Vegas, Nevada 89103. The monthly rental is
$8,565. The lease agreement commenced on June 1, 1996 and expires on June 1,
2001.
See "Item 1. Description of Business - Acquisition and Sale of Las Vegas,
Nevada Property" for a description of undeveloped real estate which the Company
sold in February 1997, and "Item 1. Description of Business - Acquisition of
North Las Vegas, Nevada Property" for a description of undeveloped real estate
which the Company acquired in May 1997.
Item 3. Legal Proceedings
Neither the Company nor any of its subsidiaries is a party to any material
legal proceeding, nor to the knowledge of Management is any litigation
threatened against the Company or its subsidiaries, except as described
hereinafter.
On May 22, 1992, the Tribe and other California Indian Tribes commenced a
lawsuit in the United States District Court, Eastern District of California
(Civ-S-92-812 GEB JFM) in the matter of Rumsey Indian Rancheria of Wintun
Indians, et al. v. Governor Peter Wilson and the State of California. The suit
resulted from an agreement between the Tribes and the state to turn to the
courts for guidance as to the type of games allowed under the IGRA. On July 16,
1993, the Court granted to the tribes, including the Table Mountain Tribe, a
declaratory judgment that the State of California and the Governor were
obligated under the IGRA to negotiate in good faith to enter into a tribal-state
compact to conduct their gambling activities, including certain forms of Class
III gaming, namely slot machines/electronic gambling devices and to negotiate to
determine whether other types of banked and percentage card games will be
permitted under a Tribe-State compact. While the judge upheld California's
opposition to traditional
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casino games, such as blackjack, the Court ruled that other banking and
percentage card games could be included in compact negotiations.
In November 1994, the U.S. Court of Appeals for the Ninth Circuit reversed
in part the July 1993 ruling by the District Court in favor of the tribes, and
remanded the case to the District Court for additional fact finding. The
remanded issue is whether California law permits the use of video gaming devices
by the California State Lottery. If California law is found to permit the use of
video gaming devices, the tribes are entitled to seek agreements for the use of
such devices. If California law is not found to permit their use, the tribes
would not be so entitled under the Court of Appeals' analysis.
In December 1994, the tribes filed a petition for rehearing with the Ninth
Circuit and a suggestion for rehearing en banc. The petition and suggestion were
denied on August 11, 1995, with a vigorous dissent by six judges. The decision,
however, has not been finalized. On August 21, 1995, the Ninth Circuit issued an
order requesting further briefing by the parties on the relevance of an
important new decision of the California Court of Appeals in Western Telcon v.
California State Lottery. In that case, the court held that the California State
Lottery was authorized to use most forms of slot machines and that the Lottery
was exempt from the State's Penal Code prohibitions against banked games. On
September 1, 1995, the parties in Western Telcon filed a petition for review
with the California Supreme Court, which is now pending. The California Supreme
Court is not required to grant review.
On October 16, 1995, the Ninth Circuit stayed its final decision in Rumsey
until the final disposition of Western Telcon by the California Supreme Court.
On June 24, 1996, the California Supreme Court decided Western Telcon. The court
held that the California State Lottery could not "bank" games, but it left open
the possibility that certain types of electronic devices could be used to play
non-banked games, and cited with approval the Lottery's use of on-line computers
and video terminals as consistent with the State Lottery Act. The parties filed
their briefs in Rumsey on July 23, 1996, and the case is now pending.
On October 29, 1996, the Ninth Circuit issued an order finding that the
Western Telcon decision had no impact on its earlier opinion in Rumsey. As a
result, the Court reissued its opinion of August 11, 1995, which will have the
effect of sending the Rumsey case back to the District Court to determine
whether the California State Lottery uses electronic devices that constitute
"slot machines."
On December 30, 1996, several Tribal plaintiffs in the Rumsey case filed a
petition asking the U.S. Supreme Court to review the Ninth Circuit Court
decision, which the Supreme Court rejected. In June 1997, the Supreme Court
denied the petition, making final the Ninth Circuit ruling sending the case back
to the District Court, where it is now pending.
In February 1997, the U.S. Attorneys' offices in California issued letters
to the Indian Tribes in California ("Tribes") which operate casinos using
electronic gaming devices. The letters, in essence, gave the Tribes until May 1,
1997 to reach a settlement with the State of California over the types of games
to be included in a compact or unplug the machines in the casinos.
The Table Mountain Tribe entered into an agreement with the U.S. Attorney
for the Eastern District of California in which the Tribe agreed to abide by the
deadline and the U.S. Attorney agreed to consider extensions of the deadline if
the Tribes showed "good faith." On April 29, 1997, and again on July 3, 1997,
the deadline was extended until September 30, 1997. On September 30, 1997, the
U.S. Attorney for the Easter District announced that the office will defer
enforcement action against tribes currently engaged in uncompacted gaming
pending (i) the completion of the ongoing compact negotiations between the Pala
Band of Mission Indians and the State of California and (ii) the establishment
of a framework for future negotiations between the State of California and (iii)
the establishment of a framework for future negotiations between the State of
California and other California Tribes, including those that presently are
engaged in gaming.
Negotiations for a model tribal-state compact between the State of
California and the California Tribes are continuing and the parties are
optimistic an agreement will be reached in the year ending July 31, 1998.
Should the U.S. Attorneys' offices enforce compliance with their letters
or should the State of California be successful in its legal actions, it could
have an adverse effect on the Company's business, because decreases in the Table
Mountain Casino's net income before consulting fees would decrease the Company's
consulting fees revenues.
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PART II
Item 5. Market for the Company's Common Stock and Related Stockholder Matters
The Company's Common Stock is traded in the over-the-counter market and
quoted through the Nasdaq Stock Market under the symbol "ACES".
The following table sets forth the range of high and low closing bid
prices of the Company's Common Stock for each quarterly period indicated, as
reported by Nasdaq. The prices represent inter-dealer quotations, without retail
mark-up, mark-down or commission, and may not necessarily represent actual
transactions:
<TABLE>
<CAPTION>
Period High Bid Low Bid
- ------ -------- -------
<S> <C> <C>
Fiscal 1997
First Quarter (August 1, 1996 - October 31, 1996) $1.84 $1.06
Second Quarter (November 1, 1996 - January 31, 1997) $1.78 $1.06
Third Quarter (February 1, 1997 - April 30, 1997) $1.41 $1.13
Fourth Quarter (May 1, 1997 - July 31, 1997) $1.28 $.94
Fiscal 1996
First Quarter (August 1, 1995 - October 31, 1995) $2.38 $.50
Second Quarter (November 1, 1995 - January 31, 1996) $3.00 $1.94
Third Quarter (February 1, 1996 - April 30, 1996) $3.13 $2.03
Fourth Quarter (May 1, 1996 - July 31, 1996) $2.13 $1.06
</TABLE>
On October 6, 1997, the closing sale price per share for the Company's
Common Stock was $1.19.
On October 17, 1997, there were 925 holders of record of the 14,867,958
shares of the Company's Common Stock outstanding.
Dividend Policy
The Company has not paid any cash dividends on its Common Stock since its
incorporation. The Company anticipates that in the foreseeable future, earnings,
if any, will be retained for use in its business or for other corporate
purposes.
Item 6. Management's Discussion and Analysis
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes thereto included elsewhere in
this Report.
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RESULTS OF OPERATIONS
FISCAL YEAR ENDED JULY 31, 1997 COMPARED WITH FISCAL YEAR ENDED JULY 31, 1996
REVENUES
Casino consulting fees for the year ended July 31, 1997 ("Fiscal 1997")
decreased 6.1% to $9,050,000 from the $9,641,000 recorded for the year ended
July 31, 1996 ("Fiscal 1996"), and were derived from the consulting agreement
the Company has with the Table Mountain Band of Indians (the "Tribe") for
providing consulting services to the Table Mountain Casino & Bingo (the "Table
Mountain Casino"), which is located near Fresno, California.
On February 1, 1996, the Company signed a new consulting agreement with the
Tribe. The agreement has a duration of 27 months and provides that the Company
will receive a base monthly consulting fee of $90,000, plus an additional
$90,000 for each increment of $500,000, or portion thereof, of casino net income
in excess of the first $1.5 million of net income from casino operations.
Additionally, effective February 1, 1996, the Company and the Tribe signed a
termination agreement of the March 1993 agreement under which a monthly payment
of $350,000 will be paid to the Company for a term of 48 months, subject to
certain operating thresholds of the Casino.
The consulting agreement in effect prior to February 1, 1996 provided for
consulting fees equal to 35% of the Table Mountain Casino's net income before
consulting fees. Also, for the period from June 19, 1995 to February 1, 1996,
the Company paid a concession to the Tribe equal to seven percent (7%) of the
net income, before consulting fees, of the Casino. During the period from August
1, 1995 through January 31, 1996 (the end of the concession period), the
concession totaled $1,276,000. Consulting fee revenue is reported net of the
concession to the Tribe.
In June 1997, the consulting agreement was amended, retroactive to May 1, 1997,
to provide a revised consulting fee schedule. The revised schedule provides for
a base monthly consulting fee of $60,000, plus additional fees of $50,000 to
$100,000 for increments of $225,000 to $500,000 or portion thereof, of monthly
casino net income in excess of the first $1.5 million of net income from casino
operations. The contract ends May 1998.
-10-
<PAGE> 11
The Company will also continue to receive a monthly payment of $350,000, as
previously discussed, in accordance with the terms of the termination agreement
signed February 1, 1996. These payments will continue through January 2000.
Under the revised consulting fee structure, assuming operations for the
nine month period ending April 30, 1998 (the end of the contract period) are at
the same level as in the nine month period ended April 30, 1997, projected
consulting fee revenues for the Company in the 1998 period would be $410,000
lower than in the 1997 period.
COSTS AND EXPENSES
Casino consulting expenses for Fiscal 1997 decreased to $1,597,000 from
$2,183,000 for Fiscal 1996. This decrease of 26.8% is comprised of a reduction
in legal expenses and fees paid to consultants working for the Company. In
Fiscal 1996, the Company wrote off an option to invest in a company seeking to
build a cardroom in a California community. Also, in Fiscal 1996, the Company
incurred substantial legal costs related to the settlement of a National Indian
Gaming Commission action against the Company.
