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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A-1
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended June 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from to
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Commission File No. 0-19128
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CAPITAL GAMING INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-3061189
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Bayport One, Suite 250 08232
8025 Black Horse Pike (Zip Code)
W. Atlantic City, New Jersey
(Address of principal executive offices)
Registrant's telephone number, including area code: (609) 383-3333
Securities registered pursuant to Section 12(b) of the
Act: None Securities registered pursuant to Section
12(g) of the Act:
Common Stock, no par value
Indicate by check mark 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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-K [ ].
The aggregate market value of the Registrant's Common Stock, no par
value, held by non-affiliates, computed by reference to the average of the
closing bid and asked prices of the Common Stock as reported by the "Electronic
Bulletin Board" on September 30, 1996 was $.11.
Number of shares of Common Stock of the Registrant issued and outstanding
as of September 30, 1996 was 19,329,574
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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ITEM 6. SELECTED FINANCIAL DATA(1)
<TABLE>
<CAPTION>
Years end June 30
----------------------------------------------------------------------------------
Statement of Operations Data:(1)(2) 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
[Restated]
<S> <C> <C> <C> <C> <C>
Management Fee Income $ 7,653,059 $ 6,440,962 $ 1,723,819 $ -- $ --
Operating Expenses 10,138,112 19,480,599 16,580,327 3,003,127 --
Other Income [Expense] (13,881,547) (15,605,729) (9,311,522) 254,709 91,722
(Loss) Income from Continuing Operations (16,677,245) (29,478,212) (23,684,292) (1,652,412) 52,282
Income (Loss) from Discontinued Operations(4) 12,638,968 (88,230,806) -- 2,310,319 1,058,460
Net Income (Loss) (4,038,277) (117,709,018) (23,784,292) 657,907(2) 1,110,742(2)
Earnings Per Share:
(Loss) Income from Continuing Operations (.86) (1.71) (1.68) (.12) --
(Loss)/Gain from Discontinued Operations .65 (5.11) -- .17 (.12)
------------- ------------- ------------ ------------ ------------
Net Income/(Loss) (.21) (6.82) (1.68) .05 .12
Weighted Average Shares Outstanding 19,329,574 17,256,591 14,135,625 13,860,099 9,020,932
June 30
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Balance Sheet Data(3) 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Working Capital (Deficit)(4) $(117,520,919) $(143,893,036) $ 26,545,294 $ 6,009,935 $ 6,993,616
Total Assets 60,048,170 82,977,303 168,906,390 9,265,415 7,345,842
Long-Term Debt(4) -- 20,292,743 150,815,438 -- --
Total Liabilities 160,308,326 179,199,182 158,927,850 341,073 300,833
Stockholders' Equity (Deficit) $(100,260,156) $(96,221,879) $ 9,978,540 $ 8,924,342 $ 7,045,009
Ratio of Earnings to Fixed Charges (5) (5) (5) (5) 5.35%
</TABLE>
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(1) As a result of the sale of the Company's former unrelated business in
1992, and planned disposal of business segment in 1995, the
comparability and informative value of information reflected in the
foregoing selected financial data with respect to June 30, 1995, 1993
and 1992 the fiscal years then ended, may not be meaningful or precise.
(2) Includes non-recurring income of $4,196,000, $4,048,607 and $1,645,000
at June 30, 1995, 1993 and 1992 respectively, received by the Company
in connection with discontinued operations.
(3) For fiscal year ended June 30, 1994 the balance sheet data is
reflective of $159,711,000 in proceeds from the debt and equity
offering received in February 1994.
(4) As a result of the closure of the riverboat casino in New Orleans in
June 1995, substantial write-downs of assets cost were recorded
contributing to a significant loss from the discontinued operation. The
working capital deficit at June 30, 1996 and 1995 includes the
classification of $124,020,000 and $123, 377,000 respectively in Senior
Secured Notes as current and $19,000,000 in unsecured Notes as current
in 1996.
(5) Earnings are inadequate to cover fixed charges.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction
with the Selected Consolidated Financial Data and the Company's Consolidated
Financial Statements and the related notes thereto appearing elsewhere in this
Report.
As a result of the sale of the Company's former unrelated business and
disposal of certain gaming operations, the comparability and informative value
of year-to-year comparisons may not be meaningful or precise.
Liquidity and Capital Resources
General
The Company is experiencing serious liquidity difficulties as a result
of the failure of the New Orleans project and resultant bankruptcy of Crescent
City Capital Development Corp. ("CCCD"). From July 28, 1995 through April 29,
1996, when its Amended Plan of Reorganization was confirmed, CCCD was operating
as a debtor-in-possession. Pursuant to CCCD's Amended Plan of Reorganization,
substantially all of the assets of CCCD were sold to Casino Magic Corp. on May
13, 1996. The Company has defaulted on the Company's 11-1/2% Senior Secured
Notes ("Senior Secured Notes") and the FNBC bank note due to failure to make
required interest payments. In addition, the Company did not make the required
October 26, 1995 interest payment on the $19 million unsecured term note. The
Company's working capital position at June 30, 1996 was negative approximately
$117 million which includes the outstanding balance of the Senior Secured
Notes which are in default and classified as a current liability. Stockholders'
equity is in a deficit position of approximately $100 million as of June 30,
1996. The Company continues to operate based upon the funds received from its
wholly owned subsidiary, Capital Gaming Management, Inc., the subsidiary which
manages three Native American gaming facilities. The Company's cash flows are
dependent upon the management fees earned from three management contracts.
The Company believes it must restructure its remaining debt in order to
continue its operations and pursue new management and development opportunities.
As a result, the Company is focusing all of its efforts on (i) restructuring the
Company's remaining debt, (ii) maintaining its gaming management contracts with
Native American Tribes, (iii) developing the Narragansett Casino, and (iv)
seeking new gaming opportunities.
The Company has and continues to actively negotiate with the Senior
Secured Noteholders' Steering Committee regarding the restructuring of the
Senior Secured Notes. The Company's total liabilities as of September 30, 1996
aggregate approximately $130 million. Although the Company believes it will
successfully restructure its debt to a level that is adequately serviceable by
the cash flow of the Company and allows the Company the ability to build
sufficient cash to pursue new development opportunities, there can be no
assurances that the Company will reach any agreement with the holders of its
Senior Secured Notes or with any other secured or unsecured creditors regarding
the restructuring of the Company's liabilities.
Planned Restructuring
In connection with such a restructuring, the Company anticipates that
it will file a consensual, pre-negotiated Plan of Reorganization (the
"Prenegotiated Plan") under Chapter 11 of the U.S. Bankruptcy Code which will
have the approval of the Steering Committee for its Senior Secured Noteholders
(the "Restructuring Case"). The Company believes that the filing of a
Prenegotiated Plan has many benefits including an expedited timeframe for
confirmation of approximately 120 days or less. At this time the Company cannot
project the terms of the Prenegotiated Plan or any other plan of reorganization
and there is no assurance that any plan of reorganization filed by the Company
will be consummated. The consummation of a plan of reorganization will be
dependent upon the satisfaction of numerous conditions, including, among others,
the acceptance of such plan by at least one class of impaired claims and
confirmation by the Bankruptcy Court. Acceptance by a class of creditors
requires the approval of holders of two-thirds in principal amount and more than
one-half in number of those voting in such class. There is no assurance that the
required conditions of any plan of reorganization filed by the Company will be
met. If the Company does file a voluntary petition for relief under Chapter 11,
it is not possible to predict the length of time the Company will
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be able to operate under the protection of Chapter 11, the outcome of the
Chapter 11 proceedings in general, or the effect of such proceedings on the
remaining business of the Company.
While the Company cannot predict the terms of its restructuring, the
Restructuring Case is most likely to take the form of an exchange of all or a
substantial portion of the Company's debt for equity. Given the secured position
of the Company's Senior Secured Noteholders and the substantial amount by which
the Company's liabilities exceeds its assets, it is likely that the consummation
of any plan of reorganization proposed with respect to the Company will result
in substantial dilution to the Company's shareholders which could result in
their retaining little, if any, equity interest in the Company. The Company
believes that any plan of reorganization consummated by the Company will not
require a restructuring of the operations of CGMI or CDGC. Furthermore, the
Company does not believe it will be necessary and does not intend to file any
reorganization proceedings for CGMI or CDGC. The Company does not believe that
the Restructuring Case will adversely affect the existing management and
development contracts of CGMI and CDGC and does not constitute a default under
any such agreements. However, there can be no assurance that the Company's
Native American casino management contracts will not be adversely affected by
the Restructuring Case. The management contract with the Muckleshoot Indian
Tribe provides that any decree or judgment of insolvency against "Capital"
(defined collectively as the Company and CGMI) is an event of default allowing
the tribe to terminate the contract. The management contracts with the Tonto
Apache Tribe and the Umatilla Tribe generally provide that the tribe may
terminate the agreement if CGMI files or consents to the filing of an
involuntary petition in bankruptcy under Chapter 7, which is not dismissed
within ninety days. The Company does not anticipate that the Restructuring Case
will constitute an event of default under any of these provisions.
Sources and Uses of Cash
During the year ended June 30, 1996 cash of approximately $10,782,000
was generated from operating activities primarily attributable to CGMI's net
income from operations of approximately $5,262,000 less an increase in
receivables of $1,330,000, plus a $3,000,000 non-recurring buy-out fee received
from Cow Creek and $5,127,000 from discontinued operations. Significant non-cash
items during the year include interest expense accruals of approximately
$16,794,000 and depreciation and amortization of $3,013,000. These cash sources
are offset by expenses of Capital Gaming International, Inc., development costs
incurred related to the Narragansett Tribe project and the costs incurred in New
Orleans. If the Company held the liquid resources necessary to meet its interest
expense obligations as they came due, net cash from operating activities would
be negative.
Investment outlays included approximately $1,069,000 for Native
American gaming facility construction costs advanced in July 1995, approximately
$960,000 for pre-petition and court approved debtor-in-possession advances to
the River City Joint Venture and approximately $233,000 for final costs related
to certain management agreements. These uses were funded by approximately
$12,097,000 in loan repayments received from the tribes and approximately
$4,064,000 of restricted cash remaining on hand at June 30, 1996. Such loan
repayments included early prepayment of the Muckleshoot and Cow Creek loans in
the amount of approximately $8,400,000. The Company received proceeds of
approximately $243,000 as a result of the sale of its interest in a partnership
agreement for the development of a riverboat gaming facility in an emerging
gaming jurisdiction. Additionally, approximately $49,000 of the Company's equity
investment in another partnership agreement was returned to the Company. Total
net cash from investing activities was approximately $14,307,000 and was
substantially used to fund payments to the Trustee for the Senior Secured
Noteholders.
Net financing activities required $24,175,000, primarily for
$22,489,000 in funds disbursed to the Trustee for the Senior Secured Noteholders
net of approximately $4,904,000 provided to CCCD for on-going costs. (See
Footnote 6 to the Consolidated Financial Statements). Additionally, principal
repayments on CGMI's equipment notes payable required approximately $1,686,000.
In December 1995 and January 1996, CCCD utilized a provision in the sale
agreement with Mirage to borrow $2,000,000 in DIP financing and also borrowed
$495,000 in March 1996 from Casino Magic pursuant to the DIP Financing Agreement
with that purchaser. Collectively, these funds were used to pay approximately
$1,300,000 to the Trustee for the Senior Secured Noteholders and approximately
$1,195,000 was used for expenses of CCCD in New Orleans.
The Company's source of internal funds for the next twelve months is
expected to be derived only from excess cash generated by CGMI's operations and
Native American loan repayments. In the event conditions arise, for whatever
reasons, that cause a reduction or elimination in such sources of funds, the
Company may not be able to continue operations.
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Sale of Assets of Crescent City Capital Development Corp.
Following the voluntary closure of the New Orleans River City Casino
and after the evaluation and negotiation of potential transactions, the Company
entered into an agreement to sell to Mirage Resorts, Inc. ("Mirage"), all of the
capital stock of CCCD and certain related assets pursuant to a plan of
reorganization of CCCD. The purchase price to be paid by Mirage was $55 million
plus the assumption of up to $6.5 million of certain equipment financing. The
sale to Mirage was contingent upon certain waivers and conditions being achieved
on or before January 24, 1996 including, but not limited to, receiving all
requisite regulatory approvals to transfer the operator's license. On January
24, 1996, Mirage announced that conditions to the closing of the purchase were
not satisfied by the contractual deadline and terminated the MRI Agreement.
Although the Louisiana State Police determined on January 23, 1996 that Mirage
was suitable to hold an operator's license, the Louisiana Riverboat Gaming
Commission deferred action on the matter indicating that it needed more time to
rule on the proposed change in berth and transfer of the license from Orleans
Parish to Bossier Parish, Louisiana. As a consequence of the termination of the
MRI Agreement, management believed that it was in the best interests of the
Company, its Senior Secured Noteholders and shareholders, to immediately pursue
other alternatives for the sale of CCCD's assets.
To that end, management was able to successfully enter into a new sale
agreement (the "CMC Agreement") with a wholly-owned subsidiary of Casino Magic
Corp. On February 21, 1996, the Company entered into a stock purchase agreement
with Casino Magic Corp., two of its wholly-owned subsidiaries, and CCCD to
transfer the ownership of CCCD and substantially all of its assets to a
wholly-owned subsidiary of Casino Magic Corp. An Amended Plan of Reorganization
(the "Amended Plan of Reorganization") predicated upon the CMC Agreement was
filed by CCCD. The Amended Plan of Reorganization was confirmed by the Court and
an order of confirmation was entered on April 29, 1996. On May 13, 1996, the
Company completed the sale of CCCD to a wholly-owned subsidiary of Casino Magic
Corp. for an aggregate consideration of $50 million in cash and Purchaser's
Notes and the assumption of up to $6.5 million in certain equipment liabilities.
The purchase price was paid partially in cash ($15 million) and partially in
CMC's wholly-owned subsidiary's 11-1/2% Senior Secured Notes due 1999
("Purchaser's Notes"). Of the total purchase price, $35 million in aggregate
consideration consisting of $7 million in cash and $28 million in Purchaser's
Notes was distributed to the Indenture Trustee for the Company's 11-1/2% Senior
Secured Notes due 2001. On July 29, 1996 the Indenture Trustee for the Company's
11-1/2% Senior Secured Noteholders distributed $49,986,000 to the Senior Secured
Noteholders on account of principal and accrued interest (the "Noteholder
Distribution"). The Noteholder Distribution included the $28 million in
Purchaser's Notes, as well as cash from the sale of CCCD to CMC, proceeds from
the early payment of the development loan to the Muckleshoot Tribe, proceeds
from the buyout of the Cow Creek contract $3.2 million and other sources.
Subsequently, in August, 1996 the $28 million in Purchaser's Notes was redeemed
by CMC at 100% of the principal amount plus accured interest in accordance with
the terms of the CMC indenture. The Amended Plan of Reorganization also provided
for the distribution to CCCD's creditors of the proceeds of all of CCCD's
remaining assets, those not sold to Casino Magic Corp., including, without
limitation, any and all causes of action arising in favor of CCCD as a
consequence of the termination of the MRI Agreement.
Defaults on Indebtedness
Senior Secured Notes.
As described above, the Company is in default under the Indenture as a
result of the CCCD Restructuring Case. The Company also failed to make interest
payments on its Senior Secured Notes of $7,302,500 each on August 1, 1995,
February 1, 1996 and August 1, 1996, and a $1,350,000 consent fee payment which
was due to the holders of the Senior Secured Notes on August 1, 1995. Such
consent fee was previously incurred to allow the relocation of the Company's New
Orleans River City Casino. The Company's failure to make the August 1, 1995
interest and consent payments and the February 1, 1996 and August 1, 1996
interest payment are also Events of Default under the Indenture.
The Company's Indenture also contains certain covenants regarding
maintenance of consolidated net worth levels, the maintenance of ratios between
earnings before income taxes, depreciation and amortization and certain fixed
charges of the Company. As of the date hereof, the Company does not satisfy many
of these covenants.
On June 21, 1995, the New Orleans 2000 Partnership, the mortgagee of
real property owned by River City, provided notice of various defaults under its
first mortgage to CCCD, River City Joint Venture and Grand Palais. An event of
default under this mortgage constitutes an Event of Default under the Indenture.
As a result of the various defaults under the Indenture, the holders of
the Senior Secured Notes are entitled to all of the remedies contained in the
Indenture, including but not limited to acceleration of the Senior Secured Notes
and foreclosing on the Collateral pledged by the Company to the Trustee which
includes, among other things, the management fees derived from the management
agreements between CGMI and the Native American Tribes.
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Furthermore, the security agreements entered into by the Company provide
remedies to the holders of Senior Secured Notes including a requirement to
transfer any proceeds received in respect of any dispositions of Collateral from
and after the occurrence of an Event of Default as defined in the Indenture.
In the event that the holders of the Senior Secured Notes exercise all
of their available remedies under the Indenture and related agreements, the
Company and its subsidiaries will not be able to continue their operations.
However, the Company does not believe the holders of the Senior Secured Notes
will exercise their remedies where the exercise of such remedies would prevent
CGMI from continuing its operations as manager of several existing Native
American gaming facilities or CDGC from continuing its development of the
Narragansett Casino project.
Bank Line of Credit. On March 28, 1995, CCCD entered into a loan
agreement with First National Bank of Commerce ("FNBC") which was guaranteed by
the Company. Pursuant to the terms of this agreement, CCCD received a $2 million
working capital Line of Credit from FNBC for a period of ninety (90) days. In
April 1995, this credit facility was utilized to provide CCCD with $2 million of
working capital. Borrowings against this facility were due June 27, 1995. CCCD
was not able to repay the obligation thereby causing a default under the
agreement. In addition, the Line of Credit contains cross-default provisions
with the Indenture. FNBC has filed suit against Capital Gaming International,
Inc. as a guarantor of CCCD's obligation and there is a chance that its suit may
succeed. Any guarantor liability, however, may be partially offset by amounts
recovered by FNBC on this obligation in connection with the CCCD Reorganization
Case. See "Business-Legal Proceedings."
Term Note Payable. In connection with the buy-out of the profit
interest of Republic Corporate Services, Inc. ("Republic") in CCCD, the Company
executed an unsecured promissory note payable to Republic for $19,000,000. The
note bears interest at 11.5% per annum and requires semi-annual interest
payments in April and October until its maturity on April 26, 2002 when all
principal becomes due. In October 1994 and April 1995, the Company made each of
the required interest payments of this term note totalling $2,185,000. As a
result of the cessation of the Company's New Orleans operations on June 9, 1995,
and the resultant Chapter 11 petition filed by CCCD, the Company did not make
the required interest payments under the note. As a result, the Company is in
default under the note agreement. See "Business-Legal Proceedings."
Capital Requirements
Capital Gaming International, Inc. Upon the cessation of gaming
operations at the New Orleans River City Casino, the Company implemented a
business strategy of not only reducing operating expenses at the Crescent City
Corp. level but also reducing operating expenses at the Company as well as at
the other operating subsidiaries. In connection therewith, in the fiscal year
ended June 30, 1996, the Company and its subsidiaries (other than Crescent City
Corp.) reduced non-Crescent City Corp. selling general and administrative
expenses by $9.5 million per year. Additionally, the Company and its
subsidiaries have downsized its employees from 56 at fiscal year end June 30,
1995 to 13 employees at September 30, 1996. The capital requirements of the
parent company through June 30, 1997 will approximate $3.2 million not including
estimated attorney and restructuring fees surrounding the anticipated
restructuring.
Capital Gaming Management, Inc. CGMI will continue to operate with the
Muckleshoot, Tonto Apache and Umatilla management agreements. Absent new
development or consideration of the Rhode Island development project, three
contracts will provide the Company with its only source of revenue for the
approximately four years remaining of the contracts. Additionally, the Company
will receive loan repayments from the Tonto Apache and Umatilla Tribes. The
capital requirements of CGMI for the next twelve months will approximate $3.0
million for all overhead costs, as restructured, and equipment financing
repayments. The expected management fees and loan repayments are anticipated to
exceed the capital requirements of CGMI as well as the Company combined. Such
excess, although not assured, if realized will assist in funding capital
requirements of the Rhode Island Project.
Rhode Island Development Project. The Company's Rhode Island
subsidiary, Capital Development Gaming Corp. ("CDGC"), has a management contract
with the Narragansett Indian Tribe of Charlestown, Rhode Island that requires
CDGC to fund the development of the Class III casino facility, however, a
precise estimate of the required investment can not be determined at this time.
The investment will be in the form of a term loan to the Tribe with repayment to
be required over no longer than the remaining duration of the Narragansett
Contract. The Tribe will own all real and personal property. The Company will
most likely seek to employ the issuance of debt instruments in order to obtain
the initial funding for the project, although it is not known whether such
financing will be obtained
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through public or private capital markets. There can be no assurance that such
financing will be available or if available, that the terms thereof will be
acceptable to the Company. The interest in the Narragansett Contract is held
through a wholly-owned subsidiary which is not a guarantor of the Senior Secured
Notes.
In order to fund the capital requirements for the project, it is
anticipated that the Company will require significant additional capital.
Depending on the content of a binding gaming compact with the State of Rhode
Island, which the Tribe continues to seek, the potential inability of the
Narragansett casino to offer a full scope of gaming could create a competitive
disadvantage. Such a disadvantage, if it materializes, may negatively impact the
Company's ability to finance the project or to finance the project on terms
acceptable to the Company. There can be no assurance that such financing will be
available, or if available that the terms thereof will be acceptable to the
Company. Given the development phase of the project and the fact that the
Tribe's petition to the Secretary of the Interior for procedures to obtain a
binding compact is pending, no financing commitments for this project have been
obtained as of the date of this report. Once financing is obtained, management
intends to pursue the construction of the casino on an expedited basis. No
assurances can be given, however, that construction delays will not prevent the
Narragansett casino from being established at the earliest possible time.
The estimated timing of capital requirements can not be estimated at
this time due to the pending legal issues and needed compact as well as
evaluation of the recently completed environmental work. Before construction
commences, the requisite financing will need to be secured.
RESULTS OF OPERATIONS
The following discussion of the results of operations includes Capital
Gaming International, Inc. and its wholly owned subsidiaries, Crescent City
Capital Development Corp., ("CCCD"), and Capital Gaming Management Inc.
("CGMI"). The results of operations of CGMI are included in the accompanying
financial statements from October 1, 1993 and the results of operations of CCCD
are included until May 13, 1996, the date on which all of the shares of stock of
CCCD were sold to Casino Magic Corporation ("CMC"). The Company's other active
subsidiary, Capital Development Gaming Corp. ("CDGC") is continuing to fund
expenses of the Rhode Island Project. The results of operations of CCCD for the
years ended June 30, 1995 and June 30, 1996 include its 50% interest in losses
of River City Joint Venture ("RCJV"), a general partnership whose other equal
partner was Grand Palais Riverboat, Inc. (a wholly owned subsidiary of Hemmeter
Enterprises, Inc.). The operations of CCCD have been presented in the Statement
of Operations as discontinued operations.
