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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1998
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, Suite 484
Phoenix, Arizona 85016
(Address of principal executive offices)
Registrant's telephone number, including area code: (602) 667-0670
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Indicate by check mark whether the registrant (1) has filed all
reports required 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 [ ] No [ X ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K [ ]
The aggregate market value of the Registrant's Common Stock, no par
value, held by non-affiliates, computed by reference to the average of the
closing bid and asked prices of the Common Stock as reported by the
"NASDAQ-Electronic Bulletin Board" on June 25, 1997 was $0.03 per share.*
Number of shares of Common Stock of the Registrant issued and outstanding as
of September 30, 1998 was 1,933,333
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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*The Company's common stock was delisted from the NASDAQ OTC Bulletin Board
effective June 25, 1997 because there were no marketmakers for the Company's
common stock. The Company may seek relisting in the future if it can satisfy
certain relevant criteria including registration of market makers.
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TABLE OF CONTENTS
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ITEM 1. BUSINESS.................................................................................................1
ITEM 2. PROPERTIES..............................................................................................22
ITEM 3. LEGAL PROCEEDINGS.......................................................................................22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....................................................23
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...................................23
ITEM 6. SELECTED FINANCIAL DATA.................................................................................24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................26
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKS ............................................36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................................................36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE....................36
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS........................................................................37
ITEM 11. EXECUTIVE COMPENSATION..................................................................................38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..........................................45
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........................................................46
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.........................................47
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ITEM 1. BUSINESS
General
Capital Gaming International, Inc., a New Jersey Corporation, (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 development of the Narragansett
Project (the "Narragansett Project") is conducted through Capital Development
Gaming Corp. ("CDGC"), a wholly-owned subsidiary of the Company.
CGMI developed and currently manages two Class III (as hereinafter
defined) Native American gaming facilities.
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)
CGMI also has a management development agreement with the Pueblo of
Laguna Tribe pursuant to which CGMI is developing a Class III gaming facility on
the tribe's sovereign lands located on I-40 west of Albuquerque, New Mexico.
CDGC has a management and development contract for the Narragansett
Project with the Narragansett Tribe for the development of a Class III gaming
facility either on the tribe's sovereign lands near Charlestown, Rhode Island or
elsewhere in the state of Rhode Island as may be permitted by law. See "Native
American Gaming Operations".
Gaming has evolved into a national industry. Approximately 33 states
sponsor lotteries. Bingo games operated by charities are legal in at least 46
states. In addition to the primary markets in Nevada and New Jersey, gaming
activities have expanded to include riverboat and dockside gaming,
state-sponsored video lotteries, limited stakes casino gaming and Native
American gaming. Other forms of gaming conducted in certain areas of the United
States include slot machine gaming, or variations thereof, in restaurants, bars,
hotels and truck stops; pari-mutuel betting on horse racing, dog racing and
jai-alai; sports book making and card rooms. The Company is actively seeking new
opportunities in Native American gaming and other gaming market jurisdictions.
Company's Strategy
The Company is focusing its efforts on maintaining its existing gaming
management interests with Native American Tribes, pursuing a strategy to develop
CGMI's and CDGC's Native American gaming operations and seeking other gaming
opportunities in existing and emerging gaming jurisdictions. The Company
believes that it has significant opportunities in Native American gaming because
of its demonstrated and continued success at the facilities it currently manages
through its subsidiaries, its approval and/or licensing by the National Indian
Gaming Commission (the "NIGC") and various state and tribal gaming jurisdictions
and its excellent reputation in this industry segment. The Company continues to
focus on management, consulting and development opportunities in Native American
gaming jurisdictions where the Company is already licensed, as well as in new
jurisdictions. The Company is also focusing on secondary gaming market
opportunities in various jurisdictions where opportunities exist parallel to the
size and scope that the Company has successfully developed and manages in the
Native American gaming segment of the gaming industry.
Management believes its experience in and early entry into the Native
American gaming segment of the gaming industry and receipt of certain
approvals from the NIGC and other state and tribal regulatory authorities will
provide it with a competitive advantage over companies just entering Native
American gaming development and management.
Company History
The Company was originally organized in June 1990 as a New Jersey
Corporation and was involved in an unrelated business prior to its entry into
the Native American gaming segment in 1993. From March 31, 1992 through January
20, 1993, the Company
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entered into a series of transactions with Great American Recreation, Inc. and
its wholly-owned subsidiary (collectively, "GAR") pursuant to which the
Company sold its assets in this unrelated business segment to GAR. Management
believes that the foregoing transactions have resulted in the satisfaction of
substantially all of the liabilities associated with these prior unrelated
business activities conducted by the Company.
With the January 1993 hiring of experienced casino industry executives,
the Company embarked on its new strategy of pursuing opportunities in emerging
segments of the gaming industry.
Native American Gaming Operations
Background on Native American Gaming
Native American casino gaming has been a rapidly growing part of the
casino gaming industry. A 1987 United States Supreme Court decision opened the
way for full-scale Native American casinos. The Supreme Court held that if a
state has legalized any form of gaming, even in a restricted form, Native
American Tribes have the right to offer the same gaming on Native American
land, free of state restrictions. In 1988, in response to this decision and to
promote Tribal economic development and self-sufficiency, Congress passed the
Indian Gaming Regulatory Act ("IGRA" or the "Act"). The Act provides the
framework for federal, state and Tribal control over Native American gaming.
Native American Tribes must negotiate compacts with their host states before
certain types of gaming are allowed. If the state does not negotiate a compact
in "good faith" with the Tribe, the Act provides that the Tribe may sue the
state in federal court to force the state to negotiate. If the state continues
to resist negotiations, the Act provides that a court-appointed mediator will
impose upon the parties either the compact proposed by the state or the
compact proposed by the Tribe.
Several states have resisted entering into Tribal/State Compacts. In
1996, the United States Supreme Court held in the case Seminole Tribe of Florida
v. Florida, that a state may assert an 11th Amendment immunity defense where a
Tribe has commenced an action to enforce the state's obligation to negotiate in
good faith. Thus, the federal courts are incapable of providing the relief
contemplated by IGRA. In response to Seminole, the Secretary of the United
States Department of Interior (the "Secretary of the Interior") has requested
comments as to how the Secretary of the Interior should implement his authority
to promulgate Secretarial procedures which would govern gaming where a state has
asserted the 11th Amendment immunity from suit. If the Secretary of the Interior
decides to adopt such procedures, and if such procedures withstood legal
challenge, the procedures would substitute for the Tribal/State Compacts.
The Act divides the types of games which may be played into two
principal classes, Class II gaming and Class III gaming. "Class II gaming"
generally consist of bingo, pull-tabs, lotto and, in some circumstances,
poker. "Class III gaming" generally consists of all other forms of commercial
gaming, including table games such as blackjack, craps and roulette, slot
machines and video gaming (including video blackjack and poker), sports
betting and pari-mutuel gaming. The forms of gaming allowed in any class vary
from state to state depending upon the terms of each Tribal/State Compact.
Class II gaming is permitted on Native American land if (a) the state in which
the Native American land is located permits such gaming for any purpose by any
person; (b) the gaming is not otherwise specifically prohibited on Native
American Land by federal law; (c) the gaming is conducted in accordance with
an approved Tribal ordinance; and (d) other miscellaneous requirements are
met. Class III gaming is permitted on Native American land if the conditions
applicable to Class II gaming are met and, in addition, the gaming is in
compliance with the terms of the compact between the Tribal government and the
applicable state government. All compacts between Tribes and states must be
approved by the Secretary of the Interior.
Operations of the Company's Subsidiaries
CGMI was incorporated on October 24, 1978, as a wholly-owned
subsidiary of Bass Leisure Group, Inc., a wholly-owned subsidiary of Bass,
PLC. CGMI operated in the Class II gaming market, primarily providing
management for high stakes bingo facilities of certain Native American tribes.
On November 19, 1993, the Company acquired all of the issued and outstanding
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shares of voting common stock of CGMI for a total purchase price of $2.6
million. At the time of CGMI's acquisition by the Company, CGMI was managing
Class II gaming facilities for the Oneida, Muckleshoot and Cow Creek Tribes.
Also, CGMI had executed a management contract with the Narragansett Tribe
which was and remains in the developmental stage. CGMI was also involved in
preliminary negotiations with regard to the execution of a Class III gaming
management contract with the Muckleshoot Tribe. As contemplated by various
agreements of the Company, CGMI's management and development rights and
obligations with the Narragansett Tribe were subsequently transferred to CDGC.
In August 1994, CGMI's management contract with the Umatilla Tribe was
approved by the NIGC. The approval followed an extensive background
investigation as required by applicable NIGC regulations into the Company's past
and current business activities and practices as well as the Company's key
employees. This approval was significant because the background investigations,
as well as certain environmental approvals, require the most time in the entire
NIGC management contract approval process. The management contracts between CGMI
and the Tonto Apache Tribe and the Muckleshoot Tribe were approved by the NIGC
in January 1995 and April 1995, respectively. The Company and its subsidiaries
invested approximately $27 million towards the expansion of existing facilities
and for the development of new Class III gaming facilities for which it had
signed contracts exclusive of the proposed Narragansett project. Of that amount,
$3.3 million represented equipment financing obtained on behalf of the Tribes.
The expenditures have included construction/expansion costs, equipment
purchases, pre-opening expenses and general working capital. The funds were
invested in the form of capital loans from CGMI to the Tribes and are required
to be repaid with interest and principal, generally over the life of the
management contracts. In September 1995, the Cow Creek Tribe prepaid
approximately $824,000 and the Muckleshoot Tribe prepaid approximately $7.6
million of loans made by CGMI to these Tribes relating to the construction of
their respective facilities. Additionally, in September, 1998 the Umatilla
Tribes made their final installment of principal and interest to CGMI. As of
June 30, 1998, CGMI was owed approximately $3,693,000 on account of remaining
tribal loans.
The Company intends to maintain a focused strategy to develop CGMI's
and CDGC's Native American gaming operations and to attempt to capitalize on its
presence in Native American gaming and general casino experience and to seek
additional management contracts.
CGMI's and CDGC's principal existing and development projects are
described below.
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Capital Gaming Management, Inc.
Tonto Apache Contract (Mazatzal Casino - Payson, Arizona).
CGMI currently manages the 35,000 square foot Mazatzal Casino for the
Tonto Apache Tribe which offers slot machines, keno, poker, pull tabs and high
stakes bingo in addition to non-gaming amenities including a restaurant, sports
bar and gift shop. The Mazatzal Casino commenced operations on April 27, 1995.
The Mazatzal Casino targets both the local Payson residents and other
persons living 75 miles to the south in the Phoenix, Arizona metropolitan
area. The Mazatzal Casino is located just south of Payson on Highway 87. In
addition to the Payson area residents, the Mazatzal Casino attracts people
from the Phoenix area on day trips and weekend vacations, particularly because
of the more desirable climate in Payson during the summer months.
On June 29, 1993, CGMI signed a five year management contract with
the Tonto Apache Tribe (the "Tonto Apache Management Contract"), to construct
and operate a Class III gaming facility which would offer slot machines, keno,
high stakes bingo, non-banking table games and OTB. The five-year term
commenced on the date the facility opened in April 1995. The Tonto Apache
Management Contract may be extended for two years at the option of the Tonto
Apache Tribe and upon application to the NIGC. The Tonto Apache Management
Contract provides for CGMI to receive a management fee of 30% of Net
Distributable Profits (as defined therein).
The Tonto Apache Management Contract between CGMI and the Tonto Apache
Tribe was approved by the NIGC on January 30, 1995. In addition, in February
1995, the Company received temporary management certification from the Arizona
State Gaming Agency and anticipates receiving full certification in the near
future.
Confederated Tribes of the Umatilla Indian Reservation Contract
(Wildhorse Gaming Resort - Pendleton, Oregon).
CGMI currently manages the Wildhorse Gaming Resort for the Umatilla
Tribes which offers video-lottery terminals, black jack, poker, OTB, keno and
high stakes bingo in addition to non-gaming amenities including a restaurant and
gift shop. The Wildhorse Gaming Resort commenced operations on March 10, 1995.
The Wildhorse Gaming Resort targets local residents of the Tri-Cities
area of southern Washington (Richland, Kennewick and Pasco). The Wildhorse
Gaming Resort site is accessible to residents within a 100 mile radius that
also includes Pendleton and Walla Walla. The Wildhorse Gaming Resort is
located approximately 200 miles east of Portland, Oregon, and targets business
travelers and tourists by attracting potential customers traveling along
Interstate 84, the main east-west freeway in northern Oregon and the location
of the historic Oregon trail.
CGMI signed a five year contract on November 9, 1993, with the
Umatilla Tribe (the "Umatilla Management Contract"), to construct, manage and
operate a Class II and Class III gaming facility. The five-year term commenced
on the date the facility opened in March 1995. The Umatilla Management
Contract provides for a management fee of 30% of Net Distributable Profits
after debt service (as defined therein). The Umatilla Management Contract may
be extended for two years if certain contingencies are met. The Umatilla
Management Contract between CGMI and the Umatilla Tribe was approved by the
NIGC on August 17, 1995, and the State of Oregon has approved the Company as
being suitable to manage/finance Native American gaming operations in the
State of Oregon.
Pueblo of Laguna Contract (Pueblo of Laguna, I-40, New Mexico)
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 a 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 ammenities. The management and development agreement, which is subject to
the approval of the NIGC, provides that CGMI will receive a management fee of
30% of "Net Distributable Profits" (as defined therein) over a term of seven (7)
years from the official date of opening of the casino. The Company currently
anticipates financing the Pueblo of Luguna Casino from existing cash reserves.
The Company is seeking third party financing as an alternative to self-financing
the casino.
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Capital Development Gaming Corp.
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 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.
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 contract 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 the 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.
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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.
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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, which
the Company believes discriminates against the Narragansett Tribe by treating
it differently than every other Tribe in the United States, 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 has
been filed by the Narragansett Tribe in the United States Court of Appeals for
the District of Columbia and is pending. The United States Court of Appeals has
held oral argument on the matter and the parties are awaiting the 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.
In spite of the set-backs caused by the invalidation of the Compact and
the application of the Chafee Rider, the Company intends to pursue the Rhode
Island Project. However, 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 will
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 June 30, 1998, has totaled
approximately $10.9 million consisting primarily of legal costs, environmental
engineering and assessment costs, design costs and other administrative costs.
At June 30, 1998, approximately $9.3 million in development costs (of the $10.9
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.
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.
Other Projects of the Company
Jena Band of Choctaws Contract. When the Company completed the
acquisition of CGMI, there was an existing management contract relating to the
development of a Class III gaming facility with the Jena Band of Choctaws Tribe
in Louisiana (the "Jena Contract"). The Jena Contract has not been submitted to
the NIGC for approval by the Tribe. Subsequent to the execution of the Jena
Contract, the Jena Band of Choctaws became a federally-recognized tribe. This
effort was funded by the Company. The Jena Tribe has advised the Company that it
does not believe it is bound by the existing agreement, and the Jena Tribe has
had discussions with other management companies. The Company intends to enforce
its rights under the Jena Contract against any third parties which interfere
with this relationship.
