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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, 1998
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
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CAPITAL GAMING INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-3061189
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2701 East Camelback Road, 85016
Suite 484 (Zip Code)
Phoenix, Arizona
(Address of principal executive offices)
---------------------
Registrant's telephone number, including area code: (602) 667-0670
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 by Section 13 or 15(d) of the Securities 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 for each of the issuer's classes of
common stock as of November 9, 1998: 1,933,333
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CAPITAL GAMING INTERNATIONAL, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 1998 and June 30, 1998 [Unaudited] 1
Consolidated Statements of Operations for the three months
ended September 30, 1998 and 1997 [Unaudited] 3
Consolidated Statements of Changes in Stockholders' Deficit for
the three months ended September 30, 1998 [Unaudited] 4
Consolidated Statements of Cash Flows for the three months
ended September 30, 1998 and 1997 [Unaudited] 5
Notes to Consolidated Financial Statements [Unaudited] 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures about Market
Risks 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities and Use of Proceeds 28
Item 3. Default Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Securityholders 29
Item 6. Exhibits and Reports on Form 8-K 29
Signature Page 30
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PART I., Item 1.
CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
ASSETS
<TABLE>
<CAPTION>
September 30, 1998 June 30, 1998
------------------ -------------
[Unaudited]
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $ 6,709 $ 4,498
Interest Receivable 21 29
Native American Management Fees & Expenses Receivable 680 709
Current Portion - Native American Loans Receivable 1,629 2,249
Current Portion - Muckleshoot Settlement Receivable [Note 9] 1,150 --
Prepaid Expenses and Other Current Assets 241 232
------- -------
TOTAL CURRENT ASSETS 10,430 7,717
------- -------
FURNITURE, FIXTURES AND EQUIPMENT, Net 21 23
------- -------
EXCESS REORGANIZATION VALUE, Net [Note 3] 5,273 5,767
------- -------
OTHER ASSETS:
Restricted Funds [Note 8] 546 541
Native American Loans Receivable 1,020 1,444
Muckleshoot Settlement Receivable [Note 9] 958 --
Investment In Native American Management
Agreements, Net 333 1,229
Deferred Charges [Note 10] 255 --
------- -------
TOTAL OTHER ASSETS 3,112 3,214
------- -------
TOTAL ASSETS $18,836 $16,721
======= =======
</TABLE>
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements
1
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CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
September 30, 1998 June 30, 1998
------------------ -------------
[Unaudited]
<S> <C> <C>
CURRENT LIABILITIES:
Accounts Payable and Accrued Expenses $ 969 $ 1,233
Accrued Interest 1,040 346
State Income Taxes Payable 228 147
-------- --------
TOTAL CURRENT LIABILITIES 2,237 1,726
-------- --------
LONG TERM DEBT:
12% Senior Secured Notes Payable [Note 7] 23,100 23,100
-------- --------
TOTAL LIABILITIES 25,337 24,826
-------- --------
STOCKHOLDERS' DEFICIT:
Common Stock, No Par Value, Authorized 3,200,000 Shares;
Issued and Outstanding 1,933,333 400 400
Retained Earnings [Deficit] (Since May 29, 1997,
Date of Reorganization) (6,901) (8,505)
-------- --------
TOTAL STOCKHOLDERS' DEFICIT (6,501) (8,105)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 18,836 $ 16,721
======== ========
</TABLE>
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements
2
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CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
[UNAUDITED]
(In Thousands except Share Data)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1998 September 30, 1997
-------------------- --------------------
<S> <C> <C>
REVENUES:
Native American Casino Management Fees $ 1,974 $ 2,645
----------- -----------
COSTS AND EXPENSES:
Salaries, Wages and Related Costs 763 440
Native American Gaming Development Costs 269 325
Professional Fees 321 194
General and Administrative 126 336
Depreciation and Amortization 577 760
----------- -----------
TOTAL COSTS AND EXPENSES 2,056 2,055
----------- -----------
INCOME [LOSS] FROM OPERATIONS (82) 590
----------- -----------
OTHER INCOME [EXPENSE]:
MUCKLESHOOT SETTLEMENT, NET [Note 9] 2,285 --
INTEREST INCOME 135 245
INTEREST EXPENSE (693) (688)
OTHER INCOME 40 --
----------- -----------
TOTAL OTHER INCOME [EXPENSE] 1,767 (443)
----------- -----------
INCOME (LOSS] BEFORE INCOME TAX 1,685 147
PROVISION FOR INCOME TAX EXPENSE [Note 6] 81 45
----------- -----------
NET INCOME [LOSS] $ 1,604 $ 102
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NET INCOME [LOSS] PER SHARE .83 $ 0.05
=========== ===========
WEIGHTED AVERAGE COMMON AND EQUIVALENT
SHARES OUTSTANDING 1,933,333 1,866,667
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements
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CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
[UNAUDITED]
(In Thousands except Share Data)
<TABLE>
<CAPTION>
Common Stock Retained
------------------------- Additional Earnings
Shares Amount Capital (Deficit)
---------- -------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCE - JUNE 30, 1998 1,866,667 $ 400 $ 0 $ (8,105)
Stock Grants to Officers and
Directors 66,666 -- -- --
Net Income for the Three Months
Ended September 30, 1998 -- -- -- 1,604
---------- -------- ---------- ----------
BALANCE - SEPTEMBER 30, 1998 1,933,333 $ 400 $ 0 $ (6,501)
========== ======== ========== ==========
</TABLE>
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements
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CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1998 September 30, 1997
-------------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income [Loss] $ 1,604 $ 102
------- ------
Adjustments to Reconile Net Income (loss) to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 577 760
Changes in Assets and Liabilities:
[Increase] Decrease In:
Interest Receivable 8 10
Management Fees and Expenses Receivable 29 (63)
Muckleshoot Settlement, Gross [Note 9] (3,300) --
Write-off of Deferred Charges [Note 9] 815 --
Prepaids and Other Current Assets (9) 93
Increase [Decrease] In:
Accounts Payable and Accrued Expenses (264) (1,281)
Accrued Interest 694 688
State Income Taxes Payable 81 --
------- ------
Total Adjustments (1,369) 207
------- ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 235 309
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Repayments of Native American Loans Receivable 1,044 950
Payments on Muckleshoot Settlement 1,192 --
Purchase of Furniture, Fixtures and Equipment -- (15)
Deferred Charges [Note 10] (255) --
Increase in Restricted Funds (5) (22)
------- ------
NET CASH PROVIDED BY INVESTING ACTIVITIES 1,976 913
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 0 0
------- ------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,211 1,222
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIODS 4,498 3,923
------- ------
CASH AND CASH EQUIVALENTS - END OF PERIODS $ 6,709 $5,145
======= ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid During the Periods for:
Interest $ 0 $ 0
Income Taxes $ 0 $ 0
</TABLE>
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements
5
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PART I., Item 1.
CAPITAL GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
[1] ORGANIZATION
Capital Gaming International, Inc. (the "Company"), together with its
subsidiaries, is a multi-jurisdictional gaming company with gaming management
and development interests with Native American Tribes in several states. The
management and development of Native American gaming facilities is conducted
through Capital Gaming Management, Inc. ("CGMI"), a wholly-owned subsidiary of
the Company. The Company is also engaged in the development of the Narragansett
Casino Project in Rhode Island (the "Rhode Island Project"). The development of
the Rhode Island Project is conducted through Capital Development Gaming Corp.
("CDGC"), a wholly-owned subsidiary of the Company.
CGMI developed and currently manages and operates two Class III Native
American gaming facilities located in separate jurisdictions as follows:
Tonto Apache Tribe - Payson, Arizona (Class III facility
became operational in April 1995)
Umatilla Tribes - Pendleton, Oregon (Class III facility
became operational in March 1995)
On July 24, 1998 CGMI entered into a management and development
agreement with the Pueblo of Laguna to exclusively develop, finance, construct,
operate and manage casino to be located on Interstate 40 on the tribe's
sovereign reservation lands approximately 45 miles west of Albuquerque, New
Mexico. The proposed 30,000 square foot casino will offer Las Vegas - style
table games, slot machines and poker as well as restaurants, a gift shop and
other amenities. The management and development agreement, which is subject to
the approval of the National Indian Gaming Commission, provides that CGMI will
receive a management fee of 30% of net profits (as defined in such agreement)
over a term of seven (7) years from the official date of opening of the casino.
CDGC has a management and development contract with the Narragansett
Tribe for the development of a Class II and Class III gaming facility either on
the Tribe's sovereign land near Charlestown, Rhode Island or elsewhere in Rhode
Island as may be permitted by law.
[2] BASIS OF PRESENTATION
The Consolidated Balance Sheet and Changes in Stockholders' Deficit as
of September 30, 1998 and the Consolidated Statements of Operations and Cash
Flows for the three-month periods ended September 30, 1998 and 1997 are
unaudited. The June 30, 1998 Balance Sheet data was derived from audited
consolidated financial statements. These Consolidated Financial Statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with 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, 1998, and the results of its operations and cash flows for the
three-month periods ended September 30, 1998 and 1997. The results of operations
for interim periods are not necessarily indicative of a full year of operations.
