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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission File No. 0-19128
---------------------------
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 Identification No.)
incorporation or organization)
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
Not applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
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 the number of shares outstanding of each of the issuer's class of
common stock as of November 1, 1996: 19,329,574
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<PAGE>
CAPITAL GAMING INTERNATIONAL, INC.
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 1996 and June 30, 1996 [Unaudited] . . . . . . . . . . . . . . . . 1 - 2
Consolidated Statements of Operations for the three months
ended September 30, 1996 and 1995 [Unaudited] . . . . . . . . . . . . . . . . . 3
Consolidated Statement of Changes in Stockholders' Deficit for
the three months ended September 30, 1996 [Unaudited] . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the three months
ended September 30, 1996 and 1995 [Unaudited] . . . . . . . . . . . . . . . . . . 5 - 7
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . 8 - 13
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . 14
Part II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 3. Default Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Signature Page . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
</TABLE>
<PAGE>
Part I, Item 1
CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
<TABLE>
<CAPTION>
September 30, June 30,
1996 1996
------------- --------
[Unaudited]
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $ 3,145 $ 2,102
Cash Held in Escrow 1,437 500
Interest Receivable 42 616
Native American Management Fees and Expenses Receivable 794 667
Current Portion - Native American Loan Receivable 3,748 3,696
Notes Receivable -- 35,000
Prepaid Expenses and Other Current Assets 189 206
------- -------
TOTAL CURRENT ASSETS 9,355 42,787
------- -------
FURNITURE, FIXTURES AND EQUIPMENT, net 118 127
OTHER ASSETS:
Native American Loan Receivable 6,474 7,630
Investments in Native American Management Agreements, net 2,461 2,677
Deferred Financing Costs, net 4,573 6,213
Deposits and Other Assets 188 188
Goodwill, net 416 426
------- -------
TOTAL OTHER ASSETS 14,112 17,134
------- -------
TOTAL ASSETS $23,585 $60,048
======= =======
</TABLE>
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
1
<PAGE>
Part I, Item 1
CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
September 30, June 30,
1996 1996
------------- ---------
[Unaudited]
<S> <C> <C>
CURRENT LIABILITIES:
Accounts Payable and Accrued Expenses $ 3,011 $ 9,943
Accrued Professional Fees 1,932 1,917
Accrued Interest 27,130 23,277
Equipment Notes Payable - Current Maturity 892 1,290
Bondholder Consent Fee Note 1,350 1,350
Bank Line of Credit 2,000 2,000
11.5% Senior Secured Notes Payable - [net of
Original Issue Discount of $2,196 and $2,980] 124,804 124,020
Funds held/paid by Trustee for/to Senior Secured Noteholders (49,986) (22,489)
Unsecured 11.5% Term Note Payable 19,000 19,000
--------- ---------
TOTAL CURRENT LIABILITIES $ 130,133 $ 160,308
LONG-TERM DEBT: -- --
STOCKHOLDERS' DEFICIT
Preferred Stock, No Par Value, Authorized 5,000,000 Shares; -- --
Common Stock, No Par Value, Authorized 75,000,000 Shares;
Issued and Outstanding 19,329,574 Shares 37,617 37,617
Additional Paid In Capital 7,877 7,877
Accumulated Deficit (152,042) (145,754)
--------- ---------
TOTAL STOCKHOLDERS' DEFICIT (106,548) (100,260)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 23,585 $ 60,048
========= =========
</TABLE>
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
2
<PAGE>
Part I, Item 1
CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
[UNAUDITED]
(In thousands)
<TABLE>
<CAPTION>
Three months ended
September 30,
1996 1995
------------ ----------
<S> <C> <C>
REVENUE
Native American Casino Management Fees $ 2,137 $ 2,718
COSTS AND EXPENSES
Salaries, Wages and Related Costs 473 756
Gaming Development Costs 296 650
Professional Fees 439 693
General and Administrative 488 469
Depreciation and Amortization 235 175
Write-off of Deferred Charges -- 64
Reorganization Costs 243 --
-------- --------
Total Costs and Expenses 2,174 2,807
-------- --------
Loss From Continuing Operations before Other
Income/[Expense] (37) (89)
Other Income [Expense]:
Interest Income 168 515
Interest Expense (4,306) (4,775)
Gain From Sale of Development Agreement -- 221
Sale of Management Contract -- 3,000
-------- --------
Total Other Income [Expense], net (4,138) (1,039)
-------- --------
Loss From Continuing Operations Before Income Tax (4,175) (1,128)
Provision for State Income Taxes (115) --
-------- --------
Loss From Continuing Operations (4,290) (1,128)
Discontinued Operations:
