<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): May 28, 1997
CAPITAL GAMING INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
New Jersey 0-19128 22-3061189
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification No.)
2701 East Camelback Road Suite 484
Phoenix, Arizona 85016
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (800) 383-5633
Bayport One, Suite 250, 8025 Black Horse Pike, West Atlantic City, NJ 08232
(Former name or former address, if changed from last report)
<PAGE>
Item 3. Bankruptcy or Receivership
Capital Gaming International, Inc., a New Jersey corporation (the
"Company"), is filing herewith its unaudited consolidated balance sheet, dated
as of May 28, 1997 (the "Effective Date") in connection with the Company's First
Amended and Modified Plan of Reorganization which was confirmed by the United
States Bankruptcy Court for the District of New Jersey as of March 19, 1997 (the
"Plan") and became effective on the Effective Date. Under the terms of the Plan,
all conditions precedent to consummation were met on the Effective Date.
Item 7. Financial Statements and Exhibits.
List below the financial statements, pro forma financial information
and exhibits, if any, filed as a part of this report.
(c) Exhibits
--------
99.1 Consolidated Balance Sheet of Capital Gaming International,
Inc. (Unaudited), dated as of May 28, 1997.
2
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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 hereunto duly authorized.
July 14, 1997 CAPITAL GAMING INTERNATIONAL, INC.
By: /s/ William S. Papazian
Name: William S. Papazian
Title: Senior Vice President and
General Counsel
3
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EXHIBIT INDEX
Exhibit
99.1 Consolidated Balance Sheet of Capital Gaming International, Inc.
(Unaudited), dated as of May 28, 1997.
<PAGE>
Exhibit 99.1
CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
[UNAUDITED]
May 28, 1997
(In thousands)
Assets
<TABLE>
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $ 3,250
Restricted Funds in Escrow 924
Interest Receivable 78
Native American Management Fees and Expenses Receivable 813
Current Portion - Native American Loan Receivable 3,911
Current Portion - Notes Receivable, Other 20
Notes Receivable From Key Management Officers 250
Prepaid Expenses and Other Current Assets 338
------
TOTAL CURRENT ASSETS 9,584
FURNITURE, FIXTURES AND EQUIPMENT, net 93
EXCESS REORGANIZATION VALUE 9,640
OTHER ASSETS:
Native American Loan Receivable 4,032
Investments in Native American Management Agreements, net 2,001
Notes Receivable, Other 80
------
TOTAL OTHER ASSETS 6,113
-------
TOTAL ASSETS 25,430
=======
</TABLE>
The Accompanying Notes are an Integral Part of these Consolidated
Financial Statements.
<PAGE>
CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
[UNAUDITED]
May 28, 1997
(In thousands)
Liabilities
<TABLE>
<S> <C> <C>
CURRENT LIABILITIES:
Accounts Payable and Accrued Expenses $ 1,930
-------
TOTAL CURRENT LIABILITIES 1,930
LONG-TERM DEBT
12.0% Senior Secured Notes Payable 23,100
------
TOTAL LONG-TERM DEBT 23,100
------
TOTAL LIABILITIES 25,030
STOCKHOLDERS' EQUITY
Common Stock, No Par Value, Authorized 3,200,000 Shares;
Issued and Outstanding 1,866,667 Shares 400
Retained Earnings -
----
TOTAL STOCKHOLDERS' EQUITY 400
-----
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 25,430
======
</TABLE>
The Accompanying Notes are an Integral Part of these Consolidated
Financial Statements.
2
<PAGE>
CAPITAL GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED BALANCE SHEET
[UNAUDITED]
[A] BASIS OF PRESENTATION AND REORGANIZATION UNDER CHAPTER 11
The Company
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 is also active in seeking new opportunities in Native American Gaming
and secondary gaming market jurisdictions.
The Company's CGMI subsidiary currently manages and operates
three Native American gaming facilities, which CGMI has developed or expanded
into Class III facilities:
- Muckelshoot Tribe - Auburn, Washington (Class III facility
became operational in April 1995)
- Tonto Apache Tribe - Payson, Arizona (Class III facility
became operational in April 1995)
- Umatilla Tribes - Pendelton, Oregon (Class III facility
became operational in March 1995)
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.