General and administrative expenses for Fiscal 1997 increased by $277,000 or
32.4% over Fiscal 1996. The increase resulted mainly from increases in:
allocated administrative salaries; legal costs related to prospective business
investment opportunities; investor relations and office rental costs.
Amortization and depreciation was $144,000 and $111,000 for Fiscal 1997 and
1996, respectively. Amortization is comprised of consulting agreement
acquisition costs, which are being amortized over the term of the Table Mountain
Casino agreement.
Minority interest in net income of a consolidated subsidiary, G & L Acquisition
Corp., which was incorporated in Fiscal 1997, totaled $20,000.
OTHER OPERATIONAL ITEMS
Interest income, represented principally by interest on time deposits with
financial institutions, totaled $769,000 and $602,000 in Fiscal, 1997 and 1996,
respectively.
During Fiscal 1997, the Company sold land held for investment or development and
recorded a gain of approximately $182,000.
During Fiscal 1996, the Company charged operations for a $500,000 civil fine
assessed by the National Indian Gaming Commission.
-11-
<PAGE> 12
The Company recorded provisions of $417,000 and $463,000 for State of California
income taxes for Fiscal 1997 and 1996, respectively. Provisions of $2,218,000
and $1,960,000 were recorded for federal income taxes currently payable for
Fiscal 1997 and 1996, respectively. Deferred federal income tax expense of
$374,000 was recorded for Fiscal 1996.
Net income for Fiscal 1997 was $4,468,000 or $0.28 per common share and common
share equivalent compared to $3,796,000 or $0.23 per common share and common
share equivalent for Fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES AS OF JULY 31, 1997
At July 31, 1997, the Company had consolidated working capital of $13,247,000,
as compared with working capital of $12,667,000 at July 31, 1996. The change
resulted principally from a combination of increases of cash ($10,000),
refundable income taxes ($368,000) prepaid expenses ($23,000) and accounts
payable ($5,000) and decreases of consulting fee and other receivables ($11,000)
and accrued expenses ($195,000).
During Fiscal 1997, investing activities used $3,649,000 as compared to $156,000
used by investing activities in Fiscal 1996. The cash used in investing
activities in Fiscal 1997 was to acquire the land for construction and
development of a funeral home and cemetery ($3,603,000) and additional office
furniture and equipment and leasehold improvements ($46,000).
Financing activities in Fiscal 1997 were comprised of the assumption and
repayment of a mortgage payable and other borrowings ($2,073,000), proceeds from
and repayment of short-term borrowing ($400,000), the proceeds from the exercise
of 500,000 options to purchase common shares of the Company ($125,000) and the
issuance of common stock of a consolidated subsidiary, G & L Acquisition Corp.,
($2,513,000, net of the Company's investment in the subsidiary). At July 31,
1997, restricted cash of $2,684,000 was available for the use of G & L
Acquisition Corp. The proceeds derived from the sale of common stock of G & L
Acquisition Corp. ("G & L") can only be used for the establishment or
acquisition of specified gaming or leisure business opportunities. In the event,
G & L does not affect the establishment or acquisition of one of these
opportunities, the remaining net proceeds from the offering will be returned to
the investors in the private placement.
The Company signed amendments to the Table Mountain Casino consulting agreement
in June 1997 and October 1997. The October 1997 amendment extends the consulting
period to June 30, 2000. The amendments change the consulting fee structure
beginning in May 1998. The October 1997 amendment also requires the Company to
lend up to $4,000,000 to the Table Mountain Tribe, if certain conditions are
met. If the loan is made, it will be repaid over the remaining period of the
consulting agreement.
In May 1997, the company purchased approximately 40 acres of land in North Las
Vegas, Nevada for approximately $3,500,000. The Company intends to begin
development of the property as a funeral home and cemetery in the year ending
July 31, 1998. The estimated cost to complete the project is approximately
$6,000,000. In connection with the project, the Company has obtained a
$4,000,000 loan commitment from a bank to provide up to $4,000,000 for the
temporary and permanent financing of the construction and development of the
project. Interest on the construction loan will be charged at 1% above the prime
rate on funds drawn on the loan. Upon completion of the project, the financial
institution has committed to provide a seven year permanent loan with interest
at 3% above an interest rate index, which is based on United States Treasury
Securities rates. Additional funds required to construct and develop the project
will be provided from cash on hand, operations, additional financing or a
combination of all three sources. Funds required for the property's operations,
after completion of construction, initially will be provided by the Company's
working capital, which is generated by other sources. Ultimately,
-12-
<PAGE> 13
management anticipates that the property will generate sufficient cash flow to
maintain its operations independently.
The Company and its joint venture partner, the Table Mountain Tribe, are
obligated under a contract with the United Auburn Indian Community ("Auburn
Tribe") to fund the acquisition of land for a casino, predevelopment costs and
tribal needs. The amount of the obligation will depend on the site selected for
the project. At July 31, 1997, the Auburn Tribe held options to acquire land at
a purchase price of approximately $3,000,000. The joint venture is obligated to
fund this acquisition if it occurs. The acquisition of the land is subject to
the consent of the Secretary of the Interior, and the placing of the land into
trust for the Auburn Tribe by the Bureau of Indian Affairs. In the event, these
options are exercised, the Company will utilize its working capital to
contribute to the joint venture, which will in turn contribute to the Auburn
Tribe funds to enable the tribe to acquire the land.
Historically, the Company has provided funds for its operations from operating
activities, financing from financial institutions and shareholders, and issuance
of common stock, and it will likely continue to use these sources of liquidity
in the future. The Company has always sought and will continue to seek other
suitable consulting contracts and/or ownership of casinos and other gaming
opportunities on and off Indian land, as well as recreational, leisure time and
entertainment ventures. Additionally, the Company will continue to, pursue any
business venture, including those not previously described, which management
believes affords an opportunity to increase shareholder value. In the event any
of these opportunities come to fruition, management will consider satisfying
financing requirements from working capital, through borrowing or capital
infusion through the public or private placement of common stock of the Company
or its subsidiaries.
At July 31, 1997, the Company had revolving lines of credit totaling $2,000,000
with two banks. One line for $1,000,000 expires in December 1997 and bears
interest at 2.5% above a reference prime rate (8.5% at July 31, 1997).
Certificates of deposit totaling $500,000 collateralize the line. The other
$1,000,000 line of credit is unsecured, expires in November 1997 and bears
interest at 1% above an indexed prime (8.5% at July 31, 1997). At July 31, 1997,
no funds were outstanding on the lines of credit.
In February 1997, the U.S. Attorneys' offices in California issued letters to
the Indian Tribes in California ("Tribes") which operate casinos using
electronic gaming devices. The letters, in essence, gave the Tribes until May 1,
1997 to reach a settlement with the State of California over the types of games
to be included in a compact or unplug the machines in their casinos.
The Table Mountain Tribe entered into an agreement with the U.S. Attorney for
the Eastern District of California in which the Tribe agreed to abide by the
deadline and the U.S. Attorney agreed to consider extensions of the deadline if
the Tribes showed "good faith". On April 29, 1997, and again on July 3, 1997,
the deadline was extended until September 30, 1997. On September 30, 1997, The
U.S. Attorney for the Eastern District announced that the office will defer
enforcement action against tribes currently engaged in uncompacted gaming
pending (i) the completion of the ongoing compact negotiations between the Pala
Band of Mission Indians and the State of California and (ii) the establishment
of a framework for future negotiations between the state of California and other
California Tribes, including those that presently are engaged in gaming.
Negotiations for a model tribal-state compact between the State of California
and the California Tribes are continuing and the parties are optimistic an
agreement will be reached in the year ending July 31, 1998.
Should the U.S. Attorneys' offices enforce compliance with their letters or
should the State of California be successful in its legal actions, it could have
an adverse effect on the Company's business, because decreases in the Table
Mountain Casino's net income before consulting fees would decrease the
Company's consulting fee revenues. The Company plans to diversify its business
operations and is seeking other opportunities to provide a means of obtaining
other sources of revenue.
Recently issued accounting standards may affect the Company's Financial
Statements in the future. See the Notes to Consolidated Financial Statements in
Item 7 of this report.
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<PAGE> 14
Item 7. Financial Statements
The consolidated financial statements of the Company are set forth in a
separate section of this Report following Part III.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
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<PAGE> 15
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.
Set forth below are the names of all the directors and executive officers
of the Company along with certain information relating to the business
experience of each of the listed officers and directors.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Ronald J. Tassinari 54 President and Director
Audrey K. Tassinari 59 Executive Vice President and Director
Roy K. Keefer 53 Chief Financial Officer,
Secretary/Treasurer and Director
Jeanne Hood 70 Director
</TABLE>
Directors are elected to serve until the next annual meeting of
stockholders or until their successors are elected and qualified. Officers serve
at the discretion of the Board of Directors subject to any contracts of
employment. The Board of Directors has an Audit Committee and a Compensation
Committee. Both committees were comprised of Jeanne Hood and Douglas Sanderson
until Mr. Sanderson's resignation from the Board of Directors, effective April
30, 1997. The Board of Directors does not have a nominating committee. See "Item
10. Executive Compensation."
Ronald J. Tassinari has been President and a Director of the Company since
its inception in August 1979.
Audrey K. Tassinari has been a Director of the Company since March 1985
and Vice President since April 1986. Mrs. Tassinari is the wife of Ronald J.
Tassinari, the Company's President.
Roy K. Keefer has been Chief Financial Officer and Secretary/Treasurer of
the Company since April 1992. Mr. Keefer has been a Director of the Company
since December 1992.
Jeanne Hood has been a Director of the Company since February 1994. Since
February 1994, Ms. Hood has served as a gaming consultant to the Company. See
"Item 12. Certain Relationships and Related Transactions." From 1985 to 1993,
Ms. Hood served as President and Chief Executive Officer of Elsinore
Corporation, a publicly traded gaming company, and of Four Queens, Inc., a
wholly-owned subsidiary of Elsinore Corporation, which subsidiary owns and
operates the Four Queens Hotel Casino in Las Vegas, Nevada.