Fiscal 1996 Compared to Fiscal 1995
Consolidated
The year ended June 30, 1996, resulted in a net loss from continuing
operations of $16,677,000, ($.86 per share) and a gain from the disposal of the
CCCD discontinued operations of $12,639,000 ($.65 per share) producing a net
loss for the Company of $3,275,000 ($.16 per share). This compares with losses
from the same period ended June 30, 1995 of $28,645,000 and $117,709,000 ($1.66
and $1.10 per share), representing continuing operations and discontinued
operations respectively. The losses from continuing operations for the year
ended June 30, 1996 are substantially attributable to the interest expense
related to the Company's secured and unsecured debt.
The net decrease of $11,968,000 in the loss from continuing operations
is attributable to (i) a decrease in total costs of $9,342,000 due to the
Company's downsizing and significant cost reduction efforts and reduction in
general and administrative costs and development expenses, and (ii) increased
management fees at CGMI of $1,222,000 plus a fee of $3,000,000 related to the
buy-out of the Cow Creek management contract, a gain from the sale of an
investment of $221,000 offset by reduced interest income of $660,000 and
increased interest expense of $836,000 and income taxes of $321,000.
The year ended June 30, 1995 reflects essentially a period of
accelerated activities in preparation for opening of the New Orleans riverboat
and several Native American gaming facilities under management. The year ended
June 30, 1996
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conversely reflects the winding down of New Orleans operations and scaled back
levels due to the cessation of operations and restructuring and sale of CCCD.
Management fees for the comparative year increased $1,222,000. Revenues of the
year ended June 30, 1995 include approximately $3,699,000 in fees earned from
the Cow Creek contract, comprising 57.4% of total revenues for that period, the
other revenues were primarily derived from Class II facilities and approximately
$445,000 from one temporary Class III facility. The fees from Cow Creek in the
year ended June 30, 1996 amounted to $618,000 and represented only two months of
operations before the buy-out. During this period, CGMI managed three other
Class III facilities for all twelve months which produced management fees of
$7,045,000 for the year ended June 30, 1996.
The losses from discontinued operations for the year ended June 30,
1996 of $4,903,000 include various carrying costs of $1,240,000, bankruptcy
related attorney fees of $2,192,000 and expenses of the joint venture of
$1,262,000. These items were $14,050,000 lower than the loss from the year ended
June 30, 1995 of $18,954,000 which was represented by various pre-opening costs
in preparation of the opening of the riverboat. Additionally, interest expense
of $210,000 was incurred related to DIP financings.
Interest income decreased $660,000 to $1,959,000 from the year ended
June 30, 1996 due to large amounts of interest earning funds still on hand at
June 30, 1995 for construction costs. Total interest expense increased from the
year ended June 30, 1996 due to $1,474,000 in interest capitalized during that
period offset by interest saved subsequent to the extinguishment of $8,000,000
in Senior Secured Notes on March 31, 1995. Additionally, interest expense on
equipment financings at CGMI was not predominantly present at June 30, 1996.
Capital Gaming Management, Inc. (CGMI)
On March 10, 1995, the Umatilla Tribe opened the 40,000 square foot
Wildhorse Gaming Resort in Pendleton, Oregon. This facility, under management by
the Company offers 300 video slot machines, keno, non-banking table games,
off-track betting (OTB) and high stakes bingo. The first phase of this
development opened on November 5, 1994. During the periods ending June 30, 1996
and 1995 the facility produced approximately $3,210,000 and $1,365,000
respectively in management fees for the Company. The slot win per unit, per day
was $203 during the fiscal year ending June 30, 1996. Slot win represents
approximate 85% of total revenues of this facility compared to over 90% for the
fiscal year ending 1995.
On April 27, 1995, the Tonto Apache Tribe opened the 32,000 square foot
Mazatzal Casino located north of Phoenix, Arizona. The casino features 318 slot
machines, keno, non-banking table games and high stakes bingo. the Company, as
manager of the casino, collected approximately $1,961,000 and $305,000 in
management fees for the periods ending June 30, 1996 and 1995 respectively. Slot
win, which comprised approximately 87% of the facility's total receivables in
1996 and 88% in 1995, produced win per unit, per day of $139 in 1996 and $128 in
1995.
The Muckleshoot Tribe opened the first phase of its Muckleshoot Casino
on April 28, 1995, and presently offers 47 table games, 22 poker games, keno and
OTB. The facility is located in the Seattle-Tacoma metropolitan area. The final
phase of this facility opened on September 8, 1995 with gaming space increased
to 40,000 square feet. The Company as manager of the facility collected
approximately $1,874,000 and $615,000 for the years ending June 30, 1996 and
1995 respectively. The facility produced table game win per day of $3,200 and
$3,100 for the years ending June 30, 1996 and 1995 respectively.
During the year ended June 30, 1996, the Cow Creek Management contract
was terminated in exchange for a payment of $3,000,000. The Cow Creek facility
generated an additional $618,000 in management fees during the year ended June
30, 1996.
27
<PAGE>
Total management fees for the years ended June 30, 1996 and 1995 were
approximately $7,663,000 and $6,441,000 respectively. During the year ended June
30, 1996 all fees were derived from Class III facility operations. During the
year ended June 30, 1996 there were approximately $5,986,000 in fees from Class
III facility operations and approximately $455,000 in fees from two remaining
Class II management agreements which expired before June 30, 1995.
CGMI's management fees of $7,663,000 and $6,441,000 for the years ended
June 30, 1996 and 1995 were sufficient to produce income from operations of
approximately $5,262,000 and $700,000 respectively. Interest income was also
earned from tribal loans of $1,332,000 and $844,000. The income from operations
includes a one time charge in September 1994 of approximately $1,017,000 for the
write down of assets related to a severed Class II management contract.
Salaries and wages for the fiscal year ended June 30, 1996 decreased by
approximately $950,000 based on a decrease in full time equivalent employees of
approximately 70%.
Legal and professional costs decreased by approximately $750,000 from
prior year levels primarily due to a reduction of development and preopening
activities.
General and administrative costs totaled approximately $604,000 for
CGMI's year ended June 30, 1996 and are primarily composed of employee benefits
costs of $112,000, travel costs of $175,000, and office and other administrative
costs of $317,000. All of these costs were reduced substantially from prior year
levels due to the decrease in costs associated with opening facilities in prior
years, among other reasons.
Gaming development activities decreased approximately $82,000 to
approximately $95,000 for the year ended June 30, 1996.
Capital Gaming International, Inc. (CGI)
CGI, the parent and registrant, incurred operating costs and expenses
of approximately $6,571,000 for the year ended June 30, 1996 as compared to
approximately $13,845,000 for the year ended June 30, 1995. Debt restructuring
costs increased by $600,000 and represent fees owed to the Company's financial
advisors. The Company realized significant cost decreases in development
($665,000), administrative costs including advertising ($1,514,000), payroll
costs ($868,000),professional fees ($4,232,000), public company costs
($452,000), travel costs ($570,000), and other operating costs ($336,000). Some
of these cost reductions were absorbed by the CDGC subsidiary (see below). Cost
reductions came as a result of substantial reductions in overhead, significant
reductions in the costs associated with managing the CCCD subsidiary, reduced
development efforts including the Company's termination of its efforts to
acquire certain real estate on Philadelphia's Delaware River Waterfront in
connection with the potential development of a gaming facility, and other
similar matters. Some of these cost reductions were offset by an increase in
costs related to the Company's marketing services agreement with HFS, Inc. Costs
associated with this agreement actually increased by approximately $628,000
during the year ended June 30, 1996. However, the Company is in default on this
agreement and has not paid approximately $763,000 in connection thereto and does
not anticipate paying these costs going forward.
Payroll and related costs amounted to approximately $2,250,000 for the
year ended June 30, 1996 as compared to approximately $3,120,000 in the prior
fiscal period. The decrease in payroll costs was a result of the reduction in
the number of employees, reduced bonus payments and a reduction in wage related
taxes and benefits.
Native American Development costs incurred by CGI of approximately
$867,000 were primarily for the benefit of the Narragansett Tribe in pursuing
the development of gaming in Rhode Island. In addition, the Company's CDGC
subsidiary incurred cost toward this development of $955,000. These combined
costs of $1,822,000 decreased by $147,000 as compared to approximately
$1,969,000 in the last fiscal period. The decrease is primarily from engineering
costs associated with development. As of June 30, 1996, the cumulative
investment expended on the Rhode Island project exceeds $6.5 million. A
substantial amount of this spending will be repaid to the Company if and when a
gaming facility is established by the Narragansett Tribe.
28
<PAGE>
Interest Expense - Consolidated
Interest expense for the year ended June 30, 1996 is comprised of the
following: (i) Senior Secured Notes $14,605,000, (ii) amortization of original
issue discount and deferred finance charges of $2,173,000, (iii) Republic Note
Payable $2,185,000 and (iv) CGMI equipment notes $99,000 for a total of
$19,062,000.
Interest expense for the year ended June 30, 1995 is comprised of the
following: (i) Senior Secured Notes $15,295,000, (ii) amortization of original
issue discount and deferred finance charges -$2,119,000, (iii) Republic Note
payable - $2,185,000 and (iv) CGMI equipment notes - $99,000 for a total of
$19,698,000. The Company capitalized interest of approximately $1,474,000 during
the year.
Extraordinary Item
The early extinguishment of debt on March 30, 1995 resulted in a loss
of approximately $833,000 as a result of the value of the common stock issued,
in exchange for 8,000,000 of Senor Secured Notes, exceeding the carrying amount
of notes. The carrying amount was inclusive of $238,000 and $504,000 of
unamortized amortized original issue discount deferred finance charges,
respectively, which was written-off with the related debt.
Income Taxes
As the Company has continuing net operating losses, there is available
for carryforward, a net operating loss of approximately $72,000,000. A deferred
tax benefit could not be recorded as its realization can not be assured at this
time and the amount can not be estimated. In the event of future forgiveness of
indebtedness, the related taxability of such forgiver could be reduced by
available net operating loss carryforwards.
Crescent City Capital Development Corp. (CCCD)
The CCCD riverboat opened on April 4, 1995, four days after the debut
of the Grand Palais riverboat and the River City terminal and pavilion. On June
9, 1995, the Company's riverboat casino operations in New Orleans was forced to
cease operations due primarily to significant revenue shortfalls which
contributed to operating losses that the Company could not continue to fund.
CCCD reported a loss from operations for the three months ended June 30, 1995 of
approximately $10,061,000, including approximately $5,094,000 in losses from the
50% interest in River City Joint Venture. Subsequent to the closing of the
riverboat, the Board of Directors believed it was necessary to seek an acquiror
for the riverboat vessel and its gaming equipment contents. The operations of
CCCD for the year ended June 30, 1996 have been segregated and presented in the
Statement of Operations as a gain on disposal for discontinued operations in the
amount of approximately $12,639,000.
The gain consists of the net gain on the sale of the remaining assets
in excess of their cost basis in the amount of $17,543,000 less the costs
incurred for the CCCD subsidiary for the current year in the amount of
$4,904,000 which are comprised of the following:
Legal fees (2,192,000)
Equity in Loss of RCJV (1,262,000)
Other reorganization items (1,240,000)
Interest Income 10,000
Interest Expense (220,000)
Net (Loss) (4,904,000)
29
<PAGE>
Fiscal 1995 Compared to Fiscal 1994
The last quarter of the June 30, 1995 fiscal year produced the opening
of three Native American facilities under management by CGMI and the opening of
the New Orleans riverboat. In the same fiscal quarter, the Grand Palais and
Crescent City Queen riverboats ceased gaming operations primarily because of the
failure of the gaming operations to generate sufficient revenue to satisfy
operating costs. This shortfall, accompanied by liquidity concerns caused by
cost overruns in excess of $30 million, required management to eliminate
continuing operating losses by halting operations, seek protection from
creditors under Chapter 11 and begin to focus on reorganization.
Crescent City Capital Development Corp.
The CCCD riverboat opened on April 4, 1995, four days after the debut
of the Grand Palais riverboat and the River City terminal and pavilion. On June
9, 1995, the Company's riverboat casino operations in New Orleans was forced to
cease operations due primarily to significant revenue shortfalls which
contributed to operating losses that the Company could not continue to fund.
CCCD reported a loss from operations for the three months ended June 30, 1995 of
approximately $10,061,000, including approximately $5,094,000 in losses from the
50% interest in River City Joint Venture. The subsidiary's operating loss for
the year ended June 30, 1995 excluding amortization of $1,765,000 of certain
assets of CGI approximated $17,627,000 which includes approximately $7,906,000
in pre-opening charges. (These losses exclude CCCD's share of the significant
write-down for impaired assets incurred by RCJV.) Subsequent to the closing of
the riverboat, the Board of Directors believed it was necessary to seek an
acquiror for the riverboat vessel and its gaming equipment contents. The
operations of CCCD for the year ended June 30, 1995 have been segregated and
presented in the Statement of Operations as discontinued operations. The loss on
disposal of discontinued operations of approximately $69,277,000 is comprised of
a $38,500,000 charge for impaired assets at RCJV, charges for the reserve of
cash held in escrow and prepaid rent of $2.2 million and $4.8 million,
respectively, representing funds escrowed for the Port of New Orleans use and
funds already disbursed to the Port of New Orleans and classified as prepaid
rent, and the write-off of acquired gaming assets of $23,725,000 recorded by
Capital Gaming International, Inc.
A summary of CCCD's operating results for the year ended June 30, 1995
is as follows:
Revenues $ 4,196,000
Operating Costs (15,682,000)(1) (3)
Pre-opening Expenses (7,906,000)(2)
--------------
(19,392,000)
Interest Income 674,000
Interest Expense (236,000)
--------------
Net Loss from Operations $ 18,954,000
==============
(1) Includes $5,094,000 in losses from 50% interest in River City
Joint Venture.
(2) Includes $4,722,000 in losses from 50% interest in River City
Joint Venture.
(3) Includes $1,765,000 in amortization of acquired gaming assets.
Capital Gaming Management, Inc.
On March 10, 1995, the Umatilla Tribe opened the 40,000 square foot
Wildhorse Gaming Resort in Pendleton, Oregon. This facility offers 300 video
slot machines, keno, non-banking table games, Off-track betting (OTB) and high
stakes bingo. The first phase of this development opened on November 5, 1995.
During this period ending June 30, 1995, the facility produced approximately
$1,365,000 in management fees for the Company. Since opening, slot win per unit,
per day has approximated $200 to $220. Slot win also represents approximately
90% of total revenues of the facility.
30
<PAGE>
On April 27, 1995, the Tonto Apache Tribe opened the 32,000 square foot
Mazatzal Casino located north of Phoenix, Arizona. The casino features 314 slot
machines, keno, non-banking table games and high stakes bingo. The Company
earned approximately $305,000 in management fees for May and June 1995. Slot
win, which comprises approximately 88% of the facility's total revenues,
produced win per unit, per day of approximately $120 to $135.
The Muckleshoot Tribe opened the first phase of its Muckleshoot Casino
on April 28, 1995, offering 31 table games, keno and OTB. The facility is
located in the Seattle-Tacoma metropolitan area. Management fees earned under
this contract amounted to approximately $615,000 for May and June 1995. The
final phase of this facility opened on September 8, 1995 with gaming space
increased to 40,000 square feet. This facility since opening has produced table
game win per day of approximately $3,000 - $3,100.
The Cow Creek tribal casino, which opened in April 1994, continued to
produce approximately $300,000 per month in management fees for the Company,
earning a total of approximately $3,699,000 for the year ended June 30, 1995.
This contract, however, was purchased from the Company by the Cow Creek Tribe in
September 1995 for $3.0 million and was substantially paid to the Company's
Senior Secured Noteholders. Effective September 1, 1995, the Company has no
further financial relationship with the Cow Creek Tribe. Simultaneous with the
management fee buy-out, the outstanding loan amount of approximately $823,000
was repaid to the Company and subsequently transferred to Senior Secured
Noteholders less expenses of the transaction.
As an operating unit, CGMI earned approximately $6,441,000 in
management fees for the year ended June 30, 1995 and was comprised of the Class
III revenues mentioned above - $5,984,000, and Class II revenues of
approximately $457,000 derived substantially from a contract which expired in
May 1995. Revenues earned in fiscal year 1994 reflected Cow Creek's Class III
earnings of approximately $400,000 and Class II fees of approximately
$1,324,000.
Total CGMI operating costs for the year ended June 30, 1995 were
approximately $5,741,000 as compared to approximately $2,375,000 for the year
ended June 30, 1994. Included in last year's fiscal period is CGMI's operations
for approximately nine months. The overall increase of $3,366,000 is
attributable to a $1,017,000 charge for the write-off of impaired assets
relating to a severed Class II contract, the additional three months of expense
included in the June 30, 1995 period which effects all categories of operating
expenses discussed and certain increases as noted below.
Salaries and wages increased approximately $1,008,000 based on an
increase in full time equivalent employees of approximately 45% required because
of the division's expansion, detailed reporting needs and facility management
needs. CGMI hired a Director of Operations, Director of Finance and two other
management team members at an aggregate annual salary of $430,000 during the
June 30, 1995 fiscal year. Additionally an $80,000 bonus was paid in June 1995
to the Director of Operations. Other increases include related payroll taxes and
the accruals for compensated absences.
Professional fees for the year ended June 30, 1995 at CGMI increased
approximately $811,000 due to increases in legal - $445,000, consulting -
$312,000 and accounting/computer - $54,000. During the current fiscal year,
three of the four management agreements were amended and finalized, including
extensive efforts related to the Muckleshoot agreement, requiring extensive
legal involvement. Additionally, the National Indian Gaming Commission (NIGC)
approvals as well as tribal level gaming commission and State gaming commission
approvals were obtained during the current fiscal year, all of which involved
legal effort and expense. Additionally, certain litigation matters arose
surrounding a severed Class II contract. Consulting expenditures increased due
to required expertise needed in establishing the facilities, including the areas
of security/surveillance and human resource and training. A new computerized
management information system was also installed.
31
<PAGE>
General and administrative costs totaled approximately $1,553,000 for
CGMI's year ended June 30, 1995 and are primarily composed of marketing fees -
$310,000, travel costs - $472,000, employee related insurance and moving, hiring
and interim living expenses - $342,000, office operational costs - $365,000 and
other general and administrative costs of $64,000. These costs represent an
approximate increase of $1,050,000 as compared to the nine months of expense for
the period ending June 30, 1994. Marketing fees earned by Hospitality Franchise
Systems, Inc. were substantially all earned in the June 30, 1995 period. Travel
costs increased approximately $335,000 because CGMI's four managed facilities
are geographically located significantly apart and three of the four facilities
became operational in the current year. Approximately 40% of the travel costs
were incurred in the quarter ending June 30, 1995 coinciding with the three
openings. CGMI implemented an enhanced employee benefit package to attract and
retain qualified personnel and such benefits now accommodate 45% more personnel,
resulting in benefit cost increases of approximately $100,000. Interim living
expenses - $43,000, moving costs - $61,000 and placement and hiring fees -
$101,000 represent $205,000 of the employee related cost increase. Together, the
benefits and other employee related costs increased approximately $310,000 to
$342,000. Office costs and other general and administrative costs increased
approximately $125,000 due to additional office space leased and increased
consumption of office utilities and resources from more personnel.
Gaming development expense at CGMI decreased approximately $593,000 to
approximately $177,000 at June 30, 1995 due primarily to the management
contracts attaining the criteria for capitalization of costs associated with
developing such contract. In the year ended June 30, 1995, CGMI expended and
capitalized approximately $3,037,000 in costs in the account "Investment in
Management Agreements." Approximately $2,050,000 was expended in various costs
for the Muckleshoot Tribe. The remainder was spent approximately equally on the
Umatilla and Tonto Apache Tribes. These amounts are amortized over the life of
the management contract once the facility opens.
Income from operations of CGMI before the one-time charge in the first
quarter of $1,017,000 for the year ended June 30, 1995 was approximately
$1,718,000 or 26% of revenues as compared to a loss from operations in the prior
fiscal year of approximately $651,000. The improvement is attributable to the
increased revenues of $4,717,000 offset by increases in operating costs.
Assuming June 30, 1994 costs were annualized, such overall total cost increase
would approximate $1,558,000 or 50% as compared to actual 100% increase. The
fourth quarter ending June 30, 1995 substantially represents management fee
earnings of all four facilities with the exception of two facilities not opened
until the end of April. Revenues for this quarter represented approximately 45%
of total revenues. As of June 30, 1995 CGMI is now fully Class III operational.
Interest income of approximately $845,000 was earned from development
loans to the tribe during the year ended June 30, 1995 as compared to no such
income in the prior fiscal year. Additional interest income of approximately
$499,000 was earned on restricted cash held for development loans. These funds
have been depleted in their entirety as of June 30, 1995. Interest expense of
approximately $99,000 was incurred on equipment financings obtained by CGMI on
behalf of the tribes. Substantially all such notes have a payback period of
twenty-four months. Additional interest expense of approximately $2.2 million
was charged to earnings for the year ended June 30, 1995 as a result of the $22
million promissory note payable to Capital Gaming International, Inc.
Capital Gaming International, Inc.
CGI incurred operating costs and expenses of approximately $13,845,000
for the year ended June 30, 1995 as compared to approximately $14,205,000 for
the prior year. The prior year costs, however, do include non-recurring charges
of $2,847,000 and $1,000,000 for bondholders consent fees and a fee for
modification of a marketing agreement, respectively. Adjusting for these two
items results in a comparable increase in costs of approximately $3,487,000. The
largest increase was in legal expense where approximately $2,195,000 in
additional costs were incurred during year ended June 30, 1995. A significant
part of the increase, approximately $1,458,000, was due to legal/legislative
work related to the Narragansett management contract and development of the
32
<PAGE>
Narragansett's tribal gaming compact with the State of Rhode Island. Other legal
efforts were intensified relative to CGI's offerings and sales of securities and
related preparation and filing of securities disclosure documents, CGI's
participation in efforts to develop, introduce and enact gaming legislation in
Pennsylvania, CGI's option to acquire certain real estate on Philadelphia's
Delaware River waterfront in connection with the potential development of a
gaming facility, and other similar matters.
Native American development costs incurred by CGI of approximately
$1,969,000 were strictly for the benefit of the Narragansett Tribe in pursuing
the development of gaming in Rhode Island. This compares to approximately
$427,000 in costs incurred in the prior year for Narragansett. The costs for the
year ended June 30, 1995 were extensive due to the signing of the gaming compact
by the Governor of Rhode Island on August 29, 1994. The costs were primarily for
engineering/design efforts, media and public relations, project planning and
studies and travel costs. As of June 30, 1995, the cumulative investment
expended on the Rhode Island project exceeds $5 million. A substantial amount of
this spending will be repaid to the Company if and when a gaming facility is
established by the Narragansett Tribe. It is expected a portion of this loan
will be recorded as a receivable during fiscal year ending June 30, 1996.