It is suggested that these financial statements be read in
6
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conjunction with the consolidated financial statements and notes included in
the Capital Gaming International, Inc. Form 10-K, as amended, for the fiscal
year ended June 30, 1998 as filed with the Securities and Exchange Commission.
The Consolidated Financial Statements include the accounts of the
Company and all of its wholly-owned subsidiaries. Inter-company transactions
and balances have been eliminated in consolidation.
Certain reclassifications have been made to the prior period financial
statements to conform to classifications used in the current period.
[3] REORGANIZATION UNDER CHAPTER 11
Reorganization Proceedings
On December 23, 1996 (the "Petition Date"), the Company, apart from
its subsidiaries, filed a voluntary petition for relief under Chapter 11 of
the United States Bankruptcy Code (the "Bankruptcy Code") in the United States
Bankruptcy Court for the District of Camden, New Jersey (the "Bankruptcy
Court"). The petition did not involve the Company's wholly-owned subsidiaries.
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 Bankruptcy Court on February 6, 1997.
Subject to certain exceptions under the Bankruptcy Code, the
Company's reorganization proceedings automatically enjoined the continuation
of 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 liens 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 approval of the Bankruptcy Court.
The Company operated as a debtor-in-possession until March 19, 1997.
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 approval of the Bankruptcy Court. On March 19, 1997 the Bankruptcy
Court conducted a hearing regarding the confirmation of the Plan and entered
an order confirming the Plan. 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 of Reorganization provides for the continuation of the
Company. Under the Plan of Reorganization, on the Effective Date the
outstanding common stock of the Company (the "Old Common Stock") and the Old
Options (as hereinafter defined) were cancelled and the Company, as
reorganized, issued 2,000,000 shares of its new common stock, no par value
(the "New Common Stock"), some of which is being held by the transfer agent
subject to distribution under the Plan of Reorganization. The New Common Stock
will be distributed pursuant to the terms of the Plan of Reorganization.
The Plan of Reorganization provides generally that creditors of the
Company are to receive distributions as follows: (i) holders of Old Senior
Secured Notes receive in the aggregate (A) on account of their Allowed Secured
Claims (as defined in the Plan of Reorganization), their Pro Rata Share (as
defined in the Plan of Reorganization) of the Company's 12% Senior Secured
Notes due 2001 (the "New Senior Secured Notes") having a principal face amount
of $21.45 million and 1,225,000 shares of the New Common Stock, and (B) on
account of their unsecured Deficiency Claims (as defined in the Plan of
Reorganization) 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 (as defined in the Plan of Reorganization) that are
not Claims (as defined in the Plan of Reorganization) arising out of Old
Senior 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 (as defined in the Plan of
Reorganization) recovered pursuant to the Plan of Reorganization; and
$1,100,000 in New Senior Secured Notes. With respect to Class 4 Claims (as
defined in the Plan of Reorganization), the trustee with respect to the
Amended Indenture (the "Amended Indenture Trustee") could receive no more than
375,000 shares of New Common Stock and $550,000 in New Senior Secured Notes on
account of its allowed Class 4 Claim, and any shares the Amended Indenture
Trustee would otherwise receive on account of its Class 4 Claim in excess of
$550,000 in New Senior Secured Notes is required to be distributed pro rata to
all other holders of Allowed Class 4 Claims. See "Business - Debt After
Reorganization" for a description of the New Senior Secured Notes and
"Business - Capital Structure" for a description of the Company's current
capital structure.
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Holders of the Old Common Stock received their pro rata share of
50,000 shares of New Common Stock. Existing warrants, options and other
rights to acquire Old Common Stock (collectively, the "Old Options") were
cancelled and holders of such Old Options received no distributions of
property on account thereof.
The Plan of Reorganization provides for the discharge of all claims
against the Company and/or the release of the Company, its officers and
employees, its wholly-owned subsidiaries and their respective present and former
directors, the Amended 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 of Reorganization is the release by the 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 for under the Plan of Reorganization.
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 reporting on the
Effective Date.
In adopting fresh-start reporting, the Company, with the assistance
of its financial advisors, estimated the fair value of the Company without
regard to liabilities (the "Reorganization Value") at $23,500,000. The excess
of the Reorganization Value over the fair market value of the net assets of
the Company, totaling approximately $9,339,000 was recorded as Excess
Reorganization Value on the Effective Date. The estimate of Reorganization
Value was based on cash flow projections, under varying scenarios and
assumptions, for the post-reorganization operations of the Company. The
significant assumptions underlying the estimate were: (i) various scenarios
regarding the acquisition of new management contracts and the
completion of the Rhode Island Project; (ii) term of post-reorganization
operations from three to eight years; (iii) a discount rate of 12%; and (iv)
no consideration for federal income taxes due to the Company's expected
utilization of its Net Operating Loss Carryforwards. As the assumptions
underlying the estimate of Reorganization Value relate to events and
circumstances that have not yet taken place, such estimates and assumptions
are inherently subject to significant economic and competitive uncertainties
and contingencies beyond the control of the Company, including, but not
limited to, those with respect to the future courses of the Company's business
activity. Accordingly, there will usually be differences between projections
and actual results because events and circumstances frequently do not occur as
expected, and those differences may be material.
The effect of the adjustments required in adopting fresh-start
reporting are reflected in the Balance Sheet data as of June 30, 1997. As a
result of the adoption of fresh-start reporting, the Consolidated Financial
Statements for the Reorganized Company are not comparable to those of the
Predecessor Company prepared prior to the Effective Date.
[4] SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of the Company are set forth in
the Company's form 10-K, as amended, for the fiscal year ended June 30, 1998
as filed with the Securities and Exchange Commission.
[5] RHODE ISLAND DEVELOPMENT PROJECT
Narragansett Contract - Native American Casino (Rhode Island)
Through CDGC, the Company entered into a seven-year management and
development contract with the Narragansett Indian Tribe (the "Narragansett
Contract") for the development of a Class II and Class III gaming facility in
Rhode Island. The Narragansett Contract provides for the Company to receive a
management fee of 30% of Net Distributable Profits (as defined therein) of the
gaming facility for the first five years, commencing on the opening of the
facility and 20% for the remaining two years. As part of the Narragansett
Contract, the Company is required to advance certain funds for the development
of the Rhode Island Project and the construction of the gaming facility which
will be repaid over a seven-year period commencing with opening of the facility.
The Narragansett Contract was submitted to the NIGC for approval in June 1995.
8
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In August 1996, the NIGC submitted comments on the Narragansett
Contract. As a result of the Decision (as defined below) invalidating the
Compact (as defined below), the NIGC informed the Company and the Narragansett
Tribe that the NIGC would only consider a contract relating solely to Class II
gaming. In light of this, the Company bifurcated the Narragansett Contract
(the "Management Agreement") and submitted it on June 21, 1996 for review and
approval by the NIGC of only the portions relating to Class II gaming. The
Company reclassified the Class III contract as a development contract until
such time as a Tribal/State Compact for Class III gaming was signed. However,
as a result of the Chafee Rider (as defined below), on December 16, 1996, the
NIGC declined further review of the Management Agreement.
In declining to review the Management Agreement, the Chairman of the
NIGC asserted that as a result of the application of the Chafee Rider, the
Narragansett Tribe lost its rights to conduct both Class II and Class III gaming
under the Indian Gaming Regulatory Act ("IGRA"). An appeal of the NIGC's action
was filed on December 20, 1996, and on June 17, 1997, the NIGC issued a final
decision upholding the Chairman's actions.
In light of the Decision (as defined below) to invalidate the Compact
and the application of the Chafee Rider (as defined below), no assurance can be
given if, or when, NIGC approval of the Management Agreement will be obtained or
if the Narragansett Tribe will be able to establish a commercial gaming
enterprise (Class II or Class III) under IGRA. Additionally, it is possible, as
a condition of obtaining such approval, that the NIGC will require material
modifications to the Narragansett Contract.
Tribal/State Compact
In August 1994, a Tribal/State Compact (the "Compact") was entered into
between the Narragansett Tribe and Governor Bruce Sundlan of Rhode Island. In
November of 1994, a lawsuit was filed by Rhode Island Attorney General Pine (the
"Pine Case") seeking to void the Compact on the grounds that the Governor of
Rhode Island lacked the authority to bind the State of Rhode Island absent State
Legislative approval. In 1995, Rhode Island's new Governor, Governor Almond,
joined with Attorney General in the Pine Case.
In February 1996, the United States District Court for the District of
Rhode Island decided that the Compact was void for lack of State Legislative
approval (the "Decision"). The State of Rhode Island has subsequently refused to
negotiate with the Narragansett Tribe. In light of this Decision, and similar
decisions in other states, the Secretary of the Interior (the "Secretary")
requested comments from the public as to whether the Secretary has the authority
to adopt Secretarial procedures to permit gaming under IGRA for the Tribes in
states (such as Rhode Island) that refuse to negotiate Tribal/State Compacts in
good faith. On January 22, 1998, a Proposed Rule on Class III Gaming Procedures
("Proposed Rule") was promulgated by the Department of the Interior.