Native American Gaming Competition
The Native American gaming industry has experienced significant
growth in the past few years and competition by management companies for
favorable Class II and Class III contracts has increased significantly. In
contrast to the early stages of Native American gaming, well-established
companies in the primary gaming market now compete for a limited number of
Tribal management contracts as opposed to significantly smaller operations
which competed for such contracts a few years ago. As a result of such
competition, new contracts may become less lucrative to management companies
such as the Company as the Tribes have more management companies to choose
from. Additionally, many of the Company's competitors have substantially more
gaming experience, are larger and have greater financial resources to fund the
development of new Tribal gaming operations and to attract new management
contracts.
Additionally, Native American casinos experience intense competition
from other Native American casinos, state sponsored lotteries and gaming,
charitable gaming, as well as from gaming in primary markets (Nevada and New
Jersey) and secondary markets (including riverboat, dockside, card rooms, bars
and truck stop operations). There can be no assurance that such competitive
factors will not negatively impact existing or future casinos which the
Company manages.
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Reorganization
Reorganization of Crescent City Capital Development Corp. and Sale of
Discontinued Operation
Crescent City Capital Development Corp. ("CCCD"), a former
wholly-owned subsidiary of the Company, held 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 riverboat and land-based gaming industry, and to stem
operating losses, 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 (the "CCCD Reorganization Case") and sought a purchaser
for this discontinued operation.
CCCD filed a plan of reorganization under Chapter 11 of the Bankruptcy
Code (the "Bankruptcy Code") on October 13, 1995. On January 12, 1996, CCCD's
plan of reorganization was confirmed (the "January CCCD Plan of
Reorganization"). The January CCCD Plan of Reorganization was predicated upon an
agreement (the "MRI Agreement") between the Company and with Mirage Resorts,
Inc. ("Mirage") for the sale of CCCD to Mirage for $55 million plus the
assumption of certain equipment financing liabilities of up to $6.5 million. The
sale to Mirage was contingent upon certain waivers and conditions being achieved
on or before January 24, 1995, including, but not limited to, receiving all
requisite regulatory approvals to transfer the operator's license. On January
24, 1996, Mirage announced that conditions to the closing of the purchase were
not satisfied by the contractual deadline and terminated the MRI Agreement.
Although the Louisiana State Police determined on January 23, 1996 that Mirage
was suitable to hold an operator's license, the Louisiana Riverboat Gaming
Commission deferred action on the matter indicating that it needed more time to
rule on the proposed change of berth and transfer of the license from Orleans
Parish, Louisiana to Bossier Parish, Louisiana. As a consequence of the
termination of the MRI Agreement, management believed that it was in the best
interests of the Company, its senior secured noteholders and its shareholders,
to immediately pursue other alternatives for the sale of CCCD's assets.
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On February 21, 1996, the Company entered into a stock purchase
agreement (the "CMC Agreement") with Casino Magic Corp. ("CMC"), two of CMC's
wholly-owned subsidiaries, and CCCD to transfer the ownership of CCCD and
substantially all of its assets to a wholly-owned subsidiary of CMC. An Amended
Plan of Reorganization (the "Amended CCCD Plan of Reorganization") predicated
upon consummation of the CMC Agreement was confirmed by the bankruptcy court
overseeing the CCCD Reorganization Case and an order of confirmation was entered
on April 29, 1996. On May 13, 1996, the Company completed the sale of CCCD to a
wholly-owned subsidiary of CMC for an aggregate purchase price of $56.5 million,
consisting of $15 million cash, $35 million in Purchaser's Notes and the
assumption of up to $6.5 million in certain equipment liabilities. The cash and
Purchaser's Notes paid by CMC's wholly-owned subsidiary as the purchase price
for CCCD were distributed in accordance with the provisions of the Amended CCCD
Plan of Reorganization. In connection therewith, $7 million in cash and $28
million in Purchaser's Notes were distributed to First Trust National
Association (now Known as U.S. Bank Trust National Association), the indenture
trustee ("Indenture Trustee") on account of the Company's 11.5% Senior Secured
Notes due in 2001 (the "Old Senior Secured Notes"). The Amended CCCD Plan of
Reorganization also provided for the distribution to CCCD's unsecured creditors
of the proceeds of all of CCCD's remaining assets not sold to CMC.
On July 29, 1996, the Indenture Trustee for the Old Senior Secured
Notes distributed $49,986,000 in cash and Purchaser's Notes to the holders of
the Old Senior Secured Notes on account of principal and accrued interest (the
"Noteholder Distribution"). The Noteholder Distribution included $28 million
in Purchaser's Notes, as well as cash from the sale of CCCD to CMC, proceeds
from the early payment of a Tribal development loan, proceeds from the buyout
of a management contract, $3.2 million in unused restricted cash and other
sources. Subsequently, in August 1996, the Purchaser's Notes were redeemed by
CMC at 100% of the principal amount plus accrued interest.
Reorganization of the Company
As a result of the CCCD Reorganization Case, on June 13, 1995, the
Indenture Trustee notified the Company of the occurrence of certain events of
default ("Events of Default") under the Indenture with respect to the Old Senior
Secured Notes (the "Old Indenture"). The Old Senior Secured Notes were
guaranteed by CGMI and CCCD. The Event of Default cited by the Trustee related
to the assertion of various claims of creditors against Collateral (as defined
in the Old Indenture), which was pledged to secure repayment of the Old Senior
Secured Notes. In addition, on June 13, 1995, the Trustee also notified First
National Bank of Commerce ("FNBC"), the Company's Collateral Agent, that FNBC
could not make further disbursements from cash collateral accounts established
pursuant to the Old Indenture until directed by the Trustee. Additionally, the
Company failed to make interest payments on its Old Senior Secured Notes of
$7,302,500 each on August 1, 1995, February 1, 1996 and August 1, 1996, and a
$1,350,000 consent fee payment which was due to the holders of the Old Senior
Secured Notes on August 1, 1995, which also constituted Events of Default under
the Old Indenture.
In order to restructure the Old Senior Secured Notes, pursuant to
negotiations with a steering committee ("Noteholders Steering Committee")
representing more than two-thirds of the holders of the Old Senior Secured
Notes, the Company filed a voluntary petition for relief under Chapter 11 of
the Bankruptcy Code in the United States Bankruptcy Court for the District of
New Jersey (the "Bankruptcy Court") on December 23, 1996 (the "Petition Date").
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
of Reorganization (as defined below) was confirmed by the Bankruptcy 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 Bankruptcy Court.
Subject to certain exceptions under the Bankruptcy 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
Bankruptcy Court.
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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 of Reorganization"), 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.
On March 19, 1997, the Bankruptcy Court conducted a hearing regarding
confirmation of the Plan of Reorganization and entered an order confirming the
Plan of Reorganization submitted by the Company as modified by that order. As
contemplated by the Plan of Reorganization, on May 28, 1997 (the "Effective
Date"), the Company emerged from Chapter 11 and consummated the 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.
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 from liability only 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.
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Liabilities Subject to Compromise . Prior to the commencement of the
Company's Chapter 11 case, the Company incurred certain secured and unsecured
obligations. 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.
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.
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."
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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.
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.
Capital Structure Prior To The Reorganization
Preferred and Common Stock. Prior to the Effective Date, the Company
had authorized 5 million shares of preferred stock (the "Old Preferred
Stock"), of which none were issued. The Old Common Stock of the Company
consisted of 75 million authorized shares of which approximately 19.0 million
shares were outstanding immediately prior to the Effective Date. All Old
Common Stock and Old Preferred Stock were cancelled on the Effective Date.
Capital Structure Following the Reorganization
The Plan of Reorganization provided for the amendment and restatement
of the Company's Certificate of Incorporation (the "Certificate of
Incorporation") and bylaws. The Certificate of Incorporation authorizes 3.2
million shares of New Common Stock. On the Effective Date, 1,866,667 shares of
New Common Stock were issued to the Company as the disbursing agent under the
Plan of Reorganization. The New Common Stock will be distributed to various
classes of creditors pursuant to the terms of the Plan of Reorganization. In
addition, the Company's executive management became entitled to receive a total
of 66,667 shares of common stock on the Effective Date and an additional 66,667
shares on the one year anniversary date following the Effective Date. As of June
30, 1998, the Company had not allocated such shares among executive management.
Also on the Effective Date, 133,333 shares were reserved to be issued to
executive management pursuant to the Plan of Reorganization over the two-year
period after the Effective Date. Executive management will be entitled to
receive the remaining 66,666 shares on the second anniversary of the Effective
Date.
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Stock Option Plan
Pursuant to the Plan of Reorganization, the Company cancelled all of
its existing stock options and adopted the 1997 Stock Option Plan (the "Stock
Option Plan") covering 200,000 shares of the New 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 Plan of
Reorganization no more than 100,000 of the shares authorized under the Stock
Option Plan may be awarded. The Stock Option Plan expires in March 2007.
Incentive stock options granted under the Stock Option Plan to employees who are
not 10% owners are exercisable for a period of up to ten years from the date of
the 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 Stock Option Plan.
Incentive stock options granted under the Stock Option Plan to employees who are
10% shareholders are exercisable for a period of up to five years at the same
exercise price provisions. As of June 30, 1998, there were no options granted
under the Stock Option Plan.
Net Operating Loss Carryforwards ("NOLs")
The following description of the Company's net operating loss
carryforwards is based upon management's analysis of the application of the
relevant sections of the Tax Code (as herein defined) to the net operating loss
carryforwards of the Company. There can be no assurance that the Internal
Revenue Service or the courts will agree with management's analysis. There are
substantial risks associated with the Company's utilization of its NOLs. See
"Risk Factors - Net Operating Loss Carryforwards."
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 $35,214,000, 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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Certain Transferability Restrictions. In accordance with Section 10
of the Company's Certificate of Incorporation, the Company is imposing certain
transferability restrictions upon its 5-percent shareholders for purposes of
Tax Code ss. 382. These restrictions generally provide that the 5-percent
shareholders shall be prohibited from transferring shares of New Common Stock
without the consent of a designated Tax Advisor (the "Tax Advisor"). The Tax
Advisor shall have no obligation to consent to a transfer unless it determines
that the proposed transfer and any related proposed transfers do not create an
unreasonable risk of loss of, or material limitation on, the Company's use of
its net operating loss carryforwards. In the event that the Tax Advisor is
willing to consent to a transfer of New Common Stock by any one shareholder
subject to transferability restrictions, the other shareholders subject to
equivalent restrictions will be offered the opportunity to engage in a
transfer on a ratable basis. These restrictions generally expire on the
earlier of (i) the date that is two years after the Effective Date, (ii) the
date on which the Company determines that the Plan of Reorganization does not
qualify under Tax Code ss. 382(1)(5), or (iii) the date the Company's Board of
Directors in its reasonable business judgment determines that the restrictions
are no longer necessary.
Effect of Tax Code ss. 384. Congress adopted Tax Code ss. 384 in 1987 to
prevent a loss corporation from using its pre-acquisition NOLs and net
built-in losses against any net built-in gains of a corporation the control of
which (utilizing an 80% test of Tax Code Section 1504(a)(2)) is acquired by the
loss corporation or whose assets are acquired by the loss corporation in
certain types of reorganizations. The limitation of Tax Code Section 384
applies to built-in gains recognized within the five-year recognition period
after the acquisition date. Tax Code ss. 384 will prevent the Company from
utilizing its NOLs against built-in gains recognized by any acquired companies
(assuming the control test is met) within five years of the acquisition date.
Effect of Tax Code ss. 269. Tax Code ss. 269(a) provides that if:
(1) any person or persons acquire ... directly or indirectly, control
of a corporation, or
(2) any corporation acquires ..., directly or indirectly, property of
another corporation .. the basis of which property, in the hands of
the acquiring corporation, is determined by reference to the basis in
the hands of the transferor corporation;
and the principal purpose of such acquisition was the evasion or avoidance of
Federal income tax by securing the benefit of a deduction, credit, or other
allowance which such person or corporation would not otherwise enjoy, then the
Internal Revenue Service may disallow such deduction, credit or other
allowance. Control is defined to mean the ownership of stock possessing at
least 50% of the total combined voting power of all classes of stock entitled
to vote or at least 50% of the total value of shares of all classes of stock
of the corporation.
Under Treas. Reg. ss. 1.269-3(a), the determination of the purpose
for which an acquisition was made requires a scrutiny of the entire
circumstances in which the transaction or course of conduct occurred, in
connection with the tax result claimed to arise therefrom. It is uncertain
whether the Internal Revenue Service would attempt to apply Tax Code ss. 269
to the transactions provided for under the Plan of Reorganization. Arguably,
the "old and cold" creditors' receipt of Company common stock was a direct
consequence of their having extended credit to the Company. If the Old Secured
Notes of a creditor were acquired by an investor to achieve control of the
Company and thus avoid or evade federal income tax, the Internal Revenue
Service might attempt to apply Tax Code ss. 269 to prevent the Company from
utilizing its NOLs.
Risk Factors
In addition to other information contained elsewhere in this
document, the reader of this Annual Report on Form 10-K for the fiscal year
ended June 30, 1998 should consider carefully the factors set forth below.
Net Operating Loss Carryforwards. While management believes that the
Net NOLs of the Company and its subsidiaries are approximately $35,214,000 as
of June 30, 1998 (see "Description of Business - Net Operating Loss
Carryforwards - Application of Tax Code ss. 382 Under The Chapter 11
Reorganization), there are risks that the NOLs may have been significantly
diminished or lost as a result of the cancellation of indebtedness occasioned by
the Plan of Reorganization and possible subsequent transfers of rights to
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receive New Common Stock under the Plan of Reorganization to the extent that
Tax Code ss. 382(1)(5) does not apply to the ownership change associated with
the implementation of the Plan of Reorganization. There are also risks
associated with the Company's use of its NOLs to reduce Federal income tax
payments, including the possibility that the Internal Revenue Service may seek
to challenge such use, that the Company may be unable to produce significant
levels of taxable income prior to the expiration of the NOLs and that a
subsequent "change in ownership" of the Company may occur which would cause
the Company to lose all or a substantial portion of the NOLs. Although the
Company has attempted to take steps to restrict transfers of New Common Stock
in order to avoid a future "change in ownership," there can be no assurance
that these steps will be successful. See "Description of Business - Net
Operating Loss Carryforwards" and Consolidated Financial Statements.
Substantial Indebtedness of the Company; Potential Limited Capacity
to Satisfy Repayment Obligations. As of June 30, 1998, the total amount of
outstanding Company long-term indebtedness was equal to $23,100,000 comprised
of the New Senior Secured Notes. As a result of the Company's indebtedness,
the Company has significant interest and principal repayment obligations, and
substantial cash is required to fulfill these obligations. This level of debt
poses a substantial risk to the holders of the Company's securities, including
the risk that the Company might not generate sufficient cash flow from
existing operations to service the Company's debt and the risk that the
Company could have limited financial capacity to respond to changes in market
conditions, extraordinary or unanticipated capital needs, shortfalls in
projected cash flow from operations or other changes. Because of the amount of
the Company's indebtedness, the Company's financial condition could be
materially adversely affected by a decline in revenues or an increase in
expenses. Additionally, the Company believes it will require new sources of
cash beyond its existing operations in order to fund the final payment of
principal on its New Senior Secured Notes in 2001.