Discontinued Operation
The Company previously had an interest in Crescent City
Capital Development Corp. ("CCCD"), a wholly-owned subsidiary which had a 50%
interest in a riverboat joint venture 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 river boat and land-based gaming
industry, the Company terminated CCCD's operations in June 1995 and the River
City Joint Venture was terminated in July 1995. On July 28, 1995, CCCD consented
to the entry of an order for relief under Chapter 11 of the U.S. Bankruptcy Code
and on May 13, 1996, the Company sold the assets and its remaining interest in
CCCD for an aggregate consideration of $50 million in cash and notes and
assumption of up to $6.5 million in certain equipment liabilities. These notes
were redeemed by the purchaser at par in August 1996.
Reorganization
On December 23, 1996 (the "Petition Date"), Capital Gaming
International, Inc., apart from its subsidiaries, filed a voluntary petition for
relief under Chapter 11 of the United States Bankruptcy Code (the "Code") in the
United States Bankruptcy Court for the District of Camden (the "Court"). The
petition did not involve the Company's wholly-owned subsidiaries. The Company
operated as a debtor-in-possession until March 19, 1997 when its Plan (as
defined below) was confirmed by the Court. As a debtor-in-possession, the
Company was authorized to operate its business but could not engage in
transactions outside its ordinary course of business without the approval of the
Court.
Subject to certain exceptions under the Code, the Company's
Reorganization Proceedings automatically enjoined the continuation of any
judicial or administrative proceedings against the Company. Any creditor actions
to obtain possession of or control over property of the Company or to create,
perfect or enforce any lien against the property of the Company were also
enjoined. As a result, the creditors of the Company were precluded from
collecting pre-petition debts without the approval of the Court.
3
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On the Petition Date, the Company filed a pre-negotiated Plan
of Reorganization (together with all subsequent amendments and modifications,
the "Plan") and an accompanying disclosure statement (together with all
subsequent amendments and modifications, the "Disclosure Statement"). The
Disclosure Statement was approved by the Court on February 6, 1997.
On March 19, 1997, the Court conducted a hearing regarding
confirmation of the Plan and entered an order confirming the Plan submitted by
the Company as modified by that order. As contemplated by the Plan, on May 28,
1997 (the "Effective Date") the Company emerged from Chapter 11 and consummated
the Plan.
Plan of Reorganization
The Plan provides for the continuation of Capital
Gaming International, Inc. as a going concern. Under the Plan, the old
common stock interests in Capital Gaming International, Inc. were cancelled
and the Company, as reorganized, issued new common stock
(the "New Common Stock").
The Plan provides generally that creditors of the Company will
receive distributions as follows: (I) holders of Old Secured Notes received in
the aggregate (A) on account of their Allowed Secured Claims, their Pro Rata
Share of New Secured Notes having a principal face amount of $21.45 million and
1,225,000 shares of the New Common Stock of the Company; and (B) on account of
their unsecured Deficiency Claims totaling $80,688,850, the same treatment as is
afforded to holders of General Unsecured Claims (see subparagraph (iii) below);
(ii) holders of Secured Claims that are not Claims arising out of Old Secured
Notes receive, at the option of the Company: (X) such treatment as will leave
such holder unimpaired; (Y) payment in full, in Cash; or (Z) return of such
holder's collateral in the possession of the Company; and (iii) holders of
General Unsecured Claims against the Company received their pro rata shares of
(A) 525,000 shares of New Common Stock; (B) the right to receive the net
proceeds of Avoidance Actions recovered pursuant to Section 9.4 of the Plan; and
$1,100,000 in New Secured Notes. With respect to Class 4 Claims, the Indenture
Trustee could receive no more than 375,000 shares of New Common Stock and
$550,000 in New Secured Notes on account of its allowed Class 4 Claim, and any
shares the Indenture Trustee would otherwise receive on account of its Class 4
Claim in excess of 375,000 shares and any New Secured Notes the Indenture
Trustee would otherwise receive on account of its Class 4 Claim in excess of
$550,000 in New Secured Notes is required to be distributed pro rata to all
other holders of Allowed Class 4 Claims.
