<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1998
Commission File No. 0-10061
AMERICAN VANTAGE COMPANIES
(Exact name of small business issuer as specified in its charter)
Nevada 04-2709807
(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) No.)
6787 W. Tropicana, Ste 200, Las Vegas, Nevada 89103
(Address of Principal Executive Offices) (Zip Code)
(702) 227-9800
(Registrant's Telephone Number, including Area Code)
N/A
(Former Name, Former Address & Former Fiscal Year, if changed since last report)
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: Common Stock, $.01 Par Value,
15,109,363 shares at June 10, 1998.
Transitional Small Business Disclosure Format Yes No X
<PAGE> 2
PART 1
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN VANTAGE COMPANIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 1998 AND JULY 31, 1997
<TABLE>
<CAPTION>
APRIL 30, JULY 31,
1998 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $14,781,000 $12,588,000
Consulting fee and other receivables 162,000 191,000
Refundable income taxes 253,000 555,000
Deferred tax asset 2,000 2,000
Prepaid expenses 63,000 68,000
----------- -----------
Total current assets 15,261,000 13,404,000
----------- -----------
Property and equipment, net 192,000 212,000
----------- -----------
Land held for development 3,706,000 3,603,000
----------- -----------
Land held for investment or development 1,351,000 --
----------- -----------
Other assets:
Restricted cash 2,737,000 2,684,000
Consulting agreement acquisition costs, net -- 396,000
Deposits and other 9,000 273,000
----------- -----------
2,746,000 3,353,000
----------- -----------
$23,256,000 $20,572,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 226,000 $ 56,000
Income taxes payable 32,000 --
Accrued expenses 115,000 101,000
----------- -----------
Total current liabilities 373,000 157,000
----------- -----------
Minority interest in consolidated subsidiary 996,000 974,000
----------- -----------
Commitments -- --
Stockholders' equity:
Common stock, $.01 par; 30,000,000 shares
authorized; 15,114,363 and 14,867,958
shares issued and outstanding 152,000 149,000
Preferred stock, $.01 par; 10,000,000 shares
authorized; shares issued and outstanding - none -- --
Capital in excess of par 4,919,000 4,892,000
Retained earnings 16,816,000 14,400,000
----------- -----------
21,887,000 19,441,000
----------- -----------
$23,256,000 $20,572,000
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE> 3
AMERICAN VANTAGE COMPANIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED APRIL 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Revenues:
Casino consulting fees $ 1,995,000 $ 2,490,000
----------- -----------
Costs and expenses:
Casino consulting 692,000 588,000
Death care operations 8,000 --
General and administrative 359,000 249,000
Amortization and depreciation 36,000 37,000
Minority interest in net income of consolidated subsidiary 9,000 9,000
----------- -----------
1,104,000 883,000
----------- -----------
Income from operations 891,000 1,607,000
----------- -----------
Other income (expense):
Interest 247,000 236,000
Gain on sale of land held for investment or development -- 178,000
Miscellaneous -- --
----------- -----------
247,000 414,000
----------- -----------
Income before write-off of project costs and
advances and income taxes 1,138,000 2,021,000
----------- -----------
Write-off of project costs and advances -- --
----------- -----------
Income before income taxes 1,138,000 2,021,000
----------- -----------
Income tax expense:
Current:
State 68,000 117,000
Federal 372,000 695,000
Deferred:
State -- 7,000
Federal -- 40,000
----------- -----------
440,000 859,000
----------- -----------
Net income $ 698,000 $ 1,162,000
=========== ===========
Earnings per common share:
Basic $ 0.05 $ 0.08
=========== ===========
Diluted $ 0.04 $ 0.07
=========== ===========
Weighted average number of common shares
and common share equivalents:
Basic 15,133,000 14,868,000
Stock options and warrants 949,000 1,190,000
----------- -----------
Diluted 16,082,000 16,058,000
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE> 4
AMERICAN VANTAGE COMPANIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED APRIL 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Revenues:
Casino consulting fees $ 6,525,000 $ 6,930,000
----------- -----------
Costs and expenses:
Casino consulting 1,425,000 1,287,000
Death care operations 8,000 --
General and administrative 907,000 895,000
Amortization and depreciation 107,000 109,000
Minority interest in net income of consolidated subsidiary 23,000 9,000
----------- -----------
2,470,000 2,300,000