-15-
<PAGE> 16
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who 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.
Officers, directors and greater than ten percent stockholders are required by
regulation to furnish the Company with copies of all Section 16(a) forms they
file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Form 5's were
required for those persons, the Company believes that, during the period from
August 1, 1996 through July 31, 1997, all filing requirements applicable to its
officers, directors, and greater than ten percent beneficial owners were
complied with.
Item 10. Executive Compensation
Summary Compensation Table
The following table sets forth all compensation awarded to, earned by, or
paid for all services rendered to the Company during the last three fiscal years
by the Company's Chief Executive Officer and all other executive officers whose
total compensation exceeded $100,000 in those years.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
-------------------------------------------- -------------------------
Awards
-------------------------------
Name and Other Annual Restricted Securities
Principal Position Year Salary($) Bonus($) Compensation($) Stock Award(s)($) Underlying Options(#)
- ------------------ ---- --------- -------- --------------- ----------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Ronald J. 1997 $417,988 $230,000 $70,281(1) -0- 400,000(2)(6)
Tassinari, 1996 $375,695 $270,000 $58,905(1) -0- 400,000(3)(6)
Chief Executive 1995 $245,425(4) $135,000 $40,517(1) -0- 764,000(5)(6)
Officer and
President
Audrey K. 1997 $153,621 $110,000 $55,840(1) -0- 250,000(3)(6)
Tassinari, 1996 $132,887 $130,000 $42,392(1) -0- 250,000(2)(6)
Executive 1995 $100,440(4) $ 82,500 $40,869(1) -0- 382,000(7)(6)
Vice President
Roy K. Keefer 1997 $127,768 $ 25,500 $46,599(1) -0- 150,000(8)(6)
Chief Financial 1996 $124,393 $ 60,000 $47,029(1) -0- 150,000(8)(6)
Officer 1995 $112,751 $ 40,000 $32,290(1) -0- 407,000(9)(6)
</TABLE>
- ------------------------------------
(1) This amount includes, but is not limited to: directors fees; disability,
life and medical insurance premiums; automobile payments and pension plan
payments.
(2) Represents options which were granted in October 1995 at an exercise price
of $1.75 per share, canceled and re-granted in October 1996 at $1.375 per
share.
(3) Represents options which were granted in October 1995 at an exercise price
of $1.75 per share, canceled and re-granted in October 1996 at $1.375 per
share.
(4) This amount does not include $12,500 in Casino Board of Directors fees
paid to this person in Fiscal 1995.
(5) Includes options to purchase 500,000 shares which were granted in December
1993 at $1.54 per share, canceled and re-granted in November 1994 at $.76
per share.
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<PAGE> 17
(6) The Board re-granted such options at a price closer to the fair market
value of the Company's Common Stock in order to provide a better incentive
to these officers.
(7) Includes options to purchase 250,000 shares which were granted in December
1993 at $1.54 per share, canceled and re-granted in November 1994 at $.76
per share.
(8) Represents options which were granted in October 1995 at an exercise price
of $1.75 per share, cancelled and regranted in October 1996 at $1.25 per
share.
(9) Includes options to purchase 275,000 shares which were granted in December
1993 at $1.40 per share, canceled and re-granted in November 1994 at $.69
per share.
Option Grants in Last Fiscal Year Table
<TABLE>
<CAPTION>
% of Total
Shares Options Exercise
Underlying Granted to or Base
Options Employees in Price Expiration
Name Granted (#) Fiscal Year ($/Sh) Date
- ---- ----------- ----------- ------ ----
<S> <C> <C> <C> <C>
Ronald J. Tassinari 400,000 50% $1.38 10/09/01
Audrey K. Tassinari 250,000 31% $1.38 10/09/01
Roy K. Keefer 150,000 19% $1.25 10/09/01
</TABLE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values Table
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-The-Money
Shares Options at Options at
Acquired FY-End (#) FY-End ($)
on Exer- Value Exercisable/ Exercisable/
Name cise (#) Realized Unexercisable Unexercisable(1)
- ---- -------- -------- ------------- ----------------
<S> <C> <C> <C> <C>
Ronald J. Tassinari 350,000 $87,500 1,226,000/88,000 $225,241/$21,120
Audrey K. Tassinari 150,000 $37,500 688,000/44,000 $253,624/$10,560
Roy K. Keefer 0 $0 563,000/44,000 $136,030/$13,640
</TABLE>
- ------------------------------------
(1) The closing price for the Company's Common Shares on July 31, 1997 was
$1.00 per share.
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<PAGE> 18
Compensation of Directors
Directors receive $1,000 for each meeting of the Board of Directors they
attend. They are also compensated for expenses incurred in attending the
meetings. Certain of the Company's directors have received stock options from
the Company. See "Item 11. - Certain Relationships and Related Transactions."
Employment Agreements
On July 20, 1995, the Company entered into substantially similar
employment agreements with Ronald J. Tassinari, to serve as the Company's Chief
Executive Officer and President, Audrey K. Tassinari, to serve as the Company's
Vice President, and Roy K. Keefer to serve as the Company's Chief Financial
Officer (collectively, the "Employees"). The employment agreements provide for a
term which concludes on March 31, 2002. The agreements provide for annual
salaries of $400,000, $150,000, and $125,000, respectively, for Mr. Tassinari,
Mrs. Tassinari and Mr. Keefer. The agreements further provide that the Employees
are entitled to receive minimum annual increases in their salaries every
December equal to the greater of (i) the annual increases provided to the
Company's other salaried executives or (ii) the increase in the Annual Average
All Items Index of the U.S. City Average Consumer Price Index. Under the
agreements, the Employees are entitled to receive incentive stock options under
the Company's stock option plans, and the Company is required to reimburse
Employees for their personal legal and financial consulting expenses, subject to
a maximum of three percent of their prior calendar year's base salary. Mr.
Tassinari is entitled to a term life insurance policy with a minimum death
benefit of $2,000,000, payable to a beneficiary of Mr. Tassinari's designation.
Mrs. Tassinari and Mr. Keefer are entitled to policies with $1,500,000 and
$1,000,000 minimum death benefits, respectively, payable to beneficiaries of
their designation. The Company has agreed to provide the Employees with an
automobile allowance or, in lieu thereof, will pay them an equal monthly cash
stipend. In the event that the Company requires the Employee to relocate from
Las Vegas, Nevada, the Company has agreed to pay their relocation expenses and
to provide second mortgages on their new permanent residences of up to $100,000.
The employment agreements also provide for indemnification of the Employees in
connection with their service to the Company.
If the employment of any of the Employees is terminated by reason of
death, the Company shall pay the balance of the monies due under the agreement
to the estate of the deceased Employee. If the employment of any of the
Employees is terminated by reason of disability, the Employee shall be entitled
to one year of severance pay at full salary and then severance pay at half
salary for the remainder of the term. If any of the Employees are terminated
without cause, or the Employees terminate their own employment following: (a) a
change in control (as defined below); (b) a significant change in the Employee's
duties under the agreements; (c) a removal of the Employee from the positions or
offices set forth in the agreements; (d) a substantial reduction in
compensation, unless all senior executives receive comparable reductions; (e) a
breach by the Company of the relocation provisions set forth in the agreements;
(f) the refusal of a successor to the Company to assume the Company's
obligations under the agreements; (g) a relocation of the Company's executive
offices without the Employee's consent; (h) a failure by the Company to increase
the Employee's salary; or (i) the Employee remains employed following a change
in control, but then resigns within two years, then the Company shall pay as
liquidated damages, or severance pay, or both to the Employee on the fifth day
following the termination date, a lump sum equal to the product of (i) an amount
equal to the sum of the annual base salary in effect as of the termination date
plus any incentive compensation most recently paid or payable to the Employees,
multiplied by (ii) two and ninety-nine one hundredths (2.99), (iii) plus any and
all accrued salary, accrued vacation pay and accrued bonus in addition to any
other consideration due under the agreements. In addition, the agreements
provide that in the event that an Employee terminates his or her employment
following a change in control, the Company shall make a cash payment on the 91st
day after such termination to the Employee in an amount equal to the excess, if
any, of (1) the number of options then held by the Employee which have not
terminated other than as a result of termination of employment multiplied by the
market price of the Company's common stock as of the date of termination, over
(2) the aggregate exercise price for all options then held by the Employee.
For purposes of the employment agreements, a "change in control of the
Company" shall be deemed to have occurred if (i) a third person becomes the
beneficial owner (as such term is defined in Rule 13d-3 promulgated pursuant to
the Securities Exchange Act of 1934, as amended (the "Act")) of the securities
of the Company having twenty
-18-
<PAGE> 19
percent (20%) or more of the combined voting power of all classes of the
Company's securities entitled to vote in an election of Directors of the
Company; (ii) there occurs a tender offer or exchange offer by, a merger or
other business combination with, or a sale of substantially all of the assets of
the Company to any third Person; (iii) a stockholder or stockholders holding
five percent (5%) or more of the outstanding common stock of the Company
proposes a reconstitution of additions to or deletions from the Board and as a
result, obtains a majority thereof; or (iv) during any period of two consecutive
years during the term of the agreements, individuals who at the beginning of
such period constitute the Board cease for any reason other than death or
disability to constitute at least a majority thereof.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of the date of this
Report, with respect to the beneficial ownership (as such term is defined in
Rule 13d-3 under the Securities Exchange Act of 1934) of shares of Common Stock,
the Company's sole voting securities, by each person known by the Company to be
the beneficial owner of more than 5% of its Common Stock, by each executive
officer named in the Summary Compensation Table, each director and by all
officers and directors as a group.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percentage
Beneficial Owner Beneficial Ownership(1) of Class(2)
---------------- ----------------------- -----------
<S> <C> <C>
Ronald J. Tassinari 2,165,213 (3) 14.6%
6787 West Tropicana, Suite 200
Las Vegas, NV 89103
Audrey K. Tassinari 1,292,317 (4) 8.7%
6787 West Tropicana, Suite 200
Las Vegas, NV 89103
Roy K. Keefer 619,000 (5) 4.2%
6787 West Tropicana, Suite 200
Las Vegas, NV 89103
Jeanne Hood 150,000 (6) 1.0%
2316 Timberline Way
Las Vegas, NV 89117
Jay H. Brown 1,183,023 (7) 8.0%
520 South Fourth Street
Las Vegas, NV 89101
All officers and directors 4,050,564 (8) 27.2%
as a group (4 persons)
</TABLE>
- ------------
(1) Unless otherwise noted, all shares are beneficially owned and the sole
voting and investment power is held by the persons indicated.