Holders of Old Common Stock of the Company received their pro
rata share of 50,000 shares of New Common Stock of the Company. Existing
warrants, options and other rights to acquire Old Common Stock of the Company
(collectively, the "Old Options") were cancelled and holders of such rights
received no distributions of property on account thereof.
The terms of the Plan provide for the discharge of all claims
against the Company and/or release of liability only of the Company, its
wholly-owned subsidiaries and their respective present and former directors,
officers and employees, the Indenture Trustee and the Noteholders Steering
Committee of all liabilities in any way related to the Company. In addition, a
critical element of the Plan is the release by the Indenture Trustee and each of
the Noteholders of all of their claims against subsidiaries of the Company
arising out of guaranties and pledges, except for the treatment of their Claims
provided under the Plan.
Management Agreements
The Plan also calls for the continued employment of the
Company's key management under their existing employment contracts, as modified.
Liabilities Subject to Compromise
Prior to the Effective Date, the Company incurred certain
secured and unsecured claims prior to the filing of the Company's Chapter 11
case on the Petition Date. Additional claims arose subsequent to the Petition
Date resulting from the rejection of certain executory contracts and from the
allowance by the Court of contingent and/or disputed claims. Creditors and other
parties in interest filed claims with the Court which were in excess of the
amounts recorded in the Company's records. These differences were related to
errors, duplicative claims and overstatement of claims.
4
<PAGE>
Liabilities subject to compromise consisted of the following
immediately preceding the Effective Date (in thousands):
Senior Secured Notes $ 102,971
Consent Fee, Payable to Noteholders 1,350
Guarantee of Notes Payable to Banks 2,141
Notes Payable to Republic Corporate Services 22,630
Trade Payables and Accrued Expenses 3,297
--------
$ 132,389
Fresh Start Reporting
In accordance with AICPA Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code"
("SOP 90-7"), the Company was required to adopt "fresh-start" accounting on the
Effective Date. The impact of the adoption of fresh-start reporting is reflected
in the May 28, 1997 consolidated balance sheet. In adopting fresh-start
reporting, the Company, with the assistance of its financial advisors, estimated
its reorganization value, which represents the fair value of the entities under
Reorganization, before considering liabilities. The estimated value for these
entities totaled approximately $23.5 million. The reorganization value of the
Company was determined by consideration of several factors, including the
discounted residual value of the Company's cash flows under different scenarios,
and comparable sales. The excess of the reorganization value over the fair
market value of the net assets, totaling $9.6 million, is reported as excess
reorganization value in the accompanying consolidated balance sheet and will be
amortized over a 5.0 year period.
The adjustments to reflect the consummation of the
Reorganization (including the gain on extinguishment of debt and other
pre-petition liabilities) and the adjustment to record assets and liabilities at
their fair values have been reflected in the Balance Sheet. As a result of
adopting fresh-start reporting, the reorganized Company's consolidated financial
statements are not comparable with those prepared before the Effective Date.
Summary of Significant Accounting Policies
In the opinion of management, the accompanying Balance Sheet
includes all adjustments which are necessary for a fair presentation of the
Company's financial position as of May 28, 1997. Certain information and
footnote disclosures normally included in financial statements have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. Although the Company believes that the disclosures are
adequate to make the information presented not misleading, it is suggested that
this condensed consolidated Balance Sheet be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Report on Form 10-K for the fiscal year ended June 30, 1996.
Cash and Cash Equivalents
Cash and cash equivalents includes cash in banks and overnight
investments. The Company considers all highly-liquid investments purchased with
an original maturity of three months or less to be cash equivalents. The
carrying amount of cash equivalents approximates fair value due to the
short-term maturity of those investments.
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are stated at cost,
depreciation and amortization are computed using the straight-line method over
the estimated useful life - primarily 4 to 8 years.