Expirations of Management Contracts. With the exception of the Pueblo
of Laguna contract, CGMI's management contracts all currently expire in the
first half of the year 2000. The ability of the Company to service its debt is
highly dependent upon the acquisition of new management contracts. There can be
no assurance that the Company will be able to attract a sufficient number of new
management contracts to replace existing ones.
Need for Additional Financing for the Development of Gaming
Facilities. The development, management and operation of Native American
gaming, other gaming establishments and ancillary and complimentary
businesses is time consuming and capital intensive. Substantial capital is
needed to finance the licensing, development, construction, architectural,
engineering, equipping, legal and accounting fees and operating expenses
associated with the management, development and operation of casino gaming
establishments. It is anticipated that the Company will require significant
additional capital in order to fund future projects, including, without
limitation, the Narragansett project. There can be no assurance that such
financing will be available or, if available, that the terms thereof will be
attractive to the Company. No financing commitments for future capital needs
have been obtained as of the date hereof.
Need to Comply with Strict Statutory and Regulatory Standards in the
Gaming Industry; Expansion Dependent upon Favorable Regulatory Dispositions.
In order to enter the Native American gaming and other gaming businesses in
new jurisdictions, the Company will be subject to regulation by each state in
which it conducts business, and to a certain extent, federal and Tribal law.
See "Business -- Native American Gaming Operations" and "Business -- Company's
Strategy". In jurisdictions where gaming has recently been legalized, gaming
cannot begin until a licensing and regulatory framework is promulgated and
regulatory commissions are appointed, staffed and funded. The regulatory
framework adopted by any jurisdiction may impose restrictions or costs that
would materially detract from the profitability of gaming operations. The
Company must obtain a gaming license for each location where it will operate
or manage a gaming casino, and each of the Company's officers, directors,
managers and principal shareholders is subject to strict scrutiny and approval
by the gaming commission or other regulatory body of each state in which the
Company may conduct gaming operations. After a gaming license or approval is
obtained by the Company, regulatory authorities have broad powers with respect
to the licensing of casino operations, and may revoke, suspend, condition or
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limit the Company's gaming licenses, impose substantial fines and take other
actions, any one of such actions could have a material adverse effect on the
Company's business.
Congress and the States historically have permitted, restricted and
abolished gaming from time to time depending on prevailing public attitudes.
Congress and the States each have the power to restrict or eliminate gaming at
any time. Any federal or state action to limit Native American or other types of
gaming may have a material adverse effect on the Company. In particular, the
Native American gaming industry has had a limited operating history and there is
uncertainty concerning the future of the industry because of the rapidly
changing and increasingly hostile legal, regulatory and political environment,
as evidenced by the activities of the National Gambling Impact Study Commission.
Further, if new legislation is enacted by Congress further restricting Native
American gaming, it may apply retroactively.
Gaming operators are typically subject to significant taxes and fees
in addition to normal Federal and state corporate income taxes which do not
apply to other industries. Such taxes and fees are generally in excess of 12%
of gaming revenues, may exceed 25% in some jurisdictions and are subject to
increase at any time. Any material increase in these taxes or fees would
adversely affect the Company. The Company anticipates the payment of
substantial taxes and fees with respect to its existing and future operations.
Competition. The Native American gaming industry and the gaming
industry as a whole, and businesses which are ancillary or complimentary to
these industries, are highly competitive (See "Business -- Native American
Gaming Competition"). As the Native American gaming and other secondary gaming
industries emerge, the Company expects that new competitors will enter the
market. Some of the competitors of the Company will have more personnel and
substantially greater finances, technology, gaming industry experience,
political experience and other resources than the Company.
The Company expects substantial competition for new projects as new
companies enter the market and/or industry consolidation creates new
competition. This competition could cause increases in the cost of securing
favorable new projects. The Company's Native American gaming casinos compete
with other forms of gaming, including land-based casinos, other Native
American casinos, riverboat and dockside gaming, bingo and pull-tab games,
pari-mutuel betting on horse racing and dog racing, state-sponsored lotteries
and gaming in bars and truck stops.
The Native American gaming industry has also experienced significant
growth in the past few years and competition by management companies for
favorable Class II and Class III contracts has increased significantly. In
contrast to the early stages of Native American gaming, well-established
companies in the primary gaming market now compete for a limited number of
Tribal management contracts as opposed to significantly smaller operations which
competed for such contracts a few years ago. As a result of such competition,
new contracts are becoming less lucrative to management companies as Tribes have
more management companies to choose from. Additionally, many of the Company's
competitors have substantially more Native American gaming experience, are
larger and have greater financial resources than that of the Company to fund the
development of new Tribal casinos and attract new management contracts.
New jurisdictions may legalize various forms of gaming that may compete
with the operations of Company. If other forms of gaming, including casino
gaming, are legalized in additional jurisdictions, existing or future gaming
establishments in which the Company may become involved will compete with these
new forms of legalized gaming. The Company expects that many of its competitors
will have more gaming industry experience, will be larger and will have
significantly greater financial and other resources than the Company. Given
these factors, it is possible that the competition will increase in the casino
gaming industry and that the Company's existing or future operations will not be
profitable.
Loans to Tribes; Limited Recourse Against Tribes. In general, Native
American Tribes do not make any equity investments in the construction,
development or equipment of casinos. With respect to existing and future
projects, the Company has been or will be required to make loans to Tribes for
all of the costs associated with the construction, development, equipment and
operation of casinos managed and to be managed by the Company. These loans are
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not conventional real estate and construction loans subject to customary
mortgages and encumbrances. If the casinos that the Company manages do not
generate sufficient cash flow, the Company's loans will not be repaid.
Native American Tribes are sovereign nations and are generally immune
from legal proceedings commenced in state or federal courts. Also,
congressional policy has mandated limited liability of Native American Tribes
in such cases. Thus, the Company's only recourse for collection of
indebtedness from a Tribe or money damages for breach or wrongful termination
of a management contract would be from revenues, if any, from casino
operations. Although CGMI and CDGC normally seek and obtain limited waivers of
sovereign immunity from Tribes, these waivers are difficult to enforce,
particularly prior to receipt of NIGC approval of a management contract. In
the event that the Company should make loans to a Native American Tribe, the
Company may be required to subordinate such Tribal loans and other
distributions due the Company from the Tribe to other obligations of the Tribe
related to that casino. Accordingly, in the event of a default by the Tribe,
the Company's loans to that Tribe may not be repaid until the Tribe's senior
creditors have been repaid in full.
Relationships with Native American Tribes. Native American Tribes are
sovereign nations with their own governmental systems. Tribal officials are
subject to replacement by appointment or election. The Company's relationship
with a Tribe may improve or deteriorate under new administrations. Good
relationships with Native American Tribes and their officials are critical to
the Company's ability to obtain and renew management contracts. A
deterioration in the relationship between the Company and a Tribe would have a
material adverse effect on the Company, including possible termination of
management contracts.
Tribal/State Compacts. Management contracts and the operation of
casinos on Native American land, including the right to offer certain types of
gaming, are subject to Tribal/State Compacts, the terms of which vary from
state to state, and may vary from Tribe to Tribe within a state. At least 20
states have signed Tribal/State Compacts with Native American Tribes that
permit certain types of casino gaming on Native American land. Changes in
state gaming laws may limit the types of gaming that are eligible for
Tribal/State Compacts. The repeal of any Tribal/State Compact or any amendment
that limits the types of gaming that may be conducted on Native American land
in the state may have a material adverse effect on the Company. Certain states
have resisted entering into or renegotiating existing Tribal/State Compacts,
and Tribal/State Compacts have been the subject of litigation in several
states. The Company cannot predict which states, if any, will allow casino
gaming on Native American land, the timing of any such approvals or whether
the states will attempt to renegotiate such compacts in the future.
Risks of Construction. Native American gaming and other gaming
projects and ancillary business construction projects which the Company is
expected to undertake entail risks, including delays in construction,
shortages of material or skilled labor, unforeseen engineering and/or
geological problems, including dredging of waterways to facilitate riverboat
casino gaming, work stoppages, weather interference and unanticipated cost
increases. Pursuant to typical construction contracts, the Company may have to
pay certain construction cost overruns. The Company anticipates that expenses
in connection with the dredging of waterways to facilitate riverboat casino
gaming will be substantial depending upon the location and site conditions.
Construction, equipment or staffing problems or difficulties obtaining any of
the requisite licenses, permits and authorizations from regulatory authorities
may delay the construction or opening of casinos which the Company may
develop.
Native American Gaming Regulation. Gaming on Native American lands is
extensively regulated under federal and state law, Tribal/State Compacts and
Tribal law. The NIGC oversees Class II gaming (essentially bingo and similar
games) and, to a lesser degree, Class III gaming (e.g., slots, casino games
and banking card games). The actual regulation of Class III gaming is
determined pursuant to the terms of Tribal/State Compacts, which govern gaming
on Tribal lands.
The terms and conditions of management contracts for the operation of
gaming facilities on Native American lands are governed by IGRA, which is
administered by the NIGC. Under IGRA, the NIGC must approve all management
contracts between Native American Tribes and managers of Tribal gaming
facilities.
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Historically, the Secretary of the Interior, acting through the
Bureau of Indian Affairs (the "BIA"), was charged with the review of
management contracts and collateral agreements, such as promissory notes and
security agreements executed in connection with management contracts. Though
IGRA became law in 1988, the BIA retained approval authority of management
contracts and collateral agreements until February 22, 1993, the effective
date of the regulations regarding the approval of management contracts by the
NIGC.
The NIGC regulations provide detailed requirements as to certain
provisions which must be included in management contracts, including a term not
to exceed five years except, upon the request of a Tribe, a term of seven years
may be allowed by the NIGC Chairman if the Chairman is satisfied that the
capital investment and income projections for the gaming facility require the
additional time. In connection with the Pueblo of Laguna Contract, there can be
no assurance that the NIGC will approve a term of seven (7) years for the
management agreement. Further, the fee received by the manager of a gaming
facility may not exceed 30% of the net revenues except that a fee of 40% of net
revenues may be approved if the NIGC Chairman is satisfied that the capital
investment and income projections for the gaming facility require the additional
fee.
In addition, in order for the management agreements to be approved by
the NIGC, the Company, its directors, persons with management responsibilities
and certain of the Company's owners, must provide background information and be
investigated by the NIGC to be found suitable to be affiliated with a gaming
operation. The NIGC regulations provide that each of the ten persons who have
the greatest direct or indirect financial interest in a management contract must
be found suitable in order for the management agreement to be approved by the
NIGC. The NIGC regulations also provide that any entity with a financial
interest in a contract must be found suitable, as must the directors and ten
largest shareholders of such entities in the case of a corporate entity, or the
ten largest holders of interest in the case of a trust or partnership. However,
the Chairman of the NIGC may reduce the scope of information to be provided by
institutional investors. At any time, the NIGC has the power to investigate and
require the finding of suitability of any person with a direct or indirect
interest in a management agreement, as determined by the NIGC. The Company must
pay all fees associated with background investigations by the NIGC.
The NIGC regulations require that the background information described
above must be submitted for approval within ten days of any proposed change in
financial interest in a management contract. The NIGC regulations do not address
any specialized procedures for investigations and suitability findings in the
context of publicly held corporations. If, subsequent to the approval of a
management contract, the NIGC determines that any of its requirements pertaining
to the management contract have been violated, it may require the management
contract to be modified or voided, subject to rights of appeal. In addition, any
amendments to the management contract must be approved by the NIGC.
The NIGC regulations provide that a management contract must be
disapproved if the NIGC determines that: (1) any person with a direct or
indirect financial interest in, or having management responsibility for, a
management contract has been convicted of a felony or any misdemeanor gaming
offense; (ii) has engaged in prior activities which make him unsuitable to be
connected with gaming; (iii) is an elected member of a Tribe that is party to
the management contract; or (iv) has provided false statements to the NIGC or
a Tribe or has refused to respond to questions from the NIGC; (2) the
management contractor has attempted to unduly interfere with or influence
Tribal decisions relating to the gaming operation or has failed to follow the
management contract and applicable Tribal ordinances; or (3) a trustee would
not approve the management contract.
Several bills have been introduced in Congress which would amend IGRA.
If IGRA is amended, it could change the governmental structure and requirements
within which the Tribe could conduct gaming.
Each of CGMI's Native American gaming management projects is also
regulated by state and/or Tribal gaming commissions. The Company and CGMI have
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submitted applications for licenses to manage and finance Native American
gaming operations with the various applicable Tribal and state gaming
commissions for Arizona, Oregon and Washington and have subsequently received
permanent or temporary gaming licenses from each of such Tribes and states,
permitting them to act as managers/financiers of Native American gaming
operations in such states.
To the best of its knowledge, CGMI is presently in material
compliance with all applicable gaming rules and regulations.
The Amended Indenture. The Company is subject to certain restrictive
covenants pursuant to the Amended Indenture. The Company is also required to
repurchase the New Senior Secured Notes under certain conditions. See
"Business--Debt After Reorganization--Description of Amended Indenture."
Continued Listing on NASDAQ. On June 25, 1997, the New Common Stock
was delisted from the OTC-Electronic Bulletin Board by NASDAQ because there
were no longer any market makers for the New Common Stock. The Company has
contacted and will continue to contact its former market makers to encourage
such entities to submit the necessary documents to NASDAQ to become market
makers of the New Common Stock. There can be no assurance that the Company
will be able to attract a sufficient number of market makers for the New
Common Stock to be relisted on the OTC Electronic Bulletin Board or that
NASDAQ will approve an application by the Company for relisting. As of the
date hereof, there is no established public trading market for the New Common
Stock.
Dependence Upon Key Personnel. The Company is substantially dependent
upon the experience and abilities of key executives whose experience in gaming
and requisite licensure makes them unique. While the Company has employment
agreements with key executives, the loss of their services could materially
adversely affect the Company.
Suitability of Associated Persons. The NIGC, state and Tribal gaming
regulatory agencies closely regulate the suitability of persons owning or
seeking to renew an interest in a gaming license or permit. Such suitability
can be adversely affected by persons associated with licensees or permitees.
Additionally, any person or entity having any direct or indirect interests in
the Company or any casino directly or indirectly owned by the Company,
including holders of shares of New Common Stock, the New Senior Secured Notes
or any warrants or options to purchase shares of New Common Stock may be
subject to administrative action, including personal history and background
investigations. The actions of such associated persons over whom the Company
may have no control could jeopardize any licenses held by the Company.