Department of the Interior Proposed Rule on Class III Gaming Procedures
The proposed rule sets forth the authority and procedures by which the
Department of the Interior will review requests for approval of Class III gaming
when a State interposes its immunity from suit brought by an Indian Tribe
seeking to enter into a compact with the State pursuant to which gaming
activities would be governed. The proposed rule also sets forth the process and
standards by which such procedures would be adopted. Written comments concerning
the proposed rule were due with the Department of the Interior on or before June
22, 1998. The comments are currently under review. In March of 1998, the U.S.
Senate voted to prohibit the Department of the Interior from proceeding with the
regulations. However, the ban, which was part of an emergency spending bill, was
lifted in September 1998 from the bill by a joint U.S. House - U.S. Senate
conference committee. It is unknown what further action, if any, Congress may
take concerning the proposed rule. Considerable opposition to the proposed rule
has been received from at least 25 states. Additionally, the National Gambling
Impact Study Commission (the "Commission") voted in July of 1998 to recommend to
the Department of the Interior that no final rules be issued or published until
after the Commission submits its report to Congress in June of 1999. As a
result, in September 1998, Congress passed certain legislation prohibiting the
Department of the Interior from proceeding any further with the proposed rule
prior to October 1, 1999. There can be no assurance as to when a final rule will
be issued or whether the final rule will apply to the Narragansett Tribe in
light of the Chafee Rider (defined below). However, as a result of the Chafee
Rider (as defined below), there can also be no assurance that the Secretary of
the Interior will have the authority under the final rules to impose a
Tribal/State Compact between the Narragansett Tribe and the State of Rhode
Island.
9
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The Chafee Rider
In September 1996, Federal legislation was passed as a non-relevant
rider introduced by U.S. Senator John Chafee of Rhode Island (the "Chafee
Rider") to the must-pass Omnibus Appropriations Bill which has the effect of
singling out the Narragansett Tribe's reservation (where the gaming facility was
planned) for exclusion from the benefits of IGRA. The Chafee Rider was passed
without hearings or debate, with no consultation with the Narragansett Tribe and
over the objections of ranking members of the Senate Indian Affairs Committee.
In February 1997, as a result of the NIGC's decision to decline further
review of the Management Agreement and the application of the Chafee Rider, the
Narragansett Tribe initiated litigation in the United States District Court for
the District of Columbia (the "District Court") naming the NIGC and its
Chairman as defendants. In this action, the Narragansett Tribe sought a
declaration of the District Court that, among other things, would declare the
Chafee Rider unconstitutional under the equal protection component of the Fifth
Amendment to the U.S. Constitution, along with an injunction requiring the NIGC
to review the Management Agreement. Both the Narragansett Tribe and the NIGC
filed cross-motions for summary judgement in the matter. In August 1997, the
District Court granted the NIGC's motion for summary judgement. An appeal was
filed by the Narragansett Tribe in the United States Court of Appeals for
the District of Columbia. On October 27, 1998 the Court of Appeals affirmed the
District Court's decision.
In May 1997, a Congressional Review of the Chafee Rider was initiated
with a hearing before the Committee on Resources of the U.S. House of
Representatives (the "Committee"). The hearing included testimony from the
Department of the Interior, the Narragansett Tribe and the National Council of
American Indians, all of whom testified in support of the repeal of the Chafee
Rider, as well as from several political leaders from the State of Rhode Island
in support of the Chafee Rider. In June 1997, legislation that would amend and
effectively repeal the Chafee Rider ("H.R. 1983") was introduced in the House of
Representatives by Rep. Patrick J. Kennedy (D-RI), a member of the Committee,
and co-sponsored by Rep. Don Young (R-AK), the Chairman of the Committee and
Rep. Dale E. Kildee (D-MI), a member of the Committee and Co-Chairman of the
Congressional Native American Caucus. H.R. 1983, known as "The Narragansett
Justice Act," has subsequently cleared the Committee. No assurances can be given
as to the ultimate outcome of H.R. 1983.
Ongoing Project Development
Unless the Chafee Rider is overturned, the Narragansett Tribe is
precluded from establishing a Class II or Class III gaming facility under IGRA.
Under Rhode Island State Law, therefore, the Narragansett Tribe's only recourse
to establish a gaming facility, absent a repeal of the Chafee Rider, is to
submit the issue to a statewide and local referendum. As a result of the Chafee
Rider, the Narragansett Tribe has focused its efforts on seeking voter approval
of a gaming facility to be located in Providence, Rhode Island. The earliest
date upon which any such referendum could be held is November 2000. In June 1998
the Rhode Island General Assembly passed a bill requiring the state
legislature's approval prior to any such referendum question being placed on the
ballot. Additionally, the bill provides that the host city or town must also
approve any such referendum question prior to its being placed on the ballot.
There can be no assurance that any such referendum would be successful or, if
successful, what the ultimate scope of permitted gaming would be.
As a result of the set-backs caused by the invalidation of the Compact
and the application of the Chafee Rider, and other factors, there can be no
assurance that any legislative, judicial or administrative efforts will be
successful.
Bureau of Indian Affairs Approval
On September 3, 1998 the Secretary of the Interior and the Deputy
Commissioner of the Bureau of Indian Affairs approved the Management Agreement
between the Narragansett Tribe and CDGC pursuant to 25 CFR Section 81. While
this approval does not impact the Narragansett Tribe's right to offer gaming
pursuant to IGRA, the approval is significant because it protects the
Narragansett Tribe and CDGC from any assertion that the Management Contract is
null and void under the provisions of 25 U.S.C. Section 81 due to lack of
approval.
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Other Matters
In connection with the Narragansett Tribe's efforts to seek statewide
voter approval of a gaming facility to be located in Providence, Rhode Island in
the November 1998 general election, the Company had retained Donaldson, Lufkin
and Jenrette Securities Corporation ("DLJ") to act as its exclusive financial
advisor with respect to the review and analysis of financial and structural
alternatives available to the Company. As part of such engagement, the Company
agreed to issue warrants to DLJ to purchase five (5%) percent of the Company's
issued and outstanding common stock on a fully diluted basis, to be exercisable
only if the Narragansett Tribe succeeded in winning voter approval for a
Narragansett gaming facility. In light of the fact that a voter referendum did
not occur in November 1998, and the uncertainty surrounding any future voter
referendum, the Company has not issued such warrants.
The Company has continued funding the on-going development costs of the
Narragansett development project, which at September 30, 1998, has totaled
approximately $11.5 million consisting primarily of legal costs, environmental
engineering and assessment costs, design costs and other administrative costs.
At September 30, 1998, approximately $9.3 million in development costs (of the
$11.5 million expended) will be recoverable by the Company only if and when a
gaming facility is established by the Narragansett Tribe. Repayment of the
development costs will be made solely from the distributable profits of the
gaming facility. These funds were expended cumulatively over the period from
Spring 1993 to present, and none of these expenditures have been capitalized.
New England is already home to several full scale casinos, including
the Foxwoods Casino operated by the Mashantucket Pequot Tribe and the Mohegan
Sun Casino operated by the Mohegan Tribe, which opened in October 1996. Both of
these casinos are in Connecticut. It is possible that other casinos will be
established in other parts of New England, including Massachusetts. Because of
the market size, the establishment of existing and such other casinos could
have an adverse impact on the Narragansett casino's gross revenues and, in
turn, on the income generated by CDGC under the Narragansett Contract.
In order to fund the construction costs for the project, it is
anticipated that the Company will require significant additional capital. The
inability of the Narragansett casino to offer Class III gaming could create a
competitive disadvantage. There can be no assurance that such financing will be
available, or if available, that the terms thereof will be acceptable to the
Company.
[6] INCOME TAXES
Net Operating Loss Carryforwards ("NOLs")
The following description of the Company's NOLs is based on the
Company's analysis of the application of the relevant sections of the United
States Tax Code (the "Tax Code"). There can be no assurance that the Internal
Revenue Service ("IRS") or the courts will agree with the Company's analysis.
There are substantial risks associated with the Company's utilization of the
NOLs.
For purposes of this discussion, unless otherwise defined or modified,
the term "Gross NOLs" means the total NOLs reported to the Internal Revenue
Service on the federal income tax returns of the particular taxpayer, before the
application of any reductions and related adjustments described in the following
paragraphs under the heading "Net Operating Loss Carryforwards". Based on its
federal income tax returns for the years through June 30, 1996, the Company and
its subsidiaries reported cumulative Gross NOLs of approximately $107,000,000.
Under Section 172(b) of the Internal Revenue Code of 1986, as amended (the "Tax
Code") and, in effect for those years, unused NOLs expire after fifteen taxable
years from the taxable year of a loss. Because these losses were generated in
1994, 1995 and 1996, they should expire in 2009, 2010 and 2011 respectively.