Principles of Consolidation
5
<PAGE>
The consolidated Balance Sheet includes the accounts of
Capital Gaming International, Inc. and its subsidiaries. All material
intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
Management of the Company has made estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare this Balance Sheet in conformity
with generally accepted accounting principles. Actual results could differ from
those estimates.
[B] RESTRICTED FUNDS IN ESCROW
Restricted funds in escrow consist of $500,000, plus accrued
interest, with an escrow agent in New Orleans, Louisiana representing funds
withheld from the sale of CCCD and $424,000 held in escrow by the Bond Indenture
Trustee.
[C] 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 - "the
Pine Case") seeking to void the Tribal-State Compact on the grounds that the
Governor lacked the authority to bind the State absent State 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 for lack of State
legislative approval. The State has subsequently refused to negotiate with the
Tribe.
The Secretary of the Interior has requested comments as to
whether the Secretary can enact Secretarial procedures to permit gaming under
IGRA for Tribes 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 Rider (see below) 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 addition, in September of 1996, federal legislation was
passed as a non-relevant rider (introduced by U.S. Senator John Chaffee of Rhode
Island) to the must-pass Omnibus Appropriations Bill which has the effect of
singling out the Narragansett Tribe's reservation (where the gaming facility is
currently planned to be built) for exclusion from the benefits of the Indian
Gaming Regulatory Act (IGRA). The Chaffee Rider, which discriminates against the
Narragansett Tribe by treating it differently from every other Indian Tribe in
the country, was passed without hearings or debate, with no consultation with
the Narragansett Tribe and over the objections of the ranking members of the
Senate Indian Affairs Committee. Unless the Chaffee Rider is overturned, the
Narragansett Tribe will be precluded from enjoying the economic development
benefits of IGRA which permit tribes to establish Class II and Class
III gaming facilities.
CDGC has entered into a 7-year 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. 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 National Indian
Gaming Commission (NIGC) will require modification 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 had informed the Company
and the Tribe that they would only consider a contract relating solely to Class
II gaming. In light of this, the Company intended to bifurcate the
Narragansett Contract and submit only the portions relating
6
<PAGE>
to Class II gaming and return the Class III contract as a development contract
until such time as a compact for Class III gaming was signed. As a result of the
Chaffee Rider, however, on December 16, 1996, the National Indian Gaming
Commission (NIGC) declined further review of the management agreement between
the Narragansett Indian Tribe and CDGC, which had been submitted on June 21,
1996 for review and approval by NIGC. In declining to approve the management
agreement, the NIGC cited enactment of the Chaffee Rider (P.L. 104-208) on
September 30, 1996, that removed the Narragansett Tribe's settlement lands from
the application of the Indian Gaming Regulatory Act (IGRA). As a result of the
Chaffee Rider, the NIGC has expressed the position that it no longer has
jurisdiction over the contract. An appeal from this decision was filed with the
NIGC on December 20, 1996, and on June 17, 1997, the NIGC issued a final
decision upholding the Chairman's decision.
On February 19, 1997, the Narragansett Indian Tribe initiated
litigation in the United States District Court for the District of Columbia,
naming NIGC and its Chairman as defendants. In this action, the Tribe seeks a
declaration of the Court, among other things, that the Chaffee Rider is
unconstitutional under the Equal Protection component of the Fifth Amendment to
the U.S. Constitution, and an injunction requiring the defendants to complete
the processing of the gaming management contract between the Tribe and CDGC. A
hearing was held on this action on July 7, 1997.
Finally, congressional review of the Chaffee Rider occurred on
May 1, 1997, with a hearing before the Committee on Resources, U.S. House of
Representatives. The hearing included testimony from the U.S. Department of the
Interior, the Narragansett Indian Tribe and the National Council of American
Indians, all of whom testified in support of repeal of the rider, as well as
several political leaders from the State of Rhode Island, who support the rider.
Following this hearing, on June 19, 1997, legislation that would amend and
effectively repeal the Chaffee Rider (H.R. 1983) was introduced in the House of
Representatives, by Rep. Patrick J. Kennedy (D-RI), a member of the Committee on
Resources. Joining Rep. Kennedy as original cosponsors of H.R. 1983 were Rep.