----------- -----------
Income from operations 4,055,000 4,630,000
----------- -----------
Other income (expense):
Interest 705,000 552,000
Gain on sale of land held for investment or development -- 178,000
Miscellaneous 10,000 --
----------- -----------
715,000 730,000
----------- -----------
Income before write-off of project costs and
advances and income taxes 4,770,000 5,360,000
----------- -----------
Write-off of project costs and advances 861,000 --
----------- -----------
Income before income taxes 3,909,000 5,360,000
----------- -----------
Income tax expense:
Current:
State 233,000 258,000
Federal 1,260,000 1,865,000
Deferred:
State -- --
Federal -- --
----------- -----------
1,493,000 2,123,000
----------- -----------
Net income $ 2,416,000 $ 3,237,000
=========== ===========
Earnings per common share:
Basic $ 0.16 $ 0.22
=========== ===========
Diluted $ 0.15 $ 0.20
=========== ===========
Weighted average number of common shares
and common share equivalents:
Basic 15,021,000 14,868,000
Stock options and warrants 1,055,000 1,132,000
----------- -----------
Diluted 16,076,000 16,000,000
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE> 5
AMERICAN VANTAGE COMPANIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED APRIL 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,416,000 $ 3,237,000
------------ ------------
Adjustments to reconcile net income to
Net cash provided (used) by operating activities:
Amortization and depreciation 107,000 109,000
Minority interest in net income of consolidated subsidiary 23,000 9,000
Changes in other assets and liabilities, net 1,140,000 (426,000)
------------ ------------
1,270,000 (308,000)
------------ ------------
Net cash provided (used) by operating activities 3,686,000 2,929,000
------------ ------------
Cash flows from investing activities:
Purchase of land held for investment or development (1,351,000) --
Land held for development, related costs (103,000) --
Purchase of property and equipment, net (16,000) (45,000)
------------ ------------
Net cash provided (used) by investing activities (1,470,000) (45,000)
------------ ------------
Cash flows from financing activities:
Net proceeds from issuance of common stock
of consolidated subsidiary -- 2,627,000
Increase in cash restricted as to use (53,000) (2,657,000)
Investment in consolidated subsidiary -- (112,000)
Proceeds from long-term debt -- 1,673,000
Repayment of long-term debt -- (1,673,000)
Repurchase of common stock (51,000) --
Proceeds from issuance of common stock 81,000 125,000
------------ ------------
Net cash provided (used) by financing activities (23,000) (17,000)
------------ ------------
Net increase in cash and cash equivalents 2,193,000 2,867,000
Cash and cash equivalents, at beginning of period 12,588,000 12,578,000
------------ ------------
Cash and cash equivalents, at end of period $ 14,781,000 $ 15,445,000
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for state and federal income taxes $ 1,158,000 $ 2,050,000
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE> 6
AMERICAN VANTAGE COMPANIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED JULY 31, 1997 AND NINE MONTHS
ENDED APRIL 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL
IN EXCESS RETAINED
SHARES DOLLARS OF PAR EARNINGS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
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 for the year 4,468,000
----------- ----------- ----------- -----------
Balance, July 31, 1997 14,867,958 149,000 4,892,000 14,400,000
----------- ----------- ----------- -----------
Issuance of shares 277,905 3,000 78,000
Shares repurchased and retired (31,500) (51,000)
Net income for the period 2,416,000
----------- ----------- ----------- -----------
Balance, April 30, 1998 15,114,363 $ 152,000 $ 4,919,000 $16,816,000
=========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE> 7
AMERICAN VANTAGE COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED APRIL 30, 1998
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
As permitted by the Securities and Exchange Commission (SEC) under Rule 10-01 of
Regulation S-X, the accompanying consolidated financial statements and notes
have been condensed and, therefore, do not contain all disclosures required by
generally accepted accounting principles. The consolidated financial statements
include the accounts of American Vantage Companies and its wholly and
majority-owned subsidiaries (the "Company"). All significant intercompany
accounts and transactions have been eliminated. For additional disclosures,
refer to the Annual Report on Form 10-KSB of the Company for the year ended July
31, 1997.