For purposes of this discussion, the term "Net NOLs" means the amount
of NOLs of the particular taxpayer for federal income tax purposes adjusted to
reflect reductions and related adjustments required under Tax Code ss. 108 and
Tax Code ss. 382(1)(5), assuming that Tax Code ss. 382(1)(5) applies, but
subject to Internal Revenue Service audits, subsequent changes in the ownership
of the Company and effects under Tax Code ss. 382, and the application of Tax
Code Sections 269 and 384. See "Net Operating Loss Carryforwards - Application
of Tax Code ss. 382 Under the Chapter 11 Reorganization". After taking into
account the reorganization of the Company pursuant to the Plan of Reorganization
and assuming that Tax Code ss. 382(1)(5) applies as described in more detail in
this section "Net Operating Loss Carryforwards", management of the Company
believes the Net NOLs of the Company and its subsidiaries as of June 30, 1998
are approximately $35,000,000, although no assurance can be given that the
Company will be able to utilize these NOLs. See "Risk Factors - Net Operating
Loss Carryforwards".
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Cancellation of Debt Income Under Tax Code ss. 108. Under the Plan of
Reorganization, unsecured indebtedness of the Company with an aggregate face
amount of approximately $110,000,000 was canceled. Generally, Tax Code ss. 108
provides that a debtor whose indebtedness is canceled must include the amount
of canceled indebtedness in gross income to the extent the indebtedness
canceled exceeds any consideration (e.g., cash, notes, stock or other
property) given for the cancellation. Tax Code ss. 108 further provides,
however, that if a taxpayer is the subject of a bankruptcy case and the
cancellation of indebtedness ("COD") is pursuant to a plan approved by the
Bankruptcy Court, the excess amount canceled is not required to be included in
gross income. Instead, any such excess amounts so excluded from gross income
reduce prescribed tax attributes of the debtor, including NOLs and the bases
of the assets of the debtor, in a specified order of priority beginning with
NOLs. Management of the Company believes that approximately $75,500,000 of its
Gross NOLs of approximately $107,000,000 as of June 30, 1996 must be reduced
to take into account cancellation of indebtedness of the Company pursuant to
the Plan of Reorganization.
Tax Code ss. 382 In General. If a corporation undergoes an "ownership
change", Tax Code ss. 382 limits the corporation's right to use its NOLs each
year to an annual percentage (based on the federal long-term tax-exempt rate
which was 5.64% in May of 1997) of the fair market value of the corporation at
the time of the ownership change (the "Section 382 Limitation"). If an
ownership change under Tax Code ss. 382 is triggered, a corporation may also
be restricted from utilizing certain built-in losses and built-in deductions
recognized during a five-year recognition period after the ownership change. A
corporation is considered to undergo "an ownership change" if, as a result of
changes in the stock ownership by "5-percent shareholders" or as a result of
certain reorganizations, the percentage of the corporation's stock owned by
those 5-percent shareholders has increased by more than 50 percentage points
over the lowest percentage of stock owned by those shareholders at any time
during a prescribed prior three-year testing period. Five-percent shareholders
are persons who hold 5% or more of the stock of a corporation at any time
during the testing period as well as groups of shareholders who are not
individually 5-percent shareholders.
Application of Tax Code ss. 382 Under the Chapter 11 Reorganization. If
the Company is subject to the Section 382 Limitation as a result of the
consummation of the Plan of Reorganization, its annual Section 382 Limitation
would be equal to the product of the applicable long-term tax-exempt rate
(5.64%) times the fair market value of the equity of the Company immediately
before the ownership change. Thus, for example, if the value of the equity of
the Company as of the Effective Date of the Plan of Reorganization was $400,000,
the Company could only use approximately $23,000 of its NOLs each year until
they expire. Although a 50% ownership change was expected to occur as a result
of the transfer of stock of the Company to creditors pursuant to the Plan of
Reorganization, an exception under Tax Code ss. 382(1)(5) is believed by
management to have applied as described as follows. Tax Code ss. 382(1)(5)
provides that the Section 382 Limitation will not apply to a loss corporation if
(1) the corporation, immediately before the ownership change, is under the
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jurisdiction of a court in a United States Code Title 11 or similar case, and
(2) the shareholders and creditors of the old corporation own at least 50% of
the total voting power and value of the stock of the corporation after the
"ownership change" as a result of being shareholders and creditors before the
change. Stock transferred to such creditors counts only if it is transferred
with respect to "old and cold" indebtedness. Indebtedness of creditors
qualifies as "old and cold" if the indebtedness (i) was held by a particular
creditor for at least 18 months before the date of the filing of the Chapter
11 case, or (ii) arose in the ordinary course of the trade or business of the
old loss corporation and was held by the person who at all times held a
beneficial interest in that debt. These requirements will not apply, however,
and thus a loss corporation generally may treat the debt as meeting the
holding period requirement, unless (i) the creditor becomes a 5-percent
shareholder of the loss corporation (directly or indirectly) immediately after
the ownership change, or (ii) such creditor's participation in the formation
of the reorganization plan makes it evident to the debtor that the creditor
has not owned the debt in question for the required period.
In an attempt to determine the extent to which the indebtedness of
creditors who received stock pursuant to the Plan of Reorganization qualifies as
"old and cold", the Company has obtained corroborative evidence as to the status
of certain creditors including written confirmation of the status of certain
creditors who are receiving New Common Stock. As a result, Management of the
Company believes that sufficient indebtedness of creditors will qualify as "old
and cold" under Tax Code ss. 382(1)(5) so that Tax Code ss. 382(1)(5) will apply
to this ownership change. No assurances, however, can be given that
corroborative documentation obtained by the Company will ultimately sustain such
analysis if challenged.
Under ss. 382(1)(5), although the Section 382 Limitation does not apply,
the Gross NOLs originally available to the Company must nevertheless be
reduced to the extent of the amount of interest accrued with respect to such
canceled debt during the three taxable years prior to the taxable year of the
"ownership change" and during the taxable year of the "ownership change" (up
to the change date). The Company's management estimates that this Tax Code ss.
382(1)(5) adjustment to the Company's Gross NOLs is approximately $32,000,000.
$35,214,000 of this amount is duplicated as a reduction under Tax Code Section
108, so that if the Company is under Tax Code Section 382(1)(5) the reduction
to NOLs under Tax Code Section 108 would amount to $54,700,000 rather than
$82,000,000. See "Cancellation of Debt Income Under Tax Code Section 108"
in this Section.
After taking into account the reductions and related adjustments to the
Gross NOLs under Tax Code ss. 108 and Tax Code ss. 382, assuming that Tax Code
ss. 382(1)(5) applies, management of the Company believes that the Net NOLs of
the Company and its Subsidiaries as of June 30, 1998 are approximately
$35,214,000, subject to Internal Revenue Service audits, subsequent changes in
the ownership of the Company and effects under Tax Code ss. 382, and the
application of Tax Code Sections 269 and 384, which are described below in
this section. See "Risk Factors - Net Operating Loss Carryforwards".
Tax Code ss. 382 and Subsequent Events and Investors. If Tax Code ss.
382(1)(5) applies to the Company, and a future ownership change under Tax Code
ss. 382 is triggered within two (2) years after the ownership change generated
pursuant to the Plan of Reorganization, the Company would not be allowed to
use any of its NOLs incurred as of that first ownership change. It is
therefore important for the Company to monitor further transfers of New Common
Stock by its 5-percent shareholders and further issuances or redemptions of
Company common stock. Because Tax Code ss. 382 tests whether a 50 percentage
point ownership change has occurred over a three-year testing period, the
Company's capacity to issue more common stock during the three years
subsequent to the Effective Date will be curtailed.
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Provision for Income Tax Expense
The Provision for Income Tax Expense of $81,000 and $45,000 for the
three-month periods ended September 30, 1998 and 1997 respectively, relate
solely to state income taxes. No provision was made for federal income taxes
due to the expected utilization of the Net Operating Loss Carryforwards. As
such, no relationship exists between income tax expense and Consolidated
Income [Loss] Before Income Tax for the Company.
[7] NEW SENIOR SECURED NOTES
Debt After Reorganization
New Senior Secured Notes. Pursuant to the Plan of Reorganization, the
holders of the Old Senior Secured Notes, along with certain unsecured
creditors and key members of management, were entitled to receive New Senior
Secured Notes having an aggregate principal amount of $23.1 million. Interest
on the New Senior Secured Notes accrues at a rate of 12% per annum, and is
payable semi-annually. The New Senior Secured Notes are secured by
substantially all the assets of the Company, including the common stock of
CGMI and CDGC. In addition, the Company's Amended and Restated Senior Secured
Notes Indenture, dated as of March 27, 1997 (the "Amended Indenture") includes
certain restrictive covenants. (See "Description of Amended Indenture".) The
New Senior Secured 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
New Senior Secured Notes mature in May 2001. Required principal payments are
as follows:
May 28, 2000 $ 4,620,000
May 28, 2001 18,480,000
Additionally, the Company has been making required semi-annual interest
payments of approximately $1,386,000 since November 15, 1997 and is obligated to
make such interest payments semi-annually until May 2001.