Don Young (R-AK), the Chairman of the Committee on Resources, and Rep. Dale E.
Kildee (D-MI), a member of the Committee on Resources, and Co-Chairman of the
Congressional Native American Caucus, H.R. 1983 has been referred to and is
pending before the Committee on Resources.In spite of the set-back caused by the
Chaffee amendment, the Company intends to pursue the Narragansett development
project. There can be no assurance, however, that any legislative or
judicial efforts to overturn the Chaffee Rider will be successful.
The Company has continued funding the on-going development
costs of the Rhode Island Development Project. None of these costs have been
capitalized.
[D] INCOME TAXES
The Company accounts for income taxes under Statement of
Financial Accounting Standard (SFAS) No. 109 "Accounting for Income Taxes" which
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.
As of May 28, 1997 and after giving rise to cancellation of
debt, the Company had a net operating loss carryforward in excess of
approximately $45 million which begins to expire in 2009. As a result the
Company has recorded a deferred tax asset of approximately $18.0 million which
has been offset by an allowance of $18 million as realization cannot be assured
at this time.
[E] LOANS RECEIVABLE - NATIVE AMERICAN TRIBES
The Company has funded the development and construction of the
Class III Native American gaming facilities it manages and operates including
equipment financing amounting to approximately $3.3 million. As of May 28, 1997,
there was a total of approximately $7,943,000 in loans outstanding, with
$3,911,000 to be realized within one year and $4,032,000 classified as
long-term. These notes bear interest at rates ranging from 8.75% to prime + 1%
and have scheduled repayments of 36 to 60 months. A five year maturity table is
presented below:
May 28, 1998 $3,911,000
May 28 1999 2,453,000
May 28, 2000 1,579,000
May 28, 2001 0
May 28, 2002 0
----------
$7,943,000
[F] PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of June 28,
1997:
Office furniture, fixtures and equipment $ 248,000
Less accumulated depreciation (155,000)
-----------
$ 93,000
===========
[G] 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.
7
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This juncture in development requires, at a minimum, a
management contract in effect 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 $2,001,000 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
3-4 years.
[H] NOTES RECEIVABLE FROM OFFICERS
Pursuant to the Plan and their respective amended employment
agreements, the Company's two senior executives borrowed a total of $250,000
from the Company. These loans are evidenced by unsecured notes which bear six
percent (6%) simple interest. Both notes mature on April 15, 1998. Pursuant to
the Plan, the Company's two senior executives are entitled to a confirmation
bonus relative to the Company's restructuring of $250,000 in cash as well as
$550,000 in New Secured Notes. The cash portion of the confirmation bonus is
payable upon the satisfaction of certain conditions subsequent as outlined in
the amended employment agreements.
[I] DEBT AFTER REORGANIZATION
Senior Secured Notes
Pursuant to the Reorganization, the holders of the Old Notes,
along with certain unsecured creditors and key members of management, received,
on a pro rata basis, the Notes having an aggregate principal amount of $23.1
million. Interest on the Notes accrues at a rate of 12% per annum, and is
payable semi-annually. The Notes are secured by substantially all the assets of
the Company, including the common stock of CGMI and CDGC. In addition, the Note
Indenture includes certain restrictive covenants. The Notes are redeemable prior
to maturity, in whole or part, at the election of the Company, at the redemption
price of 100% of the principal amount plus accrued and unpaid interest to the
redemption date. The Notes mature in May of 2001. Required principal payments
during the next five years are as follows:
May 28, 1998 $ 0
May 28 1999 0
May 28, 2000 4,620,000
May 28, 2001 18,480,000
Thereafter 0
-----------------
Total $ 23,100,000
=================
[J] CAPITAL STRUCTURE
Capital Structure After Reorganization
Pursuant to the Plan, the Company's common stock and
outstanding options were cancelled on the Effective Date. The Plan also provided
for the amendment and restatement of the Company's Certificate of Incorporation
and bylaws. The new charter authorized 3.2 million shares of no par value common
stock. Upon the Effective Date, 1.8 million shares of common stock were
authorized for issue on a pro rata basis to the Company's various classes of
creditors. In addition, the Company's executive management became entitled to
receive a total of 66,667 shares of common stock on the Effective Date. Also on
the Effective Date, 133,333 shares were reserved to be issued to executive
management pursuant to the Plan. The remaining shares will be issued in two
installments; on the first and second anniversary of the Effective Date.