Loss from Operations of Discontinued Business
and Other Reorganization Items -- (1,600)
-------- --------
Net Loss Before Extraordinary Item $ (4,290) $ (2,728)
Extraordinary Item - Loss From Early
Extinguishment of Debt (1,998) --
-------- --------
Net Loss (6,288) (2,728)
======== ========
Earnings Per Share:
Loss From Continuing Operations $ (.22) $ (.06)
Loss From Operations of Discontinued Business (.00) (.08)
Extraordinary Item (.11) (.00)
-------- --------
Net Loss $ (.33) $ (.14)
======== ========
Weighted Average Number of Shares
Outstanding (in thousands) 19,330 19,330
======== ========
</TABLE>
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
3
<PAGE>
Part I, Item 1
CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
[UNAUDITED]
(In thousands)
<TABLE>
<CAPTION>
Common Stock Additional Accumulated
------------------------ ---------- -----------
Shares Amount Capital [Deficit]
------ ------ ------- ---------
<S> <C> <C> <C> <C>
Balance - June 30, 1996 19,330 $ 37,617 $ 7,877 $(145,754)
Net loss for the three months ended
September 30, 1996 - - - (6,288)
--------- --------- --------- -----------
Balance - September 30, 1996 19,330 $ 37,617 $ 7,877 $(152,042)
========= =========== ========== ==========
</TABLE>
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
4
<PAGE>
Part I, Item 1
CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
(In thousands)
<TABLE>
<CAPTION>
Three months ended
September 30,
1996 1995
------- -------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Loss from Continuing Operations $(4,290) $(1,128)
Adjustments to Reconcile Net Loss to
Net Cash Provided by Continuing Operations:
Depreciation and Amortization 235 174
Write-off of Deferred Charges -- 64
Amortization of Deferred Finance Charges
and Original Issue Discount and
Extraordinary Loss From Early Extinguishment of Debt 426 519
Gain From Sale of Development Agreement -- (221)
Changes in Assets and Liabilities -
[Increase] Decrease in:
Interest Receivable 140 399
Prepaid Expenses and Other Current Assets 18 --
Management Fees and Expenses Receivable (128) 976
Deposits and Other Assets -- 8
Increase [Decrease] in:
Accounts Payable and Accrued Expenses 83 (358)
Accrued Interest Expense 3,852 4,175
------- -------
Total Adjustments 4,626 5,736
------- -------
Net Cash - Continuing Operations $ 336 $ 4,608
Loss From Discontinued Operations -- (1,600)
Adjustments to Reconcile Loss to Net Cash Used
in Discontinued Operations:
Equity in Losses of River City Joint Venture -- 831
Change in Net Assets of Discontinued Operations -- (192)
------- -------
Net Cash - Discontinued Operations -- (961)
------- -------
Net Cash - Operating Activities $ 336 $ 3,647
</TABLE>
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
5
<PAGE>
Part I, Item 1
CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
(In thousands)
<TABLE>
<CAPTION>
Three months ended
September 30,
1996 1995
-------- --------
<S> <C> <C>
INVESTING ACTIVITIES:
Investment in Property, Vessel and Equipment $ -- $ (453)
Advances to Joint Venture -- (630)
Net Transfers from Restricted Cash -- 4,064
Investments in Management Agreements -- (149)
Native American Casino Development Advances -- (1,070)
Repayment of Native American Notes Receivable 1,104 9,660
-------- --------
Net Cash - Investing Activities $ 1,104 $ 11,422
FINANCING ACTIVITIES:
Funds Held by Trustee -- (14,386)
Reduction in Equipment Notes (397) (428)
Proceeds From Sale of Development Agreement -- 292
-------- --------
Net Cash - Financing Activities $ (397) $(14,522)
-------- --------
NET DECREASE IN CASH $ 1,043 $ 547
Cash and Cash Equivalents - Beginning of Periods $ 2,102 $ 1,187
-------- --------
Cash and Cash Equivalents - End of Periods $ 3,145 $ 1,734
======== ========
</TABLE>
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
6
<PAGE>
Part I, Item 1
CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
Supplemental Disclosures of Cash Flow Information:
Three months ended
September 30,
------------------
1996 1995
---- ----
Cash paid during the periods for:
Interest $ 27 $ --
Income Taxes $ -- $ --
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
On July 29, 1996, the Indenture Trustee for the Company's Senior
Secured Noteholders distributed an aggregate of $49,986,000 in cash and
Purchaser's Notes to the Senior Secured Noteholders on account of principal and
accrued interest ("Noteholder Distribution"). The Noteholder Distribution
included $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 in unused restricted cash and other sources. Subsequently, in August
1996 the Purchaser's Notes were redeemed by CMC at 100% of the principal amount
plus accrued interest. The remainder is held by the trustee of the Company's
Senior Secured Noteholders, including cash escrow balances of $413,030 and
$524,017 to secure current and future fees for services of the trustee.