Description of Amended Indenture. The Amended Indenture governs the
terms of the New Senior Secured Notes. The New Senior Secured Notes are
unconditionally guaranteed pursuant to a Guaranty (the "Guaranty") as to
principal, premium, if any, and interest, on a senior basis, jointly and
severally by all existing and future Subsidiaries (other than CDGC and its
subsidiaries) of the Company (the "Guarantors"). The New Senior Secured Notes
are secured by a lien on substantially all of the assets of the Company and all
existing and future Guarantors. Under certain circumstances, the Collateral (as
defined in the Amended Indenture) may be released from the lien created by the
Amended Indenture and, under other circumstances, additional liens may be
granted on the Collateral.
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The Company is required to offer to purchase New Senior Secured Notes
with the proceeds from asset sales which are deposited in a segregated net
cash proceeds account within 365 days after the date of such asset sale or
when amounts accumulated from such asset sales exceeds $7,500,000, together
with accrued interest to the date of repurchase. The New Senior Secured Notes
and the Guaranty rank pari passu with all existing and future senior
indebtedness of the Company and the Guarantors, respectively, and senior in
right of payment to all subordinated indebtedness of the Company and the
Guarantors, respectively.
Principal covenants include, among others, maintenance of coverage
ratio, and limitations on dividends and other restricted payments and
investments, payment restrictions affecting Subsidiaries, transactions with
Affiliates (as defined in the Amended Indenture), consolidations, mergers and
sales of assets, incurrences of additional Indebtedness (as defined in the
Amended Indenture) and Disqualified Capital Stock (as defined in the Amended
Indenture), liens, as well as on lines of business and certain transactions
which must be authorized by the Advisory Committee (as defined in the Amended
Indenture).
The Amended Indenture contemplates the formation of an advisory
committee ("Advisory Committee") for the purposes of, among other things,
overseeing certain aspects of the Company's operations. The initial members of
the Advisory Committee were selected by the Noteholders Steering Committee and
were approved by the Bankruptcy Court.
The Company and the Guarantors have covenanted to file, upon request
from the Advisory Committee or the Holders of the New Senior Secured Notes or
the Holders of the New Common Stock, a registration statement under the
Securities Act of 1933 with respect to the New Senior Secured Notes and the New
Common Stock. See "Default under the Amended Indenture."
The Company and the Guarantors also have agreed to use their best
efforts to cause such registration statement to be declared effective by the
Securities and Exchange Commission (the "SEC") within 180 days following such
notice.
Default Under the Amended Indenture
The Amended Indenture contemplates that certain actions of the Company
require prior notice to (and in certain cases, approval from) the Advisory
Committee, including the ability of the Company to deliver to the Indenture
Trustee a Definitive Budget (as defined in the Amended Indenture). To date, the
Advisory Committee has not been formed, substantially due to the fact that the
Company had been notified by several state gaming regulators in states in which
the Company conducts business that the breadth and scope of the powers granted
to the Advisory Committee in the Amended Indenture require that the proposed
members of the Advisory Committee be licensed by the appropriate various state
gaming regulators.
On August 7, 1998, the Company was notified by counsel for the
Indenture Trustee of the occurrence of possible events of default ("Events of
Default") under the Amended Indenture with respect to the New Senior Secured
Notes. The alleged Events of Default included, among other things, an alleged
failure by the Company to deliver to the Indenture Trustee a Definitive Budget
(as defined in the Amended Indenture). In light of ongoing good faith
negotiations to amend the Amended Indenture in such a manner as would facilitate
curing any alleged Events of Default, the Indenture Trustee has been directed by
the holders of a majority in principal amount of the New Senior Secured Notes to
forebear, until December 31, 1998 from taking any action, and has not taken any
action to accelerate the New Senior Secured Notes, foreclose on any collateral
or otherwise execute any of its rights under the Amended Indenture.
<PAGE>
The Indenture Trustee, and the holders of a majority in principal
amount of the New Senior Secured Notes and the Company have had good faith
negotiations to resolve the various Events of Default under the Amended
Indenture and all parties have reached agreement in principle as to a Second
Amended and Restated Indenture which would resolve any Events of Default. On
October 23, 1998 the Company and the Indenture Trustee filed a Joint Motion for
an Order approving modifications of the Plan of Reorganization with the
Bankruptcy Court (the "Motion"). The Motion provides, in pertinent part, (i) the
Amended Indenture will be revised to eliminate the Advisory Committee, (ii)
certain majority holders will elect to hold their equity distributions in a
voting trust with the Company's new Chairman, Charles B. Brewer, acting as
voting trustee, (iii) for the amendment of the Company's Articles of
Incorporation and By-laws to provide for two classes of Common Stock (Common
Stock and Class A Common Stock), identical in all respects except that Class A
Common Stock will have the right to elect a controlling number of Board members
and will be distributed to the holders of Old Senior Secured Notes on account of
their Allowed Secured Claims (as defined in the Plan of Reorganization), and
(iv) that the Amended Indenture will be revised with respect to the mechanisms
by which Excess Cash (as defined in the Amended Indenture) is deposited in the
cash collateral account held by the Indenture Trustee. A hearing on the Motion
has been set for November 16, 1998. Once implemented, the revisions to the
Amended Indenture will definitively cure any alleged Events of Default. The
Amended Indenture Trustee, the majority noteholder and the Company believe it is
reasonably probable that the Events of Default will be cured on or before
December 31, 1998.
As per the terms of the Amended Indenture, the Company made an interest
payment of $1,285,900 on November 12, 1997, and an interest payment of
$1,386,000 on May 15, 1998. The Company is scheduled to make a $1,386,000
interest payment on November 15, 1998.
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[8] RESTRICTED FUNDS
Restricted funds consist of approximately $546,000 and $541,000
(including accrued interest) as of September 30, 1998 and June 30, 1998,
respectively, and are held by the Indenture Trustee as Cash Collateral (as
defined in the Plan) pursuant to the Plan and the Amended Indenture for the
benefit of the New Senior Secured Noteholders for payment of the New Senior
Secured Notes. The Company anticipates that some or all of the Restricted Funds
held by the Indenture Trustee may be applied to interest payments due on the New
Senior Secured Notes. However, the ultimate utilization of the Restricted Funds
is at present undetermined due to the discussions referenced in the preceding
Note [7] and are therefore classified as non-current.
[9] MUCKLESHOOT SETTLEMENT
On January 30, 1998 the Muckleshoot Tribal Gaming Commission summarily
notified the Company that the Company's gaming license had been revoked based on
an assertion that the Company's certification with the Washington State Gambling
Commission ("WSGC") had lapsed. Additionally, on the same date the Muckleshoot
Tribal Council purported to terminate the Company's management contract on
similar grounds. Subsequently, the WSGC had notified the Muckleshoot Tribe that
the Company remained in good standing with the WSGC and would be immediately
recertified upon request of the Muckleshoot Tribe. Moreover, on April 29, 1998
the WSGC notified the Company that it had been recommended for the issuance of a
gaming license and such license was subsequently issued.
In response to the termination of the Muckleshoot Management contract,
the Company commenced litigation in the U.S. District Court in the Western
District of Washington at Seattle, ("U.S. District Court") which asserted, among
other things, breach of contract. On July 20, 1998 the Company and its
subsidiary, CGMI, and the Muckleshoot Tribe achieved an amicable resolution to
the legal proceedings as follows:
The parties entered into a Joint Stipulation and requested the U.S.
District Court to enter an order of settlement and dismiss with prejudice the
litigation between the parties. The U.S. District Court subsequently entered the
order of settlement.
Pursuant to the Joint Stipulation, the Company will receive a total of
Three Million Three Hundred Thousand ($3,300,000) Dollars, with One Million
($1,000,000) Dollars (the "Initial Payment") being paid within three days after
the U.S. District Court entered the order of settlement and Two Million Three
Hundred Thousand ($2,300,000) Dollars being paid in equal monthly installments
over the term of twenty four (24) months commencing August 1, 1998. Such
payments, when fully received, will constitute mutual fulfillment of the
Exclusive Operating Agreement between the Muckleshoot Tribe and the Company
dated April 24, 1995. The U.S. District Court entered the order of settlement
and the Company received the Initial Payment on July 29, 1998. All monthly
installments to date have been timely received.
The Company recorded Other Income of $3.3 million, less the $200,000
receivable balance from the Muckleshoot Casino, due as of June 30, 1998, and
wrote-off the unamortized balance of the deferred asset, Investment in
Muckleshoot Agreement as of July 20, 1998 of approximately $815,000 for an other
income net gain to the Company of approximately $2,285,000 for the three months
ended September 30, 1998. Additionally, on the settlement date the Company
recorded a receivable balance of $2.3 million. The total receivable due the
Company on the Muckleshoot Settlement as of September 30, 1998 is $2,108,000.