Repurchase of Securities Relating to Gaming Matters. Persons who
acquire beneficial ownership of the Company's securities may be subject to
certain reporting and qualification procedures established by regulatory
authorities. Such regulatory scrutiny and related limitations could adversely
affect the marketability of the Company's securities. The Amended Indenture
provides that the New Senior Secured Notes may be redeemed by the Company at
par from holders of Senior Secured Notes if the Company believes such action
is required to prevent impairment of a material gaming license and in certain
other circumstances. The Company has amended its Certificate of Incorporation
to provide that if the Company reasonably determines that ownership of its
securities by any person or entity will either preclude, interfere with,
threaten or delay the issuance of or jeopardize the maintenance and existence
of any gaming license or result in the imposition of burdensome terms or
conditions on such license, the Company will have certain rights to repurchase
such securities or to require the sale of such securities. Accordingly, in
certain situations, a holder of such securities could be subject to the risk
of forfeiture or compelled sale.
Environmental Matters. The Company is subject to certain Federal, state
and local environmental protection, health and safety laws, regulations and
ordinances that apply to non-gaming businesses generally, such as the Clean Air
Act, Clean Water Act, Resource Conservation and Recovery Act, CERCLA,
Occupational Safety and Health Act and similar statutes. To the best of its
knowledge, the Company believes that it is in material compliance with all such
statutes, regulations and ordinances thereunder.
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Bank Secrecy Act. Similar to banks and other financial institutions,
casinos are required to monitor and report currency receipts and disbursements
in excess of a certain limit to the United States Department of the Treasury.
Under amendments recently adopted by the Department of the Treasury, casinos
must obtain and document customer identification data for all currency
transactions above a specified amount. These requirements impose recordkeeping
requirements on the Company which may increase its overall cost of operations.
However, the Company does not believe that such requirements will have a
material adverse impact on the financial condition or operations of the
Company.
Certain Local Regulations.
The Company must also obtain liquor licenses from state regulatory
agencies for each of its proposed operations. Rules and regulations in this
regard are strict and the loss of such licenses is possible for regulatory
violations. The loss or suspension of a liquor license could significantly
impact a licensee's operations. Local building, health and fire codes and
similar regulations could also impact the Company's operations. Violations of
any of such statutes, codes or regulations could have a material adverse impact
on the financial condition or operations of the Company.
Employees
The Company and its subsidiaries had 12 employees at fiscal year ended
June 30, 1998.
ITEM 2. PROPERTIES
CGMI leases 2,646 square feet of office space in Phoenix, Arizona
pursuant to a lease agreement which expires December 31, 2001.
ITEM 3. 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
In connection with the consummation of the Company's Plan of
Reogranization, Republic Corporate Services, Inc. ("Republic") is to receive a
distribution on account of its unsecured claims equal to its pro-rata share of
the 150,000 shares of New Common Stock and of $550,000 in New Secured Notes to
be distributed to the holders of Allowed Class 4 Claims other than the Indenture
Trustee. On August 20, 1997 the Arizona Department of Gaming ("ADOG") notified
the Company that ADOG would conduct a background investigation of Republic prior
to issuing a permanent certification to the Company. This notification was
communicated to Republic by the Company and ADOG sent further notification to
Republic on October 5, 1997. In response to ADOG's August 20, 1997 notification,
the Company had notified Republic that a License Event had occurred as defined
in, and pursuant to, the Company's Amended and Restated Certificate of
Incorporation ("Amended Certificate") and that the Company invoked its right to
have Republic's equity securities distributed to an independent trustee and that
the Company further intended to redeem such securities in accordance with the
terms of the Amended Certificate. On November 5, 1997, Republic filed a
Complaint for Declaratory Judgment, Specific Performance and Other Relief with
the U.S. Bankruptcy Court for the District of New Jersey seeking a declaration
that its ownership of equity securities is not a License Event or, in the
alterative, that if such equity ownership is a License Event then, in effect,
Republic's equity securities should be redeemed at $2.38 per share and its New
Secured Notes should be redeemed at par. On April 16, 1998, the Company and
Republic entered into a stipulation of settlement which provides, among other
things, that any equity securities slated for distribution to Republic pursuant
to the Plans will be distributed to a possession trustee and provides that
William S. Papazian, Executive Vice President and General Counsel of the
Company, will maintain all voting rights with respect to such equity securities
pursuant to a Voting Trust until such time as such securities are sold to a
suitable purchaser.
2. Muckleshoot Litigation
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.
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In response to the termination of the contract, the Company commenced
litigation in the U.S. District Court in the Western District of Washington at
Seattle, ("U.S. District Court") and 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.
See also "Risk Factors - Potential Default Under Amended Indenture".
Reorganization of the Company
The Company filed a voluntary petition for relief under Chapter 11 of
the Bankruptcy Code in the United States Bankruptcy Court for the District of
New Jersey on December 23, 1996 (the "Petition Date"). 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 of Reorganization was
confirmed by the Bankruptcy 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 Bankruptcy
Court.
On the Petition Date, the Company filed its Plan of Reorganization,
and an accompanying disclosure statement (together with all subsequent
amendments and modification, the "Disclosure Statement"). The Disclosure
Statement was approved by the Bankruptcy Court on February 6, 1997.
On March 19, 1997, the Bankruptcy Court conducted a hearing regarding
confirmation of the Plan of Reorganization and entered an order confirming the
Plan of Reorganization submitted by the Company as modified by that order. As
contemplated by the Plan of Reorganization, on the Effective Date the Company
emerged from Chapter 11 and consummated the Plan of Reorganization.
For further details on the Company's reorganization and for
information regarding the reorganization of CCCD, a former subsidiary of the
Company, see "Business-Reorganization".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended June 30, 1998, no
matter was submitted to a vote of security holders, through the solicitation
of proxies or otherwise.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Through June 24, 1997, the New Common Stock was eligible for trading on
the OTC-Electronic Bulletin Board. On June 25, 1997, the New Common Stock was
delisted from the OTC-Electronic Bulletin Board by NASDAQ because there were no
longer any market makers for the New Common Stock. There can be no assurance
that the Company will be able to attract a sufficient number of market makers
for the New Common Stock to be relisted on the OTC Electronic Bulletin Board or
that NASDAQ will approve an application by the Company for relisting. As of the
date hereof, there is no established public trading market for the New Common
Stock.
As of June 30, 1998, there were 283 holders of record of the New Common
Stock.
The Company is currently authorized under its Certificate of
Incorporation to issue up to 3,200,000 shares of New Common Stock.
The following table sets forth the range of high and low bid prices
for the Common Stock and Investor Warrants, as reported by the NASDAQ Stock
23
<PAGE>
Market for the periods indicated. The prices set forth below represent quotes
between dealers and do not include commissions, mark-ups or mark-downs, and
may not necessarily represent actual transactions.
The Investor Warrants were issued in the Company's private placement
financing in February 1994 and were listed on the NASDAQ SmallCap Market on
August 12, 1994. All the Investor Warrants were cancelled pursuant to the Plan
of Reorganization.
Common Stock Investor Warrants
Calendar Quarter High Low High Low
1995:
Third Quarter $0.69 $0.16 $0.23 $0.01
Fourth Quarter $0.38 $0.07 $0.06 $0.01
1996:
First Quarter $0.30 $0.10 $0.08 $0.02
Second Quarter $0.30 $0.13 $0.05 $0.03
Third Quarter $0.14 $0.06 $0.05 $0.03
Fourth Quarter $0.12 $0.02 $0.07 $0.001
1997:
First Quarter $0.08 $0.01 $0.001 $0.001
Second Quarter* $0.03 $0.125 $0.02 $0.01
* -- On June 25, 1997, the New Common Stock was delisted from the
OTC-Electronic Bulletin Board by NASDAQ, accordingly, subsequent balances have
not been updated.
The Company has never paid and does not presently anticipate the
payment of cash dividends in the foreseeable future. It is the present
intention of the Board of Directors to retain earnings, if any, to provide for
the growth of the Company. Payment of dividends in the future will depend,
among other things, upon the Company's ability to generate earnings, its need
for capital and its financial condition. Additionally, the Company's ability
to pay dividends is limited by the Amended Indenture and applicable state law.
ITEM 6. SELECTED FINANCIAL DATA (1)
The selected consolidated financial data set forth below for each of
the last five fiscal years ended June 30, is derived from the Company's
consolidated financial statements and notes. Due to the Company's
reorganization, comparisons of 1997 to prior years may be of limited use in
determining operating or other financial trends in the Company's business.
This data should be read in conjunction with the consolidated financial
statements of the Company and the notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
24
<PAGE>
IN THOUSANDS, EXCEPT SHARE DATA
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Reorganized |
Company Prececessor Company
-------------------------------| ----------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Year May 29, |
Data (1)(2) Ended 1997 |
June Through | July 1, 1996
30, June 30, | Through
1998 1997(A) | May 28, 1997 Years Ended June 30,
| ---------------------------------
| 1996 1995 1994(3)
- -------------------------------------------------------------------------|--------------------------------------------------
Gross Revenues $ 8,150 $ 753 | $ 7,447 $ 7,663 $ 10,637 $ 1,724
Operating Expenses 12,881 1,921 | 7,238 14,441 111,908 16,580
Reorganization Items (Expense) -- -- | (50,805) (600) -- --
Other Income (Expense) (2,087) (168) | (6,603) 3,660 (15,605) (9,312)
(Loss)Income Before Extraordinary Items(4) (7,154) (1,351) | (44,288) (4,039) (116,876) (23,685)
Loss on Early Extinguishment of Debt -- -- | (1,998) -- -- --
Gain From Reorganization Items -- -- | (103,464) -- -- --
Net (Loss) Income (7,154) (1,351) | 145,754 (4,039) (117,709) (23,784)
- -------------------------------------------------------------------------|--------------------------------------------------
Earnings Per Share:(B) |
Income (Loss) Before Extraordinary Item ($3.82) ($0.72) | N/A N/A N/A N/A
Income From Discontinued Operations -- -- | N/A N/A N/A N/A
Gain From Reorganization Items -- -- | N/A N/A N/A N/A
Net (Loss) Income ($3.82) ($0.72) | N/A N/A N/A N/A
Weighted Average Shares Outstanding(A)(B) 1,872,694 1,866,667 | N/A N/A N/A N/A
|
|
- -------------------------------------------------------------------------|--------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Reorganized |
Company |
------------------ | Predecessor Company
as of June 30, | as of June 30,
------------------ | ------------------------------------
Balance Sheet Data (1): 1998 1997 | 1996 1995 1994 (3)
- ----------------------------------------------------------------|---------------------------------------
<S> <C> <C> <C> <C> <C>
|
Working Capital (Deficit) (4) 5,991 6,431 | (118,020) (143,893) 26,545
Total Assets 16,721 25,114 | 60,048 82,977 168,906
Long-Term Debt (4) 23,100 23,100 | -- 20,293 150,815
Total Liabilities 24,826 26,065 | 160,308 179,199 158,928
Stockholder's Equity (Deficit) (8,105) (951) | (100,260) (96,222) 9,979
Ratio of Earnings to Fixed Charges (5) (5) | (5) (5) (5)
- ----------------------------------------------------------------|---------------------------------------
</TABLE>
(1) As a result of the closure of the River City Joint Venture in 1995 and the
Company's reorganization in 1997, the comparability and informative value of
information reflected in the forgoing selected financial data with respect to
the fiscal years ended June 30, 1997 and 1995 may not be meaningful for the
reader of this Annual Report on Form 10-K for the fiscal year ended June 30,
1998.
25
<PAGE>
(2) Includes non-recurring income of $4,196,000 at June 30, 1995 received by the
Company in connection with discontinued operations.
(3) For the fiscal year ended June 30, 1994, the balance sheet data is
reflective of $159,711,000 in proceeds from the debt and equity offering
received in January 1994.
(4) As a result of the closure of the River City Joint Venture in New Orleans
in June 1995, substantial write-downs of assets cost were recorded
contributing to a significant loss from the closure. The working capital
deficit at June 30, 1996 and 1995 includes the classification of $124,020,000
and $123,377,000 respectively in Senior Secured Notes as current and
$19,000,000 in unsecured notes as current in 1996.
(5) Earnings are inadequate to cover fixed charges.
(A) Commencement of fresh start reporting in connection with the consummation
of the Company's reorganization after the Effective Date. See "Business -
Reorganization" for further details.
(B) The weighted average number of common shares outstanding and net income
per common share for the predecessor company (periods through May 28, 1997
(the Effective Date)) have not been presented because, due to the Company's
reorganization and implementation of fresh-start reporting, they are not
comparable to subsequent periods and are therefore irrelevant. See "Business -
Reorganization" for further details.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Selected Consolidated Financial Data and the Company's Consolidated
Financial Statements and the related notes thereto appearing elsewhere in this
Annual Report on Form 10-K for the fiscal year ended June 30, 1998.
As a result of the sale of the Company's former unrelated business
and disposal of certain gaming operations as well as the reorganization of the
Company's indebtedness, the comparability and informative value of
year-to-year comparisons may not be meaningful or precise.
Notice Regarding Forward-Looking Statements
To the extent the information contained in this discussion and
analysis of consolidated financial condition and results of operations and the
information included elsewhere in this Annual Report on Form 10-K for the
fiscal year ended June 30, 1998 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 this Annual
Report on Form 10-K 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 fiscal year ended June 30, 1998, the
Company had a net increase in cash and cash equivalents of $575,000, of which
$3,726,000 was used in Company operating activities, and $4,301,000 was provided
by Company investing activities.
Operating Activities: Cash flows from operating activities for fiscal
year 1998 were provided by (i) Native American casino management fees of
approximately
26
<PAGE>
$8,191,000, and (ii) interest income of $832,000. Signifcant operating activity
balances required to reconcile the Company's GAAP accrual net loss of $7,154,000
to net cash flows used in operating activities include (i) depreciation and
amortization of $3,153,000, (ii) the writedown of $1.3 million in excess
reorganization value (see Footnote [5] to the Consolidated Financial
Statements), (iii) a decrease in Native American management fees and other
receivables of $62,000, (iv) a decrease in interest receivable of $43,000, (v) a
decrease in prepaid expenses and other assets of $185,000, (vi) a decrease in
notes receivable-other of $100,000, (vii) a decrease in officer loans of
$250,000, due to the repayment of the loans in fiscal year 1998 (viii) an
increase in accrued interest receivable of $95,000, and (ix) an increase of
$147,000 for state income taxes payable.
Significant operating activity cash outflows required to reconcile the
Company's GAAP, accrual net loss to net cash flows used in operating activities
include (i) the payment of $426,000 to a trustee for the benefit of the
creditors of the Old Senior Secured Noteholders, and (ii) a decrease in accounts
payable and accrued expenses of $1,481,000. The decrease in accounts payable and
accrued expenses is primarily attributable to fewer accounts payable outstanding
as of June 30, 1998 due to the confirmation of the Company's Plan of
Reorganization on May 28, 1997 which created a larger accounts payable balance,
and the more timely payment of payables in fiscal 1998.
Investing Activities: For the year ended June 30, 1998, the Company
provided $4,301,000 in net cash inflows from investing activities. Cash flows
from investing activities were provided by (i) $3,939,000 in repayment of Native
American loans/advances, (ii) increased by $385,000 for a decrease in restricted
funds, and (iii) reduced by $23,000 for purchased furniture, fixtures and
equipment in fiscal 1998.