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
7
<PAGE>
CAPITAL GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
[A] BASIS OF PRESENTATION
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's CGMI subsidiary currently manages and operates three
Native American gaming facilities, which CGMI has developed or expanded into
Class III facilities:
o Muckleshoot Tribe - Auburn, Washington (Class III facility became
operational in April 1995)
o Tonto Apache Tribe - Payson, Arizona (Class III facility became
operational in April 1995)
o Umatilla Tribes - Pendleton, Oregon (Class III facility became
operational in March 1995)
CGMI also has a management contract to develop a Class III facility for
the Jena Band of Choctaws Tribe in Louisiana.
The Company's CDGC subsidiary has a management and development contract
with the Narragansett Tribe for the development of a Class III gaming facility
in Charlestown, Rhode Island.
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"). Due primarily 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, the gaming facility voluntarily ceased operations in June of 1995 and
the River City Joint Venture was terminated in July of 1995. On July 28, 1995,
CCCD consented to the entry of an order for relief under Chapter 11 of the U.S.
Bankruptcy Code. 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 an aggregate consideration of $50 million in cash
and notes and the assumption of up to $6.5 million in certain equipment
liabilities.
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 order to restructure its debt, the Company intends to file a
consensual, pre-negotiated Plan of Reorganization under Chapter 11 of the
Bankruptcy Code which will have the approval of the Steering Committee for its
Senior Secured Noteholders (the "Restructuring Case"). The Company believes that
a pre-negotiated plan of reorganization has many benefits including an expedited
time frame for confirmation of approximately 120 days or less. See "Going
Concern and Planned Restructuring".
The accompanying unaudited financial statements have been prepared in
accordance with generally
8
<PAGE>
Capital Gaming International, Inc.
Notes to Consolidated Financial Statements (Continued)
[Unaudited]
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, such statements include all adjustments [consisting only of normal
recurring items] which are considered necessary for a fair presentation of the
financial position of the Company at September 30, 1996, and the results of its
operations and cash flows for the periods then ended. Results of operations for
interim periods are not necessarily indicative of a full year of operations. The
expenses incurred by CCCD to maintain the physical assets and maintain certain
administrative requirements are reflected as part of Discontinued Operations in
the Statement of Operations for all periods presented. It is suggested that
these financial statements be read in conjunction with the financial statements
and notes included in the Capital Gaming International, Inc. Form 10-K for the
fiscal year ended June 30, 1996 and as filed with the Securities and Exchange
Commission ("SEC").
Certain reclassifications have been made to the prior period financial
statements to conform to classifications used in the current period.
[B] CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of the Company and all of its wholly owned subsidiaries. Intercompany
transactions and balances have been eliminated in consolidation.
[C] SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of the Company are set forth in the
Company's Form 10-K, as amended, for the year ended June 30, 1996, as filed with
the Securities and Exchange Commission.
[D] GOING CONCERN AND PLANNED RESTRUCTURING
As shown in the accompanying financial statements, the Company has a
stockholders' deficit of approximately $107 million. At September 30, 1996 the
Company's current liabilities exceeded its current assets by approximately $121
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. The ultimate liability resulting from those matters cannot presently be
determined.
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. The
financial statements do not include any adjustments that might be necessary if
the Company is unable to continue as a going concern.
9
<PAGE>
Capital Gaming International, Inc.