[10] PUEBLO OF LAGUNA DEFERRED CHARGES
All expenditures incurred by the Company for the establishment and
development of the proposed Pueblo of Laguna Casino Project, as defined in the
management and development agreement, other than those costs which generally
would be classified as Company administrative costs, have been capitalized as a
deferred asset (the "Laguna Loan Balances"). Additionally, commencing October 1,
1998, all Company administrative expenditures relating to the Pueblo of Laguna
Casion Project will also be capitalized as a deferred asset. Upon the
commencement of gaming operations at the Pueblo of Laguna Casino, the total
deferred asset balance will be segregated into (i) a loan payable to the Company
(the sum of the total Laguna Loan Balances), payable in monthly installments
over an anticipated seven year period with annual interest accruing at the Prime
Lending Rate plus 100 basis points (currently 9.00%), and (ii) the sum of the
general and administrative, non-Laguna Loan Balances, will remain a deferred
asset which will be amortized over the seven year period of the Pueblo of Laguna
management and development agreement. As of September 30, 1998, the deferred
asset for Laguna Loan Balances totalled $255,000. Due to uncertainties
associated with the exact date of the commencement of gaming operations at the
proposed Pueblo of Laguna Casino, all such deferred charges will be classified
as non-current.
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[11] NEW AUTHORITATIVE PRONOUNCEMENTS
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components in the financial statements. SFAS No. 130 is effective
for fiscal years beginning after December 15, 1997. Earlier application is
permitted. Reclassification of financial statements for earlier periods provided
for comparative purposes is required. Management is in the process of
determining its preferred format. The adoption of SFAS No. 130 will have no
impact on the Company's consolidated results of operations, financial position
or cash flows.
The FASB has issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 changes how operating segments
are reported in annual financial statements and requires the reporting of
selected information about operating segments in interim financial reports
issued to shareholders. SFAS No. 131 is effective for periods beginning after
December 15, 1997, and comparative information for earlier years is to be
restated. SFAS No. 131 need not be applied to interim financial statements in
the initial year of its application. The Company is in the process of evaluating
the disclosure requirements. The adoption of SFAS No. 131 will have no impact on
the Company's consolidated results of operations, financial position or cash
flows.
In February 1998, the FASB issued SFAS No. 132, "Employers Disclosure
about Pensions and Other Postretirment Benefits," which is effective for fiscal
years beginning after December 15, 1997. The modified disclosure requirements
are not expected to have a material impact on the Company's results of
operations, financial position or cash flows.
The Financial Accounting Standard Board (FASB) has issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. SFAS No. 133 requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
accounting for changes in the fair value of a derivative depends on the intended
use of the derivative and how it is designated, for example, gain or losses
related to changes in the fair value of a derivative not designated as a hedging
instrument is recognized in earnings in the period of the change, while certain
types of hedges may be initially reported as a component of other comprehensive
income (outside earnings) until the consummation of the underlying transaction.
SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Intial application of SFAS No. 133 should be as
of the beginning of a fiscal quarter; on that date, hedging relationships must
be designated anew and documented pursuant to the provisions of SFAS No. 133.
Earlier application of all of the provisions of SFAS No. 133 is encouraged, but
it is permitted only as of the beginning of any fiscal quarter. SFAS No. 133 is
not to be applied retroactively to financial statements of prior periods. The
Company will evaluate the new standard to determine any required new disclosures
or accounting.
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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 unaudited Consolidated Financial Statements as of September 30, 1998
and June 30, 1998 and for the three months ended September 30, 1998 and 1997
contained herein and the Company's audited Consolidated Financial Statements and
the related notes thereto appearing in the Company's Annual Report on Form 10-K
for the fiscal years ended June 30, 1998 filed with the Securities and Exchange
Commission.
Notice Regarding Forward-Looking Statements
To the extent the information contained in this management discussion
and analysis of unaudited consolidated financial condition as of September 30,
1998 and June 30, 1998 (audited) and results of operations for the three months
ended September 30, 1998 and 1997 are viewed as forward-looking statements, the
reader is cautioned that various risks and uncertainties exist that could cause
the actual future results to differ materially from those inferred by the
forward-looking statements. Words such as "expects", "anticipates", "intends",
"potential", "believes" and similar expressions are intended to identify
forward-looking statements. A discussion of the risk factors regarding the
implementation of the Company's business strategy is set forth in the Company's
Annual Report on Form 10-K filed with the Securities and Exchange Commission, in
the section entitled "Risk Factors." Failure to successfully implement this
strategy would raise substantial doubt about the Company's ability to fulfill
its principal obligations under its New Senior Secured Notes. The reader is
further cautioned that risks and uncertainties exist that have not been
mentioned herein due to their unforeseeable nature, but which, nevertheless, may
impact the Company's future operations.
Liquidity and Capital Resources
Sources and Uses of Cash
For the three months ended September 30, 1998, the Company had a net
increase in cash and cash equivalents of $2,211,000, of which $235,000 was
provided by Company operating activities, and $1,976,000 was provided by Company
investing activities.
Operating Activities: Cash flows from operating activities for the
three months ended September 30, 1998 were provided by (i) Native American
casino management fees of approximately
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$1,804,000, and (ii) interest income of approximately $134,000. Signifcant
operating activity balances required to reconcile the Company's GAAP accrual net
income of $1,604,000 for the three months ended September 30, 1998 to net cash
flows used in operating activities include (i) depreciation and amortization of
$577,000, (ii) a decrease in interest receivable of $8,000, (iii) a decrease in
Native American management fees and expenses receivable of $29,000, (iv) the
write-off of $815,000 of deferred investment in Muckleshoot contract costs (see
note [9] to the unaudited financial statements contained herein), (v) an
increase in accrued interest payable of $694,000 and (vi) an increase of $81,000
for state income taxes payable. The increase in accrued interest payable of
$694,000 is due to three additional months of accrued interest on the New Senior
Secured Notes as of September 30, 1998 as compared to as of June 30, 1997.
Significant operating activity cash outflows required to reconcile the
Company's GAAP, accrual net income to net cash flows used in operating
activities include (i) the Muckleshoot litigation settlement of $3.3 million
recorded in the first quarter of fiscal year 1999 (See note [9] to the unaudited
financial statements contained herein), (ii) an increase in prepaids and other
current assets of $9,000 during the quarter ended September 30, 1998, and (iii)
a decrease in accounts payable and accrued expenses of $264,000. The decrease in
accounts payable and accrued expenses of $264,000 as of September 30, 1998 as
compared to June 30, 1998 is primarily due to the deferring of certain Pueblo of
Laguna expenditures (see note [10] to the unaudited consolidated financial
statements contained herein), and greater payable balances accrued and unpaid as
of June 30, 1998.
Investing Activities: For the quarter ended September 30, 1998, the
Company provided $1,976,000 in net cash inflows from investing activities. Cash
flows from investing activities were provided by (i) $1,044,000 in repayment of
Native American loans/advances, (ii) increased by $1,192 for payments received
on the Muckleshoot Settlement Agreement (See note [9] to the unaudited
consolidated financial statements contained herein), (iii) decreased by $255,000
in deferred Pueblo of Laguna charges (see note [10] to the unaudited
consolidated financial statements contained herein), and (iv) decreased by
$5,000 for an increase in restricted funds.
Financing Activities: The Company did not have any financing activities
for the three month period ended September 30, 1998.
The Company's source of cash for the next twelve months is expected to
be derived from the receipt of management fees, the receipt of debt service
payments on the Native American loans receivable and installment payments
received from the Muckleshoot settlement. The Company received its final debt
service payment in September 1998 on the Umatilla Tribes Casino loan, and the
Company is scheduled to be paid-in-full on the Tonto Apache Casino loan in April
2000, and as of September 30, 1998, the Muckleshoot Casino does not have a
development loan balance payable to the Company. In the event conditions arise,
for whatever reasons, that cause a reduction or elimination of existing cash
reserves and sources of cash, the Company may not be able to continue operations
or service its debt.
19
<PAGE>
On July 24, 1998 CGMI entered into a management and development
agreement with the Pueblo of Laguna to exclusively develop, finance, construct,
operate and manage an interim casino to be located on Interstate 40 on the
Tribe's sovereign reservation lands approximately 45 miles west of Albuquerque,
New Mexico. The proposed 30,000 square foot casino will offer Las Vegas - style
table games, slot machines and poker as well as restaurants, a gift shop and
other amenities. The management and development agreement, which is subject to
the approval of the National Indian Gaming Commission, provides that CGMI will
receive a management fee of 30% of net profits (as defined) over a term of seven
(7) years from the official date of opening of the casino.
The Company currently anticipates using a portion of its cash on-hand
to finance certain aspects of the new Pueblo of Laguna Casino Project which is
anticipated to open in the Spring of 1999. Company funds utilized for the Laguna
Project will be repaid by the Pueblo of Laguna Casino Project over an
anticipated seven year period commencing tentatively in the Spring of 1999.