Salaries, wages and related costs amounted to approximately $3,000,000
for the year ended June 30, 1995 at CGI as compared to approximately $3,386,000
in the prior fiscal period. The year ended June 30, 1995 includes bonuses paid
to the President and Vice President of Casino Operations totaling approximately
$225,000 and the year ended June 30, 1994 includes bonuses paid to all officers
and directors of the Company of approximately $1,170,000. Aside from bonus
compensation the increase in salaries was approximately $559,000. Such increase
is primarily due to a full year of salaries for the year ended June 30, 1995 as
compared to prior year salaries that were increased in the third quarter of the
year ended June 30, 1994. Additionally, there were four personnel added in the
fourth quarter of June 30, 1994, all of whom were present substantially all of
the subsequent fiscal year. The fiscal 1995 bonuses were paid on April 4, 1995
as a result of the opening of the New Orleans riverboat.
Gaming development costs amounted to approximately $1,455,000 for the
year ended June 30, 1995 as compared to approximately $1,886,000 incurred in the
prior fiscal year. Both years include approximately $500,000 in travel related
costs. The year ended June 30, 1994 development costs include approximately
$770,000 paid to Republic Corporate Services, Inc. for the exercise of an
option. General increases in this category approximate $340,000 and were
primarily the result of costs related to the Rockford project, St. Charles (Twin
Rivers), and other exploratory efforts.
General and administrative (G&A) expenses in total at CGI were
approximately $2,101,000, a decrease of approximately $193,000 over the same
period last year. However, G&A expense for June 30, 1994 included a $1 million
charge for modification to a marketing agreement. This charge not being present
in the current fiscal year indicates increases in other components of G&A of
approximately $807,000. A significant component of G&A for the year ended June
30, 1995 is public company related costs. These costs include services of the
Financial Relations Board, printing costs for equity and debt registrations,
filing fees, quarterly and annual reporting and distribution requirements and
other communication costs. Such costs amounted to approximately $738,000 for the
current year as compared to approximately $250,000 for the year ended June 30,
1994. The increase in costs was most prevalent in outside services ($150,000),
printing and distribution costs ($250,000) and filing fees ($75,000). Travel
costs included in G&A increased approximately $275,000 to $510,000 primarily as
a result of the inclusion of the fourth quarter travel costs of New Orleans.
Other G&A expenses did not change materially.
CGI's debt and equity proceeds from February 1994 earned interest
income for a greater number of months in the year ended June 30, 1995 although
the average invested balance was declining throughout the year. Interest income
earned the current year on cash balances was approximately $1,275,000
(additional $499,000 earned by CGMI on funds transferred to the subsidiary) as
compared to approximately $1,676,000 earned last year.
33
<PAGE>
Interest Expense - Consolidated
Interest expense for the year ended June 30, 1995 is comprised of the
following: (i) Senior Secured Notes $15,295,000, (ii) amortization of original
issue discount and deferred finance charges - $2,119,000, (iii) Republic Note
payable - $2,185,000 and (iv) CGMI equipment notes - $99,000 for a total of
$19,698,000. The Company capitalized interest of approximately $1,474,000 during
the year.
Interest expense for fiscal year ended June 30, 1994 of approximately
$11,024,000 was inclusive of a $4,000,000 charge for the termination of a
warrant agreement and approximately $6,556,000 related to the Senior Secured
Notes for approximately 4-1/2 months. Additionally, interest expense on the
Republic Note - $394,000, other expense - $308,000 less capitalized interest of
approximately $234,000 accounts for the remainder of interest expense in the
prior year.
Extraordinary Item
The early extinguishment of debt on March 30, 1995 resulted in a loss
of approximately $833,000 as a result of the fair value of the common stock
issued, in exchange for 8,000,000 of Senior Secured Notes, exceeding the
carrying amount of the notes. The carrying amount was inclusive of $238,000 and
$504,000 of unamortized amortized original issue discount and deferred finance
charges, respectively, which was written-off with the related debt.
Income Taxes
For the year ended June 30, 1994, the Company recorded a federal tax
benefit of approximately $484,000 based on the use of available net operating
losses carried back to prior years. Such benefit was received by the Company
during the year ended June 30, 1995. As the Company has continuing net operating
losses, there is available for carryforward, a net operating loss of
approximately $99,000,000. A deferred tax benefit could not be recorded as its
realization can not be assured at this time and the amount can not be estimated.
In the event of future forgiveness of indebtedness, the related taxability of
such forgiveness could be reduced by available net operating loss carryforwards.
Fiscal 1994 Compared to Fiscal 1993
The results of operations for the year ended June 30, 1994 are
reflective of the changes in the Company's management, business activities,
capitalization structure and future direction. The current year resulted in a
net loss of $23,684,292 or $1.68 per share compared to a net loss from
continuing operations of $1,652,412 or $.12 per share in the prior period. The
current loss is derived primarily from the Company's net loss of $23,025,914.
The more significant components of the parent company's loss are (i)
compensation and related expenses of approximately $3,956,000 resulting from a
new management team, higher compensation expense necessary to attract key
personnel experienced in the gaming industry, and salary increases subsequent to
the completion of the Company's financings, (ii) consulting, legal and
accounting fees of approximately $3,293,000 related to Riverboat and Native
American gaming development and corporate financings and related matters, (iii)
direct Riverboat and Native American Development costs of $3,491,000 and (iv)
interest expense of $11,024,000, which includes a $4,000,000 charge in
connection with the termination of a warrant agreement related to bridge
financing. The Company earned $1,712,272 in interest income for the current year
and recorded an income tax benefit from available loss carrybacks of $483,738.
34
<PAGE>
The Company was required to record approximately $3,847,000 in
non-recurring charges related to the bondholders' consent to purchase the New
Orleans 2000 Property and relocate the site of the New Orleans riverboat project
($2,847,000) as well as a fee to modify a marketing agreement ($1,000,000) so as
to reduce fees payable in the future.
The current period revenues were derived solely from management fees
earned by CGMI with the operations of CGMI producing a net loss of $414,776,
before corporate allocations of $243,602, from their acquisition date of October
1, 1993 through June 26, 1994. CGMI's loss was primarily attributable to
significant costs incurred as a result of aggressive new business development
activities.
The year ending June 30, 1993 was reflective of the discontinuance of
the Company's prior business activities. The operations of CGMI were not
included in that period. The $3,003,127 in operating costs primarily consists of
professional fees, wages and general and administrative expenses. As a result of
the discontinuance of the boxing business the Company recorded a net gain of
$2,422,282 during the year ended June 30, 1993.
Impact of Inflation
The Company does not believe that inflation has had a material adverse
effect on sales or income during past periods.
Seasonality
The operations of casino facilities under management by CGMI are not
expected to be materially impacted, as a whole, by seasonality factors.
35
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PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
<TABLE>
<CAPTION>
<S> <C> <C>
(a) 1. Financial Statements - See the Index to Financial Statements on page F-1.
2. Financial Statement Schedules - Schedules begin on page S-1.
3. Exhibits.
2.1 Stock Purchase Agreement dated March 15, 1993 by and among the Registrant, Bass Leisure Group, Ltd., Bass
Leisure Group, Inc. and British American Bingo, Inc.(4)
2.3 Involuntary Petition for Bankruptcy filed under Chapter 11 of the U.S. Bankruptcy Code against Crescent City
Capital Development Corp. dated July 26, 1995.(19)
2.4 Consent to Entry of Order for Relief filed by Crescent City Capital Development Corp. in Chapter 11 Bankruptcy
Case dated July 28, 1995.(19)
2.5 First Amended Chapter 11 Plan of Reorganization of Crescent City Capital Development Corp. as confirmed by
the Bankruptcy Court on January 12, 1996.(20)
2.6 Second Amended Chapter 11 Plan of Reorganization of Crescent City Capital Development Corp. and First
Immaterial Modification, as confirmed by the Bankruptcy Court on April 29, 1996.(21)
2.7 Stock Purchase Agreement by and among Casino Magic Corp., Jefferson Casino corp., C-M of Louisiana, Inc.,
Capital Gaming International, Inc. and Crescent City Capital Development Corp., dated February 21, 1996.(21)
3.1 Restated Certificate of Incorporation of the Registrant.(15)
3.2 Bylaws of the Registrant, as amended.(6)
4.3 Indenture dated February 17, 1994 by and among the Registrant, Crescent City Capital Development Corp., British
American Bingo, Inc. and First Trust National Association (without exhibits and schedules).(9)
4.4 Equity Registration Rights Agreement dated January 20, 1994 by and among the Registrant and the persons who are
signatories thereto (without exhibits and schedules)(multiple conformed signatures omitted).(9)
4.5 Senior Secured Notes Registration Rights Agreement dated February 17, 1994 by and among the Registrant,
Crescent City Capital Development Corp., British American Bingo, Inc. and the purchasers who are signatories
thereto (without exhibits and schedules)(multiple conformed signatures omitted).(9)
4.6 Security Agreement dated February 17, 1994 by and among the Registrant, Crescent City Capital Development
Corp., British American Bingo, Inc. and First Trust National Association (without exhibits and schedules).(9)
4.7 Security Agreement dated February 17, 1994 by and between Crescent City Capital Development Corp. and First
Trust National Association (without exhibits and schedules).(9)
4.8 Pledge Agreement dated February 17, 1994 by and between the Registrant and First Trust National Association
(without exhibits and schedules).(9)
4.9 Pledge Agreement dated February 17, 1994 by and between British American Bingo, Inc. and First Trust National
Association (without exhibits and schedules).(9)
4.10 Warrant Agreement dated January 20, 1994 by and between the Registrant and First Trust National Association
(without exhibits and schedules).(9)
4.11 Form of Old Note(11)
4.12 Form of New Note(11)
4.13 First Supplemental Indenture dated June 24, 1994 to the Indenture dated February 17, 1994, by and among the
Registrant, Crescent City Capital Development Corp., Capital Gaming International Casino Management Division,
Inc. (formerly British American Bingo, Inc.) and First Trust National Association (without exhibits).(12)
4.14 Form of Term Note distributed to Bondholders in exchange for their Consent to the First Supplemental
Indenture.(12)
10.1 1990 Stock Option Plan, as amended.(15)
10.34 Non-Qualified Stock Option Agreement, dated February 27, 1992 by and between the Registrant and Michael F.
Marino.(1)
10.35 Non-Qualified Stock Option Agreement, dated February 27, 1992 by and between the Registrant and Thomas E.
O'Brien.(1)
10.36 Non-Qualified Stock Option Agreement, dated February 27, 1992 by and between the Registrant and Robert
DeFilippis.(1)
46
<PAGE>
10.38 Non-Qualified Stock Option Agreement, dated June 30, 1992 by and between the Registrant and Hank Johnson.(1)
10.39 Non-Qualified Stock Option Agreement dated June 30, 1992 by and between the Registrant and Thomas P.
Gallagher.(1)
10.49 Stock Option Agreement dated January 7, 1993 by and between the Registrant and I.G. Davis, Jr.(2)
10.50 Stock Option Agreement dated January 7, 1993 by and between the Registrant and Edward Tracy.(2)
10.52 Non-Qualified Stock Option Agreement dated November 23, 1992 by and between the Registrant and Col. Clinton
L. Pagano.(2)
10.53 Non-Qualified Stock Option Agreement dated November 23, 1992 by and between the Registrant and Percival H.E.
Leach.(2)
10.54 Non-Qualified Stock Option Agreement dated January 7, 1993 by and between the Registrant and Thomas P.
Gallagher.(2)
10.55 Non-Qualified Stock Option Agreement dated January 7, 1993 by and between the Registrant and Joel Sterns.(2)
10.56 Non-Qualified Stock Option Agreement dated January 7, 1993 by and between the Registrant and Frank Gelb.(2)
10.62 Stock Option Agreement dated January 29, 1993 between the Registrant and Timothy G. Rose.(3)
10.70 Stock Option Agreement dated May 7, 1993 between the Registrant and Michael Barozzi.(6)
10.78 Stock Option Agreement dated September 15, 1993 by and between the Registrant and Peter Liguori.(6)
10.79 Letter of Intent by and between the Registrant and Republic Corporate Services, Inc. dated April 6, 1993 with
Amendments dated June 11, 1993 and June 28, 1993.(6)
10.80 Escrow Agreement by and between the Registrant and Republic Corporate Services, Inc. dated April 6, 1993 with
Amendment dated June 11, 1993.(6)
10.81 Non-Qualified Stock Option Agreement by and between the Registrant and Republic Corporate Services, Inc. dated
June 11, 1993.(6)
10.82 Option and Letter of Intent by and between the Registrant and Republic Corporate Services, Inc. dated August 25,
1993.(6)
10.83 Term Note by and between the Registrant and Joel Sterns dated June 11, 1993.(6)
10.84 Stock and Option Pledge Agreement by and between the Registrant and Joel Sterns dated June 11, 1993.6
10.86 Interim Agreement by and between the Board of Commissioners of the Port of New Orleans and Crescent City
Capital Development Corporation dated June 29, 1993.(6)
10.92 Common Stock Purchase Warrant by and between the Registrant and First National Bank of Commerce dated
September 1, 1993.(6)
10.93 Berth Infrastructure Reimbursement Agreement by and between Crescent City Capital Development Corporation
and the Board of Commissioners of the Port of New Orleans dated September 1, 1993.(6)
10.94 Engagement Letter by and between the Registrant and Stephen Edwards, Esq. dated July 20, 1993.(6)
10.95 Common Stock Purchase Warrant by and between the Registrant and Ladenburg, Thalmann & Co. Inc. dated July
22, 1993.(6)
10.96 Common Stock Purchase Warrant by and between the Registrant and Ronnie Wohl dated July 22, 1993.(6)
10.97 Common Stock Purchase Warrant by and between the Registrant and Ronald J. Kramer dated July 22, 1993.(6)
10.98 Common Stock Purchase Warrant by and between the Registrant and Peter M. Graham dated July 22, 1993.(6)
10.99 Common Stock Purchase Warrant by and between the Registrant and Jay R. Petschek dated July 22, 1993.(6)
10.100 Common Stock Purchase Warrant by and between the Registrant and Brian M. Gonick dated July 22, 1993.(6)
10.101 Common Stock Purchase Warrant by and between the Registrant and Thomas M. Ryan dated July 22, 1993.(6)
10.109 Letter Agreement dated December 2, 1993 by and among the Registrant, Hospitality Franchise Systems, Inc., I. G.
Davis, Jr. and John E. Dell.(7)
10.110 Amended and Restated Agreement dated January 13, 1994 by and between the Registrant and Bender Shipyard, Inc.(8)
10.111 Purchase Agreement dated January 20, 1994 by and among the Registrant and the persons who are signatories
thereto (without exhibits and schedules) (multiple conformed signatures omitted).(10)
10.112 Amendment to Purchase Agreement dated February 3, 1994 by and among the Registrant and the persons who are
signatories thereto (without exhibits and schedules) (multiple conformed signatures omitted).(10)
10.113 Purchase Agreement dated January 20, 1994 by and between the Registrant and Hospitality Franchise Systems, Inc.
(without exhibits and schedules).(10)
10.114 Amendment to Purchase Agreement dated February 17, 1994 by and among the Registrant, Hospitality Franchise
Systems, Inc. and Samuel Levine (without exhibits and schedules).(10)
47
<PAGE>
10.115 Purchase Agreement dated January 20, 1994 by and between the Registrant and MJM Partners, L.P. (without
exhibits and schedules).(10)
10.116 Purchase Agreement dated January 20, 1994 by and between the Registrant and MJM International Limited (without
exhibits and schedules).(10)
10.117 Purchase Agreement dated March 1, 1994 by and between the Registrant and MJM Partners, L.P. (without exhibits
and schedules).(10)
10.118 Purchase Agreement dated March 1, 1994 by and between the Registrant and MJM International Limited (without
exhibits and schedules).(10)
10.119 Cash Collateral and Disbursement Agreement dated February 17, 1994 by and among the Registrant, Crescent
City Capital Development Corp., British American Bingo, Inc., First Trust National Association and First
National Bank of Commerce (without exhibits and schedules).(10)
10.120 Marketing Services Agreement dated February 17, 1994 by and between the Registrant and HFS Gaming Corp.
(without exhibits and schedules).(10)
10.122 Amendment to Option Letter of Intent dated December 15, 1993 by and between the Registrant and Republic
Corporate Services, Inc.(11)
10.123 Agreement of Purchase and Sale dated April 26, 1994 by and among New Orleans 2000 Partnership, Crescent City
Capital Development Corp. and Grand Palais Riverboat, Inc.(11)
10.125 Loan and Security Agreement dated February 17, 1994 by and between the Registrant and Republic Corporate
Services, Inc.(11)
10.126 $5,000,000 Note dated February 17, 1994 from Republic Corporate Services, Inc. to Registrant(11)
10.127 Letter Agreement dated May 4, 1994 by and between the Registrant and Republic Corporate Services, Inc.(11)
10.128 $19,000,000 Note from the Registrant to Republic Corporate Services, Inc.(11)
10.130 First Amendment dated June 24, 1994 to the Cash Collateral and Disbursement Agreement dated February 17,
1994, by and among the Registrant, Crescent City Capital Development Corp., Capital Gaming International
Casino Management Division, Inc. (formerly British American Bingo, Inc.), First Trust National Association
and First National Bank of Commerce.(12)
10.131 Agreement to Purchase and Sell dated June 30, 1994 by and between River City Joint Venture and The Alabama
Great Southern Railroad.(12)
10.132 Term Note by River City Joint Venture to New Orleans 2000 Partnership dated July 13, 1994.(13)
10.133 Assignment of Agreement and Sale dated July 13, 1994.(13)
10.134 Mortgage and Assignment of Leases and Rentals by River City Joint Venture in favor of New Orleans 2000
Partnership dated July 13, 1994.(13)
10.135 Amended and Restated Partnership Agreement between Grand Palais Riverboat, Inc. and Crescent City Capital
Development Corp. dated July 7, 1994.(13)
10.136 First Amendment dated June 1, 1994 to the Marketing Services Agreement dated February 17, 1994 by and between
the Registrant and HFS Gaming Corp.(14)
10.137 Amendment effective as of October 1, 1994, to the Executive Employment Agreement effective as of October 17,
1993, by and between the Registrant and Clinton L. Pagano.(16)
10.139 Stock Option Agreement dated June 2, 1994, by and between Registrant and William S. Papazian.
10.143 Stock Option Agreement dated August 24, 1994 by and between Registrant and James F. Ahearn.
10.144 Letter Amendment to Warrant Agreements by and between Registrant, Ladenberg, Thalmann & Company, Inc., and
certain affiliates, dated October 11, 1994 (without exhibits).(16)
10.145 Construction Agreement by and between Crescent City Capital Development Corp., Grand Palais Riverboat, Inc.,
and Grimaldi Construction, Inc., dated October 25, 1994 (without exhibits).(17)
10.146 Stock Purchase Agreement by and between Registrant, Fidelity Galileo Fund, L.P., and Fidelity Copernicus Fund,
L.P., dated as of March 30, 1995.(18)
10.147 Registration Rights Agreement by and between Registrant, Fidelity Galileo Fund, L.P., and Fidelity Copernicus
Fund, L.P., dated as of March 30, 1995.(18)
10.148 Riverboat Casino Operating Agreement by and between Crescent City Capital Development Corp. and River Marine
Services, Inc., dated as of January 13, 1995.(18)
10.152 Promissory Note dated March 27, 1995 between Crescent City Capital Development Corp. and First National Bank
of Commerce.(18)
48
<PAGE>
10.153 Commercial Guaranty dated March 27, 1995 between Registrant and First National Bank of Commerce.(18)
10.154 Credit Agreement dated March 10, 1995 by and among River City Joint Venture, Crescent City Capital
Development Corp., Grand Palais Riverboat, Inc., and First National Bank of Commerce.(18)
10.155 Promissory Note dated March 10, 1995 between River City Joint Venture and First National Bank of
Commerce.(18)
10.156 Mortgage dated March 9, 1995 between River City Joint Venture and First National Bank of Commerce, relating
to certain property owned by the River City Joint Venture (the "Orange Street Parcels").(18)
10.157 Mortgage dated March 9, 1995 between River City Joint Venture and First National Bank of Commerce, relating
to certain property owned by the River City Joint Venture (the "Cusimano Parcels").(18)
10.162 Employment Agreement dated May 30, 1995 by and between the Registrant and Edward Tracy.(19)
10.163 Employment Agreement dated May 30, 1995 by and between the Registrant and I.G. Davis, Jr.(19)
10.167 Buy-Out Agreement dated September 1, 1995 by and among Registrant, Capital Gaming Management, Inc. and the
Cow Creek Band of Umpqua Tribe of Indians.(19)
10.168 Amendments to the January 13, 1994 Amended and Restated Riverboat Construction Agreement by and between the
Registrant, Crescent City Capital Development Corp. and Bender Shipyard, Inc. dated October 19, 1994,
February 3, 1995, and February 9, 1995.(19)
10.169 First Preferred Ship Mortgage by Crescent City Capital Development Corporation in favor of First Trust
National Association dated March 23, 1995.(19)
10.170 Engagement Agreement between Registrant and Donaldson, Lufkin & Jenrette dated June 20, 1995.(19)
10.171 Employment Agreement dated May 17, 1996 by and between Registrant and William S. Papazian.#
11.0 Computation of Earnings Per Share - Included on Page S-2.#
12.0 Computation of Ratio of Earnings to Fixed Charges - Included on Page S-3.#
27. Financial Data Schedule#
</TABLE>
- ---------------
# Filed herewith.
1 Incorporated by reference to the exhibit with the same number, filed in
connection with the Registrant's Form 10-K filed with the Securities and
Exchange Commission on September 28, 1992.
2 Incorporated by reference to the exhibit with the same number, filed in
connection with the Registrant's Post-Effective Amendment No. 5 to the
Registration Statement on Form S-1, File No. 33-36618, declared
effective by the Securities and Exchange Commission on November 21,
1990.
3 Incorporated by reference to the exhibit with the same number, filed in
connection with the Registrant's Post-Effective Amendment No. 6 to the
Registration Statement on Form S-1, File No. 33-36618, declared
effective by the Securities and Exchange Commission on November 21,
1990.
4 Incorporated by reference to the exhibit with the same number, filed in
connection with the Registrant's Post-Effective Amendment No. 8 to the
Registration Statement on Form S-1, File No. 33-36618, declared
effective by the Securities and Exchange Commission on November 21,
1990.
5 Incorporated by reference to the exhibit with the same number filed in
connection with the Registrant's Current Report on Form 8-K filed with
the Securities and Exchange Commission on September 27, 1993.