In the opinion of the Company, the accompanying unaudited consolidated financial
statements contain all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results for the interim
periods.
Certain amounts in the interim period financial statements for Fiscal 1997 have
been reclassified for comparability with the current period presentation.
In February 1997, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 128, Earnings Per Share, which is effective for periods
ending after December 15, 1997. Accordingly, the computations of basic and
diluted earnings per share have been computed in accordance with this statement.
Prior periods have been adjusted to conform with the provisions of this
statement. The computations of basic earnings per common share are based on the
weighted average number of common shares outstanding. The computations of
diluted earnings per share are based on the weighted average number of common
shares and common share equivalents outstanding. Stock purchase warrants and
options outstanding and exercisable at or below the market price are considered
common share equivalents.
Results of the interim periods are not necessarily indicative of those to be
expected for the full year.
NOTE 2 - CONSULTING AGREEMENTS
TABLE MOUNTAIN CASINO & BINGO
The Company has a consulting agreement with the Table Mountain Tribe for the
Table Mountain Casino & Bingo. On February 1, 1996, the Company signed a new
consulting agreement with the Table Mountain Band of Indians (the "Table
Mountain Tribe") for the Table Mountain Casino & Bingo (the "Casino") in Friant,
California. The new consulting agreement provided 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 monthly 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 Table Mountain Tribe signed a
termination agreement of the March 1993 agreement under which a monthly payment
of $350,000 will be paid to the Company through January 2000, subject to meeting
certain thresholds.
7
<PAGE> 8
AMERICAN VANTAGE COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED APRIL 30, 1998
(UNAUDITED)
In June 1997, the consulting agreement was amended, retroactive to May 1, 1997,
to provide a revised consulting fee schedule. The revised schedule provided 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. A second amendment to the consulting agreement was signed in
November 1997. The consulting fee schedule was adjusted, effective February 1,
1998, to provide for a base fee of $50,000 and additional fees of $45,000 to
$60,000 for increments of $250,000 to $500,000 or portion thereof, of monthly
Casino net income in excess of $1.5 million of net income from casino
operations. The term of the agreement was extended to June 30, 2000.
The Company will continue to receive a monthly payment of $350,000 in accordance
with terms of the termination agreement signed in February 1996. These payments
will continue to January 2000.
The Company is obligated during the period of the consulting agreement, under
certain circumstances, to loan the Table Mountain Tribe up to $4,000,000. If the
loan is made, it will be repaid, with interest, over the remaining period of the
consulting agreement.
UNITED AUBURN INDIAN COMMUNITY
In February 1996, the Company formed a joint venture with the Table Mountain
Tribe to provide consulting services to the United Auburn Indian Community (the
"Auburn Tribe"). The purpose of the joint venture was to assist in the
development of a casino to be built and owned by the Auburn Tribe near
Sacramento, California. The Company had an 80% interest in the joint venture.
During the period from February 1996 through January 1998, the joint venture
provided monthly payments of $22,500 to the Auburn Tribe for tribal needs. Also,
the joint venture paid for predevelopment costs incurred in the process of
acquiring land, which would be placed into trust for the tribe. The land was to
be utilized for the casino site and other tribal uses.
In March 1998, Company management, believing the project could not be completed
in a time frame that was in the best interests of its shareholders, withdrew
with its joint venture partner, the Table Mountain Tribe, from the arrangement.
The joint venture and the Auburn Tribe in March 1998 signed an agreement
providing that under certain circumstances advances of $413,000 would be repaid
from the operations of the planned Auburn casino. The Company wrote off its
investment in the project and the advances made to the Auburn Tribe ($861,000)
in the second quarter of Fiscal 1998. The transaction is reported in the
consolidated statements of income as write-off of project costs and advances.