(2) Based on 14,867,958 shares outstanding as of the date of October 17.
(3) Includes 11,094 shares owned of record by Mr. Tassinari as custodian for
his son, 174,966 shares owned by the Tassinari Family Trust, 1,000 shares
owned jointly with Audrey K. Tassinari, his wife, and 1,314,000 shares
issuable upon exercise of stock options. Such shares exclude the following
shares as to which Mr. Tassinari disclaims beneficial ownership: 1,116,361
shares of Common Stock benefically owned by Audrey
-19-
<PAGE> 20
K. Tassinari, Mr. Tassinari's wife. If such excluded shares were included,
Mr. Tassinari would be deemed to hold 22% of the Common Stock.
(4) Includes 174,966 shares owned by the Tassinari Family Trust, 1,000 shares
owned with Ronald J. Tassinari, her husband, and an aggregate of 732,000
shares issuable upon exercise of stock options. In addition, such shares
exclude the following shares as to which Mrs. Tassinari disclaims
beneficial ownership: 1,989,247 shares of Common Stock benefically owned
by Ronald J. Tassinari, Mrs. Tassinari's husband. If such excluded shares
were included, Mrs. Tassinari would be deemed to hold 22% of the Common
Stock.
(5) Includes 607,000 shares underlying incentive stock options.
(6) Represents options to acquire 150,000 shares.
(7) Includes an aggregate of 66,666 shares of Common Stock and 330,741
Warrants beneficially owned by Mr. Brown's son and 100,616 shares of
Common Stock beneficially owned in joint tenancy by Mr. Brown and Mr.
Brown's wife.
(8) Includes options to purchase an aggregate of 2,803,000 shares of Common
Stock referred to in notes 3, 4, 5 and 6 above.
Item 12. Certain Relationships and Related Transactions
Jeanne Hood, a Director of the Company, has provided consulting services
to the Company since February 1994. She has been compensated at the rate of
$6,000 per month for such services.
On November 23, 1994, the Board of Directors granted stock options to
Robert J. Michaels, Jeanne Hood and Douglas R. Sanderson, Directors or former
Directors of the Company, to purchase 50,000, 50,000 and 12,500 shares of Common
Stock, respectively. The options were immediately exercisable at $.69 per share
in recognition of prior services rendered to the Company and expire on November
23, 1997.
On October 19, 1995, the Board of Directors granted stock options to
Robert J. Michaels, Jeanne Hood and Douglas R. Sanderson, Directors of the
Company, to purchase 50,000, 100,000 and 15,000 shares of Common Stock,
respectively. The options were immediately exercisable at $1.75 per share in
recognition of prior services rendered to the Company and expire on October 18,
2005. These options were re-granted on October 7, 1996 to Ms. Hood and Mr.
Sanderson at an exercise price of $1.25 per share.
On October 19, 1995, the Board of Directors granted stock options to
Ronald J. Tassinari, Audrey K. Tassinari and Roy K. Keefer, each an Officer and
Director of the Company, to purchase 400,000, 250,000 and 150,000 shares of
Common Stock, respectively. The options were immediately exercisable at $1.75
per share in recognition of prior services rendered to the Company and expire on
October 18, 2005. On October 7, 1996, the foregoing options were canceled and
re-granted at an exercise price of $1.25 per share for Mr. Keefer and $1.38 per
share for the Tassinaris.
On August 8, 1996, the Company loaned $130,000 to Ronald J. Tassinari, the
Company's President and a Director. Such amount was repaid on October 29, 1996,
together with interest of $2,993, which had been accrued at the rate of ten and
one-quarters percent (10.25%) per annum.
See "Item 10. Executive Compensation" for the terms of certain stock
options and Employment Agreements between the Company and Ronald J. Tassinari,
Audrey K. Tassinari and Roy K. Keefer, each a Director and officer of the
Company.
-20-
<PAGE> 21
Item 13. Exhibits, List and Reports on Form 8-K
(a) Exhibits
3.1 Articles of Incorporation and By Laws of the Company. (1)
3.2 Certificate of Amendment to Articles of Incorporation of the
Company.(5)
3.3 Certificate of Amendment to Articles of Incorporation of the
Company.(6)
4.1 Warrant Certificate between the Company and Jay H. Brown dated July
23, 1991. (2)
10.1 American Enterprises, Inc. 1991 Officers Stock Option Plan. (3)
10.2 American Enterprises, Inc. 1991 Employees Stock Option Plan. (4)
10.3 Management Consultant Contract dated March 27, 1993 between the
Company and the Table Mountain Tribe.(5)
10.4 Employment Agreement between the Company and Ronald J. Tassinari
dated July 20, 1995. (6)
10.5 Employment Agreement between the Company and Audrey K. Tassinari
dated July 20, 1995. (6)
10.6 Employment Agreement between the Company and Roy K. Keefer dated July
20, 1995. (6)
10.7 Letter Agreement dated September 11, 1995 between the Company and
Table Mountain Rancheria. (6)
10.8 Business Loan Agreement and Promissory Note dated November 15, 1994
between the Company and First Security Bank of Nevada. (6)
10.9 Settlement Agreement, dated February 1, 1996, between the Company and
the NIGC. (7)
10.10 Termination Agreement, dated February 1, 1996, between the Company
and the Table Mountain Tribe. Exhibit A to the Termination Agreement
is set forth as Exhibit 99.1 below, and Exhibit B to the Termination
Agreement is incorporated herein by reference from Exhibit 10.3
above.(7)
10.11 Consulting Agreement, dated February 1, 1996, between the Company and
the Tribe. (7)
10.12 Option to Purchase and Escrow Instructions dated as of October 9,
1996, among the Company, Victorson & Associates, Inc., Fred Victorson
and United Title of Nevada. (8)
10.13 Purchase Agreement and Escrow Instructions dated October 9, 1996,
among Victorson & Associates, Inc., Fred Victorson and the Company.
(8)
10.14 Amendment to Consultant Agreement, dated June 26, 1997, between the
Company and the Tribe (9)
10.15 Joint Venture Agreement between the Company and the Table Mountain
Tribe, dated as of February 1, 1996.(10)
10.16 Funding and Loan Agreement between the Auburn Tribe and the Table
Mountain/ACES Joint Venture, dated February 1, 1996.(10)
10.17 Lease for the Company's offices dated March 14, 1996, between the
Company and Tropicana Trail Limited Partnership.(10)
-21-
<PAGE> 22
11.1 Statement of Computation of Earnings Per Share and Common Share
Equivalents Statements.
21.1 Subsidiaries of the Registrant
23.1 Consent of Bradshaw, Smith & Co.
27.1 Financial Data Schedules
99.1 Order of the United States Department of the Interior, dated February
1, 1996. (7)
- --------------------
(1) Incorporated by reference to Exhibit 3(i) to the Company's Annual Report
on Form 10-K for July 31, 1981.
(2) Incorporated by reference to the Company's Annual Report on Form 10-K for
July 31, 1991.
(3) Incorporated by reference to the Company's Registration Statement on Form
S-8 (File No. 33-51340) declared effective on August 27, 1992.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended July 31, 1992.
(5) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the year ended July 31, 1994.
(6) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the year ended July 31, 1995.
(7) Incorporated by reference from the Company's Current Report on Form 8-K
dated February 1, 1996.
(8) Incorporated by reference from the Company's Current Report on Form 8-K
dated October 9, 1996.
(9) Incorporated by reference from the Company's Current Report on Form 8-K
dated June 26, 1997.
(10) Incorporated by reference from the Company's Annual Report on Form 10-KSB
for the year ended July 31, 1996.
(b) Reports on Form 8-K.
None.
-22-
<PAGE> 23
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, thereunder duly authorized.
Dated: October 27, 1997 AMERICAN VANTAGE COMPANIES
By: /s/ Ronald J. Tassinari
---------------------------
Ronald J. Tassinari, 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
Registrant and in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ Ronald J. Tassinari President and Director October 27, 1997
- --------------------- (Principal Executive Officer)
Ronald J. Tassinari
/s/ Audrey K. Tassinari Executive Vice October 27, 1997
- --------------------- President and Director
Audrey K. Tassinari
/s/ Roy K. Keefer Chief Financial October 27, 1997
- --------------------- Officer, Secretary/
Roy K. Keefer Treasurer and Director
(Principal Financial and
Accounting Officer)
/s/ Jeanne Hood Director October 27, 1997
- ---------------------
Jeanne Hood
-23-
<PAGE> 24
AMERICAN VANTAGE COMPANIES AND SUBSIDIARIES
YEARS ENDED JULY 31, 1997 AND 1996
<PAGE> 25
AMERICAN VANTAGE COMPANIES AND SUBSIDIARIES
YEARS ENDED JULY 31, 1997 AND 1996
CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent auditors' report 1
Financial statements:
Consolidated balance sheets 2
Consolidated statements of income 3
Consolidated statements of changes in shareholders' equity 4
Consolidated statements of cash flows 5-6
Notes to consolidated financial statements 7-23
</TABLE>
<PAGE> 26
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
American Vantage Companies
We have audited the accompanying consolidated balance sheets
of American Vantage Companies and Subsidiaries as of July 31, 1997 and 1996, and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
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 consolidated 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
American Vantage Companies and Subsidiaries as of July 31, 1997 and 1996, and
the results of their operations and cash flows for the years then ended in
conformity with generally accepted accounting principles.