Notes to Consolidated Financial Statements (Continued)
[Unaudited]
In connection with the restructuring of the Company's outstanding debt,
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 which is comprised of greater than two-thirds of the
Senior Secured Noteholders (the "Restructuring Case"). 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 Restructuring 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.
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. The Company does not believe that the Restructuring Case will constitute an
event of default under any of these provisions.
Section 382 of the Internal Revenue Code of 1986 provides that in the
event of an "Ownership Change" within the meaning of such Section, the Company's
use of its tax net operating loss carryforwards could be severely limited.
Although there can be no assurance, the Company believes that an "Ownership
Change" within the meaning of such Section will not occur. Additionally, it is
possible that the Company's net operating loss carryforwards will be
substantially reduced or eliminated by cancellation of debt income in connection
with the contemplated planned restructuring.
10
<PAGE>
Capital Gaming International, Inc.
Notes to Consolidated Financial Statements (Continued)
[Unaudited]
The issuance of common stock in the restructuring to any holder of debt
resulting in such holder becoming a substantial stockholder of the Company
(greater than 5%) may require such stockholder to obtain certain licensing and
other consents.
[E] FUNDS HELD (PAID) BY TRUSTEE FOR (TO) SENIOR SECURED NOTEHOLDERS
On July 29, 1996, the trustee for the Senior Secured Noteholders
distributed a total of $49,986,000 to the Senior Secured Noteholders as follows:
(i) $21,986,000 in funds previously held by the trustee, and (ii) $28,000,000 in
Casino Magic notes from the sale of the Company's CCCD subsidiary. Due to the
Company's previous default on the Senior Secured Note obligation, the specific
application of these repayments is not known at this time. The balance sheet as
of September 30, 1996 therefore reflects a $49,986,000 contra-liability related
to Senior Secured Noteholder indebtedness. Interest expense for the period
subsequent to July 29, 1996 has been recorded based on an estimated liability
after the repayment of approximately $99,000,000. The cash balances remaining
with the trustee after the Senior Secured Note repayment have been reclassified
as current assets as of September 30, 1996.
[F] RHODE ISLAND DEVELOPMENT PROJECT
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 will 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.
11
<PAGE>
Capital Gaming International, Inc.
Notes to Consolidated Financial Statements (Continued)
[Unaudited]
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 Compact, the NIGC has informed the Company 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.
The Company has continued funding the on-going development costs of the
Rhode Island Development Project, which for the three months ended September 30,
1996 have amounted to approximately $296,000. Such costs primarily consist of
legal costs, environmental engineering and assessment and design costs.
[G] INCOME TAXES
Effective July 1, 1993, the Company adopted 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. The effect of the adoption is not material to the
financial statements.
As of September 30, 1996, the Company has a net operating loss
carryforward in excess of approximately $72 million which begins to expire in
2009. As a result the Company has recorded a deferred tax asset of approximately
$24.5 million which has been offset by an allowance of $24.5 million as
realization cannot be assured at this time. Additionally, it is possible that
the Company's net operating loss carryforwards will be substantially reduced or
eliminated by cancellation of debt income in connection with the contemplated
planned restructuring.
12
<PAGE>
Capital Gaming International, Inc.
Notes to Consolidated Financial Statements (Continued)
[Unaudited]
[H] SALE OF CRESCENT CITY CAPITAL DEVELOPMENT
On May 13, 1996, the Company sold substantially all of its remaining
assets in the CCCD subsidiary to a wholly owned subsidiary of Casino Magic Inc.
("CMC") for $56,500,000 as follows:
Notes $35,000,000
Cash 15,000,000
Assumption of Equipment Liability 6,500,000
-----------
$56,500,000
During the quarter ending September 30, 1996, the trustee for the
Senior Secured Noteholders transferred $28,000,000 of the CMC notes to the
Senior Secured Noteholders. In addition, the remaining $7,000,000 of notes were
transferred to the CCCD bankruptcy trustee in settlement of previously recorded
liabilities. In August 1996 the CMC notes were redeemed by CMC at 100% of the
principal amount plus accrued interest.
[I] EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT
The payment to the Senior Secured Noteholders resulted in a loss from
early extinguishment of debt of approximately $1,998,000. The loss is primarily
a result of the write-off of unamortized original issue discount and unamortized
deferred finance costs related to the principal amount of the notes retired (See
Note E.)