NOTE 3 - CONSULTING AGREEMENT ACQUISITION COSTS
Consulting agreement acquisition costs related to the Table Mountain Casino &
Bingo contract are amortized over a 27-month period that ended April 1998.
8
<PAGE> 9
AMERICAN VANTAGE COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED APRIL 30, 1998
(UNAUDITED)
NOTE 4 - G & L ACQUISITION CORP.
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 effect 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 the assets of G & L over the
cost as capital in excess of par in the accompanying consolidated financial
statements. At April 30, 1998 and July 31, 1997, G & L had $2,737,000 and
$2,684,000, respectively, of cash and cash equivalents, which are reported as
restricted cash in the accompanying consolidated balance sheet.
NOTE 5 - LITIGATION - 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.
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 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 in a Tribal State compact only if they are allowed to the
California State Lottery and remanded the case to the District Court for
additional fact finding. The remanded issue is whether California law permits
the State Lottery to operate slot machines. If the California State Lottery is
permitted to use slot machines, the tribes are entitled to seek agreements 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
9
<PAGE> 10
AMERICAN VANTAGE COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED APRIL 30, 1998
(UNAUDITED)
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.
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 would 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.
On March 6, 1998, the Governor of California announced the signing of a compact
with the Pala Band of Mission Indians to allow legal gaming on tribal lands. The
compact will permit electronic lottery devices in tribal casinos. On March 13,
1998, the Pala Compact was filed with the U.S. Secretary of the Interior (the
"Secretary") and, with certain amendments, such compact was approved by the
Secretary in April 1998.
Among other things, the Pala Compact limits the total number of electronic
lottery based machines to 19,900, which will be divided equally among the
approximately 100 federally recognized tribes in California. Although each tribe
is allocated only 199 electronic devices, those tribes choosing not to utilize
their allocation may license the machines to tribes wishing to accumulate more
than the initial per tribe allocation; however, the maximum number of electronic
devices that one tribe may operate is 975. Currently, the Table Mountain Casino
operates approximately 850 electronic devices.
The Table Mountain Tribe believes the table games operated at the Table Mountain
Casino are consistent with those permitted in California's card clubs. The
electronic lottery devices provided in the Pala Compact have not yet been
commercially produced or tested in an actual casino environment, but the
prototypes, that have been developed, appear to be competitive with the devices
now being used. Presently, there is no way to confirm whether the electronic
lottery devices provided for in the Pala
10
<PAGE> 11
Compact will produce an income stream consistent with those devices now being
played at the Table Mountain Casino. In the event the electronic lottery devices
do not produce an income stream consistent with that being experienced at the
Table Mountain Casino, the resulting decline in revenue and profits of the
Casino may have a materially adverse effect on the consulting fees earned by the
Company under its consulting agreement with the Tribe.
For those Tribes which elect to be bound by a form of the Pala Compact, a sixty
(60) day period from such election has been provided, during which
non-substantive changes to the compact may be negotiated. Class III games may
continue during such negotiations. However, after the compact is signed, such
operations must cease unless they are in conformity with those games permitted
under the compact. If the electronic lottery based devices described in the Pala
Compact are not available commercially, the Tribe may continue to operate
existing machines until lottery based devices become available, but in no event
longer than six (6) months after the compact becomes effective. Tribes
exercising this option may seek a ruling from the State as to whether the
electronic machines they operate are Class II or III. While such a ruling is
pending, a Tribe may continue to operate its existing games. The compact
contains provisions permitting amendment by mutual consent of the State and the
Tribe during its effective term. However, traditional slot machines would be
prohibited by California law unless future court decisions allow such games.
The Pala Compact also provides that employees of tribal casinos will be offered
California workers' compensation, unemployment insurance, disability insurance
and guaranteed the right to engage in collective bargaining activities. Patrons
of tribal casinos will have the right to require binding arbitration of player
disputes. A tribe entering into a compact must carry public liability insurance.