Las Vegas, Nevada
October 2, 1997
<PAGE> 27
AMERICAN VANTAGE COMPANIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
---------------- ----------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 12,588,000 $ 12,578,000
Consulting fee and other receivables 191,000 202,000
Refundable income taxes 555,000 187,000
Deferred tax asset 2,000 2,000
Prepaid expenses 68,000 45,000
---------------- ----------------
Total current assets 13,404,000 13,014,000
---------------- ----------------
PROPERTY AND EQUIPMENT, NET 212,000 214,000
---------------- ----------------
LAND HELD FOR DEVELOPMENT 3,603,000 --
---------------- ----------------
OTHER ASSETS:
Restricted cash 2,684,000 --
Consulting agreement acquisition costs, net 396,000 275,000
Deposits and other 273,000 133,000
---------------- ----------------
3,353,000 408,000
---------------- ----------------
$ 20,572,000 $ 13,636,000
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 56,000 $ 51,000
Accrued expenses 101,000 296,000
---------------- ----------------
Total current liabilities 157,000 347,000
---------------- ----------------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 974,000 --
---------------- ----------------
COMMITMENTS AND CONTINGENCIES -- --
SHAREHOLDERS' EQUITY:
Common stock, $.01 par; 30,000,000 shares
authorized; 14,867,958 and 14,367,958 shares
issued and outstanding 149,000 144,000
Preferred stock; $.01 par; 10,000,000 shares
authorized; shares issued and outstanding - none -- --
Capital in excess of par 4,892,000 3,213,000
Retained earnings 14,400,000 9,932,000
---------------- ----------------
19,441,000 13,289,000
---------------- ----------------
$ 20,572,000 $ 13,636,000
================ ================
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE> 28
AMERICAN VANTAGE COMPANIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JULY 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
<S> <C> <C>
REVENUES:
Casino consulting fees $ 9,050,000 $ 9,641,000
---------------- ----------------
COSTS AND EXPENSES:
Casino consulting 1,597,000 2,183,000
General and administrative 1,133,000 856,000
Amortization and depreciation 144,000 111,000
Minority interest in net income of consolidated subsidiary 20,000 --
---------------- ----------------
2,894,000 3,150,000
---------------- ----------------
INCOME FROM OPERATIONS 6,156,000 6,491,000
OTHER INCOME (EXPENSE):
Other income - interest 769,000 602,000
Loss on disposition of fixed assets (4,000) --
Gain on sale of land held for investment or development 182,000 --
---------------- ----------------
947,000 602,000
---------------- ----------------
INCOME BEFORE NIGC CIVIL FINE AND INCOME TAXES 7,103,000 7,093,000
NIGC CIVIL FINE -- 500,000
---------------- ----------------
INCOME BEFORE INCOME TAXES 7,103,000 6,593,000
---------------- ----------------
INCOME TAX EXPENSES:
Current:
State 417,000 463,000
Federal 2,218,000 1,960,000
Deferred:
State -- --
Federal -- 374,000
---------------- ----------------
2,635,000 2,797,000
---------------- ----------------
NET INCOME $ 4,468,000 $ 3,796,000
================ ================
EARNINGS PER COMMON SHARE AND COMMON
SHARE EQUIVALENT $ 0.28 $ 0.23
================ ================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 16,055,000 16,203,000
AND COMMON SHARE EQUIVALENTS ================ ================
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE> 29
AMERICAN VANTAGE COMPANIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED JULY 31, 1997 AND 1996
<TABLE>
<CAPTION>
CAPITAL
IN EXCESS RETAINED
COMMON STOCK OF PAR EARNINGS
------------------------------------ ---------------- ----------------
SHARES AMOUNT
---------------- ----------------
<S> <C> <C> <C> <C>
BALANCE, JULY 31, 1995 14,367,958 $ 144,000 $ 3,213,000 $ 6,136,000
Net income -- -- -- 3,796,000
---------------- ---------------- ---------------- ----------------
BALANCE, JULY 31, 1996 14,367,958 144,000 3,213,000 9,932,000
Issuance of shares 500,000 5,000 120,000 --
Excess of equity in consolidated
subsidiary over cost -- -- 1,559,000 --
Net income -- -- -- 4,468,000
---------------- ---------------- ---------------- ----------------
BALANCE, JULY 31, 1997 14,867,958 $ 149,000 $ 4,892,000 $ 14,400,000
================ ================ ================ ================
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE> 30
AMERICAN VANTAGE COMPANIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,468,000 $ 3,796,000
---------------- ----------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization and depreciation 144,000 111,000
Deferred income tax benefit -- 374,000
Minority interest in net income of consolidated
subsidiary 20,000 --
Changes in other assets and liabilities, net (927,000) (388,000)
---------------- ----------------
(763,000) 97,000
---------------- ----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,705,000 3,893,000
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of land held for development (3,603,000) --
Purchase of property and equipment (46,000) (156,000)
---------------- ----------------
NET CASH USED IN INVESTING ACTIVITIES (3,649,000) (156,000)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock
of consolidated subsidiary 2,625,000 --
Cash in consolidated subsidiary restricted as to use (2,684,000) --
Investment in consolidated subsidiary (112,000) --
Proceeds from long-term debt and other borrowings 2,073,000 --
Repayment of long-term debt and other borrowings (2,073,000) --
Proceeds from issuance of common stock 125,000 --
---------------- ----------------
NET CASH USED IN FINANCING ACTIVITIES (46,000) --
---------------- ----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 10,000 3,737,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 12,578,000 8,841,000
---------------- ----------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 12,588,000 $ 12,578,000
================ ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for state and federal income taxes $ 3,004,000 $ 2,646,000
================ ================
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE> 31
AMERICAN VANTAGE COMPANIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED JULY 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
<S> <C> <C>
DETAIL OF CHANGES IN OTHER ASSETS AND LIABILITIES:
Decrease in consulting fee and other receivables $ 11,000 $ 142,000
Increase in refundable income taxes (368,000) (114,000)
Increase in consulting agreement acquisition costs (217,000) (108,000)
Increase in prepaid expenses (23,000) (6,000)
Increase in deposits and other assets (140,000) (118,000)
Increase (decrease) in accounts payable 5,000 (13,000)
Increase (decrease) in accrued expenses (195,000) 174,000
Decrease in income taxes payable -- (112,000)
Decrease in payable to Table Mountain Tribe -- (233,000)
---------------- ----------------
$ (927,000) $ (388,000)
================ ================
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE> 32
AMERICAN VANTAGE COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1997 AND 1996
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS:
The Company is currently engaged in providing consulting services to a
gaming facility in central California. The Company has acquired 40
acres of land in North Las Vegas, Nevada on which it plans to begin
development and construction of a funeral home and cemetery during the
year ending July 31, 1998.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of American
Vantage Companies (previously American Casino Enterprises, Inc.) and
its wholly and majority-owned Subsidiaries (the Company). All
significant intercompany accounts and transactions have been
eliminated.
CASH AND CASH EQUIVALENTS:
The Company maintains cash and cash equivalents, investments with
original maturities of three months or less, with certain financial
institutions. Due to the quality of the financial institutions
involved, they present a low level of risk to the Company. The carrying
amount of cash and cash equivalents approximates their fair value.
ALLOWANCES FOR DOUBTFUL ACCOUNTS:
Consulting fee and other receivables are reported at their fair value and
are, in the opinion of management, collectible and no allowances for
doubtful accounts were established at July 31, 1997 and 1996.
PROPERTY, EQUIPMENT AND DEPRECIATION:
Property and equipment is stated at cost. Depreciation is calculated
using accelerated methods over the estimated useful lives of the
assets.
CONSULTING AGREEMENT ACQUISITION COSTS:
All internal salary and related indirect costs of the Company's
consulting agreement acquisition efforts are expensed as incurred.
Direct costs are capitalized when the Company has a consulting contract
with a federally recognized Indian tribe which is proposing to conduct
authorized gaming activities.
7
<PAGE> 33
AMERICAN VANTAGE COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JULY 31, 1997 AND 1996
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED):
CONSULTING AGREEMENT ACQUISITION COSTS (CONTINUED):
Table Mountain Casino & Bingo:
Consulting agreement acquisition costs are comprised of costs
associated with the acquisition of a subsidiary which previously held
the consulting agreement with the Table Mountain Casino & Bingo (the
"Table Mountain Casino"). They are amortized over the life of the
consulting contract with the Table Mountain Band of Indians (the
"Table Mountain Tribe"). The amortization period was 84 months for
the first 6 months of the year ended July 31, 1996. The amortization
period was adjusted to 27 months, the length of the February, 1996
consulting agreement, for periods after February 1, 1996.
United Auburn Indian Community:
Certain payments to the United Auburn Indian Community (the "Auburn
Tribe") are being capitalized and will begin to be amortized, after
the casino is operational, over the period of the consulting
contract. See Note 3.
EARNINGS PER SHARE:
The computation of earnings per share is based on the weighted average
number of common shares and common share equivalents outstanding. Stock
warrants and options outstanding are considered common stock
equivalents. Fully diluted earnings per share are not presented because
the effect would be anti-dilutive or the dilutive effect is less than
3%.
In February, 1997, the Financial Accounting Standards Board issued
Financial Accounting Standards No. 128 ("SFAS 128"), Earnings Per
Share, which is effective for periods ending after December 15, 1997.
At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings
per share, which will be referred to as basic earnings per share, the
dilutive effect of stock options and warrants will be excluded. The
impact is expected to result in an increase in primary earnings per
share for the years ended July 31, 1997 and 1996 of $.02 and $.03,
respectively. The impact of SFAS 128 on the calculation of fully
diluted earnings per share for these years is not expected to be
material.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates.
8
<PAGE> 34
AMERICAN VANTAGE COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JULY 31, 1997 AND 1996
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED):
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Cash and cash equivalents, receivables and accounts payable are carried
at amounts that approximate their fair values.
2. PROPERTY AND EQUIPMENT:
Property and equipment is comprised of:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Furniture, fixtures and office equipment $181,000 $146,000
Leasehold improvements 137,000 130,000
-------- --------
318,000 276,000
Less accumulated depreciation 106,000 62,000
-------- --------
$212,000 $214,000
======== ========
</TABLE>
3. INDIAN GAMING OPERATIONS:
TABLE MOUNTAIN CASINO & BINGO:
The Company has a consulting agreement with the Table Mountain Tribe for
the Table Mountain Casino.