13
<PAGE>
Part I, Item 2
CAPITAL GAMING INTERNATIONAL, INC.
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 sale 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 September 30, 1996 was negative
approximately $121 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 $107 million as
of September 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.
14
<PAGE>
Part I, Item 2
CAPITAL GAMING INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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. 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. The Company does not
believe that the Restructuring Case will constitute an event of default under
any of these provisions.
Sources and Uses of Cash
During the three months ended September 30, 1996 cash of approximately
$336,000 was generated from operating activities. Cash flow was primarily
attributable to CGMI's net income from operations of approximately $1,275,000.
Significant non-cash items during the three month period include interest
expense accruals of approximately $3,577,000 and depreciation and amortization
of $2,659,000. These cash sources are
15
<PAGE>
Part I, Item 2
CAPITAL GAMING INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
offset by expenses of Capital Gaming International, Inc., development costs
incurred related to the Rhode Island project and the extraordinary loss from the
early retirement of debt. 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.
The net cash from investment activities for the quarter ended September
30, 1996 was $1,104,000 generated from collection of Native American loan
repayments. Net financing activities required $397,000, primarily for the
reduction of equipment notes payable.
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.
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. 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
16
<PAGE>
Part I, Item 2
CAPITAL GAMING INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
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.
Hospitality Franchise Systems, Inc. Hospitality Franchise Systems, Inc.
("HSFI") purchased shares of the Company's common stock in the February 1994
private placement. The Company entered into a Marketing Services Agreement (the
"Marketing Services Agreement") with HFS Gaming Corp. ("HFSC"), a wholly-owned
subsidiary of HSFI, on February 17, 1994 which was amended in June 1994.
Pursuant to the amended Marketing Services Agreement HFSC agreed to employ
marketing efforts for the Company's current gaming projects to HSFC's customers
as well as the franchises of HSFI and their customers in return for 1% of Net
Gaming Revenues (as defined) other than the Narragansett Project which is
limited to 0.25% of the annual gaming revenues for such project. The Company is
presently in default under the Marketing Services Agreement.
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 September 30, 1997 will approximate $3.2 million not
including estimated attorney and restructuring fees surrounding the anticipated
restructuring which may total an additional $1.5 million.
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
17
<PAGE>
Part I, Item 2
CAPITAL GAMING INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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.
18
<PAGE>
Part I, Item 2
CAPITAL GAMING INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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). On
May 13, 1996, all of the shares of capital stock were sold to a wholly-owned
subsidiary of Casino Magic Corp. (CMC). The Company's other active wholly owned
subsidiary, Capital Development Gaming Corp. is continuing to fund expenses of
the Rhode Island project. The results of operations of CCCD for the three months
ended September 30, 1995 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. All amounts in this discussion are approximate as
the format of the financial statements rounds all amounts to the nearest
thousand.
Three months ended September 30, 1996 compared to September 30, 1995
Consolidated
The three months ended September 30, 1996, resulted in a net loss from
continuing operations of $4,290,000 ($.22 per share) and an extraordinary loss
of $1,998,000 ($.11 per share) producing for the Company a net loss of
$6,288,000, ($.33 per share). This compares with losses from the quarterly
period ended September 30, 1995 of $1,128,000 ($.06 per share) and $1,600,000
($.08 per share), representing continuing operations and discontinued
operations, respectively. The losses from continuing operations for the quarter
ended September 30, 1996 are substantially attributable to interest expense
related to the Company's secured and unsecured debt. This is similarly true for
the quarter ended September 30, 1995. The Company accrued interest based on
$98,883,000 and $127,000,000 of outstanding 11.5% Senior Secured Notes for the
quarterly periods September 30, 1996 and 1995, respectively, and the $19,000,000
unsecured term note. The Company estimated the outstanding balance of the Senior
Secured Notes to be $98,883,000 as of July 29, 1996, on which date the trustee
disbursed approximately $50,000,000 to the Noteholders. The Company allocated
$21,867,000 of this payment to the accrued and unpaid interest and $28,117,000
as a reduction of principal. The actual allocation of these payments has not yet
been agreed upon by the Senior Secured Noteholders.