The Table Mountain Casino presently offers its employees workers' compensation,
unemployment and disability insurance coverage. It also provides public
liability insurance coverage.
Local communities, under the Pala Compact, will be given the right to have an
advisory vote on whether a Native American facility should be located within a
certain area. Although a negative vote will not result in preventing the
location of a gaming entity on a reservation, it may prompt negotiations for
different conditions in the compact for that area. Additionally, a tribe must
make arrangements for mitigation of environmental, police, fire, emergency or
other local services.
The Table Mountain Tribe has indicated to the Governor's Office that it is
willing to sign a similar compact covering its gaming operations. The Tribe's
Indian gaming legal counsel believes the U.S. Attorney will not take any action
against the Tribe as long as progress is being made in developing a compact
between the Table Mountain Tribe and the State of California.
NOTE 6 - STOCK REPURCHASE PROGRAM
In March 1998 the Board of Directors authorized the expenditure of up to
$2,000,000 to repurchase the Company's common stock. No deadline was established
for completion of the program. As of April 30, 1998, 31,500 shares of the
Company's common stock had been purchased under the program.
11
<PAGE> 12
AMERICAN VANTAGE COMPANIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED APRIL 30, 1998
(UNAUDITED)
NOTE 7 - YEAR 2000 COMPLIANCE
Currently many of the computer systems in use record years in a two-digit
format. These computer systems are unable to properly interpret dates beyond the
year 1999, which could lead to worldwide business disruptions in the processing
of information. The potential costs and uncertainties associated with this
problem will depend on many things, including the software, hardware and the
industry in which the company operates. This requires companies to coordinate
with other entities, with which they electronically interact, including
customers and suppliers.
The Company has evaluated its internal operating system and is working with
companies with which it transacts business to assess their efforts to comply
with the Year 2000 problem and the Company's resulting exposure. At this time,
it appears the aggregate cost to the Company relating to the problem will not be
material.
The Table Mountain Casino is presently undergoing the same process of evaluating
the impact of the Year 2000 problem. Although the financial impact to the
Casino, if any, is not known, it is not believed to be material.
12
<PAGE> 13
PART 1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
MATERIAL CHANGES IN RESULTS OF OPERATIONS
NINE MONTHS ENDED APRIL 30, 1998 VERSUS NINE MONTHS ENDED APRIL 30, 1997
REVENUES
Casino consulting fees in the nine months ended April 30, 1998 ("Fiscal 1998")
decreased 5.8% to $6,525,000 from the $6,930,000 recorded in the same period in
Fiscal 1997, 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
Table Mountain Tribe for the Table Mountain Casino. The new agreement provided
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
monthly 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 Table
Mountain Tribe signed a termination agreement of the March 1993 consulting
agreement under which a monthly payment of $350,000 will be paid to the Company
through January 2000, subject to meeting certain thresholds.
In June 1997, the consulting agreement was amended, retroactive to May 1, 1997,
to provide a revised consulting fee schedule. The revised schedule provided 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. A second amendment to the consulting agreement was signed in
November 1997. The consulting fee schedule was adjusted, effective February 1,
1998, to provide for a base fee of $50,000 and additional fees of $45,000 to
$60,000 for increments of $250,000 to $500,000 or portion thereof, of monthly
casino net income in excess of $1.5 million of net income from casino
operations. The term of the agreement was extended to June 30, 2000.
As a result of the November 1997 amendment of the consulting agreement,
consulting fee revenues will be approximately $845,000 lower in Fiscal 1998, if
operations of the Casino for the period from February 1, 1998 through July 31,
1998 are at the same level as in the comparable period in Fiscal 1997.
The Company will continue to receive a monthly payment of $350,000 in accordance
with terms of the termination agreement signed in February 1996. These payments
will continue to January 2000.
COSTS AND EXPENSES
Casino consulting expenses in the nine months ended April 30, 1998 increased to
$1,425,000, up 10.7%, from $1,287,000 in the comparable period in Fiscal 1997.
This increase is comprised principally of an increase in payroll costs and legal
expenses.