On February 1, 1996, the Company signed a new consulting agreement with
the Table Mountain Tribe for the Table Mountain Casino in Friant,
California. The agreement has a duration of 27 months, and provides
that the Company would receive a base monthly consulting fee of
$90,000, plus an additional $90,000 for each increment of $500,000 or
portion thereof, of casino net income in excess of the first $1.5
million of net income from casino operations. Additionally, effective
February 1, 1996, the Company and the Tribe signed a termination
agreement of the previous agreement. The termination agreement provides
that a monthly payment of $350,000 will be paid to the Company for a
term of 48 months. If net income from casino operations is below
$1,000,000 in any month, the termination agreement provides for
deferral of the monthly payment up to 12 months at which time the
payment is forgiven.
The consulting agreement in effect prior to February 1, 1996 provided for
consulting fees equal to 35% of the casino's net income before
consulting fees. For the period from June 19, 1995 to February 1, 1996,
the Company paid a concession to the Tribe equal to 7% of the casino's
net income before consulting fees. The concession for the year ended
July 31, 1996 totaled $1,276,000. Consulting fee revenue is reported
net of the concession to the Tribe.
9
<PAGE> 35
AMERICAN VANTAGE COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JULY 31, 1997 AND 1996
3. INDIAN GAMING OPERATIONS (CONTINUED):
TABLE MOUNTAIN CASINO & BINGO (CONTINUED):
In June 1997, the consulting agreement was amended, retroactive to May 1,
1997, to provide a revised consulting fee schedule. The revised
schedule provides for a base monthly consulting fee of $60,000, plus
additional fees of $50,000 to $100,000 for increments of $225,000 to
$500,000 or portion thereof, of monthly casino net income in excess of
the first $1.5 million of net income from casino operations.
The agreement ends May 1998.
The Company will also continue to receive a monthly payment of $350,000
in accordance with the terms of the termination agreement signed
February 1, 1996. These payments will continue through January, 2000.
The Company is obligated to make advances to the casino in certain
circumstances, mainly for the acquisition of capital assets which
cannot be acquired using the casino's operating cash surplus.
Included in consulting fee and other receivables at July 31, 1997 and
1996 is $-0- and $110,000, respectively, due from the casino.
Accumulated amortization of consulting agreement acquisition costs
totaled $476,000 and $380,000 at July 31, 1997 and 1996, respectively.
UNITED AUBURN INDIAN COMMUNITY:
In March 1996, the Company formed a joint venture with the Table Mountain
Tribe to provide consulting services to the United Auburn Indian
Community. The joint venture will assist in the development of a Class
II casino to be built and owned by the Auburn Tribe near Sacramento,
California. The joint venture will also train tribal members in
operating the casino. The Company has an 80% interest in the joint
venture.
10
<PAGE> 36
AMERICAN VANTAGE COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JULY 31, 1997 AND 1996
3. INDIAN GAMING OPERATIONS (CONTINUED):
UNITED AUBURN INDIAN COMMUNITY (CONTINUED):
Compensation to the joint venture for the consulting agreement is
structured as a base consulting fee of $150,000 per month, with
additional fees of $37,500 paid for each increment of $250,000 of net
income between $1,000,000 and $3,000,000, and $31,250 paid for each
increment of $250,000 of net income over $3,000,000. The five-year term
of the agreement will commence when the casino becomes operational.
The joint venture is committed to provide the Auburn Tribe capital for
land acquisition, pre-development costs, and tribal needs. The Auburn
Tribe is in the process of acquiring land for the casino. After its
acquisition, subject to the consent of the Secretary of the Interior,
the land will be placed into trust by the Bureau of Indian Affairs, a
process which will take an undetermined amount of time. At the time the
land is placed into trust, a one-time fee of $125,000 will be paid by
the joint venture to the Auburn Tribe. The Auburn Tribe will also
receive options to acquire 150,000 shares of American Vantage
Companies' common stock at the then-current market price. In the
interim, a monthly payment of $22,500 will be made by the joint venture
to the Auburn Tribe until the gaming facility is operational. The
payments are reported in the accompanying consolidated balance sheets
as consulting agreement acquisition costs. At July 31, 1997 and 1996,
approximately $324,000 and $108,000, respectively, had been
capitalized.
Amounts advanced to the Auburn Tribe for pre-development costs, land
acquisition and related costs, including land option costs, and casino
construction costs will begin to be repaid with interest after the
casino begins operation. Advances to the Auburn Tribe by the Company at
July 31, 1997 and 1996 totaled approximately $263,800 and $113,000,
respectively, and are reported as deposits and other in the
accompanying consolidated balance sheets.
4. SHAREHOLDERS' EQUITY:
PREFERRED STOCK:
The Board of Directors has the authority to issue the preferred stock,
the terms of which (including, without limitation, dividend rates,
conversion rights, voting rights, terms of redemption and liquidation
preferences) may be fixed by the Board at its sole discretion. The
holders of the Company's common stock will not be entitled to vote upon
such matters. No shares of preferred stock of any series are
outstanding and the Board of Directors has no present intention to
issue any such shares. Shares of preferred stock issued in the future
could have conversion rights, which may result in the issuance of
additional shares of common stock, which could dilute the interest of
the holders of common stock. Such shares could also have voting rights
and liquidation preferences which are senior to the rights and
preferences of the common stock. Additionally, such shares could have
dividend, redemption or other restrictive provisions.
11
<PAGE> 37
AMERICAN VANTAGE COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JULY 31, 1997 AND 1996
4. SHAREHOLDERS' EQUITY (CONTINUED):
WARRANTS:
In July, 1991, the Company sold shares of common stock together with
warrants to purchase additional common stock shares. On June 27, 1997,
the Board of Directors granted an extension of the exercise period of
the remaining 972,222 warrants to July, 1999 and increased the exercise
price per share to $.90.
STOCK OPTION PLANS:
Prior to 1997, the Company's shareholders approved the creation of an
Officers' Stock Option Plan and an Employees' Stock Option Plan. Under
the Officers' Stock Option Plan 1,500,000 shares of the Company's
common stock are reserved for issuance to Company officers. The
Employees' Stock Option Plan provides for 2,500,000 shares of common
stock which may be issued to key employees, including officers. In
1997, the Company's shareholders approved the creation of the 1996
Stock Option Plan which reserves an additional 2,500,000 shares of the
Company's common stock for issuance to employees, officers and
directors of the Company and others who are involved in the continuing
development and success of the Company or its subsidiaries. The
options, under all plans, are granted at not less than 100% of the
market value of the Company's common stock on the date of grant.
The following is a summary of activity of outstanding stock options under
the Officers' Stock Option Plan:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
---------------- ----------------
<S> <C> <C> <C>
Balance, July 31, 1995 1,031,266 $ 0.47
---------------- ----------------
Balance, July 31, 1996 1,031,266 $ 0.47
Exercised (500,000) 0.25
---------------- ----------------
Balance, July 31, 1997 531,266 $ 0.68
================ ================
Exercisable, July 31, 1997 531,266 $ 0.68
================ ================
</TABLE>
12
<PAGE> 38
AMERICAN VANTAGE COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JULY 31, 1997 AND 1996
4. SHAREHOLDERS' EQUITY (CONTINUED):
STOCK OPTION PLANS (CONTINUED):
The following is a summary of information about the Officers' Stock
Option Plan options outstanding at July 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------------------------------- ------------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- ---------------- ---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.58-0.76 531,266 2.7 $ 0.68 531,266 $ 0.68
================ ================ ================ ================ ================ ================
</TABLE>
Activity of the Employees' Stock Option Plan is summarized as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
---------------- ----------------
<S> <C> <C> <C>
Balance, July 31, 1995 1,508,734 $ 0.72
Granted 800,000 1.75
Canceled (100,000) 0.69
---------------- ----------------
Balance, July 31, 1996 2,208,734 1.10
Granted 800,000 1.36
Canceled (820,000) 1.72
---------------- ----------------
Balance, July 31, 1997 2,188,734 $ 0.96
================ ================
Exercisable, July 31, 1997 2,012,734 $ 0.98
================ ================
</TABLE>
13
<PAGE> 39
AMERICAN VANTAGE COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JULY 31, 1997 AND 1996
4. SHAREHOLDERS' EQUITY (CONTINUED):
STOCK OPTION PLANS (CONTINUED):
The following is a summary of information about the Employees' Stock
Option Plan options outstanding at July 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------------------------------- ------------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- ---------------- ---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.53-0.76 1,388,734 3.3 $ 0.73 1,212,734 $ 0.73
1.25-1.38 800,000 4.0 1.36 800,000 1.36
- ---------------- ---------------- ---------------- ---------------- ---------------- ----------------
$ 0.53-1.38 2,188,734 3.6 $ 0.96 2,012,734 $ 0.98
================ ================ ================ ================ ================ ================
</TABLE>
No options were granted under the 1996 Stock Option Plan.
OTHER OPTIONS GRANTED:
Other options were granted to outside members of the Board of Directors
and to the Table Mountain Tribe. The options were granted at the market
value of the Company's common stock at the date of grant. Activity of
other options granted is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
---------------- ----------------
<S> <C> <C> <C>
Balance, July 31, 1995 250,000 $ 0.60
Granted 165,000 1.75
---------------- ----------------
Balance, July 31, 1996 415,000 1.06
Granted 115,000 1.25
Canceled (127,500) 1.63
---------------- ----------------
Balance, July 31, 1997 402,500 $ 0.93
================ ================
Exercisable, July 31, 1997 392,500 $ 0.94
================ ================
</TABLE>
14
<PAGE> 40
AMERICAN VANTAGE COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JULY 31, 1997 AND 1996
4. SHAREHOLDERS' EQUITY (CONTINUED):
OTHER OPTIONS GRANTED (CONTINUED):
The following is a summary of information about other options outstanding
at July 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------------------------------- ------------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- ---------------- ---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.53-0.69 237,500 1.6 $ 0.61 227,500 $ 0.61
1.25 115,000 4.0 1.25 115,000 1.25
1.75 50,000 3.0 1.75 50,000 1.75
- ---------------- ---------------- ---------------- ---------------- ---------------- ----------------
$ 0.53-1.75 402,500 2.5 $ 0.93 392,500 $ 0.94
================ ================ ================ ================ ================ ================
</TABLE>
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 - Accounting for Stock-Based Compensation
("SFAS 123"), which provides that companies may elect to account for
employee stock options using a fair value-based method or continue to
apply the intrinsic value-based method prescribed by Accounting
Principals Board Opinion No. 25 ("APB 25").