The net increase of $3,162,000 in the loss from continuing operations
is primarily attributable to the $3,000,000 buy-out of the management agreement
by the Cow Creek Tribe in the prior periods and a $221,000 gain from the sale
of a development agreement during the quarter ended September 30, 1995. CGMI
had three Class III facilities active as of September 30, 1996 as compared to
four Class III facilities in 1995. Thus, management fees for the comparative
quarters decreased approximately $581,000.
The consolidated loss from continuing operations before interest and
other income/expense for the quarter ended September 30, 1996 was $37,000 as
compared to the same loss for the immediately preceding June 30, 1996 fiscal
quarter of $184,000. The decrease in loss is primarily attributable to increased
management fees
19
<PAGE>
Part I, Item 2
CAPITAL GAMING INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
and a decrease in professional fees and salaries.
Interest Income and Expense - Interest income was $168,000 for the
quarter ending September 30, 1996 compared to $515,000 for the quarter ended
September 30, 1995, the difference being attributable to the decrease in the
outstanding loans to the tribes to $10,222,000 from $13,763,000 for the quarters
ended September 30, 1996 and 1995, respectively and adjustments to accrued
interest of $95,000. Interest expense for the quarter ended September 30, 1996
is comprised of the following: (i) Senior Secured Notes of $3,307,000, (ii)
amortization of original issue discount and deferred finance charges - $427,000,
(iii) Republic Note payable - $546,000 and (iv) CGMI equipment notes - $26,000
for a total of $4,306,000. Total interest expense decreased from the quarter
ended September 30, 1995 due to the extinguishment of $28,116,000 in Senior
Secured Notes on July 29, 1996.
Income Taxes - As the Company has continuing net operating losses
(NOL), there is a substantial NOL carryforward existing. 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 NOL
carryforwards. Any "ownership change," as defined in the Internal Revenue Code
of 1986, will severely limit the amount of any NOL carryforwards that may be
utilized. CGMI has recorded provisions during fiscal year 1996 for income taxes
payable to states in which it operates. Additionally, it is possible that the
Company's net operating loss carryforwards will be substantially reduced or
eliminated by cancellation of debt income in connection with the contemplated
planned restructuring.
Extraordinary Loss - The loss of approximately $1,998,000 is primarily
a result of the write-off of unamortized original issue discount and unamortized
deferred finance costs related to the principal amount of notes retired.
Capital Gaming Management, Inc. (CGMI)
Management fees from CGMI's three Native American gaming facilities
under management were $2,137,000 and decreased approximately $581,000 from the
quarter ended September 30, 1995 as a result of three Class III facilities being
operational during the quarter ended September 30, 1996 as compared to four
Class III facilities in operation during the quarter ended September 30, 1995.
CGMI's income from operations before interest and other income/expenses
was $1,275,000 for the quarter ended September 30, 1996 and reflects management
fee income of $2,137,000 reduced by $862,000 in operating costs. This represents
a decrease of $536,000 from the quarter ended September 30, 1995. The costs
include salaries and wages $122,000, professional fees $52,000, marketing
$364,000, and general and administration and other costs $104,000. In addition,
depreciation and amortization was $220,000. This compares to income from
operations before interest and other income/expense for the September 30, 1995
quarter of $1,811,000 based on management fees of $2,718,000 offset by $907,000
in operating costs. Costs of the prior quarter include salaries and wages
$187,000, professional fees $131,000, marketing $178,000, and
20
<PAGE>
Part I, Item 2
CAPITAL GAMING INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
general and administrative and other costs $188,000. Depreciation and
amortization was $223,000. As mentioned previously, revenues have decreased
$581,000 from the prior period.
CGMI earned interest income of $248,000 for the quarter ended September
30, 1996 from outstanding loans to tribes of approximately $10.2 million as of
September 30, 1996. The same quarter last year earned $473,000 in interest
income, the difference being attributable to the outstanding loan balance of
$13.8 million as of September 30, 1995. Interest expense of $26,000 was
recognized in the September 30, 1996 quarter on outstanding equipment notes
which CGMI obtained for financing slot machines installed in the Native American
facilities.
Capital Gaming International, Inc. (CGI)
CGI's costs of operations before interest and other income/expenses of
$1,081,000 for the quarter ended September 30, 1996 include wages and salaries
$351,000, professional fees $387,000 , development costs $49,000, reorganization
costs $244,000, and general and administration costs $35,000. Additionally,
depreciation and amortization was approximately $15,000. As compared to the
quarter ended September 30, 1995, these costs in total represent a reduction of
approximately $818,000 from the prior quarter total of approximately $1,899,000.