Financing Activities: The Company did not have any financing activities
for the fiscal year ended June 30, 1998.
The Company's source of cash for the next twelve months is expected to
be derived from the receipt of management fees and the receipt of debt service
payments on the Native American loans. 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. As of June 30, 1998, the Muckleshoot Casino does not have a loan
receivable balance payable to the Company. In the event conditions arise, for
whatever reasons, that cause a reduction or elimination in such sources of cash,
the Company may not be able to continue operations or service its debt.
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 ammenities. 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, if any, will be repaid by the Pueblo of Laguna Casino Project over an
anticipated seven year period.
Capital Requirements. The Company will continue to operate, through
CGMI, the Tonto Apache and Umatilla casinos pursuant to the related management
agreements, installment payments on the Muckleshoot settlement, management fees,
and principal and interest loan repayments from the proposed Pueblo of Laguna
Casino Project. Absent any new developments, these agreements, along with
debt-service payments on the Tribal Loans with Tonto Apache and Umatilla Tribes
and cash and cash equivalents at June 30, 1998 of $4,498,000, will provide the
Company with its only source of cash for the approximately one and one-half
years remaining on the contracts. 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.
27
<PAGE>
In order to complete the funding of the construction or acquisition
costs of new projects, excluding the planned Laguna Pueblo 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 currently planned 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.
28
<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
protocol 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 protocol, 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 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.
29
<PAGE>
RESULTS OF OPERATIONS
Overview
The following discussion about the Company's results of operations
includes the Company and its subsidiaries, CGMI, and CDGC. It also includes CCCD
until May 23, 1996, the date on which all of the shares of CCCD were sold to a
wholly-owned subsidiary of Casino Magic Corporation. The results of operations
of CCCD for the year ended June 30, 1996, includes its 50% interest in losses of
River City Joint Venture, a general partnership whose other equal partner was
Grand Palais Riverboat, Inc. (then a wholly owned subsidiary of Hemmeter
Enterprises, Inc.).
On the Petition Date, the Company, apart from its subsidiaries, filed
a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. On
the Petition Date, the Company filed its Plan of Reorganization. As
contemplated by the Plan of Reorganization, on the Effective Date, the Company
emerged from Chapter 11 and consummated the Plan of Reorganization.
On the Effective Date, upon emergence from bankruptcy, the Company
adopted fresh-start reporting as required by American Institute of Certified
Public Accountants ("AICPA") Statement of Position 90-7. Under fresh-start
reporting, all assets and liabilities were restated to reflect their
reorganization value which represents the fair value of the entities under
Reorganization. As a result of adopting fresh-start reporting, the consolidated
financial statements of the Reorganized Company are not comparable with those of
the Predecessor Company prepared before the Effective Date.
In addition to the Plan of Reorganization, and in furthering its
strategy of reducing operating expenses, the Company's Board of Directors
approved an informal Business Plan for Consolidating Operations (the "Business
Plan"). The Business Plan called for the closure of the Company's New Jersey
headquarters offices and the relocation of the Company's headquarters to its
current Phoenix, Arizona offices, thereby gaining substantial efficiencies of
operations, better communications amongst management and significant
reductions in staffing and administrative costs on a prospective basis.
As a consequence of the implementation of its Business Plan, and the
resultant consolidation of operations, the Company effected a change in the
method used to distribute operating expenses among the Company and its
subsidiaries. Effective in June 1997, all staffing costs (with the exception of
officers of the Company), selling, and most general and administrative expenses
of the Company are charged to CGMI as the primary operating entity of the
Company. The Company's officers payroll expenses and public company general and
administrative expenses are charged to the Company. CDGC continues to be charged
with the expenses relating to the development of the Narragansett project.
Accordingly, the results of operations for each of the entities of the
reorganized Company are not necessarily comparable to that of the predecessor
Company. As such, the following discussion of the results of operations for
fiscal 1998 as compared to fiscal 1997, and fiscal 1997 as compared to fiscal
1996 is presented on a consolidated basis only.
FISCAL 1998 COMPARED TO FISCAL 1997
As a consequence of the Company's fresh-start accounting, reporting
for the fiscal year ended June 30, 1997, is accomplished by combining the
results of operations for the Reorganized Company (May 29, 1997 through June
30, 1997) and the Predecessor Company (July 1, 1996 through May 28, 1997).
30
<PAGE>
The following table sets forth certain key elements of the results of
operations for the combined periods discussed above:
<TABLE>
<CAPTION>
| Reorganized Predecessor
| Company Company
Fiscal Fiscal | May 29, 1997 - July 1, 1996-
1998 1997 (1) | June 30, 1997 May 28, 1997
<S> <C> <C> | <C> <C>
REVENUES: |
Management Fees $ 8,150,000 $8,200,000 | $ 753,000 $ 7,447,000
----------- ----------- | ---------- -----------
|
COSTS & EXPENSES |
Salaries, Wages & Related 3,284,000 2,006,000 | 188,000 1,818,000
Native American Develop Costs 2,317,000 2,442,000 | 532,000 1,910,000
Professional Fees 1,380,000 1,856,000 | 469,000 1,387,000
General & Administrative 1,447,000 1,858,000 | 470,000 1,388,000
Depreciation & Amortization 3,153,000 997,000 | 262,000 735,000
Write-Down of Excess Reorganization |
Value 1,300,000 -- | -- --
---------- ---------- | ---------- ----------
TOTAL COSTS & EXPENSES 12,881,000 9,159,000 | 1,921,000 7,238,000
---------- ---------- | ---------- ----------
|
(LOSS) INCOME FROM OPERATIONS (4,731,000) (959,000) | (1,168,000) 209,000
|
|
REORGANIZATION ITEMS (EXPENSE) -- 50,805,000 | -- 50,805,000
|
OTHER INCOME (EXPENSE) |
Interest Income 798,000 958,000 | 83,000 875,000
Interest Expense (2,885,000) (8,093,000) | (251,000) (7,842,000)
Gain on Disposal of River |
Boat Gaming Facility -- 364,000 | -- 364,000
---------- ---------- | ---------- ----------
(LOSS) INCOME BEFORE INCOME TAX (6,818,000) 43,075,000 | (1,336,000) 44,411,000
---------- ---------- | ---------- ----------
PROVISION FOR INCOME TAX (336,000) (138,000) | (15,000) (123,000)
---------- ---------- | ---------- ----------
(LOSS) INCOME BEFORE |
EXTRAORDINARY ITEMS (7,154,000) 42,937,000 | (1,351,000) 44,288,000
---------- ---------- | ---------- ----------
EXTRAORDINARY ITEMS: |
Loss on Early Extinguishment |
of debt -- (1,998,000) | -- (1,998,000)
|
Gain from Reorganization -- 103,464,000 | -- 103,464,000
---------- ----------- | ---------- -----------
NET (LOSS) INCOME $(7,154,000) $144,403,000 | $(1,351,000) $145,754,000
========== =========== | ========== ===========
</TABLE>
(1) Reorganized Company and Predecessor Company combined.
Revenues
Revenues for the years ended June 30, 1998 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year
Ended Ended
06/30/98 06/30/97 Variance $ Variance %
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues
Tonto Apache Management Fees $2,276,000 $2,055,000 $ 221,000 10.8%
Umatilla Management Fees 4,754,000 3,866,000 888,000 23.0%
Muckleshoot Management Fees 1,120,000 2,268,000 (1,148,000) (50.6)%
Other 0 11,000 (11,000) (100.0)%
----------- ---------- ---------- ------
Total Revenues $8,150,000 $8,200,000 $ (50,000) 0.6%
----------- ---------- ---------- ------
</TABLE>
31
<PAGE>
Total revenues for fiscal year 1998 were $8.15 million, a $50,000
decrease from fiscal 1997's total revenues of $8.2 million. This decrease in
revenues is primarily attributable to the decrease in revenues at the
Muckleshoot Casino due to the Muckleshoot Contract dispute which commenced in
December 1997 and which was settled in July 1998, as further described in Item
3. Legal Proceedings. The revenue increases at the Tonto Apache and Umatilla
Casinos is due to better slot management, increased marketing and promotional
events, and greater traffic flows.
Costs and Expenses
Salaries and wages increased approximately $1.28 million, or 63.7% in
fiscal 1998 as compared to fiscal 1997. This increase is primarily attributable
to (i) salary increases for officers and staff, (ii) certain one time payments
for retiring employees paid during fiscal 1998, (iii) new officer and staff
appointments made in fiscal 1998, and (iv) changes to the Company's benefit
programs.
Native American Development costs decreased $125,000, or 5.1% from
$2.44 million in fiscal 1997 to $2.32 million in fiscal 1998. The preponderance
of Native American development costs were for the benefit of the Narragansett
Indian Tribe in Rhode Island in their furtherance of obtaining an approved
gaming Compact as described in footnote [4] of the Company's consolidated
financial statements contained herein. The nominal decrease in expenditures is
due to decreased legal expenditures associated with the Narragansett Indian
Tribe's attempt to further their position toward an approved Compact.
Professional fees decreased $476,000, or 25.6% in fiscal 1998,
decreasing from approximately $1.86 million in fiscal 1997 to $1.38 million in
fiscal 1997. The decrease in legal expenses is primarily attributable to reduced
legal activity of the Company following the Company's emergence from Chapter 11
Bankruptcy and consummation of its Plan of Reorganization.
General and Administrative expenses decreased approximately $400,000,
from approximately $1.86 million in fiscal 1997 to $1.45 million in fiscal 1998.
This 22.1% decrease is due to reduced expenses associated with the streamlining
of the Company's operations after the comsummation of the Plan of
Reorganization, including the consolidation of all office functions to Phoenix,
Arizona, as well as the Company's overall efforts to control expenses.
Depreciation and amortization increased approximately $2.2 million in
fiscal 1998, a 216% increase from the $997,000 balance in fiscal 1997. The
increase in depreciation and amortization expenses is primarily due to
amortization of excess reorganization costs capitalized at the time of
consummation of the Company's Plan Reorganization on May 27, 1997. A total of
approximately $9.8 million in excess reorganization value was originally
capitalized, and is being amortized over a 48 month period ending in May 2001.
On June 30, 1998, the Company recorded a non-cash impairment loss of
$1.3 million related to the writedown of the Company's excess reorganization
value in accordance with Statement of Accounting Standards No. 121 --
"Accounting for the Imparement of Long-Lived Assets and for Long-Lived Assets to
be disposed of." The excess reorganization value was written down to its
estimated fair market value based on the Company's discounted operating cash
flows anticipated to be earned through May 2001, the end of the assets'
estimated life. The remaining net unamortized value of the excess reorganization
value will be amortized over the remaining 35 months of the assets' useful life
(see footnote [5] to the Company's consolidated financial statements contained
herein).
Reorganization Items
Reorganization adjustments included in Reorganization Items for the
year ended June 30, 1997 were comprised of:
Legal Professional Fees $(1,716,000)
Interest Income 30,000
Write-off of Goodwill (405,000)
Excess Reorganization Value 9,265,000
Adjustments to Capital Stock 37,217,000
Adjustment to Paid in Capital 7,877,000
Reorganization Fees (1,463,000)
-----------
Total $50,805,000
===========
Reorganization fees paid to management included in Reorganization
Items amounted to $1,463,000 for the year ended June 30, 1997. According to
the Plan of Reorganization, this was comprised of (i) $900,000 from the
discontinuance and sale of the riverboat operation in New Orleans, (ii)
$550,000 in New Senior Secured Notes, and (iii) $13,000 in New Common Stock
grants.
32
<PAGE>
Other Income and Expense Items
Interest income declined $160,000 in fiscal 1998, or 16.7% from the
$958,000 balance earned in fiscal 1997. The decreased in interest income is
primarily attributable to less interest income being earned on the Native
American loans receivable, as the principal balances on these loans is amortized
down.
Interest expense for the fiscal year ended June 30, 1998 is composed of
the following: (i) interest expense on the New Senior Secured Notes Due May 15,
2001 of $2,767,000, and (ii) Interest expense payable for professional services
associated with the Naragansett Casino development of $118,000.
Interest expense for the fiscal year ended June 30, 1997 is composed of
the following: (i) Old Senior Secured Notes - $5,929,000, (ii) New Senior
Secured Notes - $251,000, (iii) amortization of original issue discount and
deferred finance charges - $813,000, (iv) Republic Note Payable - $1,050,000
and, (v) COMI equipment notes - $50,000.
The gain on the disposal of the riverboat gaming facility of $364,000
represents a gain recorded by the Company in the period ended May 28, 1997 for
an adjustment to the carrying value of liabilities related to the sale of CCCD
(see footnote [1] to the consolidated financial statements contained herein).
Provision for Income Tax Expense
As discussed in "Business - Net Operating Loss Carryforwards",
management of the Company believes that the Company and its subsidiaries possess
Net NOLs as of June 30, 1998 of approximately $35,214,000 for federal income tax
reporting purposes after taking into account the reorganization of the Company
pursuant to the Plan and assuming that Tax Code ss. 382(1)(5) applies, although
no assurance can be given that the Company will be able to utilize these NOLs.
See "Risk Factors - Net Operating Loss Carryforwards". For financial statement
reporting purposes, a deferred tax benefit with respect to such NOLs could not
be recorded on the balance sheet of the Company because any realization of the
NOLs cannot be assured at this time and the amount cannot be estimated.
Income taxes for each of fiscal years 1998 and 1997 are for state
income taxes liabilities incurred in the various state jurisdictions in which
the Company operates. The increase in state income taxes of approximately
$200,000 or 144% in fiscal 1998, from $138,000 in fiscal 1997, is primarily due
to greater net income of GGMI.
Extraordinary Items
The loss on early extinguishment of debt of $1,998,000 for the year
ended June 30, 1997, represents the accelerated write-off of original issue
discounts and deferred finance charges on the Old Senior Secured Notes due to
the closure and sale of the Company's riverboat operations.
The gain from reorganization items of $103,464,000 for the year ended
June 30, 1997 is composed of the following:
Write-off Deferred Finance Costs and Original
Issue Discounts $ (4,311,000)
Record New Notes in exchange for old debt (23,100,000)
Record New Notes issued to management included in
Reorganization Items 550,000
Reduce Liabilities Subject to Compromise to zero 130,325,000
------------
Total $103,464,000
============
FISCAL 1997 COMPARED TO FISCAL 1996
As a consequence of the Company's fresh-start accounting, reporting
for the fiscal year ended June 30, 1997, is accomplished by combining the
results of operations for the Reorganized Company (May 29, 1997 through June
30, 1997) and the Predecessor Company (July 1, 1996 through May 28, 1997).