Debt
At September 30, 1998 the New Senior Secured Notes consist of the face
value $23,100,000 of the New Senior Secured Notes issued pursuant to the Plan.
See Part II. Item 3 - Default under the Amended Indenture for additional
information regarding the New Senior Secured Notes.
Capital Requirements
The Company will continue to operate, through CGMI, the Tonto Apache
and Umatilla casinos pursuant to the related management agreements, and the
proposed Pueblo of Laguna Casino Project pursuant to the related management
agreement subject to NIGC approval. Absent any new developments, these
agreements, along with debt-service payments on the Tribal Loans with the Tonto
Apache Tribe, installment payments on the Muckleshoot Settlement, principal and
interest payments on the tribal loan relative to the Pueblo of Laguna Project,
and cash and cash equivalents on hand at September 30, 1998 of $6,709,000 will
provide the Company with its only sources of cash for the approximately one and
one-half years remaining on the Company's two existing operating management
contracts, and the seven years on the proposed Pueblo of Laguna Casino Project.
The Company believes that these sources of cash coupled with a new and reduced
expense budget will exceed the ongoing cash requirements for all operating
expenses and general business development costs (including the Narragansett and
Laguna projects) as well as all interest payments on the New Senior Secured
Notes and principal payments on the New Senior Secured Notes, with the exception
of the final principal payment of $18,480,000 due May 15, 2001. The Company
expects to use any excess cash to fund new projects, although the realization of
excess cash is not assured.
20
<PAGE>
In order to complete the funding of the construction or acquisition
costs of new projects, excluding the proposed Pueblo of Laguna Casino
anticipated to open in Spring 1999, and to fund the construction costs of the
Narragansett project, if and when a gaming facility is approved in Rhode Island,
it is anticipated that the Company will require significant additional capital.
The Company believes that should any new projects become available or if the
gaming facility is approved for Rhode Island, the Company will have available
funding through the debt and/or equity markets or alternatively though bank
financing, based on the viability of the individual project(s). This belief is
founded on the Company's past success in developing Class III gaming facilities,
the expertise of its management in the gaming industry and its favorable
position of being currently licensed and/or approved by the NIGC and by several
state jurisdictions. However, there can be no assurance that such financing will
be available, or if available, that the terms thereof will be acceptable or
favorable to the Company. Given the high level of uncertainty concerning the
prospects of new development projects and/or the Narragansett Tribe's ability to
secure a binding compact or approval for non-compacted gaming, no financing
commitments have been obtained as of the date of this filing. Further, the
timing of any new capital requirements cannot be reasonably estimated at this
time.
The Company believes it will require new sources of cash beyond its
existing operations and current expansion plans in order to fund the final
payment of principal of $18,480,000 on its New Senior Secured Notes due May 15,
2001.
Restricted Funds
Restricted funds as of September 30, 1998 consist of approximately
$546,000 held by the Indenture Trustee as Cash Collateral pursuant to the Plan
and the Amended Indenture for the benefit of the New Senior Secured Noteholders
for payment of the New Senior Secured Notes. The Company anticipates that some
or all of the Restricted Funds held by the Indenture Trustee may be applied to
interest payments due on the New Senior Secured Notes. However, the ultimate
utilization of the Restricted Funds is at present undetermined due to the
discussions referenced in Note [7] to the unaudited Consolidated Financial
Statements contained herein, and are therefore classified as non-current.
21
<PAGE>
Year 2000 Computer Software Compliance
The Company relies on computer hardware, software and related
technology in the course of its operations, and such technology is utilized by
the Company and its managed casinos for their delivery of products and services.
The Company has preliminarily reviewed its computer systems as well as those of
its managed casino operations for compliance with the potential hazards of the
year 2000 computer conversion. Based on this preliminary review, it appears the
Company and its managed casino operations will be in compliance with year 2000
protocols prior to the end of the millennium, and that modifications, software
or computer hardware upgrades, or any other procedures required to comply with
year 2000 protocols, should primarily be handled by the software and computer
system vendors and/or manufacturers, and that expected costs to the Company are
currently expected to be immaterial.
Default Under the Amended Indenture
The Amended Indenture contemplates that certain actions of the Company
require prior notice to (and in certain cases, approval from) the Advisory
Committee, including the ability of the Company to deliver to the Indenture
Trustee a Definitive Budget (as defined in the Amended Indenture). To date, the
Advisory Committee has not been formed, substantially due to the fact that the
Company has been notified by several state gaming regulators in states in which
the Company conducts business that the breadth and scope of the powers granted
to the Advisory Committee in the Amended Indenture require that the proposed
members of the Advisory Committee be licensed by the appropriate various state
gaming regulators.
On August 7, 1998, the Company was notified by counsel for the
Indenture Trustee of the occurrence of possible events of default ("Events of
Default") under the Amended Indenture with respect to the New Senior Secured
Notes. The alleged Events of Default included, among other things, an alleged
failure by the Company to deliver to the Indenture Trustee a Definitive Budget
(as defined in the Amended Indenture). In light of ongoing good faith
negotiations to amend the Amended Indenture in such a manner as would facilitate
curing any alleged Events of Default, the Indenture Trustee has been directed by
the holders of a majority in principal amount of the New Senior Secured Notes to
forebear, until December 31, 1998 from taking any action, and has not taken any
action to accelerate the New Senior Secured Notes, foreclose on any collateral
or otherwise execute any of its rights under the Amended Indenture.
The Indenture Trustee, and the holders of a majority in principal
amount of the New Senior Secured Notes and the Company have had good faith
negotiations to resolve the various Events of Default under the Amended
Indenture and all parties have reached agreement in principle as to a Second
Amended and Restated Indenture which would resolve any Events of Default. On
October 23, 1998 the Company and the Indenture Trustee filed a Joint Motion for
an Order approving modifications of the Plan of Reorganization with the
Bankruptcy Court (the "Motion"). The Motion provides, in pertinent part, (i)
that the Amended Indenture will be revised to eliminate the Advisory Committee,
(ii) that certain majority holders will elect to hold their equity distributions
in a voting trust with the Company's new Chairman, Charles B. Brewer, acting as
voting trustee, (iii) for the amendment of the Company's Articles of
Incorporation and By-laws to provide for two classes of Common Stock (Common
Stock and Class A Common Stock), identical in all respects except that Class A
Common Stock will have the right to elect a controlling number of Board members
and will be distributed to the holders of Old Senior Secured Notes on account of
their Allowed Secured Claims (as defined in the Plan of Reorganization), and
(iv) that the Amended Indenture will be revised with respect to the mechanisms
by which Excess Cash (as defined in the Amended Indenture) is deposited in the
cash collateral account held by the Indenture Trustee. A hearing on the Motion
has been set for November 16, 1998. Once implemented, the revisions to the
Amended Indenture will definitively cure any alleged Events of Default. The
Amended Indenture Trustee, the majority noteholder and the Company believe it is
reasonably probable that the Events of Default will be cured on or before
December 31, 1998.
22
<PAGE>
Results of Operations
Overview
The following discussion about the Company's results of operations
includes the Company and its subsidiaries, CGMI, and CDGC.
Three Month Period Ended September 30, 1998 as Compared to the Three Month
Period Ended September 30, 1997
Revenues
The following table outlines the Company's revenues for the three
months ended September 1998 and 1997:
3 Months 3 Months
Ended Ended
09/30/98 09/30/97 Inc. (Dec.) % Change
-------- -------- ----------- --------
Umatilla $1,257 $1,365 $(108) -7.9%
Muckleshoot 0 540 (540) -100.0%
Tonto Apache 717 740 (23) -3.1%
------ ------ ------ -------
$1,974 $2,645 $(671) -25.4%
====== ====== ====== =======
Revenues declined $671,000, or 25.4%, declining from $2.6 million to
$2.0 million for the three month period ended September 30, 1998 as compared to
the year quarter. This decrease in revenues is primarily due to (i) the
termination of the Muckleshoot management agreement as explained in Note [9] to
the unaudited consolidated financial statements contained herein, and (ii) a
$108,000, or 7.9% decrease in management fees from the Umatilla Casino, due to
increased table game competition resulting from the June 1998 opening of the
Legends Casino in Yakima, Washington, located within 200 miles of the Umatilla
Casino.
Costs and Expenses
Salaries and wages increased to $763,000 from $440,000, a $323,000 or
73.4% increase in the first quarter of fiscal 1999 as compared to the first
quarter of fiscal 1998. This increase in salaries, wages and related expenses is
primarily attributable to (i) salary increases for officers and staff, and (ii)
certain one-time payments paid to retiring/terminated employees in the first
quarter of fiscal 1999.
Company development costs declined $56,000 or 17.2% for the three
months ended September 30, 1998 as compared to the year earlier quarter. This
nominal decline is due to reduced legal fees being incurred in conjunction with
the Narragansett Indian Tribe's attempt to further their position towards an
approved Compact.