8
<PAGE>
Capital Structure Prior To The Reorganization
Preferred and Common Stock
Preferred stock of the predecessor Company consisted of 5
million authorized shares, of which none were issued. Common stock of the
predecessor Company consisted of 75 million authorized shares. All common and
preferred stock were cancelled under the Reorganization.
The predecessor Company had adopted a Stock Option Plan. All
outstanding options were cancelled pursuant to the Reorganization.
[K] STOCK OPTION PLAN
Pursuant to the Reorganization, the Company cancelled all of
its existing stock options and adopted the 1997 Stock Option Plan covering
200,000 shares of the Company's common stock, pursuant to which officers,
directors, consultants of, or other people rendering services to the Company or
its subsidiaries are eligible to receive incentive and/or non-qualified stock
options. With respect to any option granted to any employee who was employed by
the Company prior to the Effective Date of the Company's Plan of Reorganization
no more than 100,000 of the shares authorized under the Stock Option Plan may be
awarded. The Plan expires in March 2007. Incentive stock options granted under
the Plan to employees who are not 10% owners are exercisable for a period up to
ten years from the date of grant at an exercise price of $1.75 or such lesser
amount approved by the Company's noteholders advisory committee. The exercise
price may be adjusted subject to certain recapitalization provisions of the
Plan. Incentive stock options granted under the Plan to employees who are 10%
shareholders are exercisable for a period up to five years at the same exercise
price provisions. As of May 28, 1997, there were no options granted under the
Plan.
[L] COMMITMENTS AND CONTINGENCIES
Pursuant to the Plan and on the Effective Date, the Company
adopted and amended the existing employment agreements with the Company's
President and Chief Executive Officer and Senior Vice President and General
Counsel which provides for three year terms expiring in May 2000 at an annual
salary of $495,000 and $200,000, respectively. The agreements also provide for
severance payments equal to one to three years upon the occurrence of certain
terminations. Included in accrued expenses are deferred salaries to the
Company's former Chairman, in the amount of $4,000 and to the Company's
Executive Vice President of Compliance in the amount of $4,000. An employment
agreement in effect at May 28, 1997 with the Vice President of Compliance
requires an annual compensation of $100,000 expiring May 2000.
[M] 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 employee's contribution up to a maximum of
4% of salary.
[N] LEASES
The Company leases facilities under various leases expiring
through January 2001. The Company's aggregate lease commitments under
non-cancelable leases with terms of one year or greater total $194,000 and will
require approximately $97,000 in 1998, $40,000 in 1999, $36,000 in 2000 and
$21,000 in 2001.
[O] 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 and Euro rollover obligations that have
maturities of less than three months. The Company has approximately $3,000,000
in repurchase agreements and Euro investments which are not insured.
The Company has recorded at May 28, 1997, $813,000 in casino
development advances, management fees, and reimbursable expenses due from Native
American Tribes under management contracts as
9
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well as $7,943,000 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 May 28, 1997, these receivables are due from three 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. The Company does not have collateral
with respect to these contracts beyond the pledge by each Tribe of their gaming
reserves. 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 and securing appropriate
regulatory approval.
[P] 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 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.
The 12.0% Senior Secured notes due 2001 are carried at
$23,100,000 because the Company has just emerged from Chapter 11 proceedings.
[Q] LEGAL PROCEEDINGS
Pursuant to the Plan, all legal proceedings against the parent
company prior to the Effective Date were settled pursuant to the Plan. As a
result there was no litigation pending against the parent company on the
Effective Date. The Company is or may become a defendant in pending or
threatened legal proceedings in the ordinary course of business although is not
aware of the existence of any such pending or threatened legal proceedings at
this time. The Company's management believes that the ultimate resolution of
currently pending legal proceedings will not have a material adverse impact on
the Company's financial position or results of operations.
[R] 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 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 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.
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