33
<PAGE>
The following table sets forth certain key elements of the results of
operations for the combined periods discussed above:
<TABLE>
<CAPTION>
Reorganized Predecessor | Predecessor
Company Company | Company
May 29, 1997 - July 1, 1996- | Fiscal Fiscal
June 30, 1997 May 28, 1997 | 1997 (1) 1996
<S> <C> <C> <C> <C>
REVENUES: |
Management Fees $ 753,000 $ 7,447,000 | $ 8,200,000 $ 7,663,000
----------- ------------ | ------------ ------------
COSTS & EXPENSES |
Salaries, Wages & Related 188,000 1,818,000 | 2,006,000 2,862,000
Native American Develop Costs 532,000 1,910,000 | 2,442,000 1,899,000
Professional Fees 469,000 1,387,000 | 1,856,000 1,795,000
General & Administrative 470,000 1,388,000 | 1,858,000 2,034,000
Depreciation & Amortization 262,000 735,000 | 997,000 940,000
----------- ------------ | ------------ ------------
TOTAL COSTS & EXPENSES 1,921,000 7,238,000 | 9,159,000 14,441,000
----------- ------------ | ------------ ------------
(LOSS) INCOME FROM OPERATIONS (1,168,000) 209,000 | (959,000) (6,778,000)
|
|
REORGANIZATION ITEMS (EXPENSE) -- 50,805,000 | 50,805,000 (600,000)
|
OTHER INCOME (EXPENSE) |
Interest Income 83,000 875,000 | 958,000 1,959,000
Interest Expense (251,000) (7,842,000) | (8,093,000) (19,062,000)
Gain on Disposal of Riverboat |
Gaming Facility -- 364,000 | 364,000 --
----------- ------------ | ------------ ------------
(LOSS) INCOME BEFORE INCOME TAX (1,336,000) 44,411,000 | 43,075,000 (3,718,000)
----------- ------------ | ------------ ------------
PROVISION FOR INCOME TAX (15,000) (123,000) | (138,000) (321,000)
----------- ------------ | ------------ ------------
(LOSS) INCOME BEFORE |
EXTRAORDINARY ITEMS (1,351,000) 44,288,000 | 42,937,000 (4,039,000)
----------- ------------ | ------------ ------------
EXTRAORDINARY ITEMS: |
Loss on Early Extinguishment |
of debt -- (1,998,000) | (1,998,000) --
|
Gain from Reorganization -- 103,464,000 | 103,464,000 --
----------- ------------ | ------------ ------------
NET (LOSS) INCOME $(1,351,000) $145,754,000 | $144,403,000 $ (4,039,000)
=========== ============ | ============ ============
</TABLE>
(1) Reorganized Company and Predecessor Company combined.
Loss From Operations
Loss from operations for the year ended June 30, 1997 amounted to
$959,000 as compared to $6,778,000 for the year ended June 30, 1996, a
decrease of $5,819,000 or 85.6%. This decrease in loss from operations is
comprised of (i) an increase in revenues of $537,000, (ii) a decrease in
operating expenses of $379,000 and (iii) reduction in the costs of the
riverboat operations of $4,903,000.
The loss from operations of the Reorganized Company was $1,168,000
for the period May 29, 1997 to June 30, 1997. This loss includes certain
one-time charges, accruals and reserves of about $1,255,000 relating to
professional fees, Plan implementation costs, development costs, office
consolidation, insurance costs and taxes.
34
<PAGE>
Revenues
Revenues for the year ended June 30, 1997, comprised primarily of
CGMI's management fees from the Company's three managed Class III gaming
facilities amounted to $8,200,000, an increase of $537,000 or 7.0% over the
year ended June 30, 1996. The following table sets forth the comparison
between Fiscal 1997 and Fiscal 1996 by facility:
<TABLE>
<CAPTION>
Facility 1997 1996 Inc(Dec) %
<S> <C> <C> <C> <C>
Cow Creek 0 618,000 (618,000) (100.0%)
Muckleshoot Casino 2,360,000 2,038,000 322,000 15.8%
Muckleshoot Bingo (92,000) (197,000) 105,000 53.3%
Tonto Apache 2,055,000 1,961,000 94,000 4.8%
Umatilla 3,866,000 3,210,000 656,000 20.4%
Miscellaneous 11,000 33,000 (22,000) (66.7%)
</TABLE>
Note: Revenues for Cow Creek are through August 1995 and for
Muckleshoot Bingo are through September 1996
The increase in management fees is due primarily to the strong
financial performance of each of Company's managed facilities. In comparison
to Fiscal 1996, Fiscal 1997 total revenues were higher for each facility by
the following percentages: Muckleshoot - 10.3%; Tonto Apache - 3.3% and;
Umatilla - 12.0%. Operating performance of each of the three facilities for
Fiscal 1997, as measured by their EBITDA margins were: Muckleshoot - 47.8%;
Tonto Apache - 52.0% and; Umatilla - 54.9%. The Company anticipates the
continued strong performance of each of the managed facilities.
Interest income for the year ended June 30, 1997 was $958,000, which
represented a $1,001,000 or 51.1% decline from June 30, 1996 levels.
Approximately $464,000 of the decrease is due to the pay down of the Tribal
loans with the remainder of the decrease of $507,000 due to a lower average
balance of cash for Fiscal 1997 as compared to 1996. Additionally, approximately
$30,000 in interest income is included in Reorganization Items.
Costs and Expenses
Salaries, wages and related costs for the year ended June 30, 1997
were $2,006,000. This represents a decrease of $856,000 or 29.9% and is due
directly to the Company's efforts to reduce operating expenses.
Native American development Costs increased $543,000 or 28.6% from
$1,899,000 to $2,442,000 for the years ended June 30, 1996 and 1997
respectively. By reporting entity Native American development costs were:
<TABLE>
<CAPTION>
Entity 1997 1996 Inc(Dec) %
<S> <C> <C> <C> <C>
CGII $ 141,000 $862,000 $ (722,000) (83.8%)
CDGC 2,190,000 951,000 1,239,000 130.3%
CGMI 112,000 86,000 26,000 30.2%
</TABLE>
Development costs for CGII and CGDC for both Fiscal 1997 and 1996
were primarily for the benefit of the Narragansett Tribe in Rhode Island. The
increase in Rhode Island development costs is due primarily to increased
activity in attempting to further the Tribe's position toward an approved
Compact. As of June 30, 1997 the cumulative expenditures on the Rhode Island
project is approximately $8.7 million. About $7.4 million is expected to be
recoverable by the Company if and when a gaming facility is established by the
Narragansett Tribe. The Company's management expects that Fiscal 1998 funding
of the Narragansett project will not approach Fiscal 1997 levels, however, the
actual level of required funding cannot be reasonably estimated at this time
due to the uncertainty of the process.
Professional fees (primarily legal) increased $61,000 or 3.4% to
$1,856,000 for the year ended June 30, 1997 as compared to the year ended June
30, 1996. Of the total increase, $368,000 was attributable to CGMI which was
offset by a $307,000 decrease in CGII. The decrease in the Company was due to
the sale and closure of the riverboat operations in Fiscal 1996 while the
increase in CGMI was due primarily to increased legal costs in protecting
certain contractual claims and professional fees for consultants used to
service the existing contracts.
General and administrative costs for the year ended June 30, 1997
were $1,858,000, which included a reserve of about $120,000 for office
relocation costs and about a $75,000 write-off of F,F&E related to the
implementation of the Business Plan. This represents a decrease of $176,000
or 8.7% and is due directly to the Company's efforts to reduce operating
expenses.
35
<PAGE>
Depreciation and amortization expenses were $997,000 and $940,000 for
the years ended June 30, 1997 and 1996 respectively. The Fiscal 1997 amount
includes one month amortization of the excess reorganization cost of $193,000
and is offset by about $120,000 in reduced amortization of deferred contract
charges from the termination of the Muckleshoot Bingo and Cow Creek contracts.
Reorganization adjustments included in Reorganization Items for the
year ended June 30, 1997 were comprised of:
Legal Professional Fees $(1,716,000)
Interest Income 30,000
Write-off of Goodwill (405,000)
Excess Reorganization Value 9,265,000
Adjustments to Capital Stock 37,217,000
Adjustment to Paid in Capital 7,877,000
-----------
Total $52,268,000
===========
Reorganization fees paid to management included in Reorganization
Items amounted to $1,463,000 for the year ended June 30, 1997. According to
the Plan of Reorganization, this was comprised of (i) $900,000 from the
discontinuance and sale of the riverboat operation in New Orleans, (ii)
$550,000 in New Senior Secured Notes, and (iii) $13,000 in New Common Stock
grants.
Interest Expense
Interest expense for the year ended June 30, 1997 is comprised of the
following: (i) Old Senior Secured Notes - $5,929,000, (ii) New Senior Secured
Notes - $251,000, (iii) amortization of original issue discount and deferred
finance charges - $813,000, (iv) Republic Note Payable - $1,050,000 and, (v)
CGMI equipment notes - $50,000, for a total of $8,093,000.
Interest expense for the year ended June 30, 1996 is comprised of the
following: (i) Old Senior Secured Notes - $14,605,000, (ii) amortization of
original issue discount and deferred finance charges - $2,173,000, (iii)
Republic Note Payable - $2,185,000 and, (iv) CGMI equipment notes - $99,000,
for a total of $19,062,000.
Income Taxes
As discussed in "Business - Net Operating Loss Carryforwards", management
of the Company believes that the Company and its subsidiaries possess Net NOLs
as of June 30, 1997 of approximately $31.5 million for federal income tax
purposes after taking into account the reorganization of the Company pursuant to
the Plan and assuming that Tax Code ss. 382(1)(5) applies, although no assurance
can be given that the Company will be able to utilize these NOLs. See "Risk
Factors - Net Operating Loss Carryforwards". For financial statement purposes, a
deferred tax benefit with respect to such NOLs could not be recorded on the
balance sheet of the Company because any realization of the NOLs cannot be
assured at this time and the amount cannot be estimated.
<PAGE>
Extraordinary Items
The loss on early extinguishment of debt of $1,998,000 for the year
ended June 30, 1997, represents the accelerated write-off of original issue
discounts and deferred finance charges on the Old Senior Secured Notes paid as
a result of the closure and sale of the riverboat operations.
The gain from reorganization items of $103,464,000 for the year
ended June 30, 1997 represents the following:
Write-off Deferred Finance Costs and Original
Issue Discounts $ (4,311,000)
Record New Notes in exchange for old debt (23,100,000)
Record New Notes issued to management included
in Reorganization Items 550,000
Reduce Liabilities Subject to Compromise to zero 130,325,000
------------
Total $103,464,000
============
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Company Management reviewed the disclosure requirements for Item 7A --
Quantitative and Qualitative Disclosures About Market Risks, and based upon the
Company's current capital structure, scope of operations, and financial
statement structure, management believes such disclosures are not warranted at
this juncture. As conditions may change, the Company will periodically review
its compliance with the disclosures, to the extent they are applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This information appears in a separate section of this Annual Report on
Form 10-K for the fiscal year ended June 30, 1998 following Part IV.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements with the Company's independent public
accountants with respect to any matters of accounting principles or practices,
fiancial statement disclosure or auditing scope or procedure.
36
<PAGE>
PART III
MANAGEMENT
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name Age Position Director Class
Charles B. Brewer 50 Chairman A
Michael W. Barozzi 50 President and Chief Operating Officer A
Col. Clinton L. Pagano 70 Executive Vice President of Compliance B
(Retired) and Director
William S. Papazian 36 Executive Vice President and General Counsel, C
Corporate Secretary and Director
Bradley A. Denton 34 Vice President and Chief Financial Officer N/A
</TABLE>
The Company's Class A Director's term shall expire at the third Annual
Meeting of Shareholders following May 28, 1997. The Company's Class B Director's
term shall expire at the second Annual Meeting of Shareholders following May 28,
1997. The Company's Class C Director's term shall expire at the first Annual
Meeting of Shareholders following May 28, 1997. Pursuant to the Second Amended
Indenture presently pending before the U.S. Bankruptcy Court, it is anticipated
that Mr. Brewer will be a Class A Common Director and Messrs. Barozzi, Papazian
and Pagano will be Common Directors. All terms of these directors will expire at
the next Annual Meeting of Shareholders.
- ----------------------------
Charles B. Brewer was appointed as Chairman of the Board of Directors
on August 24, 1998 and is an outside director of the Company. From August 1996
to present Mr. Brewer has served as Chairman, President and Chief Executive
Officer of Southmark Corporation. From July 1989 through July 1996 Mr. Brewer
served as Chief Operating Officer, Executive Vice President, General Counsel and
Secretary of Southmark Corporation. Additionally, from September 1996 to present
Mr. Brewer has served as Trustee for the Value-Added Communications, Inc.
Litigation Trust and from January 1998 to present as Chairman and President of
Northwest Senior Housing Corporation. Mr. Brewer has also served as an outside
director to Lady Luck Gaming Corporation from January 1997 to present. From July
1989 to July 1996, Mr. Brewer served as Chief Operating Officer, Executive Vice
President, General Counsel and Secretary to Southmark Corporation.
Michael W. Barozzi was appointed President and Chief Operating Officer
and a member of the Board of Directors on August 24, 1998. From November 1997 to
August 1998, and from April 1993 to September 1995, Mr. Barozzi served as Senior
Vice President of Operations of the Company. Mr. Barozzi served as an outside
gaming consultant to the Company from September 1995 until December 1997. From
August 1989 to July 1992 Mr. Barozzi was Casino Manager of the Trump Taj Mahal
Casino in Atlantic City, New Jersey. From March 1986 to January 1988 Mr. Barozzi
was Vice President and General Manager of the Aruba Concorde Hotel and Casino in
Aruba, Netherlands Antilles. Mr. Barozzi's career in the gaming industry spans
29 years and he has, in addition to the above, worked in Las Vegas, Nevada and
in Monte Carlo, Monaco. Mr. Barozzi is regarded as a foremost expert on casino
operations and development.
Col. Clinton L. Pagano (retired) was appointed Executive Vice President
of Compliance and a Director of the Company in November 1992. Col. Pagano was
the Superintendent of the New Jersey State Police from 1975 to 1990, during the
tenures of two Governors. During 1990 and 1991, Col. Pagano was Director of the
New Jersey Division of Motor Vehicles, a position he was appointed to by a third
New Jersey Governor. Col. Pagano has over 35 years of law enforcement experience
including the implementation in New Jersey of a coordinated State and Federal
organized crime control program. During his tenure as Superintendent of the New
Jersey State Police, Col. Pagano was the State Director of Emergency Management,
a Federal crisis management program, and was also responsible for developing and
implementing various security programs for the New Jersey Sports and Exposition
Authority. Col. Pagano also served as a member of the Board of Directors of
Digital Products Corporation of Florida from December 10, 1992 to January 13,
1997, and was Chairman from February 14, 1996 to January 13, 1997.
William S. Papazian was appointed Vice President and General Counsel of
the Company on May 23, 1994, became Senior Vice President and General Counsel on
June 17, 1995 and was appointed Corporate Secretary on September 5, 1995. Mr.
Papazian became a member of the Board of Directors on March 19, 1997 and
Executive Vice President and General Counsel on August 24, 1998. From July 1992
through May 1994, Mr. Papazian represented the Company in a wide variety of
matters as an attorney with the firm of Mason, Briody, Gallagher & Taylor in
Princeton, New Jersey. From February 1990 through June
37
<PAGE>
1992, Mr. Papazian served as Associate General Counsel to Mercy Medical Center
in New York, New York. From November 1986 through February 1990, Mr. Papazian
practiced corporate law with the firm of Farrell, Fritz, Caemmerer, Cleary,
Barnosky & Armentano in Uniondale, New York. Mr. Papazian has been practicing
corporate and regulatory law since 1986, and is admitted to the bar in the
States of New Jersey, California, New York and Pennsylvania. Mr. Papazian has an
expertise in all aspects of gaming and regulatory law, and is a recognized
expert in Native American gaming.