Under the fair value-based method prescribed by SFAS 123, all employee
stock option grants are considered compensatory. Compensation cost is
measured at the date of grant based on the estimated fair value of the
options determined using an option pricing model. The model takes into
account the stock price at the grant date, the exercise price, the
expected life of the option, the volatility of the stock, expected
dividends on the stock and the risk-free interest rate over the
expected life of the option. Under APB 25, generally only stock options
that have intrinsic value at the date of grant are considered
compensatory. Intrinsic value represents the excess, if any, of the
market price of the stock at the grant date over the exercise price of
the options.
As permitted by SFAS 123, the Company accounts for these plans under APB
25, under which no compensation cost has been recognized.
15
<PAGE> 41
AMERICAN VANTAGE COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JULY 31, 1997 AND 1996
4. SHAREHOLDERS' EQUITY (CONTINUED):
OTHER OPTIONS GRANTED (CONTINUED):
The following table discloses the Company's proforma net income and net
income per share assuming compensation cost for employee stock options
and warrants had been determined using the fair value-based method
prescribed by SFAS 123.
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
<S> <C> <C>
Net income:
As reported $ 4,468,000 $ 3,796,000
Proforma 4,454,000 3,085,000
Earnings per share:
As reported 0.28 0.23
Proforma 0.28 0.19
</TABLE>
The fair value of each award under the stock option plans is estimated on
the date of grant using the Black-Scholes option pricing model. The
following assumptions were used to estimate the fair value of the
options and warrants with extension of exercise periods:
<TABLE>
<CAPTION>
1997 1996
------------------- ----------------
EMPLOYEE STOCK EMPLOYEE
OPTION PLAN, STOCK OPTION
OTHER OPTIONS PLAN AND
AND WARRANTS OTHER OPTIONS
------------------- ----------------
<S> <C> <C>
Expected stock price volatility 83.4% and 97.8% 98.9%
Expected option/warrant lives 2 and 5 5
Expected dividend yield -- --
Risk-free interest rates 6.2% and 6.3% 5.9%
Weighted-average fair value of
warrants/options granted during year $ 0.56 and 0.94 $ 1.34
</TABLE>
Because SFAS 123 is not applicable to options granted prior to January 1,
1995, the compensation cost reflected in the proforma amounts shown
above may not be representative of that to be expected in future years.
16
<PAGE> 42
AMERICAN VANTAGE COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JULY 31, 1997 AND 1996
5. INCOME TAXES:
The income tax expense for 1997 and 1996 differs from the amount of
income tax determined by applying the applicable U.S. statutory federal
income tax rate to pre-tax income as a result of the following
differences:
<TABLE>
<CAPTION>
1997 % 1996 %
---------------- ------ ---------------- -----
<S> <C> <C> <C> <C>
Statutory federal tax rate $ 2,415,000 34 $ 2,242,000 34
Utilization of net operating losses -- -- (299,000) (5)
Change in net deferred tax assets -- -- 374,000 6
State income tax, net of federal benefit 275,000 4 306,000 5
Non-deductible NIGC civil fine -- -- 170,000 2
Utilization of capital loss carryforward (60,000) (1) -- --
Other 5,000 -- 4,000 --
---------------- ------ ---------------- -----
Effective tax expense $ 2,635,000 37 $ 2,797,000 42
================ ====== ================ =====
</TABLE>
6. SEGMENT INFORMATION:
Revenues, operating income (loss) (excluding other income and expense and
minority interests), identifiable assets, capital expenditures, and
depreciation and amortization are as follows:
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
<S> <C> <C>
Revenues:
Casino consulting $ 9,050,000 $ 9,641,000
================ ================
Operating income (loss):
Casino consulting $ 7,358,000 $ 7,382,000
Corporate (1,182,000) (891,000)
---------------- ----------------
$ 6,176,000 $ 6,491,000
================ ================
Identifiable assets:
Casino consulting $ 15,768,000 $ 13,136,000
Death care 3,603,000 --
Corporate 1,201,000 500,000
---------------- ----------------
$ 20,572,000 $ 13,636,000
================ ================
Capital expenditures:
Death care $ 3,603,000 $ --
Corporate 46,000 156,000
---------------- ----------------
$ 3,649,000 $ 156,000
================ ================
Depreciation and amortization:
Casino consulting $ 95,000 $ 76,000
Corporate 49,000 35,000
---------------- ----------------
$ 144,000 $ 111,000
================ ================
</TABLE>
17
<PAGE> 43
AMERICAN VANTAGE COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JULY 31, 1997 AND 1996
6. SEGMENT INFORMATION (CONTINUED):
There were no intersegment sales during 1997 and 1996.
7. FORMATION OF NEW SUBSIDIARY:
In September, 1996, the Company formed a new subsidiary, G & L
Acquisition Corp. ("G & L"). G & L will pursue business opportunities
involving the establishment or acquisition of a California card room, a
gaming business located on a ship which sails to international waters
from home ports in the United States or elsewhere and/or a leisure
business ("Target Business"). The Company owns approximately 64% of the
outstanding shares of G & L.
G & L sold additional shares of its common stock through a private
placement to "accredited investors" as such term is defined in
Regulation D under the Securities Act of 1933. The private placement
resulted in the sale of 1,992,000 shares at a price of $1.55 per share.
The net proceeds from the sale, after the costs of the offering,
totaled approximately $2,625,000. In the event G & L does not affect
the acquisition or establishment of a Target Business within 18 months
from the closing of the offering, January 21, 1997, the remaining net
proceeds from the offering will be returned to the investors in the
private placement.
The Company recorded the excess of its equity in net assets of G & L over
the cost as capital in excess of par in the accompanying consolidated
financial statements.
At July 31, 1997, G & L had $2,684,000 of cash and cash equivalents,
which is reported as restricted cash in the accompanying consolidated
balance sheet and can only be used for the purposes specified
previously.
8. LAND TRANSACTIONS:
In October, 1996, the Company purchased approximately 162 acres of land
in Las Vegas, Nevada. In connection with the purchase, the Company
granted an option to the seller of the land to repurchase the land. The
option holder exercised the option in February, 1997 and the Company
recognized a gain of approximately $182,000.
In May, 1997, the Company purchased approximately 40 acres of land in
North Las Vegas, Nevada for approximately $3,500,000. The Company
intends to begin development of the property as a funeral home and
cemetery during the year ending July 31, 1998. The estimated additional
cost to complete the project is approximately $6,000,000. In connection
with the project, the Company obtained a $4,000,000 loan commitment
from a bank to provide temporary and permanent financing for the
construction and development of the project. Additional funds required
to construct and develop the project will be provided from cash on
hand, operations, additional financing or a combination of all three
sources. See Note 9.
18
<PAGE> 44
AMERICAN VANTAGE COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JULY 31, 1997 AND 1996
9. COMMITMENTS AND CONTINGENCIES:
a) COMMITMENTS:
1) Operating leases:
The Company leases automobiles and office space under operating
leases expiring in various years through 2001.
Minimum future rental payments under non-cancelable operating
leases having remaining terms in excess of one year as of July
31, 1997 for each of the next five years are:
<TABLE>
<CAPTION>
YEAR AMOUNT
------------------ ----------------
<S> <C> <C>
1998 $ 146,000
1999 153,000
2000 120,000
2001 86,000
2002 --
----------------
$ 505,000
================
</TABLE>
Lease expense was $163,000 and $79,000 for the years ended July
31, 1997 and 1996, respectively.
2) Line of credit:
At July 31, 1997, the Company had revolving lines of credit
totaling $2,000,000 with two banks. One line for $1,000,000
expires in December, 1997 and bears interest at 2.5% above a
reference prime rate. Certificates of deposit totaling
$500,000 collateralize the line. The other $1,000,000 line of
credit is unsecured, expires in November, 1997 and bears
interest at 1% above an indexed prime rate. At July 31, 1997,
no funds were outstanding on the lines of credit.
3) Construction loan commitment:
The Company has a construction loan commitment from a financial
institution to provide temporary and permanent financing for
up to $4,000,000 of the costs to develop and construct the
planned funeral home and cemetery. Interest on the
construction loan will be charged at 1% above the prime rate
on funds drawn on the loan. Upon completion of the project,
the financial institution has committed to provide a seven
year permanent loan with interest at 3% above an interest rate
index, which is based on United States Treasury Securities
rates.
19
<PAGE> 45
AMERICAN VANTAGE COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JULY 31, 1997 AND 1996
9. COMMITMENTS AND CONTINGENCIES (CONTINUED):
b) CONCENTRATIONS OF CREDIT RISK:
The Company's cash, cash equivalents and restricted cash are on
deposit with two financial institutions which are FDIC insured on
amounts up to $100,000.
Virtually all the Company's revenues and related receivables are
derived from the consulting agreement with the Table Mountain
Casino & Bingo. Generally, these receivables are unsecured.
c) LITIGATION:
AMERICAN VANTAGE COMPANIES:
On July 15, 1994, the Chairman of the National Indian Gaming
Commission ("NIGC") issued a Notice of Violation and a separate
Notice to Show Cause to the Company. The Notice of Violation
charged that the Company was in violation of certain provisions of
the Indian Gaming Regulatory Act ("IGRA") and the NIGC's
regulations, in that the Company had allegedly; (1) engaged in
management of the Table Mountain Casino & Bingo without an
approved management contract beginning on November 1, 1990; and
(2) operated illegal video gaming devices and house-banked
blackjack games without a Class III gaming compact with the State
of California.
On February 1, 1996, the Company entered into a settlement agreement
with NIGC. The settlement agreement resolved all issues associated
with the Notice of Violation and the Notice to Show Cause.