General and administrative expenses in the nine months ended April 30, 1998
increased by $12,000 or 1.3% from the comparable period of Fiscal 1997. The
increase resulted from increases in payroll costs, consulting fees and loan
commitment fees and decreases in insurance and corporate legal costs.
Amortization and depreciation was $107,000 and $109,000 in the nine months ended
April 30, 1998 and
13
<PAGE> 14
1997, respectively. Amortization is comprised of consulting agreement
acquisition costs, which were being amortized over a 27-month period, which
ended in April 1998.
OTHER OPERATIONAL ITEMS
Interest income from time deposits with financial institutions, totaled $705,000
and $552,000 in the nine months ended April 30, 1998 and 1997, respectively.
During the second quarter of Fiscal 1998, the Company charged operations
$861,000 for the write-off of its investment in the Auburn project costs and
advances related to the Auburn Tribe.
The Company recorded provisions of $233,000 and $258,000 for State of California
income taxes for the nine months ended April 30, 1998 and 1997, respectively.
Provisions of $1,260,000 and $1,865,000 were recorded for Federal income taxes
currently payable for the nine months ended April 30, 1998 and 1997,
respectively.
Net income was $2,416,000 and $3,237,000 for the nine months ended April 30,
1998 and 1997, respectively.
THREE MONTHS ENDED APRIL 30, 1998 VERSUS THREE MONTHS ENDED APRIL 30, 1997
REVENUES
Casino consulting fees from the Table Mountain Casino in the third quarter of
Fiscal 1998 were $495,000 less than in the third quarter of Fiscal 1997. The
decrease was a result of the lower consulting fee structure in the amended
consulting agreement, which became effective in February 1998.
COSTS AND EXPENSES
Casino consulting expenses increased to $692,000 in the third quarter of Fiscal
1998 from $588,000 in the third quarter of Fiscal 1997. This increase is
comprised principally of an increase in legal and consulting expenses partially
offset by a reduction in payroll costs.
General and administrative expenses were $359,000 for the third quarter of
Fiscal 1998 and $249,000 for the third quarter of Fiscal 1997. Expenses in the
third quarter of Fiscal 1997 were lower than normal due to the cancellation of
stock options previously granted to an investment banking company and the
resulting credit to third quarter expenses. Consulting and loan commitment fee
expenses increased in the third quarter of Fiscal 1998.
OTHER OPERATIONAL ITEMS
Interest income increased to $247,000 in the third quarter of Fiscal 1998 from
$236,000 in the third quarter of Fiscal 1997. The income is represented by
interest earned on the Company's bank deposits.
The Company recorded current state income taxes of $68,000 and current Federal
income taxes of $372,000 for the three months ended April 30, 1998 as compared
to current state income taxes of $117,000 and current Federal income taxes of
$695,000 for the same period in Fiscal 1997. Deferred taxes of $7,000 (state)
and $40,000 (Federal) were recorded in the third quarter of 1997.
Net income for the three months ended April 30, 1998 and 1997 was $698,000 and
$1,162,000, respectively.
LIQUIDITY AND CAPITAL RESOURCES AT APRIL 30, 1998 AND THE NINE MONTHS THEN ENDED
14
<PAGE> 15
At April 30, 1998, the Company had consolidated working capital of $14,888,000,
as compared with working capital of $13,247,000 at July 31, 1997. The change
resulted principally from a combination of increases of cash ($2,193,000),
income taxes payable ($32,000); accounts payable ($170,000) and accrued expenses
($14,000) and reductions in consulting fee and other receivables ($29,000),
refundable income taxes ($302,000), consulting agreement acquisition costs
($396,000), and deposits and other ($264,000).
During the nine months ended April 30, 1998, investing activities used
$1,470,000 as compared to $45,000 used by investing activities in the same
period in Fiscal 1997. The cash used in investing activities in Fiscal 1998 was
to acquire land held for investment or development, additional office furniture
and equipment and for capitalized costs related to the funeral home and cemetery
being developed by the Company.