Bradley A. Denton was appointed Vice President and Chief Financial
Officer of the Company in April 1998. From December 1995 to January 1997, Mr.
Denton was Vice President and Chief Financial Officer for M.D. Labs, Inc., an
international food supplement manufacturer and distributor. Mr. Denton worked as
an investment banker with First Interstate Bank Corp. from October 1993 to
December 1995 and on Wall Street with Donaldson, Lufkin & Jenrette Securities
Corp. from November 1992 to July 1993. Mr. Denton started his career in public
accounting, spending six years in the audit and consulting groups of Deloitte &
Touche (August 1986-September 1989) and Ernst & Young (October 1989-August
1991). Mr. Denton is a Certified Public Accountant and has received a B.S. from
Arizone State University and an M.B.A. from Southern Methodist University.
The Company knows of no family relationships between any director,
executive officer or person nominated or chosen by the Company to become a
director or executive officer.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act requires the Company's
officers and directors, and persons who own more than ten percent (10%) of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership on Forms 3, 4 and 5 with the SEC and the
National Association of Securities Dealers. Officers, directors and greater
than ten percent (10%) beneficial owners are required by SEC regulation to
furnish the Company with copies of all Forms 3, 4 and 5 which they file.
Based solely on the Company's review of the copies of such forms it
has received, and written representations from certain reporting persons that
they were not required to file Form 5 for specified fiscal years, the Company
believes that all of its officers, directors and greater than ten percent
(10%) beneficial owners complied with all filing requirements applicable to
them with respect to transactions during the fiscal year ended June 30, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth compensation to, earned by, or paid to
the Company's Chief Executive Officer, and all executive officers of the
Company. Set forth below is such information with respect to the Company and all
of its subsidiaries.
38
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Secrities
Name and Fiscal Other Restricted Underlying Long All
Principal Year Annual Stock Options/SARs Term Other
Position Ended Salary Bonus Compensation Awards(10) Granted(11) Payouts Compensation
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Edward M.
Tracy(1) 06/30/98 585,417 0 131,667(16/20) 0 0 0 323,707(19/21)
Chairman and 06/30/97 495,000 333,333 272,667(9) 0 0 0 216,250(16/18)
Chief 06/30/96 495,000 0 0 0 1,200,000(12) 0 41,250(14)
Executive 06/30/95 495,000 100,000 76,835(9) 0 800,000(12) 0 0
Officer
- ------------------------------------------------------------------------------------------------------------------------------------
Clinton L.
Pagano(2) 06/30/98 129,167 0 37,500(16/20) 0 0 0 12,540(19)
Executive 06/30/97 100,000 0 0 0 0 0 14,268(19)
Vice 06/30/96 260,000(8) 0 0 0 350,000(13) 0 0
President 06/30/95 232,492 0 0 0 50,000(13) 0 0
and
Director
- ------------------------------------------------------------------------------------------------------------------------------------
William S.
Papazian(3) 06/30/98 304,167 0 41,661(16/20) 0 0 0 169,481(17)
Executive 06/30/97 210,000 166,667 127,333(9) 0 0 0 16,667(16)
Vice 06/30/96 160,000 0 0 0 200,000(14) 0 13,333(16)
President, 06/30/95 160,000 0 0 0 35,000(14) 0 0
General
Counsel,
Secretary
and
Director
- ------------------------------------------------------------------------------------------------------------------------------------
Mark
Suglian(4) 06/30/98 187,500 0 29,808(16) 0 0 0 2,253(19)
Vice 06/30/97 124,039 0 0 0 0 0 7,500(16)
President 06/30/96 90,000 0 0 0 0 0 11,652(19)
and Chief 06/30/95 22,500 0 0 0 0 0 0
Financial
Officer
- ------------------------------------------------------------------------------------------------------------------------------------
Michael
Barozzi(5) 06/30/98 $200,000(5) 0 $91,666(16/20) 0 0 0 1,152(19)
Senior Vice 06/30/97
President of 06/30/96
Operations 06/30/95
- ------------------------------------------------------------------------------------------------------------------------------------
James
Ahearn(6) 06/30/98 98,077 0 0 0 0 0 0
Vice 06/30/97 150,000 0 0 0 0 0 12,500(16)
President 06/30/96 150,000 0 0 0 100,000(15) 0 0
and Chief 06/30/95 125,240 75,000 60,824(9) 0 70,000(15) 0 0
Operating
Officer
- ------------------------------------------------------------------------------------------------------------------------------------
Bradley A.
Denton(7) 06/30/98 32,513 0 0 0 0 0 0
Vice 06/30/97
President 06/30/96
and Chief 06/30/95
Financial
Officer
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Mr. Tracy was appointed President and Chief Operating Officer of the
Company on January 7, 1993. Mr. Tracy was appointed Chief Executive
Officer of the Company on May 30, 1995, and became Chairman of the Board
of Directors on March 19, 1997. Mr. Tracy resigned as an officer and
director of the Company on August 24, 1998.
(2) Mr. Pagano was appointed Executive Vice President of Compliance and a
member of the Board of Directors of the Company on October 17, 1993.
(3) Mr. Papazian was appointed Vice President and General Counsel of the
Company on May 23, 1994; Senior Vice President and General Counsel on
June 17, 1995; and Secretary on September 5, 1995. He became a member of
the Board of Directors on March 19, 1997 and Executive Vice President and
General Counsel on August 24, 1998.
(4) Mr. Suglian was appointed Vice President of Finance and Chief Financial
Officer of Capital Gaming Management, Inc. on February 2, 1997; and Vice
President and Chief Financial Officer of the Company on June 1, 1997. Mr.
Suglian resigned as Vice President and Chief Financial Officer of the
Company on March 31, 1998.
39
<PAGE>
(5) Mr. Barozzi was appointed Senior Vice President of Operations of the
Company on November 1997 and President and Chief Operating Officer of
the Company on August 24, 1998. Prior to his appointment in November 1997,
Mr. Barozzi was a consultant to the Company pursuant to which he was paid
$50,000 in Fiscal year 1998.
(6) Mr. Ahearn was appointed Vice President and Director of Operations of
Capital Gaming Management, Inc. on August 15, 1994. Mr. Ahearn resigned
as Vice President and Director of Operations of Capital Gaming
Management, Inc. on August 31, 1997.
(7) Mr. Denton was appointed Vice President and Chief Financial Officer of the
Company on April 1, 1998.
(8) Based on an annual salary of $260,000 earned by Mr. Pagano in fiscal
1996. By letter agreement dated November 1, 1995, Mr. Pagano agreed to
defer $160,000 of his salary on that date. Pursuant to the Company's Plan
of Reorganization, Mr. Pagano's total deferred salary was treated by
giving Mr. Pagano a $4,000 priority expense claim with the balance being
a general unsecured claim.
(9) Payments made by the Company to cover income taxes.
(10) Pursuant to the Plan of Reorganization, management has the right to
receive, collectively, in the form of stock grants, ten (10%) percent of
the issued and outstanding shares of the Company in three equal annual
installments of 66,667 shares each commencing with the Effective Date.
The total value recorded by the Company for the initial installments of
the stock grants was $13,000. The Board of Directors has not as yet
issued any such stock grants.
(11) Pursuant to the Stock Option Plan, ten percent (10%) of the Company's
issued and outstanding stock has been reserved for issuance to management
as incentive stock options. The Board of Directors has not, as yet,
issued any such options.
(12) On January 14, 1996, 1,200,000 stock options exercisable at $5.25 per
share were cancelled and replaced with 1,200,000 stock options
exercisable at $.3125 per share. All stock options were cancelled in
connection with the Plan of Reorganization.
(13) On January 14, 1996, 250,000 stock options exercisable at $5.25 per share
were cancelled and replaced with 250,000 stock options exercisable at
$.3125 per share. Also, an additional 100,000 stock options were granted
exercisable at $.3125 per share. All stock options were cancelled in
connection with the Plan of Reorganization.
(14) On January 14, 1996, 35,000 stock options exercisable at $5.25 per share
were cancelled and replaced with 35,000 stock options exercisable at
$.3125 per share. Also, an additional 165,000 stock options were granted
with an exercise price of $.3125 per share. All stock options were
cancelled in connection with the Plan of Reorganization.
(15) On January 14, 1996, 65,000 stock options exercisable at $5.25 per share
were cancelled and replaced with 65,000 stock options exercisable at
$.3125 per share. Also, an additional 35,000 stock options were granted
with an exercise price of $.3125 per share. All stock options were
cancelled in connection with the Plan of Reorganization.
(16) Vacation paid in lieu of time off.
(17) As part of the confirmation award pursuant to the Plan of Reorganization,
Mr. Papazian was loaned $83,333 as an advance against the confirmation
award. Mr. Papazian was subsequently paid $161,957, the net proceeds of
which were used to repay the loan. Also includes certain relocation
expenses. Pursuant to the Plan of Reorganization, Mr. Papazian is entitled
to receive $183,333 in New Senior Secured Notes; these Notes have not as
yet been distributed.
(18) On July 18, 1996, $175,000 was paid to Mr. Tracy in lieu of the Company's
unfulfilled commitment to purchase Director's and Officer's Liability
insurance.
(19) Miscellaneous fringe benefits paid relating to moving expenses, automobile
allowances and medical insurance.
(20) Retroactive payroll per the terms of employment agreement.
(21) As part of the confirmation award pursuant to the Plan of Reorganization,
Mr. Tracy was loaned $166,667 as an advance against the confirmation
award. Mr. Tracy was subsequently paid $320,313, the net proceeds of which
were used to repay the loan. Additionally, pursuant to the Plan of
Reorganization Mr. Tracy was entitled to receive $366,667 in New Senior
Secured Notes. Mr. Tracy released the Company of this obligation in
connection with his resignation from the Company in August 1997.
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Option/SAR Grants in the Fiscal Year Ended June 30, 1998
In the fiscal year ended June 30, 1998, no stock options or SARs were
granted to any of the Company's executive officers named in the Summary
Compensation Table.
Aggregated Option/SAR Exercises in Fiscal Year Ended June 30, 1998, and
June 30, 1998 Option/SAR Values
In the fiscal year ended June 30, 1998, no stock options or SARs were
exercised by any of the Company's executive officers named in the Summary
Compensation Table and no stock options or SARs were held as of June 30, 1998
by any of such named executive officers. All of the Company's issued and
outstanding stock options were cancelled in connection with the Plan of
Reorganization and there were no stock options issued and outstanding as of
June 30, 1998.
Long-Term Incentive Plan ("LTIP") Awards
The Company does not have, and has made no award under, any
compensation plan constituting a "long-term incentive plan" (as that term is
defined under SEC Regulations). The Stock Option Plan is not a "long-term
incentive plan" as that term is defined under SEC Regulation S-K. Information
pertaining to the Stock Option Plan is provided herein under
"Business--Reorganization--Stock Option Plan".
Defined Benefits or Actuarial Plan
The Company does not have, and has made no award under, any defined
benefit plan or actuarial plan.
Compensation of Directors
Directors currently receive no fees for serving as members of the
Company's Board of Directors, but are reimbursed for their expenses in
connection with their attendance at each Board meeting.
Michael W. Barozzi, Col. Clinton L. Pagano and William S. Papazian are
Directors of the Company and also employees of the Company, and are
compensated as employees under the terms of employment agreements discussed in
this report and described in the Summary Compensation Table hereinabove.
Employment Contracts, Termination of Employment and Change-In-Control
Arrangements
The Company entered into an employment agreement with Michael W.
Barozzi, the Company's President and Chief Operating Officer, in December 1997,
which provides for, among other things, a term which extends to the third
anniversary of the Effective Date, a lump sum severance payment of $600,000 in
the event of termination without cause or upon a change in control, (at the
election of employee) and a severance payment of one year's salary in the event
of a voluntary termination upon the satisfaction of certain conditions. Mr.
Barozzi's annual salary is currently $275,000.
Col. Clinton L. Pagano, an Executive Vice President and Director of the
Company, entered into a three-year employment agreement with the Company, dated
October 17, 1993, providing for an annual salary of $150,000. As of October 1,
1994, Col. Pagano's employment agreement was amended by resolution of the Board
of Directors to provide for an annual salary of $260,000. In the event of a
change of control of the Company, Col. Pagano's employment agreement provides
that the Company, and any successors, will continue to honor and be bound by the
agreement. During the duration of the employment agreement, the Company (or its
successor) is obligated to continue to pay a level of compensation not less than
the level applicable on the change of control date, fully perform the Company's
obligations on the change of control date, and continue benefit programs in
effect on the change of control date. Col. Pagano's employment agreement
provides that it may be terminated without cause upon 90 days' notice, in which
event the Company will be obligated to continue his salary and benefits for the
balance of the agreement, or 90 days, whichever is longer. On November 1, 1995,
Col. Pagano voluntarily agreed to defer and accrue $160,000 per year of his
$260,000 per year salary until such time as he notified the Company otherwise.
Col. Pagano's entire deferred salary was treated under the Plan of
Reorganization as a $4,000 priority claim with the balance treated as a general
unsecured claim. Additionally, on October 1, 1996 Col. Pagano's employment
agreement was amended to provide for an annual salary of $100,000 and a term of
three years from the Effective Date. In connection with the amendment, all
other terms of Col. Pagano's prior employment agreements remained unchanged.
Pursuant to Board approved increases and an amendment to his employment
agreement, Col. Pagano's annual salary is now $150,000.
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The Company entered into an amended and restated employment agreement
with William S. Papazian, the Company's Executive Vice President, General
Counsel and Secretary, and a Board Director on May 17, 1996, which provides for,
among other things, a three-year term, commencing on June 1, 1996, with
automatic one-year extensions; annual salary of $160,000 (which was subject to
an increase in connection with the Company's restructuring); and certain
severance agreements. Pursuant to Board approved increases and amendments to his
employment agreement, Mr. Papazian's annual salary is currently $275,000. An
amendment No. 1 to Mr. Papazian's employment agreement was entered into on the
Effective Date and provides, among other things, for a term of three years from
the Effective Date, a lump sum severance payment of $600,000 in the event of
termination without cause or upon a change in control (at the election of
employee) and a severance payment of one year's salary in the event of a
voluntary termination upon the satisfaction of certain conditions. The agreement
further provided for the distribution to Mr. Papazian, upon the satisfaction of
certain conditions, of $183,333 in New Secured Notes and a $83,333 cash payment
as contemplated by the Plan of Reorganization.
The Company entered into an employment agreement with Bradley A.