6 Incorporated by reference to the exhibit with the same number filed in
connection with the Registrant's Form 10-K filed with the Securities and
Exchange Commission on September 28, 1993.
7 Incorporated by reference to the exhibit with the same number filed in
connection with the Registrant's Current Report on Form 8-K filed with
the Securities and Exchange Commission on January 3, 1994.
49
<PAGE>
8 Incorporated by reference to the exhibit numbered 10.109 filed in
connection with the Registrant's Current Report on Form 8-K filed with
the Securities and Exchange Commission on February 1, 1994.
9 Incorporated by reference to the exhibit with the same number filed in
connection with the Registrant's Current Report on Form 8-K filed with
the Securities and Exchange Commission on March 4, 1994.
10 Incorporated by reference to the exhibits numbered 10.110, 10.111,
10.112, 10.113, 10.114, 10.115, 10.116, 10.117, 10.118 and 10.119,
respectively, filed in connection with the Registrant's Current Report
on Form 8-K filed with the Securities and Exchange Commission on March
4, 1994.
11 Incorporated by reference to the exhibits with the same number, filed in
connection with the Registrant's Registration Statement on Form S-1,
File No. 33-79082, which was filed with the Securities and Exchange
Commission on May 18, 1994.
12 Incorporated by reference to the exhibits with the same number, filed in
connection with the Registrant's Pre-Effective Amendment No. 1 to the
Registration Statement on Form S-1, File No. 33-79082, which was filed
with the Securities and Exchange Commission on July 11, 1994.
13 Incorporated by reference to the exhibit with the same number, filed in
connection with the Registrant's Current Report on Form 8-K filed with
the Securities and Exchange Commission on July 29, 1994.
14 Incorporated by reference to the exhibit with the same number, filed in
connection with the Registrant's Pre-Effective Amendment No. 2 to the
Registration Statement on Form S-1, File No. 33-79082, which was filed
with the Securities and Exchange Commission on August 11, 1994.
15 Incorporated by reference to the exhibit with the same number filed in
connection with the Registrant's Form 10-K filed with the Securities and
Exchange Commission on September 28, 1994.
16 Incorporated by reference to the exhibit with the same number filed in
connection with the Registrant's Registration Statement on Form S-1,
File No. 33-86094, which was filed with the Securities and Exchange
Commission on November 7, 1994.
17 Incorporated by reference to the exhibit with the same number filed in
connection with the Registrant's Pre-Effective Amendment No. 1 to the
Registration Statement on Form S-1, File No. 33-86094, which was filed
with the Securities and Exchange Commission on November 15, 1994.
18 Incorporated by reference to the exhibit with the same number filed in
connection with the Registration Statement on Form S-1, File No.
33-91024, which was filed with the Securities and Exchange Commission on
April 7, 1995.
19 Incorporated by reference to the exhibit with the same number filed in
connection with the Registrant's Form 10-K filed with the Securities and
Exchange Commission on October 12, 1995.
20 Incorporated by reference to the exhibit with the same number, filed in
connection with the Registrant's Current Report on Form 8-K filed with
the Securities and Exchange Commission on January 31, 1996.
21 Incorporated by reference to the exhibit with the same number, filed in
connection with the Registrant's Form 10-Q filed with the Securities and
Exchange Commission on May 10, 1996.
(b) Reports on Form 8-K.
No Current Reports on Form 8-K were filed for the fourth quarter of the
fiscal year ended June 30, 1996.
<PAGE>
CAPITAL GAMING INTERNATIONAL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditor's Report. ........................................... F-2
Consolidated Balance Sheets as of June 30, 1996 and 1995................. F-3
Consolidated Statements of Operations for the years ended
June 30, 1996, 1995 and 1994......................................... F-5
Consolidated Statement of Changes in Stockholders' Equity
for the years ended June 30, 1996, 1995 and 1994..................... F-7
Consolidated Statements of Cash Flows for the years
ended June 30, 1996, 1995 and 1994................................... F-8
Notes to Consolidated Financial Statements............................... F-12
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Capital Gaming, International, Inc.
West Atlantic City, New Jersey
We have audited the accompanying consolidated balance sheets of Capital
Gaming International, Inc. and its subsidiaries as of June 30, 1996 and 1995,
and the related consolidated statements of operations, changes in stockholders'
[deficit], and cash flows for each of the three fiscal years in the period ended
June 30, 1996. 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 consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated 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 consolidated financial position of
Capital Gaming International, Inc. and its subsidiaries as of June 30, 1996 and
1995, and the consolidated results of their operations and their cash flows for
each of the three fiscal years in the period ended June 30, 1996, in conformity
with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, effective July 1,
1994, the Company adopted Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 6 to the
consolidated financial statements, one of the Company's subsidiaries ceased
operations and was sold primarily because of the failure of its gaming
operations to generate sufficient revenue to satisfy operating costs. The
Company has also suffered recurring losses from, operations, has a working
capital deficit of approximately $118,000,000, and has a stockholders' deficit
of approximately $100,000,000. The Company has not been able to satisfy its debt
obligations and consequently is in default on substantially all of its debt.
Additionally, the Company is a party to various legal and other actions as a
result of the cessation of certain operations and defaults on debt as described
above. The ultimate liability resulting from those matters cannot presently be
determined. The above conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters, including the possible filing by Capital Gaming International, Inc. of
a voluntary petition for relief on a pre-negotiated basis under the
reorganization provision of Chapter 11 of the U.S. Bankruptcy Code, and its
planned restructuring are described in Note 26. The financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
As discussed in Note 29 to the consolidated financial statements, the
Company restated its consolidated financial statements as of and for the year
ended June 30, 1996 to reflect an accrued expense relating to a marketing
services agreement.
MOORE STEPHENS, P.C.
Certified Public Accountants.
Cranford, New Jersey
September 18, 1996
F-2
<PAGE>
CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30,
---------------------------
1 9 9 6 1 9 9 5
-------- -------
[Restated]
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $ 2,101,624 $ 1,187,241
Cash Held in Escrow [Note 3] 500,000 --
Interest Receivable 616,619 587,489
Native American Management Fees and Expenses Receivable 666,672 1,996,096
Current Portion - Native American Loan Receivable [Note 14] 3,696,165 11,029,694
Notes Receivable [Note 3] 35,000,000 --
Prepaid Expenses and Other Current Assets 206,327 212,883
----------- -----------
TOTAL CURRENT ASSETS 42,787,407 15,013,403
----------- -----------
ASSETS HELD FOR SALE, net [Note 3 and 6] -- 40,660,974
FURNITURE, FIXTURES AND EQUIPMENT, net [Note 12] 127,053 140,667
OTHER ASSETS:
Restricted Cash [Note 4] -- 4,063,558
Native American Loan Receivable [Note 14] 7,629,720 11,323,830
Investments in Native American Management Agreements,
net of accumulated amortization of $1,290,273 and
$566,559 [Note 13] 2,677,053 3,294,550
Deferred Financing Costs,(net of accumulated amortization of
$3,303,686 and $1,873,055) [Note 10] 6,212,978 7,643,608
Deposits and Other Assets 188,175 370,654
Goodwill, (net of accumulated amortization of
$110,760 and $70,510) [Note 9] 425,784 466,059
----------- -----------
TOTAL OTHER ASSETS 17,133,710 27,162,259
----------- -----------
TOTAL ASSETS $60,048,170 $82,977,303
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
F-3
<PAGE>
CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
<TABLE>
<CAPTION>
June 30,
----------------------------
1 9 9 6 1 9 9 5
------- -------
[Restated]
<S> <C> <C>
CURRENT LIABILITIES:
Accounts Payable and Accrued Expenses $ 9,943,087 $ 12,275,745
Accrued Professional Fees 1,916,880 1,920,610
Accrued Interest 23,277,243 6,505,172
Notes Payable - Current Maturity 1,289,390 1,683,007
Bank Line of Credit [Note 3 and 21] 2,000,000 2,000,000
Bondholder Consent Fee Note [Note 3] 1,350,000 1,350,000
Proportionate Share of Losses in Joint Venture
in Excess of Investment and Advances [Note 6 and 7] -- 9,794,726
11.5% Senior Secured Notes Payable - net of $8,000,000 face
Treasury Bonds and unamortized Original Issue Discount of
$2,979,588 and $3,622,821 [Notes 4, 5, 8 and 10] 124,020,412 123,377,179
Funds Held by Trustee for Senior Secured Noteholders [Note 4] (22,488,686) --
Unsecured 11.5% Term Note Payable [Note 3] 19,000,000 --
------------- -------------
TOTAL CURRENT LIABILITIES 160,308,326 158,906,439
LONG-TERM DEBT:
Unsecured 11.5% Term Note Payable [Note 3] -- 19,000,000
Notes Payable - Native American -- 1,292,743
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' (DEFICIT): [Notes 11 and 15]
Preferred Stock, No Par Value, Authorized 5,000,000 Shares;
None Issued -- --
Common Stock, No Par Value, Authorized
75,000,000 Shares; Issued and Outstanding
19,329,574 and 19,329,574 Shares, respectively 37,617,099 37,617,099
Additional Paid In Capital 7,877,002 7,877,002
Accumulated (Deficit) (145,754,257) (141,715,980)
------------- -------------
TOTAL STOCKHOLDERS' (DEFICIT) (100,260,156) (96,221,879)
------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' (DEFICIT) $ 60,048,170 $ 82,977,303
============= =============
</TABLE>
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
F-4
<PAGE>
CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------------------
1 9 9 6 1 9 9 5 1 9 9 4
------- ------- -------
[Restated]
<S> <C> <C> <C>
REVENUES:
Native American Casino Management
Fees [Note 8] $ 7,663,059 $ 6,440,962 $ 1,723,819
COSTS AND EXPENSES
Salaries, Wages and Related Costs 2,861,560 4,564,614 3,955,786
Gaming Development Costs 8,464 1,454,905 1,885,988
Native American Gaming Development Costs 1,899,475 2,146,481 1,605,424
Professional Fees 1,795,283 6,244,656 3,292,877
General and Administrative 2,033,699 3,654,110 2,597,908
Write-off of Native American Assets -- 1,017,766 --
Depreciation and Amortization 939,631 398,067 395,344
Debt Restructuring Fee 600,000 -- --
Bondholder Consent Fee and Related Costs [Note 3] -- -- 2,847,000
------------- ------------- -------------
Total Costs and Expenses 10,138,112 19,480,599 16,580,327
------------- ------------- -------------
Loss From Continuing Operations (2,475,053) (13,039,637) (14,856,508)
Other Income [Expense]:
Interest Income 1,959,405 2,619,646 1,712,272
Interest Expense, net of Capitalized Interest (19,061,910) (18,225,375) (11,023,794)
Gain on Sale of Development Agreement 220,958 -- --
Sale of Management Contract 3,000,000 -- --
------------- ------------- -------------
Total Other Income [Expense], net (13,881,547) (15,605,729) (9,311,522)
------------- ------------- -------------
Loss From Continuing Operations Before Income Tax (16,356,600) (28,645,366) (24,168,030)
Provision For Income Tax (Expense) Benefit (320,645) -- 483,738
------------- ------------- -------------
Loss From Continuing Operations (16,677,245) (28,645,366) (23,684,292)
Discontinued Operations:
Loss From Discontinued Operations
[Net of Income Tax][Note 6] -- (18,953,923) --
Gain/[Loss] on Disposal of Discontinued Operations
[Net of Income Tax] [Note 6] 12,638,968 (69,276,883) --
------------- ------------- -------------
Total Discontinued Operations 12,638,968 (88,230,806) --
------------- ------------- -------------
Net [Loss] Before Extraordinary Item $ (4,038,277) $(116,876,172) $ (23,684,292)
Extraordinary Item - Loss on Early
Extinguishment of Debt [Net of Income Tax] [Note 8] -- (832,846) --
------------- ------------- -------------
Net [Loss] $ (4,038,277) $(117,709,018) $ (23,684,292)
============= ============= =============
</TABLE>
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
F-5
<PAGE>
CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------------------------
1 9 9 6 1 9 9 5 1 9 9 4
------- ------- -------
[Restated]
<S> <C> <C> <C>
EARNINGS [LOSS] PER SHARE:
Loss from Continuing Operations $ (.86) $ (1.66) $ (1.68)
Loss from Discontinued Operations -- (1.10) --
Gain/[Loss] on Sale of Discontinued Operations .65 (4.01) --
Extraordinary Item -- (.05) --
----------- ----------- -----------
Net [Loss] $ (.21) $ (6.82) $ (1.68)
=========== =========== ===========
Weighted Average Number of Shares Outstanding 19,329,574 17,256,591 14,135,625
=========== =========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
F-6
<PAGE>
CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY [DEFICIT]
<TABLE>
<CAPTION>
Common Stock Additional Accumulated
--------------------------- ---------- -----------
Shares Amount Capital [Deficit]
------ ------ ------- ---------
[Restated]
<S> <C> <C> <C> <C>
Balance - June 30, 1993 12,746,326 $ 9,224,448 $ 22,564 $ (322,670)
Exercise of Warrants 860,756 2,025,049 -- --
Repurchase of Common Stock (2,000,000) (8,000,000) -- --
Issuance of Common Stock 4,912,291 24,711,455 -- --
Issuance of Common Stock
Purchase Warrants -- (474,987) 7,854,438 --
Equity Issuance Costs -- (1,377,465) -- --
Net Loss Year Ended June 30, 1994 -- -- -- (23,684,292)
------------- ------------- ------------- --------------
Balance - June 30, 1994 16,519,373 $ 26,108,500 $ 7,877,002 $ (24,006,962)
Exercise of Common Stock Options 60,000 80,000 -- --
Issuance of Common Stock 750,000 3,187,500 -- --
Issuance of Common Stock in
Exchange for Debt 2,000,201 8,241,099 -- --
Net Loss Year Ended June 30, 1995 (117,709,018)
------------- ------------- ------------- --------------
Balance - June 30, 1995 19,329,574 $ 37,617,099 $ 7,877,002 $(141,715,980)
Net Loss Year Ended June 30, 1996 -- -- -- (4,038,277)
------------- ------------- ------------- --------------
Balance - June 30, 1996 19,329,574 $ 37,617,099 $ 7,877,002 $(145,754,257)
============= ============= ============= =============
</TABLE>
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
F-7
<PAGE>
CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------------
1 9 9 6 1 9 9 5 1 9 9 4
------- ------- -------
[Restated]
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net [Loss] from Continuing Operations $(16,677,245) $(29,478,212) $(23,684,292)
Adjustments to Reconcile Net Loss to
Net Cash Provided by Continuing Operations:
Loss on Early Extinguishment of Debt -- 832,846 --
Loss on Sale of Assets 1,303 -- --
[Gain] on Sale of Development Agreement (220,958) -- --
Write-off of Native American Assets -- 1,017,766 --
Depreciation and Amortization 939,631 398,067 395,344
Amortization of Original Issue Discount 643,233 673,392 249,501
Amortization of Advances and
Deferred Financing Costs 1,430,630 1,441,753 827,787
Interest Charge in Connection with
Termination of Warrant -- -- 4,000,000
Other Non-Cash Charges -- -- 1,625,000
Changes in Assets and Liabilities -
Net of Assets and Liabilities Acquired
[Increase] Decrease in:
Interest Receivable (29,130) (150,878) (436,611)
Income Taxes Receivable -- 486,720 (84,266)
Prepaid Expenses and Other Current Assets (58,979) (193,751) 46,284
Management Fees and Expenses Receivable 1,329,424 (1,630,974) (90,141)
Deposits and Other Assets 6,163 (44,273) (226,381)
Increase [Decrease] in:
Accounts Payable and Accrued Expenses 1,496,364 12,407,884 1,096,331
Accrued Interest Expense 16,794,432 331,908 6,173,264
------------ ------------ ------------
Total Adjustments 22,332,113 15,570,460 13,576,112
------------ ------------ ------------
Net Cash - Continuing Operations 5,654,868 (13,907,752) (10,108,180)
[Loss] from Discontinued Operations -- (18,953,923) --
Gain/[Loss] on Sale of Discontinued Operations 12,638,968 (69,276,883) --
</TABLE>
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
F-8
<PAGE>
CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------------------
1 9 9 6 1 9 9 5 1 9 9 4
------- ------- -------
[Restated]
<S> <C> <C> <C>
Adjustments to Reconcile [Loss] Gain from
Discontinued Operations to Net Cash
Provided by Discontinued Operations:
Equity in (Gain) Losses of Unconsolidated Affiliate $ 1,262,000 $ 48,388,511 $ --
Reserve for Port of New Orleans Assets -- 7,051,500 --
Write-off of Impaired Gaming Assets -- 23,725,380 --
Depreciation and Amortization -- 2,807,326 --
Adjustments to Basis of Disposed Assets (5,980,779) -- --
[Gain] on Sale of Disposed Assets (17,542,802) -- --
Proceeds from Sale of Discontinued Operations 15,000,000 -- --
Cash Disbursed to Liquidating Trust (4,740,773) -- --
Repayment of Debtor in Possession
Financing of CCCD (3,009,227) -- --
Accrued Expenses due to Liquidating Trust 7,000,000 -- --
Accrued Expenses on Sale of Discontinued Operations 500,000 -- --
------------ ------------ -------------
Net Cash - Discontinued Operations 5,127,387 (6,258,089) --
------------ ------------ -------------
Net Cash - Operating Activities 10,782,255 (20,165,841) (10,108,180)
INVESTING ACTIVITIES:
Proceeds from Sale of Assets 292,240 -- --
Investment in Property and Equipment -- (35,083,517) (7,773,489)
Berth Infrastructure Reimbursement (Payments) -- 500,000 (3,016,561)
Proceeds from Sale of Assets 1,571 112,500 --
Cash Held in Escrow -- -- (2,534,939)
Issuance of Notes Receivable -- -- (5,000,000)
Proceeds from Repayment of Notes Receivable -- -- 5,000,000
CMDI Acquisition Payment -- -- (112,500)
Cash Acquired with CMDI -- -- 196,725
Advances to Affiliates (335,172) (37,590,605) (1,045,025)
Gaming Asset Purchase -- -- (6,540,000)
Net Transfers (to) from Restricted Cash 4,063,558 89,398,474 (93,462,032)
Investments in Management Agreements (242,662) (3,037,193) (138,307)
Native American Casino Development Advances -- -- (1,505,988)
Repayment of Native American Casino
Development Advances/Loans 12,097,137 1,419,958 765,439
Loans to Tribes (1,069,498) (17,261,596) (1,281,733)
Cash Held in Escrow (500,000) -- --
------------ ------------ -------------
Net Cash - Investing Activities $ 14,307,174 $ (1,541,979) $(116,448,410)
</TABLE>
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
F-9
<PAGE>
CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------------
1 9 9 6 1 9 9 5 1 9 9 4
------- ------- -------
[Restated]
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Proceeds from Issuance of Notes $ -- $ 2,000,000 $ 135,000,000
Repayment of Equipment/Other Notes (1,686,360) (379,995) (16,200,000)
Proceeds from Exercise of Warrants and Options -- 80,000 2,025,049
Proceeds from Common Stock Issuance -- 3,187,500 24,711,455
Cash for Debt Issuance Costs -- -- (8,899,402)
Proceeds from Bridge Financing -- -- 4,000,000
Payments to Trustee for Senior Secured Noteholders (22,488,686) -- --
------------- ------------- -------------
Net Cash - Financing Activities (24,175,046) 4,887,505 140,637,102
------------- ------------- -------------
Net Increase in Cash and Cash Equivalents 914,383 (16,820,315) 14,080,512
Cash and Cash Equivalents - Beginning of Periods 1,187,241 18,007,556 3,927,044
------------- ------------- -------------
Cash and Cash Equivalents - End of Periods $ 2,101,624 $ 1,187,241 $ 18,007,556
============= ============= =============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest (Net of Amounts Capitalized) $ 2,510,052 $ 17,251,844 $ 4,322,743
Income Taxes $ 320,645 $ -- $ --
</TABLE>
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
F-10
<PAGE>
CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
In August 1993, the Company offset a receivable from a company for
$300,000 against an obligation to the same company for $300,000.
In November 1993, the Company issued a note payable for $8,000,000 in
exchange for 2,000,000 shares of common stock.
In December 1993, the Company issued a note payable for $4,000,000 and
charged interest expense in lieu of the issuance of warrants to purchase
1,250,000 shares of the Company's common stock.
In connection with the issuance of debt and equity, the Company also
issued detachable purchase warrants. The value of these warrants were charged to
deferred financing costs, original issue discount and no par common stock in the
amounts of $2,595,387, $4,784,064 and $474,987, respectively, with an offset to
paid-in capital.
The Company capitalized interest of $1,473,522 and $233,645 during the
years ended June 30, 1995 and 1994, respectively, related to the construction of
the riverboat.
In connection with the acquisition of all of the common stock of
British American Bingo for $2,612,500, the Company acquired on October 1, 1993,
assets with a fair value of $3,353,738 and assumed liabilities of $1,546,769. As
a result, goodwill of $805,531 was recorded.
In April 1994, the Company purchased certain gaming assets for
$25,540,000 from an entity which held a 28% interest in the future profits of a
Company subsidiary. The Company paid cash of $6,540,000 and issued a note for
$19,000,000.
On March 31, 1995, the Company exchanged 1,961,290 shares of Common
Stock for $8,000,000 principal amount of Senior Secured Notes outstanding. [See
Note 7].
The Company's wholly owned subsidiary, CGMI, secured equipment
financing of $3,355,745 on behalf of the Native American Tribes whose facilities
the Company manages. Such amount is also included in the balance of Native
American Loans Receivable at June 30, 1995.
In May 1996, the Company sold all the outstanding common stock of its
wholly owned subsidiary, CCCD, for $50,000,000, plus assumption of equipment
liabilities of $6,500,000. The Company received cash of $15,000,000, a note for
$35,000,000 and Casino Magic assumed equipment Notes of $6,500,000.
In May of 1996, the Company, as guarantor, assumed the liability from
CCCD of the bank note payable of $2,000,000 to FNBC.
F-11
<PAGE>
CAPITAL GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[1] ORGANIZATION AND BUSINESS
Capital Gaming International, Inc. (the "Company"), together with its
subsidiaries, is a multi-jurisdictional gaming company with gaming management
interests with Native American Tribes in several states. The management of
Native American gaming facilities is conducted through Capital Gaming
Management, Inc. ("CGMI"), a wholly owned subsidiary of the Company. The
development of the Narragansett Casino Project is conducted through Capital
Development Gaming Corp., (CDGC) a wholly owned subsidiary of the Company. The
Company previously had an interest in Crescent City Capital Development Corp.