In the settlement, the NIGC agreed to fully withdraw any and all
allegations, charges and claims against the Company. In turn, the
Company, without admitting or denying the NIGC allegations, agreed
to pay a civil fine of $500,000, and to terminate its 1993 amended
agreement with the Table Mountain Tribe. On February 1, 1996, the
Company signed a new consulting agreement and also signed a
termination agreement of the previous agreement with the Table
Mountain Tribe. See Note 3.
TABLE MOUNTAIN CASINO:
In 1992, the National Indian Gaming Commission promulgated
regulations stating that Indian casinos could not offer certain
games, including electronic gaming machines such as the Table
Mountain Tribe's video pull tab gaming devices, without state
approval under tribal-state compacts. Several tribes sought a
compact to engage in full casino gaming, however, the State of
California refused to allow certain games.
20
<PAGE> 46
AMERICAN VANTAGE COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JULY 31, 1997 AND 1996
9. COMMITMENTS AND CONTINGENCIES (CONTINUED):
c) LITIGATION (CONTINUED):
TABLE MOUNTAIN CASINO (CONTINUED):
In May, 1992, the Tribe and other California Indian tribes filed a
lawsuit in Federal Court against the State of California and its
Governor over the scope of gaming permissible on Indian land,
captioned as Rumsey v. Wilson. In November, 1994 , the U.S. Court
of Appeals for the Ninth Circuit held that the games are a proper
subject of negotiation only if they are allowed to the California
State Lottery in a Tribal State compact, and remanded the case to
the District Court for additional fact finding. The remanded issue
is whether California law permits the use of video gaming devices.
If the California State Lottery is permitted to use video gaming
devices, the tribes are entitled to seek arrangements for the use
of such devices. If California is not found to permit their use,
the tribes would not be so entitled under the Court of Appeals'
analysis. The U.S. Court remanded this issue to the District
Court.
On August 21, 1995, the Ninth Circuit issued an order requesting
further briefing by the parties on the relevance of a state court
decision entitled Western Telcon v. California State Lottery. In
Western Telcon, the issue was whether the State Lottery could
operate banked games and utilize slot machines. On June 24, 1996,
the California Supreme Court decided Western Telcon. The court
held that the California State Lottery could not "bank" games, but
it left open the possibility that certain types of electronic
devices could be used to play non-banked games, and cited with
approval the Lottery's use of on-line computers and video
terminals as consistent with the State Lottery Act.
On October 29, 1996, the Ninth Circuit issued an order finding that
the Western Telcon decision had no impact on its earlier opinion
in Rumsey. As a result, the Court reissued its opinion of August
11, 1996, which will have the effect of sending the Rumsey case
back to the District Court to determine whether the California
State Lottery uses electronic devices that constitute "slot
machines".
On December 30, 1996, several Tribal plaintiffs in the Rumsey case
filed a petition asking the U. S. Supreme court to review the
Ninth Circuit Court decision, which the Supreme Court rejected. In
June, 1997, the Supreme Court denied the petition, making final
the Ninth Circuit ruling sending the case back to the District
Court, where it is now pending.
In February, 1997, the U. S. Attorneys' offices in California issued
letters to the Indian Tribes in California ("Tribes") which
operate casinos using electronic gaming devices. The letters, in
essence, gave the Tribes until May 1, 1997 to reach a settlement
with the State of California over the types of games to be
included in a compact or unplug the machines in their casinos.
21
<PAGE> 47
AMERICAN VANTAGE COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JULY 31, 1997 AND 1996
9. COMMITMENTS AND CONTINGENCIES (CONTINUED):
c) LITIGATION (CONTINUED):
TABLE MOUNTAIN CASINO (CONTINUED):
The Table Mountain Tribe entered into an agreement with the U. S.
Attorney for the Eastern District of California in which the Tribe
agreed to abide by the deadline and the U. S. Attorney agreed to
consider extensions of the deadline if the Tribes showed "good
faith". On April 29, 1997, and again on July 3, 1997, the deadline
was extended until September 30, 1997. On September 30, 1997, the
U. S. Attorney for the Eastern District announced that the office
will defer enforcement action against tribes currently engaged in
uncompacted gaming pending (i) the completion of the ongoing
compact negotiations between the Pala Band of Mission Indians and
the State of California and (ii) the establishment of a framework
for future negotiations between the State of California and other
California Tribes, including those that presently are engaged in
gaming.
Negotiations for a model tribal-state compact between the State of
California and the California Tribes are continuing and the
parties are optimistic an agreement will be reached during the
year ending July 31, 1998.
Should the U. S. Attorneys' offices enforce compliance with their
letters or should the State of California be successful in its
legal actions, it could have an adverse effect on the Company's
business, because decreases in the Table Mountain Casino's net
income before consulting fees would decrease the Company's
consulting fee revenues.
d) EMPLOYMENT AGREEMENTS:
In July, 1995, the Company entered into employment agreements with
certain key executives which expire in 2002. The employment
agreements provide for, among other things, annual base
compensation, participation in bonus plans and life insurance. The
agreements also contain severance provisions which provide for
payments to the executives in the event of their termination after
a change in control, as defined. The severance provisions provide
for a compensation payment equal to 2.99 times the annual salary
paid to the executive at the time of the change of control, as
well as accelerated payment of accrued bonuses payable to the
executives under the Company's compensation policies and an
additional payment based on the number of stock options which the
key executives have not exercised within three months of their
termination of employment. Aggregate annual salaries guaranteed by
the agreements are $675,000. At July 31, 1997, the estimated
amount that would have been payable as severance compensation
under the agreements to these executives based on compensation and
stock options was $2,503,000.
22
<PAGE> 48
AMERICAN VANTAGE COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JULY 31, 1997 AND 1996
10. RETIREMENT PLAN:
All of the Company's employees participate in a simplified employee
pension plan. Employer contributions to the Plan are made on a
discretionary basis and were $93,000 and $115,000 for the years ended
July 31, 1997 and 1996, respectively.
23
<PAGE> 49
EXHIBIT INDEX
Exhibit Description
------- -----------------------------------------
11.1 Schedule of Computation of Earnings Per Common
Share And Common Share Equivalent
21.1 Subsidiaries of the Registrant
23.1 Independent Auditors' Consent
27.1 Financial Data Schedule
<PAGE> 1
EXHIBIT 11.1
AMERICAN VANTAGE COMPANIES AND SUBSIDIARIES
SCHEDULE OF COMPUTATION OF EARNINGS PER COMMON SHARE
AND COMMON SHARE EQUIVALENT
YEARS ENDED JULY 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
PRIMARY:
Net income ............................................... $ 4,468,000 $ 3,796,000
=========== ===========
Weighted average number of common shares
outstanding during the period .......................... 14,868,000 14,368,000
Add:
Common stock equivalents (determined
using the "treasury stock" method) representing
shares issuable upon exercise of options
and warrants that are in the money ..................... 1,187,000 1,835,000
----------- -----------
Weighted average number of shares used in
calculation of primary income per share ................ 16,055,000 16,203,000
=========== ===========
PRIMARY EARNINGS PER COMMON SHARE
AND COMMON SHARE EQUIVALENT .............................. $ 0.28 $ 0.23
=========== ===========
FULLY DILUTED
Net income ............................................... $ 4,468,000 $ 3,796,000
=========== ===========
Weighted average number of common shares
outstanding during the year ............................ 14,868,000 14,368,000
Add:
Common stock equivalents (determined
using the "treasury stock" method) representing
shares issuable upon exercise of options
and warrants that are in the money ..................... 1,187,000 956,000
----------- -----------
Weighted average number of shares used in
calculation of fully diluted per share ................ 16,055,000 15,324,000
=========== ===========
FULLY DILUTED EARNINGS PER COMMON SHARE
AND COMMON SHARE EQUIVALENT .............................. $ 0.28 $ 0.25
=========== ===========
NOTE: Fully diluted earnings per common share and common share
equivalent is not presented in the Consolidated Statements of Income
because the effect is antidilutive or the dilutive effect is less than three percent.
</TABLE>
<PAGE> 1
EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
State of Percentage
Name Incorporation Owned
- ---- ------------- -----------
<S> <C> <C>
American Casino Enterprises, Inc. Nevada 100%
American Care Group, Inc. Nevada 100%
Diversy Enterprises, Inc. Nevada 100%
Fowler Card Club, Inc. California 100%
Fuel and Air Service Technology, Inc. Nevada 100%
G & L Acquisition Corp. Nevada 64%
Las Vegas Enterprises, Inc. Nevada 100%
Millerton Games, Inc. California 100%
Motel Development, Inc. Nevada 100%
Nevada Publishing, Inc. Nevada 100%
Royal Reservations, Inc. Nevada 100%
The Reservation Connection Nevada 100%
Trinidad Management, Inc. Nevada 100%
</TABLE>
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
American Vantage Companies
We consent to incorporation by reference in registration statement No.
333-00905 on Form S-8 of American Vantage Companies (formerly American Casino
Enterprises, Inc.) of our report dated October 2, 1997, relating to the
consolidated balance sheets of American Vantage Companies and Subsidiaries as
of July 31, 1997 and 1996, and the related consolidated statements of income,
changes in shareholders' equity, and cash flows for the years then ended, which
report appears in the July 31, 1997 annual report on Form 10-KSB of American
Vantage Companies.
Las Vegas, Nevada
October 29, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JUL-31-1997
<EXCHANGE-RATE> 1
<CASH> 12,588,000
<SECURITIES> 0
<RECEIVABLES> 191,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 13,404,000
<PP&E> 212,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 20,572,000
<CURRENT-LIABILITIES> 157,000
<BONDS> 0
0
0
<COMMON> 149,000
<OTHER-SE> 19,292,000
<TOTAL-LIABILITY-AND-EQUITY> 20,572,000
<SALES> 0
<TOTAL-REVENUES> 9,050,000
<CGS> 0
<TOTAL-COSTS> 2,874,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,103,000
<INCOME-TAX> 2,635,000
<INCOME-CONTINUING> 4,468,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,468,000
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0
</TABLE>