Financing activities in the nine months ended April 30, 1998 were comprised of
the proceeds from the issuance of common stock ($81,000) and an increase in cash
restricted as to use ($53,000). The cash restricted as to use represents a
portion of the proceeds from the issuance of stock in G & L Acquisition Corp.
The increase resulted from interest earned on the funds held in escrow. In
February 1998, the Company acquired 20 acres of undeveloped land in N. Las
Vegas, Nevada for $1,375,000. The land is located near the site of the funeral
home and cemetery the Company is developing and will be held for future
development or sale.
At April 30, 1998, restricted cash of $2,737,000 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 effect 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 an amendment to the Table Mountain Casino consulting
agreement in November 1997. The amendment extends the consulting period to June
30, 2000. The agreement 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 Fiscal 1997, the Company purchased approximately 40 acres of land in N. Las
Vegas, Nevada for approximately $3,500,000. The Company is developing the
property as a funeral home and cemetery. The estimated cost to build the
project, including the acquisition of the land, ranges from $8,000,000 to
$12,000,000. In connection with the project, the Company has obtained a 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 bank 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, management anticipates that the property will
generate sufficient cash flow to maintain its operations independently.
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
15
<PAGE> 16
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 April 30, 1998, the Company had revolving lines of credit totaling $2,000,000
with two banks. One line for $1,000,000 expires in December 1998 and bears
interest at 2.5% above a reference prime rate. The line is collateralized by
certificates of deposit totaling $500,000. The other $1,000,000 line of credit
is unsecured, expires in November 1998 and bears interest at 1% above an indexed
prime (8.5% at April 30, 1998). At April 30, 1998, no funds were outstanding on
the lines of credit.
On March 6, 1998, the Governor of California announced the signing of a compact
with the Pala Band of Mission Indians to allow legal gaming on tribal lands. The
compact will permit electronic lottery devices in tribal casinos. On March 13,
1998, the Pala Compact was filed with the U.S. Secretary of the Interior (the
"Secretary") and, with certain amendments, such compact was approved by the
Secretary in April 1998.
Among other things, the Pala Compact limits the total number of electronic
lottery based machines to 19,900, which will be divided equally among the
approximately 100 federally recognized tribes in California. Although each tribe
is allocated only 199 electronic devices, those tribes choosing not to utilize
their allocation may license the machines to tribes wishing to accumulate more
than the initial per tribe allocation; however, the maximum number of electronic
devices that one tribe may operate is 975. Currently, the Table Mountain Casino
operates approximately 850 electronic devices.
The Table Mountain Tribe believes the table games operated at the Table Mountain
Casino are consistent with those permitted in California's card clubs. The
electronic lottery devices provided in the Pala Compact have not yet been
commercially produced or tested in an actual casino environment, but the
prototypes that have been developed, appear to be competitive with the devices
now being used. Presently, there is no way to confirm whether the electronic
lottery devices provided for in the Pala Compact will produce an income stream
consistent with those devices now being played at the Table Mountain Casino. In
the event, the electronic lottery devices do not produce an income stream
consistent with that being experienced at the Table Mountain Casino, the
resulting decline in revenue and profits of the Casino may have a materially
adverse effect on the consulting fees earned by the Company under its consulting
agreement with the Tribe.
The Table Mountain Tribe has indicated to the Governor's Office that it is
willing to sign a similar compact covering its gaming operations. The Tribe's
Indian gaming legal counsel believes the U.S. Attorney will not take action
against the Tribe as long as progress is being made in developing a compact
between the Table Mountain Tribe and the State of California. See Note 5 -
Litigation of Notes to Consolidated Financial Statements.
The Company has evaluated its internal operating system and is working with
companies with which it transacts business to assess their efforts to comply
with the Year 2000 problem and the Company's resulting exposure. At this time,
it appears the aggregate cost to the Company relating to the problem will not be
material. The Table Mountain Casino is presently undergoing the same process of
evaluating the impact of the Year 2000 problem. Although the financial impact to
the Casino, if any, is not known, it is not believed to be material.