("CCCD"), a wholly owned subsidiary which had a 50% interest in a joint venture
riverboat gaming facility in New Orleans, Louisiana (the "River City Joint
Venture"). The gaming facility ceased operations in June of 1995 and the River
City Joint Venture was terminated in July of 1995. On July 26, 1995 a
involuntary bankruptcy petition was filed against CCCD seeking reorganization
under Chapter 11 of the U.S. Bankruptcy Code (the "Bankruptcy Case"). On July
28, 1995 CCCD consented to the entry of an order for relief in the Bankruptcy
Case. Since such order, CCCD continued to manage its business and properties as
a debtor-in-possession. On May 13, 1996, the Company sold the assets and its
remaining interest in CCCD to a wholly owned subsidiary of Casino Magic
Corporation (CMC) for cash, notes and the assumption of certain liabilities in
an aggregate amount of $56.5 million (see gain on disposal of assets). [See Note
6].
In order to enter the Native American, riverboat, dockside casino or
any other aspect of the gaming industry, the Company will be subject to
regulation by each state in which it conducts business, and to a certain extent
under Federal, Tribal and (in some cases) state law with respect to Native
American gaming. In jurisdictions where gaming has recently been legalized,
gaming cannot begin until a licensing and regulatory framework is promulgated
and regulatory commissions are appointed, staffed and funded. The regulatory
framework adopted by any jurisdiction may impose delays in licensure,
restrictions or costs that would materially detract from the profitability of
gaming operations. The Company must obtain a gaming license for each location
where it will operate or manage a gaming casino, and each of the Company's
officers, directors, managers and principal shareholders are subject to strict
scrutiny and approval of the gaming commission or other regulatory body of each
state in which the Company may conduct gaming operations. In addition, gaming on
Native American lands is extensively regulated, and the terms and conditions of
management contracts must be approved by the Tribes and certain regulatory
entities. Changes in the interests of principals must be approved, and the
Company and certain of its principals must be licensed, by Tribal and, in some
cases, state authorities. There can be no assurance that the Company or any of
its key personnel will obtain the requisite licenses and approvals of the
various state and Tribal gaming commissions and the NIGC in a timely fashion, if
at all.
The Company must also obtain liquor licenses from state regulatory
agencies for each of its proposed operations. Rules and regulations in this
regard are strict and the loss of such licenses is possible for regulatory
violations. The loss or suspension of a liquor license could significantly
impact a licensee's operations. Local building, health and fire codes and
similar regulations could also impact the Company's operations. Violations of
any of such statutes, codes or regulations could have a material adverse impact
on the financial condition or operations of the Company.
F-12
<PAGE>
Capital Gaming International, Inc.
Notes to Consolidated Financial Statements
As a result of CCCD's reorganization and sale, the Company is now
focusing all of its efforts on (i) restructuring the Company's debt, (ii)
maintaining its remaining gaming management contracts with Native American
Tribes, (iii) developing the Narragansett Casino, and (iv) seeking new gaming
opportunities. In the event the Company is unable to satisfactorily restructure
its debt, the Company may be compelled to seek relief under the reorganization
provisions of Chapter 11 of the Bankruptcy Code.
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of the Company and its wholly owned subsidiaries
- - Capital Gaming Management, Inc. and Capital Development Gaming Corp.
Intercompany balances and transactions have been eliminated.
As a result of the bankruptcy and sale of CCCD, the Company ceased to
have control of this entity and therefore effective June 30, 1995, Crescent City
Capital Development Corp. is presented as a discontinued operation in the
financial statements. [See Note 6].
The payment of principal and interest of the Company's 11.5% Senior
Secured Notes due 2001 are unconditionally guaranteed by CGMI. The guarantor is
a wholly owned subsidiary of the Company and its guaranty is full,
unconditional, joint and several. Summarized financial information for CGMI has
been provided in Note 9 to the consolidated financial statements. The
non-guarantor subsidiary of the Company, Capital Development Gaming Corp., is
inconsequential to the Company as of June 30, 1996.
Revenue Presentation and Recognition - The revenues recognized in these
financial statements from continuing operations are those of CGMI and represent
management fees derived primarily from Class III (gaming) facilities in 1996 and
1995 and from Class II (primarily bingo), facilities in 1994. Management fees
are recognized as revenue when earned based upon earnings sharing arrangements
detailed in the respective management contracts with the Native American Tribes.
Cash and Cash Equivalents - The Company considers all highly liquid
instruments purchased with a maturity of three months or less to be cash
equivalents. Cash equivalents are carried at cost which approximates market
value.
Impairment - Certain long term assets of the Company, including
Goodwill, Acquired Gaming Assets, and Investments in Native American Management
Agreements are reviewed at least annually as to whether their carrying value has
become impaired, pursuant to guidance established in Financial Accounting
Standard 121, "Accounting for the Impairment of Long Lived Assets." Management
considers assets to be impaired if the carrying value exceeds the future
projected cash flows from related operations (undiscounted and without interest
charges). If impairment is deemed to exist, the assets will be written down to
fair value or projected discounted cash flows from related operations.
Management also re-evaluates the periods of amortization to determine whether
subsequent events and circumstances warrant revised estimates of useful lives.
As of June 30, 1996 management expects these assets to be fully recoverable
based on revised carrying amounts of assets, some of which were substantially
written down in 1995. [See Note 3].
Excess of Purchase Price Over Fair Value of Assets Acquired - Goodwill
arising from the CGMI acquisition is being amortized using the straight line
method over a period of 20 years.
F-13
<PAGE>
Capital Gaming International, Inc.
Notes to Consolidated Financial Statements
Original Issue Discount and Deferred Financing Costs - Original issue
discount is amortized over the seven year life of the senior secured notes using
the straight line method. Costs associated with the issuance of debt are
deferred and amortized over seven years using the straight-line method.
Amortization is included in "Interest Expense" in the statement of operations. A
pro-rata amount of these assets were reduced with the repurchase of $8,000,000
face amount of outstanding notes. [See Note 8].
Depreciation - Office furniture and fixtures are recorded at cost and
depreciated using the straight line method over the estimated useful life -
primarily 4 to 8 years.
Net (Loss) Income Per Share of Common Stock - Net income (loss) per
share of common stock is computed on the basis of the weighted average shares of
common stock outstanding. The loss per share is computed without consideration
for contingently issuable shares underlying stock options and warrants as the
effect on earnings per share would be anti-dilutive. Fully diluted and primary
earnings per share are the same for all periods presented.
Reclassifications - Certain reclassifications have been made to prior
year financial statements to conform with classifications used in the current
year.
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 reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
[3] THE NEW ORLEANS RIVERBOAT PROJECT (Assets Held For Sale)
The Grand Palais and Crescent City Queen riverboats operating through
the River City Joint Venture, in which CCCD held a 50% interest, ceased gaming
operations on June 6, 1995 and June 9, 1995, respectively, primarily due to a
failure of the gaming operations to generate sufficient revenue to satisfy
operating costs. As a result, CCCD became a debtor-in-possession in a case under
Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the
Eastern District of Louisiana (the "CCCD Reorganization Case"). The
Reorganization Case was originally filed as an involuntary Chapter 11 petition
on July 26, 1995 and was converted to a voluntary case under Chapter 11 on July
28, 1995. The Grand Palais riverboat and River City Joint Venture's
entertainment pavilion and docking facility commenced operations on March 29,
1995 and the Company's Crescent City Queen riverboat commenced operations on
April 4, 1995. From the commencement of gaming operations until termination of
same on June 9, 1995, CCCD incurred operating losses of approximately
$10,061,000. The revenues derived during the period of operation of the River
City Joint Venture were approximately 66% below the revenues projected by the
Company. As a result of project cost overruns in excess of $30 million and the
failure of the River City Casino to generate sufficient revenue to cover
operating costs, CCCD determined they could no longer continue funding operating
losses. On July 28, 1995, CCCD filed a voluntary petition seeking reorganization
under Chapter 11 of the U.S. Bankruptcy Code. [See Note 21]
F-14
<PAGE>
Capital Gaming International, Inc.
Notes to Consolidated Financial Statements
Subsequent to and in connection with the bankruptcy proceedings, the
Company entered into an agreement with a wholly owned subsidiary of Casino Magic
Corp. (CMC) to sell 100% of the stock and substantially all the assets of the
Crescent City subsidiary in consideration for the following:
Notes $35,000,000
Cash 15,000,000
Assumption of equipment liabilities 6,500,000
-----------
$56,500,000
The $35,000,000 note had an interest rate of 11-1/2% per annum, payable
quarterly beginning August 13, 1996. The principal amount of the notes was due
no later than May 13, 1999 and was guaranteed by CMC.
The note was paid in full on July 29, 1996.
The difference between the amounts realized and the investment in the
Crescent City subsidiary have been accounted for as a gain from disposal (See
Note 6).
In connection with the sale, the Company agreed to indemnify the
purchaser for any undisclosed liabilities which are discovered within 36 months
after the closing. The Company was required to place in escrow $500,000 until
May 13, 1997 to partially secure the potential indemnification obligation.
Purchase of Real Property - Crescent City originally intended to locate
the New Orleans Riverboat Project at the Julia Street Wharf in downtown New
Orleans. The Partners re-examined that location and decided to move to an
alternative site on and adjacent to an approximately 51-acre parcel of
riverfront land which is approximately 3/4 mile upriver from the Julia Street
Wharf (the "New Orleans 2000 Property"). On June 24, 1994, the holders of the
Company's Senior Secured Notes consented to the relocation of the New Orleans
Riverboat Project. Pursuant to the consent, the Company paid $1,350,000 on June
30, 1994 and executed a note payable for $1,350,000 due August 1, 1995 in favor
of the noteholders. The Company did not make this payment on August 1, 1995,
resulting in a default of the Company's Indenture Agreement.
The Partners acquired title to the New Orleans 2000 Property at a
closing on July 14, 1994 (the "Closing"). The Land Purchase Agreement provides
for a purchase price of $37,500,000, subject to certain prorations and credits.
The purchase price was paid $15,000,000 in cash at Closing and $22,500,000 in
the form of a purchase money note and mortgage (the "Mortgage") in favor of the
seller which is a first lien on the New Orleans 2000 Property. The Mortgage has
a term of five years, provides for quarterly payments of interest at a rate
equal to the prime rate as published in the Wall Street Journal, calculated
monthly, and requires principal payments from the Riverboat Joint Venture in the
amount of $1,500,000 on each anniversary date of the Mortgage, with the
remaining principal and accrued interest due at the end of the fifth loan year.
Due to failure to make the July 1995 principal payment and interest payments and
the occurrence of other conditions, the River City Joint Venture is in default.
On July 7, 1995, the seller filed suit. [See Note 5].
Bank Line of Credit - On March 28, 1995, CCCD entered into a loan
agreement with First National Bank of Commerce ("FNBC") which was guaranteed by
the Company. Pursuant to the terms of this agreement, CCCD received a $2 million
working capital Line of Credit from FNBC for a period of ninety (90) days. In
April 1995, this credit facility was utilized to provide CCCD with $2 million
used for construction requirements. The Note bears interest at a rate of prime
plus 2%. Borrowings against this facility were due June 27, 1995. CCCD
F-15
<PAGE>
Capital Gaming International, Inc.
Notes to Consolidated Financial Statements
was not able to repay the obligation thereby causing a default under the
agreement. FNBC has filed suit against Capital Gaming International, Inc. and
there is a likelihood that their suit will succeed. The Company has recorded a
liability in the amount of $2,500,000 which included the original Note of
$2,000,000 plus interest and costs of $500,000. The entire amount was added to
the basis of the disposed assets and is included in the gain from disposal. This
amount is based upon the estimated amount of judgement arising from litigation
related to the Note and accordingly, actual amounts may differ from this
estimate in the near term.
Berth Infrastructure Reimbursement Agreement - CCCD had contemplated
locating the New Orleans Riverboat operation at the Julia Street Wharf and in
September 1993 entered into a Berth Infrastructure Reimbursement Agreement with
the Board of Commissioners of the Port of New Orleans [the "Dock Board"]
pursuant to which CCCD agreed to pay for costs of certain interrelated
infrastructure improvements in the amount of $7,551,500. The total costs of the
berth infrastructure improvements were to be borne equally by CCCD, Grand Palais
and one other holder of a preliminary riverboat gaming license. In order to fund
its reimbursement obligations to the Port, CCCD had posted a $7,551,500 Stand-by
Letter of Credit issued by First National Bank of Commerce ["FNBC"] in New
Orleans, Louisiana pursuant to which the Port had the right to draw down on the
Stand-by Letter of Credit as work progressed. The Company has also issued a
warrant to FNBC to purchase 50,000 shares of the Company's common stock at the
exercise price of $9.00 per share.
In February 1994, CCCD terminated its letter of credit and loan
agreement with FNBC by paying $1,179,513 in principal, representing funds
disbursed for improvements, and $3,502 in interest to FNBC. Crescent City
replaced the letter of credit with an escrow account for the benefit of the
Port. As of June 30, 1994, the escrow account held $4,534,939 and a total of
$3,016,561 has been disbursed for improvements. The $3,016,561 was recorded as a
prepaid rental and was to be amortized over the 10 year term of the berthing
agreement with such amortization commencing when the berthing improvements were
finished and placed in service. As of June 30, 1995 these assets had been
reserved for and were fully disposed of as of June 30, 1996.
On June 9, 1995, the Dock Board notified CCCD, Grand Palais Riverboat
Inc. and River City Joint Venture that each of them were in default of the
Terminal and Use Agreement between the Dock Board and the River City Joint
Venture for the failure of the River City Joint Venture to operate the terminal
as required on a continuous day-to-day basis. On the same day, the Dock Board
also notified CCCD that it was in default of its Berthing Agreement as a result
of CCCD's closure of its gaming vessel and discontinuance of its day-to-day
operations.
Acquisition of Certain Gaming Related Assets - In developing its
Louisiana operations, the Company had reached an agreement, as amended, in
principal with Republic Corporate Services, Inc. ("Republic") pursuant to which
the parties formed a joint venture in which Republic received 20% of the pre-tax
profits and an additional 8% of pre-tax profits (limited to $1,600,000 annually)
of CCCD, in return for which the Company received the right to 40% of Republic's
pre-tax profits as well as certain consulting, public relations and marketing
and marketing support services. Republic granted the Company an option in August
1993 to purchase Republic's profit interest in CCCD for $26 million. The
granting of the option required a $300,000 payment to Republic and is included
in "Gaming Development Costs" in the Statement of Operations for the year ended
June 30, 1994.
F-16
<PAGE>
Capital Gaming International, Inc.
Notes to Consolidated Financial Statements
Effective April 26, 1994, the Company exercised its option to purchase
from Republic their minority interest in the future profits of CCCD. In May
1994, the Company was repaid the loan of $5,000,000, which it made to Republic
in February 1994, together with interest of $93,150. The Company then paid
$7,000,000 toward the buy-out and executed a promissory note payable to Republic
for $19,000,000. As a result of the closing, the Company was entitled to all
profits of the New Orleans Riverboat operation.
The purchase price of $26,000,000 was allocated based on independent
appraisal to various gaming assets. On June 30, 1995, management of the Company
determined the carrying value of these acquired gaming assets would not have an
available future revenue or cash flow stream to support any cost recovery.
Hence, effective June 30, 1995, the Company charged to earnings $23,725,000
representing the unamortized balance of the assets. This charge is included in
"Loss on Disposal of Discontinued Operations." The amortization for the year
ended June 30, 1995 of $1,765,000 is included in "Loss from Discontinued
Operations." [See Note 6].
Term Note Payable - In connection with the buy-out of Republic's profit
interest in Crescent City, the Company executed an unsecured promissory note
payable to Republic for $19,000,000. The note bears interest at 11.5% per annum
and requires semi-annual interest payments in April and October until its
maturity on April 26, 2002 when all principal becomes due.
In October 1994 and April 1995, the Company made each of the required
interest payments of this term note totaling $2,185,000. As a result of the
cessation of the Company's New Orleans operations on June 9, 1995, and the
resultant Chapter 11 Petition filed by the Company's wholly owned subsidiary,
CCCD, and other reasons, the Company did not make the required interest payments
under the note. As a result, the Company is in default under the note agreement.
[See Note 5].
[4] FUNDS HELD BY TRUSTEE FOR SENIOR SECURED NOTEHOLDERS
As of June 30, 1996, approximately $22.5 million was held by the
Trustee for Senior Secured Noteholders against obligations owed by the Company
to the Noteholders in the amount of approximately $124 million. The obligations
included Senior Secured Notes - $127 million, consent fee note payable of $1.35
million and accrued interest of approximately $20.7 million. The funds held
represent the approximate $7.6 million Muckleshoot loan repayment, $2.8 million
net Cow Creek buy-out payment, approximately $.8 million of Cow Creek loan
repayment, approximately $3.2 million in unused restricted cash, approximately
$1.3 million paid to noteholders from the $2.0 million debtor in possession
financing obtained from Mirage in December 1995 and approximately $6.8 million
paid to noteholders from the sale of the CCCD subsidiary to Casino Magic, Inc.
All such funds were directly paid and/or returned to the Trustee. As management
is currently negotiating with the noteholders to restructure the outstanding
debt, the specific application of these repayments among the three different
noteholder obligations is not known at this time. The balance sheet as of June
30, 1996 therefore reflects approximately $22.5 million as a contra-liability
related to Senior Secured Noteholder indebtedness. Interest expense for the year
ended June 30, 1996 and total accrued interest as of June 30, 1996 has been
recorded based on the total $127 million in outstanding Senior Secured Notes.
In addition, the trustee held $28.0 million face amount of Notes due
from Casino Magic as a result of the sale of CCCD. These Notes are classified in
the Balance Sheet as Notes Receivable in the amount of $35.0 million and accrued
expenses in the amount of $7.0 million.
F-17
<PAGE>
Capital Gaming International, Inc.
Notes to Consolidated Financial Statements
[5] DEFAULT ON INDEBTEDNESS
On June 13, 1995, First Trust National Association, the Trustee with
respect to the issuance of the Company's 11-1/2% Senior Secured Notes due 2001
(the "Senior Secured Notes") notified the Company of the occurrence of events of
default ("Events of Default") under the Company's Indenture (the "Indenture").
The Senior Secured Notes were guaranteed by the CCCD and CGMI subsidiaries. The
Events of Default cited by the Trustee related to the assertion of various
claims of creditors against Collateral, as defined in the Company's Indenture,
which was pledged to secure repayment of the Senior Secured Notes. In addition,
on June 13, 1995, the Trustee also notified First National Bank of Commerce
("FNBC") - the Company's Collateral Agent - that FNBC could not make further
disbursements from cash collateral accounts established pursuant to the
Indenture until directed by the Trustee. The Company also failed to make
interest payments on its Senior Secured Notes of $7,302,500 each on August 1,
1995, February 1, 1996 and August 1, 1996, and a $1,350,000 consent fee payment
which was due to the holders of the Senior Secured Notes on August 1, 1995. Such
consent fee was previously incurred to allow the relocation of the Company's New
Orleans River City Casino. The Company's failure to make the August 1, 1995
interest and consent payments and the February 1, 1996 interest payment are
Events of Default under the Indenture.
The Company's Indenture also contains certain covenants regarding
maintenance of consolidated net worth levels, the maintenance of ratios between
earnings before income taxes, depreciation and amortization and certain fixed
charges of the Company. As of the date hereof, it does not appear that the
Company will be in a position to satisfy many of the financial covenants
contained in the Indenture and accordingly the Trustee is in a position to
declare further Events of Default with respect to the breach of these financial
covenants.
As a result of the monetary and non-monetary Defaults under the
Indenture, the holders of the Senior Secured Notes are entitled to all of the
remedies contained in the Indenture, including but not limited to acceleration
of the Senior Secured Notes and foreclosing on the Collateral pledged by the
Company to the Trustee which includes, among other things, the management fees
derived from the management agreements between CGMI and the Native American
Tribes. Furthermore, the security agreements entered into by the Company provide
remedies to the holders of Senior Secured Notes including a requirement to
transfer any proceeds received in respect of any dispositions of Collateral from
and after the occurrence of an Event of Default as defined in the Indenture.
On June 21, 1995, the New Orleans 2000 Partnership, the mortgagee of
real property owned by River City (the "New Orleans 2000 Property"), provided
notice of various defaults under its first mortgage to CCCD, River City Joint
Venture and Grand Palais. An event of default under this mortgage constitutes an
Event of Default under the Indenture.
In addition, certain of the loan transactions the Company has entered
into as a borrower with third-party lenders contain cross-default provisions
with the Indenture, including the $2.0 million working capital line of credit
from FNBC acquired on March 28, 1995. Accordingly, the Events of Default under
the Indenture places the Company in default under such loan transaction.
In the event that the holders of the Senior Secured Notes exercise all
of their available remedies under the Indenture and related agreements, the
Company and its subsidiaries will not be able to continue their operations.
F-18
<PAGE>
Capital Gaming International, Inc.
Notes to Consolidated Financial Statements
However, the Company does not believe the holders of the Senior Secured Notes
will exercise their remedies where the exercise of such remedies would prevent
CGMI from continuing its operations as manager of several existing Native
American gaming facilities.
[6] DISCONTINUED OPERATIONS - GAIN ON DISPOSAL OF GAMING ASSETS
On June 9, 1995, the Company's riverboat casino operations in New
Orleans was forced to cease operations due primarily to significant revenue
shortfalls which contributed to operating losses that the Company could not
continue to fund. On July 26, 1995, CCCD was involuntarily petitioned for
reorganization under Chapter 11 of the Federal Bankruptcy Code by certain
creditors. On July 28, 1995, the petition was changed to a voluntary filing.
[See Note 3]. On May 13, 1996 the remaining assets of the CCCD subsidiary were
sold to a wholly owned subsidiary of Casino Magic, Inc. The Company's wholly
owned subsidiary, CCCD, reported a loss from operations for the three months
ended June 30, 1995 of approximately $10,061,000, including approximately
$5,094,000 in losses from the 50% interest in River City Joint Venture. The
subsidiary's operating loss for the years ended June 30, 1996 and 1995
approximated $4,903,000 and $17,189,000 respectively. (These losses exclude
CCCD's share of the significant write-down for impaired assets incurred by the
Joint Venture and $1,765,000 in 1995 in amortization of certain assets of CGI.)
The $4,903,000 represents operating losses in excess of those originally
anticipated during the phase out period and consists principally of professional
fees. Subsequent to the closing of the riverboat, the Board of Directors
believed it was necessary to seek an acquiror for the riverboat vessel and its
gaming equipment contents. The operations of CCCD for the years ended June 30,
1996 and 1995 have been segregated and presented in the Statement of Operations
as discontinued operations. The gain on disposal of approximately $17,543,000 is
comprised of the sale price net of assumed debt of $50,000,000 less repayment of
advances from Casino Magic of $989,000, the net assets (assets less liabilities)
of the Crescent City subsidiary of $15,207,000, the repayment of the Mirage DIP
Financing of $2,020,000, the assumption of the FNBC debt of $2,500,000 and
amounts retained by the liquidating trust of $11,741,000. The loss on disposal
of discontinued operations for year ended June 30, 1995 of approximately
$69,277,000 is comprised of a $38,500,000 charge for impaired assets, charges
for the reserve of cash held in escrow and prepaid rent of $2.2 million and $4.8
million, respectively, representing funds escrowed for the Port of New Orleans
use and funds already disbursed to the Port of New Orleans and classified as
prepaid rent, and the write-off of acquired gaming assets of $23,725,000
recorded by Capital Gaming International, Inc. There are no income taxes
associated with the discontinued operations.