The largest decrease is $555,000 in development costs, as the result of
transferring the Narragansett development responsibilities to CDGC. However, the
entire costs of the operations of CDGC continues to be funded by CGI. The total
gaming development costs of CGI and CDGC were $296,000 for the quarter ended
September 30, 1996, a decrease of $308,000 from the quarter ended September 30,
1995. In addition, salaries and professional fees decreased $218,000 and
$175,000, respectively. This is offset by an increase in reorganization costs of
$243,000 which represent costs in connection with the Company's proposed debt
restructuring.
21
<PAGE>
Part II, Item 1
CAPITAL GAMING INTERNATIONAL, INC.
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 voluntarily
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.
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 predicated 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 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.
22
<PAGE>
Part II, Item 1
CAPITAL GAMING INTERNATIONAL, INC.
LEGAL PROCEEDINGS
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, $35 million in Purchaser's Notes and the assumption of up to $6.5
million in certain equipment liabilities. The cash and Purchaser's Notes paid by
Casino Magic Corp's. wholly owned subsidiaries 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 unsecured 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.
On July 29, 1996, the Indenture Trustee for the Company's Senior
Secured Noteholders distributed $49,986,000 in cash and Purchaser's Notes to the
Senior Secured Noteholders on account of principal and accrued interest (the
"Noteholder Distribution"). The Noteholder Distribution included $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 in unused restricted
cash 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
accrued interest.
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
23
<PAGE>
Part II, Item 1
CAPITAL GAMING INTERNATIONAL, INC.
LEGAL PROCEEDINGS
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 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.
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.
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
24
<PAGE>
Part II, Item 1
CAPITAL GAMING INTERNATIONAL, INC.
LEGAL PROCEEDINGS
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.
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
25
<PAGE>
Part II, Item 3
CAPITAL GAMING INTERNATIONAL, INC.
LEGAL PROCEEDINGS
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 payments under the note. As a result, the Company is in
default under the note agreement.
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.
There are a number of proceedings arising out of the River City project
which name the Company as a party defendant. None of these cases are being
actively pursued against the Company at this time. The Company believes that
each of these claims is without merit and will vigorously defend them if they
are pursued.
26
<PAGE>
Part II, Item 4
CAPITAL GAMING INTERNATIONAL, INC.
DEFAULT UPON SENIOR SECURITIES
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 notified
the Company of the occurrence of events of default under the Company's
Indenture. The Company and CCCD are also in default under certain other debt
instruments. These default conditions were disclosed and reported in detail in
the Company's Form 10-K for the year ended June 30, 1995 filed with the SEC.
27
<PAGE>
Part II, Item 6
CAPITAL GAMING INTERNATIONAL, INC.
EXHIBIT AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number
- ------
27 Financial Data Schedule
28
<PAGE>
SIGNATURES
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.
Date: November 1996 By: /s/ Edward M. Tracy
-----------------------------------------------
Edward M. Tracy, Chief Executive Officer,
President and Director
(Principal Executive Officer)
Date: November 1996 By: /s/ Cory Morowitz
-----------------------------------------------
Cory Morowitz, Acting Chief Financial Officer
(Principal Financial Officer)
29
<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
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> SEP-30-1996
<CASH> 4,582
<SECURITIES> 0
<RECEIVABLES> 4,584
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,355
<PP&E> 118
<DEPRECIATION> 0
<TOTAL-ASSETS> 23,585
<CURRENT-LIABILITIES> 130,133
<BONDS> 0
0
0
<COMMON> 37,316
<OTHER-SE> (144,165)
<TOTAL-LIABILITY-AND-EQUITY> 23,585
<SALES> 2,137
<TOTAL-REVENUES> 2,137
<CGS> 2,174
<TOTAL-COSTS> 2,174
<OTHER-EXPENSES> 168
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,306
<INCOME-PRETAX> (4,175)
<INCOME-TAX> 115
<INCOME-CONTINUING> (4,280)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,998)
<CHANGES> 0
<NET-INCOME> (6,288)
<EPS-PRIMARY> (.33)
<EPS-DILUTED> (.33)
</TABLE>