The Company historically and currently has derived substantially all of its
revenues and income from services provided to the Table Mountain Tribe. The
Company is taking steps to diversify its business activities and is seeking
other opportunities to provide a means of obtaining other sources of revenues.
16
<PAGE> 17
Included in this Item 2, and in the Notes to the Consolidated Financial
Statements are certain forward-looking statements reflecting the Company's
current expectations. Although the Company believes that its expectations are
based on reasonable assumptions, there can be no assurance that the Company's
financial goals or expectations will be realized. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance, or achievements of the Company, or
industry results, to be materially different from future results, performance,
or achievements expressed or implied by such forward-looking statements.
Numerous factors may affect the Company's actual results and may cause results
to differ materially from those expressed in forward-looking statements made by
or on behalf of the Company. The Company assumes no obligation to update or
revise any such forward-looking statements or the factors listed below to
reflect events or circumstances that may arise after this report is filed, and
that may have an effect on the Company's overall performance.
17
<PAGE> 18
PART II
OTHER INFORMATION
Item 1. See Part I, Note 5 of Notes to Consolidated Financial Statements.
Item 5. Other Information
See Part I, Notes 4 and 5 of Notes to Consolidated
Financial Statements.
Item 4. Submission of Matters to a Vote of Security Holders
On April 27, 1998, the Company held an annual meeting of shareholders
to consider and vote upon (i) a proposal to elect Ronald J. Tassinari
and Audrey K. Tassinari as Class A Directors of the Company, and (ii)
to ratify the appointment of Bradshaw Smith & Co. as the Company's
independent auditors for the year ended July 31, 1998.
The number of votes cast for, against and to withhold authority to vote
for each of the foregoing proposals are set forth below:
(i) Proposal to elect Directors:
<TABLE>
<CAPTION>
Withhold
For Against Authority
------------------------------------
<S> <C> <C> <C>
Ronald J. Tassinari 12,887,959 -- 521,483
Audrey K. Tassinari 12,887,773 -- 521,669
(ii) To ratify Bradshaw Smith & Co. as the Company's
independent auditors: 13,180,093 117,365 112,851
</TABLE>
Item 6. Exhibit
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule - 1997
18
<PAGE> 19
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
AMERICAN VANTAGE COMPANIES
Dated: June 12, 1998 By: /s/ Ronald J. Tassinari
Las Vegas, Nevada Ronald J. Tassinari
President
(Principal Executive Officer)
By:/s/ Roy K. Keefer
Roy K. Keefer
(Chief Financial Officer and Accounting
Officer)
19
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> APR-30-1998
<EXCHANGE-RATE> 1
<CASH> 14,781,000
<SECURITIES> 0
<RECEIVABLES> 162,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 15,261,000
<PP&E> 192,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 23,256,000
<CURRENT-LIABILITIES> 373,000
<BONDS> 0
0
0
<COMMON> 152,000
<OTHER-SE> 21,735,000
<TOTAL-LIABILITY-AND-EQUITY> 23,256,000
<SALES> 6,525,000
<TOTAL-REVENUES> 6,525,000
<CGS> 0
<TOTAL-COSTS> 2,470,000
<OTHER-EXPENSES> 861,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,909,000
<INCOME-TAX> 1,493,000
<INCOME-CONTINUING> 2,416,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,416,000
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.15
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> APR-30-1997
<CASH> 18,102,000
<SECURITIES> 0
<RECEIVABLES> 237,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 18,557,000
<PP&E> 222,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 19,459,000
<CURRENT-LIABILITIES> 284,000
<BONDS> 0
0
0
<COMMON> 149,000
<OTHER-SE> 18,063,000
<TOTAL-LIABILITY-AND-EQUITY> 19,459,000
<SALES> 6,930,000
<TOTAL-REVENUES> 6,930,000
<CGS> 0
<TOTAL-COSTS> 2,300,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,360,000
<INCOME-TAX> 2,123,000
<INCOME-CONTINUING> 3,237,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,237,000
<EPS-PRIMARY> .22
<EPS-DILUTED> .20
</TABLE>