F-19
<PAGE>
Capital Gaming International, Inc.
Notes to Consolidated Financial Statements
Summarized financial information of Crescent City Capital Development
Corp. as of and for the years ended June 30, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Assets:
Current assets -- $ 210,826
Riverboat vessel and related equipment -- 40,660,875
------------
-- 40,871,701
========== ============
Liabilities:
Current liabilities -- 14,842,835
Proportionate share of unconsolidated
affiliates losses in excess of investment -- 14,178,073
Due to parent (CGI) -- 76,446,880
Accumulated deficit -- (64,596,087)
---------- ------------
-- $ 40,871,701
========== ============
Summary of Operations:
Revenues -- 4,196,171
Pre-opening expenses -- 7,905,785
Operating expenses -- 13,917,431
Net loss from operations -- 17,188,831
Gain (Loss) on disposal of discontinued operations 12,638,968 (45,551,500)
</TABLE>
[7] INVESTMENT IN UNCONSOLIDATED AFFILIATE
The River City Joint Venture ("RCJV") was a general partnership formed
to develop, own and operate a common berthing terminal from which CCCD and their
partner's riverboat casino operated. Crescent City's 50% interest in River City
Joint Venture has been accounted for under the equity method. Under this
accounting method, CCCD records 50% of the losses incurred by RCJV. CCCD's share
of losses of River City Joint Venture included in consolidated accumulated
deficit is approximately $49,650,000 and $48,388,000 at June 30, 1996 and 1995
respectively, and represents CCCD's 50% share of losses for the years then
ended. It is inclusive of a $38,500,000 charge for the impairment of River
City's terminal facility which is discussed below.
In development of this facility, RCJV recorded approximately $102
million as the cost for the land, building and improvements of the terminal
facility. The land is encumbered by a first mortgage held by the seller of the
property in the amount of $22.5 million and an additional pledge to First
National Bank of Commerce in the amount of $2.5 million. RCJV defaulted on both
of these obligations. In accordance with Financial Accounting Standards #121,
"Accounting for the Impairment of Long-Lived Assets and the Impairment of Long-
Lived Assets to be Disposed of," the RCJV was required to write-down the
carrying cost of the land and building to a fair value. As of June 30, 1995,
RCJV recorded a charge of $77 million in reducing the carrying cost of these
assets down to approximately $25 million, the estimated fair market value. This
valuation is deemed to be conservative while representing management's best
estimate of a disposal value. Management has considered such factors as the poor
performance of the New Orleans gaming market as a whole, the lack of interest in
F-20
<PAGE>
Capital Gaming International, Inc.
Notes to Consolidated Financial Statements
the terminal facility by potential gaming acquirors with which management
negotiated for the sale of the riverboat, the structural characteristics of the
facility and possible required modifications for use in a non-gaming capacity.
Accordingly, CCCD has incurred 50% of the $77 million write-down charge or $38.5
million with such charge included in "Loss on Disposal of Discontinued
Operations" in the Statement of Operations for the year ended June 30, 1995.
[See Note 6].
Summarized unaudited financial information for River City Joint Venture
as of and for the years ended June 30, 1996 and 1995 is as follows:
Summary of Operations: 1996 1995
---- ----
Pre-opening costs $ - $ 9,588,418
Operating costs 2,524,000 10,556,663
---------- -----------
Net loss from operations 2,524,000 20,145,081
Write-down of impaired assets - 77,000,000
---------- -----------
Net loss year ended June 30 $2,524,000 $97,145,081
========== ===========
[8] EXCHANGE OF DEBT FOR EQUITY AND PRIVATE PLACEMENT OF COMMON STOCK
On March 30, 1995, the Company entered into an agreement (the "Fidelity
Agreement") with certain funds managed by Fidelity Investments, who held certain
of the Company's outstanding Senior Secured Notes (the "Fidelity Funds").
Pursuant to the Fidelity Agreement, the Company issued to the Fidelity Funds, an
aggregate of 2,750,201 shares of Common Stock (the "Fidelity Shares") in
connection with (i) the exchange of 1,961,290 shares of Common Stock for
$8,000,000 aggregate principal amount of Senior Secured Notes owned by the
Fidelity Funds, (ii) the payment of accrued interest on the Senior Secured Notes
by the issuance of 38,911 shares of Common Stock and (iii) the sale, in a
private placement, of 750,000 shares of Common Stock at the purchase price of
$4.25 per share, or an aggregate purchase price of $3,187,500 (collectively, the
"Fidelity Transaction"). The Fidelity Transaction lowered the Company's annual
interest expense by approximately $1,041,000. Additionally, as a result of the
Fidelity Transaction, stockholder's equity reflects an increase of $10,595,753.
The exchange of common shares for debt resulted in a loss in 1995 from early
extinguishment of debt of $832,846. This is reflected as an extraordinary item
in the June 30, 1995 statement of operations. The loss is primarily a result of
the write-off of unamortized original issue discount and unamortized deferred
finance costs related to the $8,000,000 of notes retired. There are no income
taxes associated with this extraordinary item.
The reacquired Senior Secured Notes with an aggregate face value of
$8,000,000 have been placed in treasury. The Company's board of directors
approved the holding and non-cancellation of the Notes for future consideration
of issuance. Interest will not accrue on these obligations while in treasury.
F-21
<PAGE>
Capital Gaming International, Inc.
Notes to Consolidated Financial Statements
[9] NATIVE AMERICAN GAMING OPERATIONS
Facility Openings and Summarized Financial Information - On March 10,
1995, the Umatilla Tribe opened the 40,000 square foot Wildhorse Gaming Resort
in Pendleton, Oregon. This facility, under management by the Company offers 300
video slot machines, keno, non-banking table games, off-track betting (OTB) and
high stakes bingo. The first phase of this development opened on November 5,
1994. During the periods ending June 30, 1996 and 1995 the facility produced
approximately $3,210,000 and $1,365,000 respectively in management fees for the
Company.
On April 27, 1995, the Tonto Apache Tribe opened the 32,000 square foot
Mazatzal Casino located north of Phoenix, Arizona. The casino features 318 slot
machines, keno, non-banking table games and high stakes bingo. The Company, as
manager of the casino, collected approximately $1,961,000 and $305,000 in
management fees for the periods ending June 30, 1996 and 1995 respectively.
The Muckleshoot Tribe opened the first phase of its Muckleshoot Casino
on April 28, 1995, and presently offers 47 table games, 22 poker games, keno and
OTB. The facility is located in the Seattle-Tacoma metropolitan area. The final
phase of this facility opened on September 8, 1995 with gaming space increased
to 40,000 square feet. The Company as manager of the facility collected
approximately $1,874,000 and $615,000 for the years ending June 30, 1996 and
1995 respectively.
During the year ended June 30, 1996, the Cow Creek Management contract
was terminated in exchange for a payment of $3,000,000. The Cow Creek facility
generated an additional $618,000 in management fees during the year ended June
30, 1996.
Total management fees for the years ended June 30, 1996 and 1995 were
approximately $7,663,000 and $6,441,000 respectively. During the year ended June
30, 1996 all fees were derived from Class III facility operations. During the
year ended June 30, 1996 there were approximately $5,986,000 in fees from Class
III facility operations and approximately $455,000 in fees from two remaining
Class II management agreements which expired before June 30, 1995.
CGMI currently has management contracts for three operating Native
American facilities. The loss of any one contract could result in a significant
negative impact in the near term.
F-22
<PAGE>
Capital Gaming International, Inc.
Notes to Consolidated Financial Statements
Summarized financial information of CGMI is provided below. For the
years ended June 30, 1996 and 1995 the net income (loss) reflects approximately
$1.9 million and $2.2 million respectively in interest expense to the parent and
approximately $0 and $ .5 million respectively in interest income earned on
restricted cash.
June 30, 1996 June 30, 1995
------------- -------------
Assets:
Current Assets $ 4,619,500 $18,022,417
Non-Current Assets 10,832,031 15,999,648
------------- -----------
15,451,531 34,002,065
============= ===========
Liabilities:
Current Liabilities 1,479,898 4,718,728
Due to Parent 6,340,071 26,841,005
Non- Current Liabilities - 1,292,743
Net Book Value 7,631,562 1,169,589
------------- ------------
$ 15,451,531 34,002,065
============= ============
Management Fee 7,663,059 6,440,962
Acquisition of CGMI - In March 1993, the Company signed a stock
purchase agreement to purchase all of the 630 shares of outstanding voting
common stock of British American Bingo, Inc. for a purchase price of $2,500,000.
The closing under the Stock Purchase Agreement occurred on November 19, 1993 and
a final additional payment of $112,500 was made on that date for additional
assets. On August 11, 1994, British American Bingo, Inc. changed its name to
Capital Gaming Management, Inc. ("CGMI").
The acquisition of CGMI was recorded under the purchase method of
accounting. Accordingly, the total purchase price of $2,612,500 was allocated to
assets acquired and liabilities assumed based on their estimated fair values.
Expenses of the acquisition were not material. The excess of purchase price over
fair value of assets and liabilities acquired has been recorded as goodwill and
is being amortized over 20 years using the straight-line method. Amortization
for the years ended June 30, 1996 and 1995, was $40,250 and $40,250,
respectively.
Condensed balance sheet data for the acquired net assets is as follows:
<TABLE>
<CAPTION>
<S> <C>
Current Assets, (including cash of $196,725) $ 612,344
Land and Other Assets 167,912
Investment in Native American Management Agreements - Net 1,577,653
Native American Casino Development Advances 995,829
Liabilities (1,546,769)
-------------
Fair Market Value of Net Assets $ 1,806,969
Purchase Price 2,612,500
-------------
Goodwill $ 805,531
=============
</TABLE>
F-23
<PAGE>
Capital Gaming International, Inc.
Notes to Consolidated Financial Statements
Subsequent to the acquisition the Company recorded a write down of the
goodwill in the amount of $268,909.
National Indian Gaming Commission Approval - In August 1994 CGMI's
management contract with the Umatilla Tribe was approved by the National Indian
Gaming Commission (NIGC). The approval follows an extensive background
investigation by the NIGC into the Company's past and current business
activities and practices as well as the Companies "key employees" and management
personnel. Additionally, the NIGC approved the Company's management contracts
with the Tonto Apache Tribe and Muckleshoot Tribe. The management contract's
provisions were not significantly modified as a result. The Company's management
contract with the Cow Creek Band of Umpquas was previously approved under
regulations administered by the Bureau of Indian Affairs. The Company's
management contract with the Narragansett Tribe is currently pending NIGC
approval.
[10] DEBT TRANSACTIONS
The Company has been notified by Senior Secured Noteholders of various
default conditions under the Indenture Agreement. [See Note 5].
Private Placement of Notes - On February 17, 1994, the Company issued
$135,000,000 aggregate principal amount of Series A 11-1/2% Senior Secured Notes
due 2001 ("A Notes") pursuant to a private offering. The Company structured the
offering of the Notes as a private placement to be followed by an exchange offer
of Series B 11-1/2% Senior Secured Notes due 2001 ("B Notes") for A Notes (the
"Exchange Offer") in order to raise funds on a more expeditious basis than would
have been possible had the initial sale been pursuant to an offering registered
under the Securities Act. Such funds were required in order to proceed with
various projects in which the Company is involved. The purchasers of the A
Notes, as a condition to such purchase, requested that the Company agree to
commence the Exchange Offer following the Private Offering. The terms of the B
Notes and the A Notes are identical in all material respects, except for certain
provisions which are no longer consequential as of August 12, 1994, the date the
B Notes registration with the Securities and Exchange Commission became
effective.
Also as part of the Private Offering, the Company sold an aggregate of
4,912,291 shares of Common Stock and 3,051,250 Common Stock Purchase Warrants,
resulting in gross proceeds to the Company of an additional $24,711,455, for
total gross proceeds from the Company's debt and equity financing of
$159,711,455. [See Note 4, 5, 8 and 10].
Senior Secured Notes Due 2001 - The Notes are senior secured
obligations of the Company and were issued pursuant to an indenture agreement
dated February 17, 1994, as amended, June 24, 1994 (the "Indenture"). The Notes
mature on February 17, 2001 with all principal due at that time. The Notes
require semi-annual interest payments based on a per annum rate of 11.5%. The
first year's interest payments on the Notes were funded from a portion of the
proceeds of the Notes which has been escrowed in a collateral account for such
purpose. The Company has granted security interests in substantially all of the
Company's assets along with security interests granted by the Company's
subsidiaries in their capacities as guarantors.
F-24
<PAGE>
Capital Gaming International, Inc.
Notes to Consolidated Financial Statements
The proceeds from the financing transactions were used for the
development of the New Orleans Riverboat Casino and expansion of Class III
Native American gaming projects, reserve for interest payments, payment to
Republic for the purchase of their minority interest in the future profits of
the New Orleans Riverboat Casino and for general corporate working capital
needs.
The Notes have been recorded at their face value of $135,000,000 net of
an original issue discount of $4,784,063 resulting from 2,733,750 warrants with
ascribed value of $1.75 each. Amortization of original issue discount of
$643,236 and $673,390 is included in interest expense for the years ending June
30, 1996 and 1995, respectively. The notes were reduced by $8,000,000 on March
31, 1995 in a debt for equity exchange. [See Note 8]. During the year ended June
30, 1995 the Company recorded capitalized interest in the amount of $1,474,000.
Deferred Financing Costs - The Company has recorded as Deferred
Financing Costs all debt issuance costs associated with the private offering of
the Senior Secured Notes on February 17, 1994. Such costs include fees to the
Company's investment bankers, legal costs, printing costs and 1,754,500 common
stock purchase warrants valued at $1.75 each, issued to the investment banker,
certain employees of the investment banker and to bondholders. Total financing
costs were allocated to debt and equity financing. Amortization of the deferred
finance costs amounted to approximately $1,431,000 and $1,442,000 for the years
ended June 30, 1996 and 1995, respectively, and is included in "Interest
Expense".
CGMI has various notes payable with gaming equipment suppliers which
were incurred on behalf of certain Native American tribes under management
contract agreements. These Notes bear interest at rates ranging from a fixed 10%
to prime + 1% and have scheduled maturity dates ranging from February to May,
1997.
[11] CAPITAL STOCK
No Par, Common Stock - The Company has increased the number of common
shares authorized from 30,000,000 to 75,000,000. The amendment was ratified by
shareholder vote on June 15, 1994. Holders of common stock are entitled to one
vote for each share held on all matters to be voted on by stockholders. The
common stock does not carry cumulative voting rights, and is not redeemable or
convertible. All outstanding shares of common stock are fully paid and
non-assessable. There are 19,329,574 and 19,329,574 shares outstanding at June
30, 1996 and 1995, respectively.
No Par, Preferred Stock - The company is authorized to issue up to
5,000,000 shares of no par, preferred stock. No shares have been issued as of
June 30, 1996. The Board of Directors has the authority without shareholder
approval, to determine and affix the rights, conversion rights, voting rights
and any terms of redemption, liquidation preferences or special rights and
qualifications of this class of stock.
Initial Offering of Units and Warrants - In November 1990, the Company
completed the initial public offering of 640,000 units, at $5 per unit resulting
in net proceeds to the Company of $2,362,512. Each unit consists of four shares
of common stock and four redeemable Class A warrants. Each Class A warrant
entitles the holder to purchase one share of common stock and one redeemable
Class B warrant at $1.90 until the fifth anniversary of the date of the
offering. Each Class B warrant entitles the holder to purchase shares of common
stock at $2.80 from the date of issuance until the fifth anniversary of the date
of the offering. The exercise prices of the Warrants were subject to adjustment
under certain circumstances. Both the Class A and Class B warrant exercise
prices were reduced from $1.90 and $2.80, respectively, to $1.10 for a 90 day
period commencing February 14, 1992. During this 90 day period, 2,271,150 Class
A warrants and 2,244,900 Class B warrants were exercised resulting in proceeds
to the Company of $4,931,322 [net of $36,333 related expenses].
F-25
<PAGE>
Capital Gaming International, Inc.
Notes to Consolidated Financial Statements
In connection with the initial public offering, the Company sold a unit
purchase option to purchase 64,000 units to the underwriter. In June 1993, these
unit purchase options were exercised at $6.00 per unit resulting in proceeds to
the Company of $384,000.
During June 1993, 114,729 Class A warrants and 134,729 Class B warrants
were exercised at a price of $1.90 and $2.80, respectively, resulting in
proceeds to the Company of $595,226. An additional 427,883 Class A warrants and
432,873 Class B warrants were exercised in July 1993 resulting in proceeds of
$2,025,049.
As of June 30, 1994 there are no Class A or Class B warrants
outstanding.
Equity Financing - In February and March of 1994 the Company
consummated transactions under various equity purchase agreements pursuant to a
private placement of senior secured notes and common stock [See Note 9]. A total
of 4,662,291 common shares were sold in February at $5.00 per share and 250,000
common shares were sold in March at $5.60 per share, resulting in total equity
proceeds of $24,711,455. Included were 3,600,450 common shares, 3,051,250 common
stock purchase warrants and $135,000,000 in 11.5% senior secured notes issued in
units to the purchasers. There were four purchasers of the Company's common
stock who did not purchase debt securities. In the aggregate they purchased
1,311,841 shares.
The Company's placement agent in this financing transaction and certain
employees of the placement agent, received 1,442,000 common stock purchase
warrants. All warrants issued to the unit purchasers and the placement agent are
exercisable at any time up to five years from issuance at a price of $6.50 for
each share of common stock. The Company issued additional warrants to purchase
an aggregate of 100,000 shares of common stock to a financial advisor of the
Company and certain employees of the financial advisor.
As of June 30, 1996, a total of 4,643,250 common stock purchase
warrants (the "Investor Warrants") with an exercise price of $6.50 per share are
outstanding, except for 50,000 warrants exercisable at $9.00 each (the "FNBC
Warrants"). The Investor Warrants and FNBC Warrants expire on February 1, 1999
and September 30, 1998, respectively.
The Company incurred $11,972,495 in debt and equity issuance costs in
connection with the private offering. Such costs have been allocated to debt
(capitalized as deferred finance charges) and to equity (charged against no par,
common stock) based on a ratio equal to their respective proceeds to total
proceeds. The allocation resulted in 15.47% or $1,852,452 being charged to
common stock, including $474,987 attributable to the warrants issued to the
placement agent. All warrants were valued at $1.75 each and charged to deferred
financing costs ($3,070,375) and original issue discount ($4,784,063) in
February 1994.
F-26
<PAGE>
Capital Gaming International, Inc.
Notes to Consolidated Financial Statements
[12] PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of June 30:
<TABLE>
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C>
Office furniture, fixtures and equipment $ 247,700 $ 253,079
---------- -----------
247,700 253,079
Less accumulated depreciation (120,647) (112,412)
---------- -----------
$ 127,053 $ 140,667
========== ===========
</TABLE>
Depreciation expense for the years ended June 30, 1996, 1995 and 1994
was $37,100, $65,000 and $16,100 respectively and is included as part of
depreciation and amortization.
[13] INVESTMENT IN NATIVE AMERICAN MANAGEMENT AGREEMENTS
The costs associated with developing, negotiating and securing new
management agreements are expensed as incurred until such time when management
believes the development of a casino facility is likely. This juncture in
development requires, at a minimum, a management contract in effect, existence
of favorable Company-Tribal relations, and indications that regulatory approvals
and licensure is probable. Subsequent costs are capitalized and included in
Investments in Native American Management Agreements. Amortization of
capitalized amounts related to new contracts begins when the facility opens.
Management of the Company will periodically evaluate whether the individual
carrying value of these assets has been impaired by comparing the carrying value
to the value of projected net cash flow from related operations.
The balance of $2,677,053 as of June 30, 1996 in this caption on the
balance sheet represents capitalized costs and payments related only to the
remaining Class III management agreements. The Company is amortizing such
amounts over the remaining lives of these management contracts of approximately
4-5 years. Amortization for the years ended June 30, 1996, 1995 and 1994 was
approximately $860,000, $293,000 and $301,000, respectively.
[14] LOANS RECEIVABLE - NATIVE AMERICAN TRIBES
The Company has funded the development and construction of the three
remaining Native American Class III facilities including equipment financing
amounting to approximately $3.3 million. As of June 30, 1996, there was a total
of $11,325,885 in loans outstanding, with $3,696,165 to be realized within one
year and $7,629,720 classified as long-term. These notes bear interest at rates
ranging from 8.75% to prime + 1% (prime rate at June 30, 1996 was 8%) and have
scheduled repayments of 36 to 60 months. A five year maturity table is presented
below:
June 30, 1997 $ 3,696,165
June 30, 1998 3,941,606
June 30, 1999 2,248,182
June 30, 2000 1,439,932
June 30, 2001 --
------------
$ 11,325,885
F-27
<PAGE>
Capital Gaming International, Inc.
Notes to Consolidated Financial Statements
Federally recognized Native American Indian tribes are sovereign
nations governed by federal statutes that are different than statutes governing
commercial enterprises in the United States. These receivables are due from four
tribes, collectively. While the Company has legal counsel experienced in Indian
gaming law and matters, there is the risk that the Company may not prevail if
collectability is forced into litigation. Management has no disputes with any
Native American tribe that would place doubt on the full collectability of any
of the receivables. The Company takes all necessary legal measures in the
documentation and preparation of agreements executed with Native American
Tribes, including the Tribe's waiver of sovereign immunity related to contract
enforcement.
Loan Repayment and Contract Buy-Out - Pursuant to the terms of the
Class III management contract between the Muckleshoot Tribe and the Company's
Native American gaming subsidiary - Capital Gaming Management, Inc. (CGMI) - the
Tribe has repaid to CGMI approximately $7.6 million that was advanced for
developing, constructing and equipping the gaming facility. Additionally, under
the terms of the Class III management contract, the annual management fee of
11.5% of gross gaming revenues has been reduced to 3.9% simultaneously upon the
repayment of the loan by the Tribe in September 1995.
The Company also closed an agreement effective September 1, 1995
pursuant to which the Cow Creek Band of Umpqua Tribe of Indians bought out the
remaining term of the Management Agreement for the Tribe's gaming facility in
Canyonville, Oregon. The Tribe has paid the Company and its Native American
subsidiary $3.0 million in consideration for early termination of the Management
Agreement and principal repayment of approximately $823,000. The buy-out of
future management fees of $3.0 million and the principal repayment of $823,000
was paid to the Trustee for the Senior Secured Noteholders, less $200,000 for
expenses in connection with the transaction which was reimbursed to the Company.