23
<PAGE>
Professional fees increased to $321,000 from $194,000, a 65.5% or
$127,000 increase in the first quarter of fiscal 1999 as compared to the year
earlier quarter. This increase in legal fees is attributable to the collective
sum of several non-recurring or above average professional fees incurred during
the three months ended September 30, 1998. These increased professional fees
include (i) legal fees associated with the Pueblo of Laguna Management
Agreement, (ii) environmental studies and other professional fees expensed by
the Company associated with establishing the Pueblo of Laguna Casino, (iii)
professional fees relating to the Narragansett Indian Tribes attempt to obtain
an approved Compact, (iv) legal fees associated with the Muckleshoot Settlement
which was finalized in July 1998, (v) investment banking fees related to the
retention of Donaldson, Lufkin & Jenrette Securities Corp., related to capital
raising issues associated with the Narragansett Casino project and (vi)
increased public relations expenses for the Company's managed casinos.
General and administrative expenses declined $210,000 or 62.5% to
$126,000 for the three months ended September 30, 1998. This decline is
attributable to the streamlining of the Company's operations and general expense
reductions in the first quarter of fiscal 1999.
The decline in depreciation and amortization of $183,000 or 24.1% is
primarily attributable to the write-off of the Muckleshoot deferred charges on
July 20, 1998 (see footnote [9] to the unaudited consolidated financial
statements contained herein), resulting in less amortization expenses in the
first quarter of fiscal 1999.
Other Income and Expenses
The other income line item, Muckleshoot Settlement - Net, for
$2,285,000, represents the net gain to the Company for the three months ended
September 30, 1998 for the Muckleshoot settlement (see note [9] to the Company's
unaudited consolidated financial statements contained herein). The balance
represents the net of the $3.3 million settlement, less a $200,000 receivable
balance due the Company as of June 30, 1998, less the unamortized balance of the
deferred asset - Investment in Muckleshoot Agreement, of approximately $815,000
which was written-off on July 20, 1998.
Interest income declined $110,000 or 44.9% from $245,000 for the three
months ended September 30, 1998. This decline is the collective result of three
factors, (i) a decline in interest rates from the first quarter of fiscal 1998
to 1999 which lowered interest income, (ii) an increase in average idle interest
bearing cash and cash equivalents outstanding in the first quarter of fiscal
1999 which increased interest income, and (iii) lesser interest income from the
Native American loans due the Company in the first quarter of fiscal 1999 as
compared to the year earlier quarter due to the scheduled monthly amortization
of theses loans during the year, which lowered interest income.
Interest expense was relatively unchanged for the three months ended
September 30, 1998 as compared to the year earlier quarter, as the only interest
expense bearing instrument of the Company during both quarters was the new
Senior Secured Notes with a principal balance of $23.1 million and an interest
rate of 12.0% that have both remained unchanged.
Other income of $40,000 recorded in the first quarter of fiscal 1999
represents the receipt by the Company of a settlement payment on a gain
contingency settled during the quarter.
Income Taxes
Income taxes increased $36,000 or 80%, increasing from $45,000 to
$81,000 during the three months ended September 30, 1998 as compared to the year
earlier quarter. This increase is due to greater balances being accrued in
fiscal 1999 as compared to fiscal 1998 for state income taxes payable for CGMI
earnings in the state jurisdictions in which CGMI operates.
24
<PAGE>
PART I., Item 3.
Quantitative and Qualitative Disclosures about Market Risks
Not applicable.
25
<PAGE>
PART II., Item 1.
CAPITAL GAMING INTERNATIONAL, INC.
LEGAL PROCEEDINGS
Pursuant to the Plan of Reorganization, all legal proceedings against
the Company prior to the Effective Date were settled. As a result there was no
material litigation pending against the Company on June 30, 1998. 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
material pending or threatened legal proceedings at this time.
1. Republic Litigation
Previously reported in Company's Annual Report filed on form 10-K for
the fiscal year ended June 30, 1998, filed with the Securities and Exchange
Commission.
2. Muckleshoot Litigation
Previously reported in Company's Annual Report filed on form 10-K for
the fiscal year ended June 30, 1998 filed with the Securities and Exchange
Commission. See Note [9] to the unaudited financial statements contained herein.
26
<PAGE>
Reorganization of the Company
See Note [3] to the unaudited financial statements contained herein and
the Company's Annual Report filed on form 10-K for the fiscal year ended June
30, 1998, filed with the Securities and Exchange Commission.
27
<PAGE>
Part II., Item 2.
Changes in Securities and Use of Proceeds
There have been no changes in securities or the capital structure of
the Company for the three months ended September 30, 1998. See note [3] to the
unaudited financial statements contained herein and the Reorganization section
in the Company's Annual Report filed on form 10-K for the fiscal year ended June
30, 1998, filed with the Securities and Exchange Commission.
PART II., Item 3.
Default Under the Amended Indenture
The Amended Indenture contemplates that certain actions of the Company
require prior notice to (and in certain cases, approval from) the Advisory
Committee, including the ability of the Company to deliver to the Indenture
Trustee a Definitive Budget (as defined in the Amended Indenture). To date, the
Advisory Committee has not been formed, substantially due to the fact that the
Company had been notified by several state gaming regulators in states in which
the Company conducts business that the breadth and scope of the powers granted
to the Advisory Committee in the Amended Indenture require that the proposed
members of the Advisory Committee be licensed by the appropriate various state
gaming regulators.
On August 7, 1998, the Company was notified by counsel for the
Indenture Trustee of the occurrence of possible events of default ("Events of
Default") under the Amended Indenture with respect to the New Senior Secured
Notes. The alleged Events of Default included, among other things, an alleged
failure by the Company to deliver to the Indenture Trustee a Definitive Budget
(as defined in the Amended Indenture). In light of ongoing good faith
negotiations to amend the Amended Indenture in such a manner as would facilitate
curing any alleged Events of Default, the Indenture Trustee has been directed by
the holders of a majority in principal amount of the New Senior Secured Notes to
forebear, until December 31, 1998 from taking any action, and has not taken any
action to accelerate the New Senior Secured Notes, foreclose on any collateral
or otherwise execute any of its rights under the Amended Indenture.
The Indenture Trustee, and the holders of a majority in principal
amount of the New Senior Secured Notes and the Company have had good faith
negotiations to resolve the various Events of Default under the Amended
Indenture and all parties have reached agreement in principle as to a Second
Amended and Restated Indenture which would resolve any Events of Default. On
October 23, 1998 the Company and the Indenture Trustee filed a Joint Motion for
an Order approving modifications of the Plan of Reorganization with the
Bankruptcy Court (the "Motion"). The Motion provides, in pertinent part, (i) the
Amended Indenture will be revised to eliminate the Advisory Committee, (ii)
certain majority holders will elect to hold their equity distributions in a
voting trust with the Company's new Chairman, Charles B. Brewer, acting as
voting trustee, (iii) for the amendment of the Company's Articles of
Incorporation and By-laws to provide for two classes of Common Stock (Common
Stock and Class A Common Stock), identical in all respects except that Class A
Common Stock will have the right to elect a controlling number of Board members
and will be distributed to the holders of Old Senior Secured Notes on account of
their Allowed Secured Claims (as defined in the Plan of Reorganization), and
(iv) that the Amended Indenture will be revised with respect to the mechanisms
by which Excess Cash (as defined in the Amended Indenture) is deposited in the
cash collateral account held by the Indenture Trustee. A hearing on the Motion
has been set for November 16, 1998. Once implemented, the revisions to the
Amended Indenture will definitively cure any alleged Events of Default. The
Amended Indenture Trustee, the majority noteholder and the Company believe it is
reasonably probable that the Events of Default will be cured on or before
December 31, 1998.
As per the terms of the Amended Indenture, the Company made an interest
payment of $1,285,900 on November 12, 1997, and an interest payment of
$1,386,000 on May 15, 1998.
28
<PAGE>
Part II., Item 4.
Submission of Matters to a Vote of Securityholders
There were no matters required to be brought to a vote of the
securityholders during the three months ended September 30, 1998.
PART II., Item 6.
CAPITAL GAMING INTERNATIONAL, INC.
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number
- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed subsequent to the Company's
filing of Form 10-K for the fiscal year ended June 30, 1998 with the
Securities and Exchange Commission.
29
<PAGE>
Signature Page
CAPITAL GAMING INTERNATIONAL, INC.
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, thereto duly authorized.
Dated: November 13, 1998 By: /s/ Michael W. Borozzi
---------------------------------------------
Michael W. Borozzi, President and Chief
Operating Officer
(Authorized Representative)
Dated: November 13, 1998 By: /s/ William S. Papazian
------------------------------------------
William S. Papazian, Executive Vice President
and General Counsel and Secretary
(Authorized Representative)
Dated: November 13, 1998 By: /s/ Bradley A. Denton
------------------------------------------
Bradley A. Denton, Vice President and
Chief Financial Officer
(Principal Accounting Officer)
30
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