The five year Management Agreement had less than two years remaining prior to
its expiration.
[15] STOCK OPTION PLAN
In July 1990, the Company adopted the 1990 Stock Option Plan [the
"Plan"] covering 350,000 shares of the Company's common stock, pursuant to which
officers, directors and key employees of the Company are eligible to receive
incentive and/or non-qualified stock options. During 1992, 1993 and most
recently June 15, 1994, the Board of Directors, with shareholder approval,
adopted resolutions to increase the number of options under the Plan. The number
of options which currently may be issued under the Plan is 6,500,000. The Plan
expires on July 30, 2000. Incentive stock options granted under the Plan are
exercisable for a period up to 10 years from the date of grant at an exercise
price which is not less than the fair market value of the common stock on the
date of the grant, except that the term of an incentive stock option granted
under the Plan to a stockholder owning more than 10% of the outstanding common
stock may not exceed five years and its exercise price may not be less than 110%
of the fair market value of the common stock on the date of the grant.
Repricing of Stock Options - On January 14, 1996, upon the
recommendation of the Executive Compensation Committee, the Board of Directors
(i) cancelled 1,782,500 outstanding stock options with exercise prices in excess
of the fair market value of the Company's common stock at the time and granted
1,770,000 stock options exercisable at $.3125 per share and (ii) cancelled
2,000,000 outstanding stock options, held by the Company's Chairman, I.G. Jack
Davis, Jr., with exercise prices in excess of fair market value of the Company's
common stock at that time, and granted 1,200,000 stock options exercisable at
F-28
<PAGE>
Capital Gaming International, Inc.
Notes to Consolidated Financial Statements
$.50 per share. In addition, on January 14, 1996, upon the recommendation of the
Executive Compensation Committee, the Board of Directors awarded new stock
options (i) to Colonel Clinton L. Pagano, Executive Vice President of
Compliance, to purchase 100,000 shares of the Company's common stock exercisable
at $.3125 per share, (ii) to Mr. Thomas P. Gallagher to purchase 100,000 shares
of the Company's common stock exercisable at $.3125 per share, (iii) to James F.
Ahearn, Vice President of Operations (CGMI), to purchase 65,000 shares of the
Company's common stock exercisable at $.3125 per share (iv) to William S.
Papazian, Senior Vice President and General Counsel, to purchase 165,000 shares
of the Company's common stock exercisable at $.3125 per share and (v) to Robert
Specht, former Acting Treasurer and former Acting Chief Financial Officer, to
purchase 25,000 shares of the Company's common stock exercisable at $.3125 per
share. The options granted on January 14, 1996 all had exercise prices
significantly above the Fair Market Value of the Company's common stock on the
date of grant as such term is defined under the Company's 1990 Stock Option
Plan, as amended. All of the stock options granted on January 14, 1996 will vest
on July 14, 1996 and will be exercisable thereafter for a period of five years.
The following is a three year summary of stock option activity for
shares under option:
Incentive Non-Qualified
Stock Options Stock Options
Outstanding, June 30, 1993 270,918 2,533,082
Options Granted 200,284 1,799,716
-------- ----------
Outstanding, June 30, 1994 471,202 4,332,798
Options Granted 134,876 362,124
Options Exercised -- (60,000)
Options Cancelled (34,807) (174,893)
-------- ----------
Outstanding, June 30, 1995 571,271 4,460,029
Options Granted 896,271 2,528,729
Options Exercised -- --
Options Cancelled (571,271) (3,874,574)
-------- ----------
Outstanding, June 30, 1996 896,271 3,114,184
======== ==========
Options Exercisable as of June 30, 1996 -- 610,455
======== ==========
Options exercisable as of June 30, 1996 have exercise prices ranging from $1.50
to $5.25 per share. The weighted average exercise price of those options vested
is $1.70 per share.
[16] COMMITMENTS AND CONTINGENCIES
On May 30, 1995, the Company entered into employment agreements with
the Company's Chairman and Chief Executive Officer which provides for three year
and two year terms at annual salaries of $297,000 and $495,000, respectively.
The agreements also provide for severance payments equal to one to three years
F-29
<PAGE>
Capital Gaming International, Inc.
Notes to Consolidated Financial Statements
upon the occurrence of certain terminations and annual cash payments in lieu of
directors and officers liability insurance coverage. Included in accrued
expenses for the year ended June 30, 1996 are deferred salaries to the Company's
Chairman in the amount of $198,000 and to the Company's Vice President of
Compliance in the amount of $107,000. Employment agreements in effect at June
30, 1996 with three other Company officers require an aggregate annual
compensation of $805,000 through terms expiring between October 1996 and June
1999.
As of June 30, 1996, the Company has consulting agreements which can be
terminated upon varying short-term notices aggregating approximately $90,000 per
year.
[17] INCOME TAXES
The Company uses Statement of Financial Accounting Standard (SFAS) No.
109 "Accounting for Income Taxes." The Statement requires that deferred income
taxes reflect the tax consequences on future years of differences between the
tax bases of assets and liabilities and their financial reporting amounts.
Components of income tax (expense) benefit:
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current:
--------
Federal $ -- $ -- $ 483,738
State (320,645) -- --
--------- ------- ---------
Current (Expense) Benefit $(320,645) -- $ 483,738
------------------------- ========= ======= =========
</TABLE>
A reconciliation of income tax (expense) benefit at the federal
statutory rate to the Company's effective income tax (expense) benefit is as
follows:
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal Income Tax Benefit at the
Statutory Rate $ 5,098,000 $ 5,306,000 $ 3,166,000
State Tax Benefit, (Expense) Net of
Federal Tax Benefit (320,645) 3,190,000 1,355,391
(Non) Recognition of NOL Carryforward (5,098,000) (8,496,000) $(4,037,653)
----------- ----------- -----------
Income Tax (Expense) Benefit $ (320,645) $ -- $ 483,738
=========== =========== ===========
</TABLE>
As of June 30, 1996, the Company has a net operating loss carryforward
of approximately $72,000,000 expiring as follows:
June 30, 2009 $23,400,000
June 30, 2010 48,600,000
------------
Total $72,000,000
F-30
<PAGE>
Capital Gaming International, Inc.
Notes to Consolidated Financial Statements
A tax benefit of $483,738 was recorded during the year ended June 30,
1994 and was derived from the carryback of operating losses. Additionally, as a
result of the net operating loss carryforward, the Company has a deferred tax
asset of approximately $24,500,000 which is offset by an allowance of
$24,500,000 because its realization cannot be assured at this time. The
allowance was reduced from June 30, 1995 by $15,224,000 principally due to the
sale of a subsidiary (CCCD) with operating loss carryforwards.
Additionally, in connection with the acquisition of CGMI [Note 3], the
Company elected to have IRS Code Section 338 apply to the transaction and
accordingly, the assets acquired receive a step-up in basis for tax purposes.
CGMI's tax attributes such as net operating loss carryforwards remain with the
seller and are not available for the Company's use.
[18] PENSION PLAN
Effective November 1, 1994, the Company adopted a defined contribution
[401(k)] plan covering all eligible employees. Under the terms of the Plan,
participating employees deposit a percentage of their salaries in the Plan. The
Company matches 50% of the employees' contribution up to a maximum of 4% of
salary. Expense for the year ended June 30, 1996 and 1995 was $22,131 and
$43,421 respectively.
[19] LEASES
The Company leases operating facilities under various leases expiring
through January 2001.
Rent expense aggregated approximately $129,000, $144,000 and $110,000
for the years ended June 30, 1996, 1995 and 1994, respectively. The Company's
aggregate lease commitments under non-cancelable leases with terms of one year
or greater total $343,000 and will require approximately $149,000 in 1997,
$97,000 in 1998, $40,000 in 1999, $36,000 in 2000 and $21,000 in 2001.
The Company previously leased space under an operating lease which
served as the gym and training facility. The lease which expired May 31, 1996
with one five year option period was assumed by Great American Recreation, Inc.
The Company remains obligated under this lease in the event Great American
Recreation, Inc. defaults on the lease payments.
[20] FEE FOR AGREEMENT MODIFICATION
On February 17, 1994, the Company entered into a Marketing Services
Agreement with HFS Gaming Corp. ("HFS"), a wholly-owned subsidiary of
Hospitality Franchise Systems, Inc., whereby HFS agreed to employ marketing
F-31
<PAGE>
Capital Gaming International, Inc.
Notes to Consolidated Financial Statements
efforts (including sales efforts with tour operators and travel clubs,
distribution of promotional materials and advertisements in travel periodicals
and other publications) for the Company's current and future gaming operations
to its customers as well as the franchisees of Hospitality Franchise Systems,
Inc. and their customers in return for 1% of the Company's net gaming revenues
(as defined). The agreement's term is for a period of ten years from the
commencement of each gaming operation.
As amended in June 1994, the Marketing Services Agreement only applies
to the present and not the future gaming projects of the Company and limits the
fee paid to HFS for the Narragansett Project to 0.25% of annual Net Gaming
Revenues for such project. In consideration for the termination of HFS' right to
provide marketing services and collect marketing services fees with respect to
future gaming operations of the Company, and the limit placed on marketing
services fees paid to HFS for the Narragansett Project, the Company paid and
expensed $1 million to HFS in June 1994. Additionally, marketing expenses under
this agreement amounted to approximately $311,000 for the year ended June 30,
1995 and approximately $939,000 for the year ended June 30, 1996. The Company is
presently in default under the agreement.
Hospitality Franchise Systems, Inc. purchased approximately 730,000
shares of the Company's common stock in the February 1994 private placement in
which the Company raised debt and equity proceeds of $159.7 million.
[21] LEGAL PROCEEDINGS
Reorganization of Crescent City Capital Development Corp. The Grand
Palais and Crescent City Queen riverboats, operating through the River City
Joint Venture, in which CCCD had a 50% interest, voluntarily ceased gaming
operations on June 6, 1995 and June 9, 1995, respectively, primarily due to
unforeseen failure of projected market conditions which have been widely
reported to have severely and negatively impacted the entire New Orleans
riverboat and land-based gaming industry. As a result, CCCD consented to the
entry of an order for relief under Chapter 11 of the Bankruptcy Code in the
United States Bankruptcy Court for the Eastern District of Louisiana (the "CCCD
Reorganization Case") on July 28, 1995 and became a debtor-in-possession. The
Grand Palais riverboat and River City Joint Venture's entertainment pavilion and
docking facility commenced operations on March 29, 1995 and the Company's
Crescent City Queen riverboat commenced operations on April 4, 1995. From the
commencement of gaming operations until termination on June 9, 1995, CCCD
incurred operating losses of approximately $10,061,000. The revenues derived
during the period of operation of the River City Joint Venture were
approximately 66% below the revenues projected by the Company. As a result of
the failure of the River City Casino to generate sufficient revenue to cover
operating costs, and a determination that the unforeseen failure of projected
market conditions could not be reasonably expected to change, CCCD ceased
operations in order to stem further operating losses.
On June 13, 1995, First Trust National Association, the Trustee with
respect to the issuance of the Company's 11-1/2% Senior Secured Notes due 2001
(the "Senior Secured Notes") notified the Company of the occurrence of events of
default ("Events of Default") under the Company's Indenture (the "Indenture").
The Senior Secured Notes were guaranteed by the CCCD and CGMI subsidiaries. The
Events of Default cited by the Trustee related to the assertion of various
claims of creditors against Collateral, as defined in the Company's Indenture,
which was pledged to secure repayment of the Senior Secured Notes. In addition,
on June 13, 1995, the Trustee also notified First National Bank of Commerce
("FNBC") - the Company's Collateral Agent - that FNBC could not make further
disbursements from cash collateral accounts established pursuant to the
Indenture until directed by the Trustee.
F-32
<PAGE>
Capital Gaming International, Inc.
Notes to Consolidated Financial Statements
CCCD filed a plan of reorganization under Chapter 11 of the Bankruptcy
Code on October 13, 1995. On January 12, 1996, CCCD's plan of reorganization was
confirmed (the "January Plan of Reorganization"). The January Plan of
Reorganization was predicted upon an agreement (the "MRI Agreement") with Mirage
Resorts, Inc. ("Mirage") for the sale of CCCD to Mirage for $55 million plus the
assumption of certain equipment liabilities of up to $6.5 million. The sale to
Mirage was contingent upon certain waivers and conditions being achieved on or
before January 24, 1996 including, but no limited to, receiving all requisite
regulatory approvals to transfer the operator's license. On January 24, 1996,
Mirage announced that conditions to the closing of the purchase were not
satisfied by the contractual deadline and terminated the MRI Agreement. Although
the Louisiana State Police determined on January 23, 1996 that Mirage was
suitable to hold an operator's license, the Louisiana Riverboat Gaming
Commission deferred action on the matter indicating that it needed more time to
rule on the proposed change in berth and transfer of the license from Orleans
Parish to Bossier Parish, Louisiana. As a consequence of the termination of the
MRI Agreement, management believed that it was in the best interests of the
Company, its Senior Secured Noteholders and shareholders, to immediately pursue
other alternatives for the sale of CCCD's assets.
To that end, management was able to successfully enter into a new sale
agreement (the "CMC Agreement") with a wholly-owned subsidiary of Casino Magic
Corp. On February 21, 1996, the Company entered into a stock purchase agreement
with Casino Magic Corp., two of its wholly-owned subsidiaries, and CCCD to
transfer the ownership of CCCD and substantially all of its assets to a
wholly-owned subsidiary of Casino Magic Corp. An Amended Plan of Reorganization
(the "Amended Plan of Reorganization") predicated upon the CMC Agreement was
filed by CCCD. The Amended Plan of Reorganization was confirmed by the Court and
an order of confirmation was entered on April 29, 1996. On May 13, 1996, the
Company completed the sale of CCCD to a wholly-owned subsidiary of Casino Magic
Corp. for an aggregate purchase price of $56.5 million, consisting of $15
million cash and $35 million in 11.5% secured notes of the purchaser due in
three years (the "Purchaser's 11.5% Notes") and the assumption of up to $6.5
million in certain equipment liabilities.
The cash and Purchaser's 11.5% Notes paid by Casino Magic Corp. as the
purchase price for CCCD were distributed in accordance with the provisions of
CCCD's Amended Plan of Reorganization. In connection therewith, $7 million in
cash and $28 million in Purchaser's 11.5% Notes were distributed to the
Indenture Trustee for the Company's 11-1/2% Senior Secured Noteholders. The
Amended Plan of Reorganization also provided for the distribution to CCCD's
creditors of the proceeds of all of CCCD's remaining assets, those not sold to
Casino Magic Corp., including, without limitation, any and all causes of action
arising in favor of CCCD as a consequence of the termination of the MRI
Agreement.
Senior Secured Notes. As described above, the Company is in default
under the Indenture as a result of the CCCD Restructuring Case. The Company also
failed to make interest payments on its Senior Secured Notes of $7,302,500 each
on August 1, 1995, February 1, 1996 and August 1, 1996, and a $1,350,000 consent
fee payment which was due to the holders of the Senior Secured Notes on August
1, 1995. Such consent fee was previously incurred to allow the relocation of the
Company's New Orleans River City Casino. The Company's failure to make the
August 1, 1995 interest and consent payments and the February 1, 1996 and August
1, 1996 interest payment are also Events of Default under the Indenture.
F-33
<PAGE>
Capital Gaming International, Inc.
Notes to Consolidated Financial Statements
The Company's Indenture also contains certain covenants regarding
maintenance of consolidated net worth levels, the maintenance of ratios between
earnings before income taxes, depreciation and amortization and certain fixed
charges of the Company. As of the date hereof, the Company does not satisfy many
of these covenants.
On June 21, 1995, the New Orleans 2000 Partnership, the mortgagee of
real property owned by River City, provided notice of various defaults under its
first mortgage to CCCD, River City Joint Venture and Grand Palais, An event of
default under this mortgage constitutes an Event of Default under the Indenture.
As a result of the various defaults under the Indenture, the holders of
the Senior Secured Notes are entitled to all of the remedies contained in the
Indenture, including but not limited to acceleration of the Senior Secured Notes
and foreclosing on the Collateral pledged by the Company to the Trustee which
includes, among other things, the management fees derived from the management
agreements between CGMI and the Native American Tribes. Furthermore, the
security agreements entered into by the Company provide remedies to the holders
of Senior Secured Notes including a requirement to transfer any proceeds
received in respect of any dispositions of Collateral from and after the
occurrence of an Event of Default as defined in the Indenture.
In the event that the holders of the Senior Secured Notes exercise all
of their available remedies under the Indenture and related agreements, the
Company and its subsidiaries will not be able to continue their operations.
However, the Company does not believe the holders of the Senior Secured Notes
will exercise their remedies where the exercise of such remedies would prevent
CGMI from continuing its operations as manager of several existing Native
American gaming facilities or CDGC from its development of the Narragansett
Casino Project.
Bank Line of Credit. On March 28, 1995, CCCD entered into a loan
agreement with First National Bank of Commerce ("FNBC") which was guaranteed by
the Company (the "Guaranty"). Pursuant to the terms of this agreement, CCCD
received a $2 million working capital Line of Credit from FNBC for a period of
ninety (90) days. In April 1995, this credit facility was utilized to provide
the Company with $2 million of working capital. Borrowings against this facility
were due June 27, 1995. CCCD was not able to repay the obligation thereby
causing a default under the agreement. In addition, the Line of Credit contains
cross-default provisions with the Indenture. FNBC has filed suit against Capital
Gaming International, Inc. as a guarantor of CCCD's obligation and there is a
chance that its suit may succeed. Any guarantor liability, however, may be
partially offset by amounts recovered by FNBC on this obligation in connection
with the CCCD reorganization case.
On November 21, 1995, FNBC filed suit against the Company in the U.S.
District Court for the Eastern District of Louisiana alleging the Company's
liability under the Guaranty for the debt incurred by CCCD, as well as a second
promissory note in the amount of $2,500,000 (the "RCJV Note") given by River
City Joint Venture ("RCJV"), an entity in which CCCD was a general partner. FNBC
sued the Company on the theory that CCCD, as a general partner of RCJV, was
liable on the RCJV Note and the Company Guaranty applied to any and all
liabilities of CCCD to FNBC. RCJV failed to pay all of the principal and
interest due on the RCJV Note and ultimately filed bankruptcy. CCCD never repaid
the principal of the CCCD Note and as described above filed the Bankruptcy Case.
FNBC demanded payment of the notes from the Company under the Guaranty and the
Company has refused for valid reasons to pay under the Guaranty. As a result of
the CCCD bankruptcy and the Company's refusal to pay under the Guaranty, FNBC
filed its Complaint.
F-34
<PAGE>
Capital Gaming International, Inc.
Notes to Consolidated Financial Statements
On January 16, 1996, CCCD filed an Objection to Proof of Claim Filed by
FNBC (the "Crescent City Objection" or "Objection") in CCCD's Bankruptcy Case
which raised substantial questions about the liability of CCCD under the
promissory notes on which FNBC sued the Company. The Company then filed its
Motion for Referral to Bankruptcy Court on January 18, 1996, which motion was
opposed by FNBC. Notwithstanding the fact that the Motion for Referral was
pending. FNBC filed a Motion for Partial Summary Judgment with the District
Court on February 5, 1996, seeking judgment against the Company on only the CCCD
Note. The District Court granted the Company's motion to refer the case to the
Bankruptcy Court on February 9, 1996 as a non-core proceeding. The Order
transferring this case was entered on February 13, 1996.
FNBC moved to dismiss that portion of the case involving the RCJV Note
and the same was dismissed without prejudice by the Bankruptcy Court on May 31,
1996 leaving the only issues before the court as those relating to the Guaranty,
the CCCD Note and the Company's and CCCD's liability thereunder.
The Company opposed the FNBC Motion for Partial Summary Judgment,
asserting detrimental reliance as well as estoppel and misrepresentation as
defenses to liability under the Guaranty. On May 23, 1996, the Bankruptcy Case
judge held a hearing on the FNBC Motion and orally granted the motion.
On June 3, 1996, the Bankruptcy Case judge issued his written Proposed
Findings of Fact and Conclusions of Law. In accordance with the statutory
procedure, the Company filed timely objections to those findings of fact and
conclusions of law with the U.S. District Court on June 13, 1996, and set the
objections for hearing on July 24, 1996, before the District Judge. In its
objections, the Company argued, in addition to reiterating its previously
asserted defenses, that the Bankruptcy Court erred in the calculation of the
amounts due because of the uncertainty of and lack of evidence on the amounts
paid by the Company or seized by FNBC. The Company also objected that FNBC had
not proved any of its calculations of the interest due. FNBC filed a response to
the Company's objections on July 16, 1996, opposing the Company's arguments. The
Company filed a reply to FNBC's opposition to advise the court that FNBC's
response was untimely and to clarify and amplify on certain statements made by
FNBC in its opposition.
There has been no action by the court since July 24, 1996, and the
matter remains pending before the Judge for action on the Company's objections
to the Bankruptcy Judge's proposed Findings of Fact and Conclusions of Law.
The Company has and will continue vigorously to contest any liability
under the CCCD Note on the basis of detrimental reliance, estoppel, and
misrepresentation by FNBC. In the event that judgment is rendered against the
Company, appropriate motions to reconsider or to modify the judgment will be
filed and serious consideration will be given to an appeal.
Although valid objections have been made by the Company to the proposed
findings of fact and conclusions of law it is probable that an unfavorable
outcome could occur, notwithstanding the fact that the Company has meritorious
defenses based upon detrimental reliance, estoppel and misrepresentation by
FNBC. If the court rules against the Company's objections final judgment may be
entered against the Company, but the amount of such judgment is still uncertain.
F-35
<PAGE>
Capital Gaming International, Inc.
Notes to Consolidated Financial Statements
Term Note Payable. In connection with the buy-out of the profit
interest of Republic Corporate Services, Inc. ("Republic") in CCCD, the Company
executed an unsecured promissory note payable to Republic for $19,000,000. The
note bears interest at 11.5% per annum and requires semi-annual interest
payments in April and October until its maturity on April 26, 2002 when all
principal becomes due. In October 1994 and April 1995, the Company made each of
the required interest payments of this term note totalling $2,185,000. As a
result of the cessation of the Company's New Orleans operations on June 9, 1995,
and the resultant Chapter 11 Petition filed by CCCD, and other reasons, the
Company did not make the required interest payment under the note. As a result,
the Company is in default under the note agreement. See "Business Legal
Proceedings."
Other Litigation. The Company and its subsidiaries are parties to
various lawsuits that have arisen in the course of business, none of which is
material.
[22] NEW AUTHORITATIVE PRONOUNCEMENTS
The Financial Accounting Standards Board has issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of". SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity, including goodwill,
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Company
elected early adoption of SFAS 121 for the year ended June 30, 1995.
The FASB has also issued SFAS No. 123 "Accounting for Stock Based
Compensation." in October 1995. SFAS No. 123 uses a fair value based method of
recognition for stock options and similar equity instruments issued to employees
as contrasted to the intrinsic valued based method of accounting prescribed by
Accounting Principles board ["APB"] Opinion No. 25, "Accounting for Stock Issued
to Employees." The recognition requirements of SFAS No. 123 are effective for
transactions entered into in fiscal years that begin after December 15, 1995.
The Company will continue to apply Opinion No. 25 in recognizing its stock based
employee arrangements. The disclosure requirements of SFAS No. 123 are effective
for financial statements for fiscal years beginning after December 15, 1995. The
Company will adopt the disclosure requirements on July 1, 1996, SFAS 123 also
applies to transactions in which an entity issues its equity instruments to
acquire goods or services from non-employees. Those transactions must be
accounted for based on the fair value of the consideration received or the fair
value of the equity instrument issued, whichever is more reliably measurable.
This requirement is effective for transactions entered into after December 15,
1995.
[23] AMENDMENTS TO THE CERTIFICATE OF INCORPORATION
In May 1993, the Company's shareholders authorized an amendment to the
Company's Certificate of Incorporation to change the corporate name of the
Company to Capital Gaming International, Inc. The prior legal name of the
Company, Triple Threat Enterprises, Inc., was changed to reflect the Company's
new business strategy to concentrate on opportunities in the secondary market
within the casino gaming industry.
The following additional amendments to the Company's Certificate of
Incorporation were approved by a vote of shareholders, through solicitation of
proxies, at the Annual meeting of shareholders held on June 15, 1994:
F-36
<PAGE>
Capital Gaming International, Inc.
Notes to Consolidated Financial Statements
(1) The classification of the Board of Directors into three classes of
Directors with staggered terms of office;
(2) That Directors may only be removed for cause with the affirmative
vote of holders of 80% of the voting power of all the shares of the Company
entitled to vote thereon, or a majority of the remaining Directors;
(3) That any vacancy on the Board of Directors may be filled by the
remaining Directors then in office, or if such vacancy is not filled by the next
succeeding Annual or Special Meeting of Shareholders called for that purpose, by
a vote of the shareholders entitled to vote at such Meeting;
(4) That the number of Directors will be determined only by a majority
vote of the Board of Directors;
(5) To provide for the divestiture of shares of the Company's Capital
Stock and Stock Equivalents (as defined) from shareholders in instances in which
such ownership would jeopardize the Company's or its subsidiaries' licenses with
regulatory authorities or cause the Company to no longer be considered a "United
States citizen" under the Shipping Act of 1916, as amended, or the Merchant
Marine Act of 1936, as amended;
(6) That the shareholder vote required to amend, repeal or adopt any
provisions inconsistent with the foregoing amendments be increased from a
majority to 80% of the voting power of all the shares of the Company entitled to
vote thereon;
(7) To authorize an amendment to the Company's 1990 Stock Option Plan,
as amended, to increase the number of shares of Common Stock issuable pursuant
thereto from 5,000,000 shares to 6,500,000 shares; [See Note 12] and
(8) To authorize an amendment to the Company's Certificate of
Incorporation to increase the number of shares of Common Stock authorized from
30,000,000 to 75,000,000 shares.
[24] CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk are cash equivalents and receivables arising from
Native American gaming development and operations. The Company places its cash
investments with high credit quality financial institutions and currently
invests primarily in U.S. government obligations that have maturities of less
than three months. The Company currently maintains cash and cash equivalents of
approximately $161,000 in financial institutions which are subject to credit
risk beyond FDIC insured limits. In addition, the Company has approximately
$1,900,000 in repurchase agreements which are not insured.
The Company has recorded at June 30, 1996 and 1995, $1,283,000 and
$2,584,000 respectively in casino development advances, management fees, and
reimbursable expenses due from Native American Tribes under management contracts
as well as $11,326,000 and $22,354,000 respectively for development loans to
tribes. Federally recognized Native American Indian tribes are sovereign nations
governed by federal statutes that are different than statutes governing
commercial enterprises in the United States. As of June 30, 1996 these
receivables are due from three tribes, collectively. While the Company has legal
F-37
<PAGE>
Capital Gaming International, Inc.
Notes to Consolidated Financial Statements
counsel experienced in Indian gaming law and matters, there is the risk that the
Company may not prevail if collectability is forced into litigation. The Company
does not have collateral with respect to these contracts. Management has no
disputes with any Native American tribe that would place doubt on the full
collectability of any of the receivables. The Company takes all necessary legal
measures in the documentation and preparation of agreements executed with Native
American Tribes, including the Tribe's waiver of sovereign immunity related to
contract enforcement.
[25] OTHER PROJECTS
Native American Casino [Rhode Island] - In August 1994, a Tribal-State
Compact was entered into between the Narragansett Indian Tribe and Governor
Bruce Sundlun of Rhode Island. In October and November of 1994, two lawsuits
were filed (including one by Rhode Island Attorney General Pine) seeking to void
the Tribal-State Company on the grounds that the Governor lacked the authority
to bind the State absent legislative approval. In 1995, the State's new
governor, Governor Almond, joined in the Pine Case.
In February of 1996, the United States District Court for the District
of Rhode Island held that the Compact was void. The State has subsequently
refused to negotiate with the Tribe.
In addition, in September of 1996, federal legislation was entered as
an amendment (introduced by U.S. Senator John Chaffee of Rhode Island) to the
Omnibus Appropriations Bill which has the effect of excluding the Narragansett
Tribe's reservation (where the gaming facility is currently planned to be built)
from the benefits of IGRA.
Although there can be no assurance, the Company believes that there is
a chance that the Chaffee amendment may be overturned in the next Congressional
session. In addition, the Secretary of the Interior has requested comments as to
whether the Secretary can enact Secretarial procedures to permit gaming under
IGRA for Tribe's in States (such as Rhode Island) that refuse to negotiate
Tribal-State Compacts in good faith. If the Secretary concludes that he has such
authority, the Company believes that the Secretary may adopt such procedures
sometime in 1997. On April 16, 1996, the Narragansett Tribe filed a petition
with the Secretary requesting that the Secretary adopt procedures applicable to
gaming by the Tribe. Unless the Chaffee amendment is overturned, however, there
can be no assurance that the Secretary may not have the authority to impose a
compact on the State of Rhode Island. In spite of the set-back caused by the
Chaffee amendment, the Company intends to pursue the Narragansett development
project.
CDGC has entered into a management contract with the Narragansett Tribe
(the "Narragansett Contract"). As amended, the Agreement provides for CDGC to
receive an annual management fee of 30% of net revenues (as defined) of the
facility for the first five years and 20% for the remaining two years. As part
of the amended management contract, the Company will advance a construction loan
to be repaid over a seven year period. The amended Narragansett Contract was
submitted to the NIGC for approval in June of 1995 and until approved is not
legally binding, or enforceable against the Tribe. No assurance can be given
that, or when, such approval will be obtained. It is possible, as a condition of
obtaining such approval, that the NIGC will require modifications to be made to
the contract, some of which may be material.
In August 1996, the NIGC submitted comments on the Narragansett
Contract. In light of the decision by the United States District Court
invalidating the Tribal-State Company, the NIGC has informed the Company
F-38
<PAGE>
Capital Gaming International, Inc.
Notes to Consolidated Financial Statements
and the Tribe that they will only consider at this time a contract relating
solely to Class II gaming. In light of this, the Company currently intends to
bifurcate the Narragansett Contract and submit only the portions relating to
Class II gaming and return the Class III contract as a development contract
until such time as a compact for Class III gaming is signed. Unless the Chaffee
amendment is overturned, however, there can be no assurance that the Chairman of
the NIGC will have the authority to approve the Narragansett contract.
Included in "Native American Gaming Development Costs" in the statement
of operations for the year ended June 30, 1996 and 1995 are approximately
$1,808,000 and $1,927,000 in costs related to the development of this management
contract. Additionally, for the years ended June 30, 1996 and 1995 the Company
has incurred additional costs for legal expenses related to this project which
are included as part of professional fees.
Rockford Riverboat - In August 1993, the Company entered into a
partnership agreement to develop and operate a casino riverboat in Rockford,
Illinois. The agreement was subject to passage of state legislation increasing
the number of authorized riverboats in Illinois. The Company was entitled to a
50% interest in the operation and a management fee for services as managing
partner if the development succeeded. The Company has incurred and expensed
$70,000 in various development costs during the year ended June 30, 1994 and
$170,000 during the year ended June 30, 1995. In July 1995, the Company sold its
50% interest in the partnership to its partner for $243,800. Since the
development costs incurred by the Company for this project were expensed during
1994 and 1995, the Company reported a gain from the sale in the first quarter of
1996 of approximately $221,000.
Philadelphia Real Property Purchase Option - In May 1993, the Company
entered into an agreement as amended, and secured an option to purchase certain
unimproved real property until May 1995 at a cost of $10,000 per month. In March
1995, the option period was extended at a cost of $15,000 per month. In
September 1995, the Company terminated its Option Agreement to acquire certain
real estate in Philadelphia, Pennsylvania along the Delaware waterfront. In
arriving at its decision to terminate the Option Agreement, the Company
considered the anticipated lengthy time period for gaming legislation to be
passed in the State of Pennsylvania, including the risks of non-passage, the
substantial costs associated with developing, passing and implementing gaming
legislation in Pennsylvania and the costs associated with maintaining the real
estate option.
[26] GOING CONCERN
As shown in the accompanying financial statements, the Company has
incurred a net loss of approximately $3.3 million and $117.7 million for the
years ended June 30, 1996 and 1995, respectively, and has a stockholders'
deficit of approximately $99.5 million. At June 30, 1996 the Company's current
liabilities exceeded its current assets by approximately $116.8 million.
Additionally, the Company is a party to various legal and other actions as a
result of the cessation of certain operations and defaults on debt. Those
factors create uncertainty about the Company's ability to continue as a going
concern.
Management is taking the following steps to revise its operating and
financial requirements, which it believes are sufficient to provide the Company
with the ability to continue in existence: (1) restructure substantially all of
the Company's indebtedness, (2) continue to provide management services under
the Company's Native American gaming operations, (3) develop the Narragansett
Casino, and (4) seek new gaming opportunities. The ability of the Company to
continue as a going concern is dependent on the success of those plans.
F-39
<PAGE>
Capital Gaming International, Inc.
Notes to Consolidated Financial Statements
Alternatively, the Company is contemplating filing a voluntary petition for
relief on a pre-negotiated basis under Chapter 11 of the Federal Bankruptcy
Code. The financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
In connection with such a restructuring, the Company anticipates that
it will file a consensual, pre-negotiated Plan of Reorganization (the
"Prenegotiated Plan") under Chapter 11 of the U.S. Bankruptcy Code which will
have the approval of the Steering Committee for its Senior Secured Noteholders
(the "Restructuring Case"). The Steering Committee has indicated that it plans
to work with the Company to resolve its financial difficulties. The Company
believes that the filing of a Prenegotiated Plan has many benefits including an
expedited time frame for confirmation of approximately 120 days or less. At this
time the Company cannot project the terms of the Prenegotiated Plan or any other
plan of reorganization and there is no assurance that any plan of reorganization
filed by the Company will be consummated. The consummation of a plan of
reorganization will be dependent upon the satisfaction of numerous conditions,
including, among others, the acceptance of such plan by at least one class of
impaired claims and confirmation by the Bankruptcy Court. Acceptance by a class
of creditors requires the approval of holders of two-thirds in principal amount
and more than one-half in number of those voting in such class. There is no
assurance that the required conditions of any plan of reorganization filed by
the Company will be met. If the Company does file a voluntary petition for
relief under Chapter 11, it is not possible to predict the length of time the
Company will be able to operate under the protection of Chapter 11, the outcome
of the Chapter 11 proceedings in general, or the effect of such proceedings on
the remaining business of the Company.
While the Company cannot predict the terms of its restructuring, the
Restructuring Case is most likely to take the form of an exchange of all or a
substantial portion of the Company's debt for equity. Given the secured position
of the Company's Senior Secured Noteholders and the substantial amount by which
the Company's liabilities exceeds its assets, it is likely that the consummation
of any plan of reorganization proposed with respect to the Company will result
in substantial dilution of the Company's shareholders which could result in
their retaining little, if any, equity interest in the Company. The Company
believes that any plan of reorganization consummated by the Company will not
require a restructuring of the operations of CGMI or CDGC. Furthermore, the
Company does not believe it will be necessary and does not intend to file any
Bankruptcy Case for CGMI or CDGC. The Company does not believe that the
Restructuring Case will adversely affect the existing management and development
contracts of CGMI and CDGC and does not constitute a default under any such
agreements. However, there can be no assurance that the Company's Native
American casino management contracts will not be adversely affected by the
Restructuring Case.
In connection with the above restructuring the Company may experience
an "Ownership Change" within the meaning of Section 382 of the Internal Revenue
Code of 1986. If an "Ownership Change" were to occur the Company's use of its
tax net operating loss carryforwards could be severely limited.
The management contract with the Muckleshoot Indian Tribe provides that
any decree or judgment of insolvency against "Capital" (defined collectively as
the Company and CGMI) is an event of default allowing the tribe to terminate the
contract. The management contracts with the Tonto Apache Tribe and the Umatilla
Tribe generally provide that the tribe may terminate the agreement if CGMI files
or consents to the filing of an involuntary petition in bankruptcy under Chapter
7, which is not dismissed within ninety days. The Company does not anticipate
that the Restructuring Case will constitute an event of default under any of
these provisions.
[27] FAIR VALUE OF FINANCIAL INSTRUMENTS
Effective June 30, 1996, the Company adopted Statement of Financial
Accounting Standards No. 107, "Disclosure About Fair Value of Financial
Instruments" which requires disclosing fair value to the extent practicable for
F-40
<PAGE>
Capital Gaming International, Inc.
Notes to Consolidated Financial Statements
financial instruments which are recognized or unrecognized in the balance sheet.
The fair value of the financial instruments disclosed herein is not necessarily
representative of the amount that could be realized or settled, nor does the
fair value amount consider the tax consequences of realization or settlement.
In assessing the fair value of financial instruments, the Company used
a variety of methods and assumptions, which were based on estimates of market
conditions and risks existing at that time. For certain instruments, including
cash and cash equivalents, trade receivables, trade payables, and certain
short-term debt, it was concluded that the carrying amount approximated fair
value of these instruments because of their short maturities. Management also
estimates that the carrying amount of certain long-term debt approximates fair
value because the interest rates approximate the rates which can be obtained
currently from the bank.
For the ll.5% Senior Secured notes due 2001 carried at $101,531,726
(net of funds held in trust) and the ll.5% Term note due 2002 carried at
$19,000,000, and the Bondholder Consent Fee note due August 1, 1995 carried at
$1,350,000, it is not practicable to estimate the fair value for these financial
instruments because the Company is in default on these notes. The Company is
presently in negotiations with the bondholders steering committee to reduce
these notes but the amount is not determinable at the present time. However, it
is managements position that the notes will be reduced substantially to an
amount which is readily serviceable with the Company's cash flow.
[28] SUBSEQUENT EVENTS
On July 29, 1996 a payment was made to the trustee for the holders of
the 11.5% Senior Secured Notes as follows:
Transfer of Casino Magic Notes $28,000,000
Released from Funds Held by Bond Trustee $21,986,000
[29] Restatement of Financial Statements
The Company has a marketing services agreement with HFS [see Note 20].
The Company's management ceased accruing for this liability in October, 1995,
because of the anticipated rejection of the contract during the Company's
planned restructuring (See Note 26). Subsequently, it was determined by
management that relative to the expected restructuring of the Company, HFS would
have an unsecured claim for the nine months of unpaid fees pursuant to the HFS
agreement and that a liability should have been established for these unpaid
fees at June 30, 1996. As of June 30, 1996, accrued expenses include
approximately $763,000 in marketing service fees. An expense for this amount has
been included in the Company's results of operation for the year ended June 30,
1996.
F-41
<PAGE>
INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTARY SCHEDULES
To the Board of Directors and Stockholders of
Capital Gaming International, Inc.
West Atlantic City, New Jersey
Our report on the consolidated financial statements of Capital Gaming
International, Inc. and its subsidiaries, modified for going concern
considerations, is included on page F-2 of this Form 10-K. In connection with
our audits of such financial statements, we have also audited the related
consolidated financial statement schedule II, Valuation and Qualifying
Accounts, on page S-2 of Form 10-K.
In our opinion, the consolidated financial statement schedule referred
to above, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be included therein.
MOORE STEPHENS, P.C.
Certified Public Accountants.
Cranford, New Jersey
September 18, 1996
S-1
<PAGE>
CAPITAL GAMING INTERNATIONAL, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance
at Charged to Other Balance
Beginning Cost and [Deductions] at End
Description of Period Expenses Additions of Period
- ----------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C>
June 30, 1996:
Prepaid Rent - Reserve
(New Orleans Dock Board) $ 4,859,322 $ -- $(4,859,322) $ --
Cash Held in Escrow - Port of
New Orleans - Reserve 2,192,178 -- (2,192,178) --
Uncollectible Patron Markers - Reserve 14,250 -- (14,250) --
Employee Advance - Reserve 9,000 -- (9,000) --
----------- ----------- ----------- -----------
TOTALS $ 7,074,740 $ -- $(7,074,750) $ --
------ =========== =========== =========== -----------
June 30, 1995:
Prepaid Rent - Reserve
(New Orleans Dock Board) $ -- $ 4,859,322 $ -- $ 4,859,322
Cash Held in Escrow - Port of
New Orleans - Reserve -- 2,192,178 -- 2,192,178
Reserve for Asset Impairment -- 993,536 (993,536) --
Uncollectible Patron Markers - Reserve -- 14,250 -- 14,250
Employee Advance - Reserve -- 9,000 -- 9,000
----------- ----------- ----------- -----------
TOTALS $ -- $ 8,068,286 $ (993,536) $ 7,074,750
------ =========== =========== =========== ===========
</TABLE>
S-2
<PAGE>
CAPITAL GAMING INTERNATIONAL, INC.
EXHIBIT 11
SCHEDULE OF COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------------------
1 9 9 6 1 9 9 5 1 9 9 4
---------- --------- ----------
<S> <C> <C> <C>
Proceeds upon Assumed Exercise of
Options Outstanding -- -- $ 36,681,000
============= ============= =============
Number of Shares Outstanding
as Adjusted 19,329,574 17,256,591 14,135,625
Issued Shares on Assumed
Exercise of Options (1) (1) (1)
Shares Assumed to be Repurchased
with Proceeds from Exercise (1) (1) (1)
------------- ------------- -------------
Total Common and Common
Equivalent Shares 19,329,574 17,256,591 14,135,625
============= ============= =============
NET [LOSS] INCOME FOR YEAR:
Loss from Continuing Operations $ (16,677,245) $ (28,645,366) $ (23,684,292)
Loss from Operations of
Discontinued Business -- (18,953,923) --
Gain/(Loss) on Sale of Discontinued
Operations 12,638,968 (69,276,883) --
Extraordinary Item -- (832,846) --
------------- ------------- -------------
NET [LOSS] $ (4,038,277) $(117,709,018) $ (23,684,292)
============= ============= =============
EARNINGS PER SHARE:
Loss from Continuing
Operations Before Extraordinary Item $ (.86) $ (1.66) $ (1.68)
Loss from Operations of
Discontinued Business -- (1.10) --
[Loss]/Gain on Sale of Discontinued
Operations .65 (4.01) --
Extraordinary Item -- (.05) --
------------- ------------- -------------
NET [LOSS] $ (.21) $ (6.82) $ (1.68)
============= ============= =============
</TABLE>
(1) No contingently issuable shares are considered under the treasury stock
method when the effect is anti-dilutive.
S-3
<PAGE>
CAPITAL GAMING INTERNATIONAL, INC.
EXHIBIT 12
SCHEDULE OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Years ended
----------------------------------------------------------------------------------
June 30,
----------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
[Restated]
<S> <C> <C> <C> <C> <C>
Consolidated Pre-Tax
[Loss] Income from Continuing Operations $(16,677,245) $(29,478,212) $(23,684,292) $ (1,652,412) $ 52,282
Fixed Charges 21,846,414 20,388,518 7,837,795 2,332 12,800
------------ ------------ ------------ ------------ ------------
Earnings for Computation $ 5,169,169 $ (9,089,694) $(15,846,497) $ (1,650,080) $ 64,290
============ ============ ============ ============ ============
Interest Expense $ 19,061,910 $ 18,225,375 $ 7,023,794(1) $ -- $ 942
Capitalized Interest -- 1,473,522 233,645 -- --
Deferred Financing Costs 2,784,504 2,115,143 777,288 -- --
Interest Portion of Rent Expense -- $ 48,000 $ 36,713 $ 2,332 11,066
------------ ------------ ------------ ------------ ------------
Fixed Charges $ 21,846,414 $ 21,862,040 $ 8,071,440 $ 2,332 $ 12,008
============ ============ ============ ============ ============
Ratio of Earnings to Fixed Charges $ -- $ -- -- $ -- $ 5.35
============ ============ ============ ============ ============
Deficiency of Earnings $ 16,677,245 $ 30,951,734 $ 23,917,937 $ 1,652,412 $ --
============ ============ ============ ============ ============
</TABLE>
(1) Does not include a one time charge of $4,000,000 which was recognized as
interest expense as consideration for the termination of the Company's
obligation to issue warrants to purchase 1,250,000 shares of the
Company's common stock.
S-4
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CAPITAL GAMING INTERNATIONAL, INC.
Dated: November 13, 1996 By: /s/ Edward M. Tracy
-----------------------
Edward M. Tracy, Chief Executive Officer,
President and Director
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 dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Edward M. Tracy Chief Executive Officer, November 13, 1996
- ----------------------------------- President and Director
Edward M. Tracy (Principal Executive Officer)
/s/ Col. Clinton L. Pagano Executive Vice President November 13, 1996
- ----------------------------------- of Compliance and Director
Col. Clinton L. Pagano
/s/ Cory Morowitz Acting Chief Financial Officer November 13, 1996
- ----------------------------------- (Principal Financial Officer)
Cory Morowitz
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES THERETO AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND RELATED
NOTES.
</LEGEND>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,601
<SECURITIES> 0
<RECEIVABLES> 39,979
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 42,787
<PP&E> 127
<DEPRECIATION> 0
<TOTAL-ASSETS> 60,048
<CURRENT-LIABILITIES> 160,308
<BONDS> 0
0
0
<COMMON> 37,617
<OTHER-SE> 7,877
<TOTAL-LIABILITY-AND-EQUITY> 60,048
<SALES> 7,663
<TOTAL-REVENUES> 7,663
<CGS> 10,138
<TOTAL-COSTS> 10,138
<OTHER-EXPENSES> 13,882
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,062
<INCOME-PRETAX> (16,357)
<INCOME-TAX> 321
<INCOME-CONTINUING> (16,677)
<DISCONTINUED> 12,639
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,039)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
</TABLE>