Denton, the Company's Vice President and Chief Financial Officer, on February
11, 1998, which provides for, among other things, a term which extends to the
third anniversary of the Effective Date and a severance payment equal to six
month's salary in the event of a termination without cause. Mr. Denton's
employment agreement provides that the Company, and any successors, will
continue to honor and be bound by the agreement. During the duration of the
employment agreement, the Company (or its successor) is obligated to continue to
pay a level of compensation not less than the level applicable on the change of
control date, fully perform the Company's obligations on the change of control
date, and continue benefit programs in effect on the change of control date. Mr.
Denton's annual salary is currently $100,000.
Repricing of Stock Options
There have been no repricings of stock options in the fiscal year
ended June 30, 1998. All of the Company's issued and outstanding stock options
were cancelled in connection with the Plan of Reorganization and there were no
stock options issued and outstanding as of June 30, 1998.
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
As of June 30, 1998, the Company's Executive Compensation Committee
consisted of an outside consultant, Robert B. Runyon. The Executive Compensation
Committee is responsible for setting all Company policies with respect to
compensation of executive officers and directors, as well as for determining
changes to the compensation level of such officers and directors.
Mr. Runyon is a consultant to the Company for all compensation related
matters. During Mr. Runyon's career, he has served as an officer to such
corporations as ITT Corporation, ITT Grinnell, BP Oil Corporation and F. W.
Woolworth in the areas of organization, business planning and administration.
Mr. Runyon presently serves as a member of the Board of Directors and consultant
to several corporations and provides consulting services in the areas of
strategy, business planning, human resources and administrative systems.
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The Company is not aware of any relationship whereby (i) an executive
officer of the Company served as a member of the compensation committee (or
other board committee performing equivalent functions or, in the absence of any
such committee, the entire board of directors) of another entity, one of whose
executive officers served on the compensation committee (or other board
committee performing equivalent functions or, in the absence of any such
committee, the entire board of directors) of the Company; (ii) an executive
officer of the Company served as a director of another entity, one of whose
executive officers served on the compensation committee (or other board
committee performing equivalent functions or, in the absence of such committee,
the entire board of directors) of the Company; or (iii) an executive officer of
the Company served as a member of the compensation committee (or other board
committee performing equivalent functions or, in the absence of any such
committee, the entire board of directors) of another entity, one of whose
executive officers served as a director of the Company.
THE EXECUTIVE COMPENSATION PROGRAM
Report from Board of Directors on Executive Compensation
This report is furnished by the Board of Directors of the Company.
During the fiscal year ended June 30, 1998, management of the Company spent
significant time and energies preparing for and completing its reorganization
proceedings. The Executive Compensation Committee of the Board of Directors did
not meet or issue any reports in fiscal 1998. Accordingly, compensation paid to
executive officers of the Company was determined by certain past and present
members of the Board Directors with affected Directors abstaining. In reaching
its determinations, the Board of Directors relied in part on the Executive
Compensation Program prepared by Runyon and Associates ("Runyon") in June 1995
as well as a fairness opinion on success bonus awards prepared by Runyon in May
1996.
It is the objective of the Company's Executive Compensation Program
to develop, implement and manage a total executive compensation strategy that
will enable the Company to attract, motivate and sustain a superior
organization, as measured by the highest quality and performance standards, at
a cost that is fully competitive in the target marketplaces. The Executive
Compensation Program is further designed to enhance stockholder value,
motivate and attract superior executive officers to achieve long-term business
goals and provide compensation opportunities which are competitive and align
the interests of executive officers with the long-term interests of
stockholders through award opportunities that can result in ownership of
common stock.
The specific elements of the Executive Compensation Program,
including the specific business purpose of each program component, is as
follows:
1. Base Salary
This compensation is to bring to, and retain within the Company, the
technical, professional, and industry knowledge, along with the integrity,
licensure and skills required to operate the business competitively in the
marketplace.
2. Benefits
In conjunction with base salary, benefits retain basic capabilities
and help maintain a competitive organization. Careful planning as to the cost
effectiveness of each benefit provided is a part of the program.
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3. Perquisites
Careful consideration to cost effectiveness of perquisites is a
priority of the Executive Compensation Committee and the goal of any
perquisites provided is to reduce stress in the working environment to
executives whose personal time is often sacrificed to job demands.
4. Short-Term (Annual) Incentives
This variable element of the Executive Compensation Program focuses on
the achievement of specific near-term objectives. Measurements are in terms of
performance and expectations as per plans which can be quantified and qualified.
Incentive rewards are more a result of quantitative value building than
perceived value increase, although sound quantitative growth is the ultimate
goal.
5. Long-Term Incentives
The goal of long-term incentives is the creation, development and
growth of an entity that increases in value, both quantitatively and
perceived, and demonstrates in real time the ability to generate superior
profits and profitability. Success under this criteria is best measured by
stock market valuation, over time, and incentive remuneration to the executive
is weighted towards equity appreciation.
COMPENSATION POLICIES APPLICABLE TO EXECUTIVE OFFICERS AND BASES FOR
CEO COMPENSATION
The fiscal years ending 1998, 1997 and 1996 represented difficult times
for the Company and its executive officers. With the closure of the River City
Joint Venture in June, 1995 and the resultant default on the Company's Old
Secured Notes. Critical to the Company's future success was the ability to
successfully sell and reorganize its CCCD subsidiary and recover maximum value
in a hostile business and regulatory climate, to preserve and grow the
operations of the Company's Indian gaming subsidiary, CGMI, as well as to
continue to develop the Narragansett Project through the CDGC subsidiary, to
negotiate and complete a successful restructuring of the parent company and
accomplish all of the above with a significantly reduced executive staffing
level. Continued employment of key executives and incentivized performance was a
critical component of the application of the Company's compensation policies in
order to achieve these essential tasks and position the Company for future
growth.
In May, 1996, the Board of Directors of the Company requested a
fairness opinion on success bonus awards from Runyon. The subject
of the report was to analyze and provide an objective opinion on the
prevalence, appropriateness, fairness and structure of success fees, stay in
place fees and/or consummation bonuses in the context of business
reorganizations primarily arising from the bankruptcy process. This report
concluded that management of the Company took the prompt, prudent actions
necessary to not only recover substantially more financial assets from the
reorganization of the CCCD subsidiary than normally would have been possible,
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but moreover preserved existing operations and positioned the Company for a
successful but difficult parent reorganization. The report further found that
in weighing the major contributions of management, the successful conversion
of CCCD's assets to substantial cash for the Company would, in and of itself,
warrant a significant success fee. The report additionally found that as
favorable a financial impact as such conversion represented, it would be
exceeded in the long run by the financial productivity of a viable,
competitive business enterprise. Based on the methodology contained in the
report for weighing these various relevant factors, the report concluded that
the reasonable range for the award of a success bonus, verified by consensus
both within bankruptcy environments, and in the course of normal business
conduct as fair and equitable to both executive management and debt/equity
holders, was within $1,100,000 to $1,665,000. Similarly, using a valuation of
the contributions made by management based on profitability, an award of
$1,030,000 to S1,548,000 was found to be reasonable. Finally, the report
concluded that the bonus pool ultimately created by the Board of Directors be
distributed by the Board of Directors to the principal contributors to the
reorganization. The actual payments made to the Company's executive officers
on the date hereof is contained in this Item 11 - Summary Compensation Table.
STOCK PRICE PERFORMANCE COMPARISON
The following graph compares cumulative total return of the Company's
Common Stock (the Old Common Stock and the New Common Stock taking into
account the conversion ratio pursuant to the Plan of Reorganization) with the
cumulative total return of the Standard & Poor's 500 Index and a peer group
selected in good faith by the Company. The Company selected a composite of
small cap gaming common stocks for the industry peer group comparison. These
stocks include Aztar Corporation, Grand Casinos and Showboat, Inc. equally
weighted.
The graph assumes $100 was invested on June 30, 1992 in shares of
Common Stock and stocks comprising the S&P 500 Index and the peer group. (As the
Company's stock was delisted effective June 25, 1997 from the NASDAQ OTC
Bulletin Board due to a lack of market matters for the Company's common stock,
data for the fiscal year ended June 30, 1998 is excluded from the chart.)
S&P 500 Peer Group
Company Index Composite
------- ----- ---------
6/30/92 $100.00 $100.00 $100.00
6/30/93 900.00 110.39 125.82
6/30/94 480.60 108.80 106.49
6/30/95 54.50 133.39 126.52
6/30/96 10.31 164.20 142.07
6/30/97 2.38 216.58 113.94
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the New Common Stock as of September 30, 1998: (i) by
each person who was known by the Company to be a beneficial owner of more than
five percent (5%) of the New Common Stock; (ii) by all directors and nominees;
(iii) by each of the named executive officers of the Company (as that term is
defined in Item 402(a)(3) of Regulation S-K); and (iv) by all directors and
executive officers of the Company as a group. Percentage of class is calculated
on the basis of 1,866,667 shares outstanding as of September 30, 1997, and
1,933,333 as of June 30, 1998 except that shares underlying options currently
vested and options exercisable within 60 days are deemed to be outstanding for
purposes of calculating the beneficial ownership of securities owned by the
holder of such options. Pursuant to the Plan of Reorganization, the Company
issued 1,866,667 shares of New Common Stock. As of September 30, 1998, the
Company held approximately 98% of the outstanding shares of the New Common Stock
as disbursing agent under the Plan of Reorganization. The Company expects the
balance of the outstanding shares will be distributed pursuant to the Plan of
Reorganization within the period of two years from the Effective Date.
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Name and Address of Amount and Nature of
Beneficial Owner(1) Beneficial Ownership Percentage of Class
Charles B. Brewer 0 *%
Micharl W. Barozzi 0 *%
Col. Clinton L. Pagano 0 *%
William S. Papazian(2) 1 *%
Bradley A. Denton 0 *%
Directors and Executive 1 *%
Officers As a Group
(5 persons)
- ------------------------
* Less than 1% of the Company's outstanding New Common Stock.
(1) The address of each beneficial owner named in this table, unless otherwise
noted, is: c/o Capital Gaming International, Inc., 2701 East Camelback
Road, Suite 484, Phoenix, Arizona 85016.
(2) Sole voting and investment power over the shares owned.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There were no related party transactions in fiscal year ended
June 30, 1998.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
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(a) 1. Financial Statements - See the Index to Financial Statements on page F-1.
2. Financial Statement Schedules - Schedules begin on page S-1.
3. Exhibits.
2.1 Stock Purchase Agreement dated March 15, 1993, by and among the Registrant, Bass Leisure Group, Ltd., Bass Leisure
Group, Inc. and British American Bingo, Inc. (4)
2.3 Involuntary Petition for Bankruptcy filed under Chapter 11 of the U.S. Bankruptcy Code against Crescent City
Capital Development Corp. dated July 26, 1995. (19)
2.4 Consent to Entry of Order for Relief filed by Crescent City Capital Development Corp. in Chapter 11 Bankruptcy
Case dated July 28, 1995. (19)
2.5 First Amended Chapter 11 Plan of Reorganization of Crescent City Capital Development Corp. as confirmed by the
Bankruptcy Court on January 12, 1996. (20)
2.6 Second Amended Chapter 11 Plan of Reorganization of Crescent City Capital Development Corp. and First Immaterial
Modification, as confirmed by the Bankruptcy Court on April 29, 1996. (21)
2.7 Stock Purchase Agreement by and among Casino Magic Corp., Jefferson Casino Corp., C-M of Louisiana, Inc., Capital
Gaming International, Inc. and Crescent City Capital Development Corp., dated February 21, 1996. (21)
2.8 First Amended and Modified Plan of Reorganization of Capital Gaming International, Inc., dated March 19, 1997.
(22)
3.1 Restated Certificate of Incorporation of the Registrant. (15)
3.2 Amended and Restated Certificate of Incorporation of the Registrant. (26)
3.2 Bylaws of the Registrant, as amended. (6)
4.3 Indenture dated February 17, 1994, by and among the Registrant, Crescent City Capital Development Corp., British
American Bingo, Inc. and First Trust National Association (without exhibits and schedules). (9)
4.4 Equity Registration Rights Agreement dated January 20, 1994, by and among the Registrant and the persons who are
signatories thereto (without exhibits and schedules) (multiple conformed signatures omitted). (9)
4.5 Senior Secured Notes Registration Rights Agreement dated February 17, 1994, by and among the Registrant, Crescent
City Capital Development Corp., British American Bingo, Inc. and the purchasers who are signatories thereto
(without exhibits and schedules) (multiple conformed signatures omitted). (9)
4.6 Security Agreement dated February 17 1994, by and among the Registrant, Crescent City Capital Development Corp.,
British American Bingo, Inc. and First Trust National Association (without exhibits and schedules). (9)
4.7 Security Agreement dated February 17, 1994, by and between Crescent City Capital Development Corp. and First Trust
National Association (without exhibits and schedules). (9)
4.8 Pledge Agreement dated February 17, 1994, by and between the Registrant and First Trust National Association
(without exhibits and schedules). (9)
4.9 Pledge Agreement dated February 17, 1994, by and between British American Bingo, Inc. and First Trust National
Association (without exhibits and schedules). (9)
4.10 Warrant Agreement dated January 20, 1994 by and between the Registrant and First Trust National Association
(without exhibits and schedules). (9)
4.11 Form of Old Note. (11)
4.12 Form of New Note. (11)
4.13 First Supplemental Indenture dated June 24, 1994, to the Indenture dated February 17, 1994, by and among the
Registrant, Crescent City Capital Development Corp., Capital Gaming International Casino Management Division, Inc.
(formerly British American Bingo, Inc.) and First Trust National Association (without exhibits). (12)
</TABLE>
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<TABLE>
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4.14 Form of Term Note distributed to Bondholders in exchange for their consent to the first Supplemental Indenture.
(12)
4.15 Amended and Restated Indenture, dated February 17, 1994 and amended and restated as of March 27, 1997, by and
among the Registrant, the Guarantor named therein and First Trust National Association. (23)
4.16 Form of New Secured Note. (25)
10.1 1990 Stock Option Plan, as amended. (15)
10.34 Non-qualified Stock Option Agreement, dated February 27, 1992, by and between the Registrant and Michael F.
Marino. (1)
10.35 Non-Qualified Stock Option Agreement, dated February 27, 1992, by and between the Registrant and Thomas E.
O'Brien. (1)
10.36 Non-Qualified Stock Option Agreement, dated February 27, 1992, by and between the Registrant and Robert
DeFilippis. (1)
10.38 Non-Qualified Stock Option Agreement, dated June 30, 1992, by and between the Registrant and Hank Johnson. (1)
10.39 Non-qualified Stock Option Agreement dated June 30, 1992, by and between the Registrant and Thomas P. Gallagher.
(1)
10.49 Stock Option Agreement dated January 7, 1993, by and between the Registrant and I.G. Davis, Jr. (2)
10.50 Stock Option Agreement dated January 7, 1993, by and between the Registrant and Edward Tracy. (2)
10.52 Non-qualified Stock Option Agreement dated November 23, 1992, by and between the Registrant and Col. Clinton L.
Pagano. (2)
10.53 Non-Qualified Stock Option Agreement dated November 23, 1992, by and between the Registrant and Percival H.E.
Leach. (2)
10.54 Non-qualified Stock Option Agreement dated January 7, 1993, by and between the Registrant and Thomas P. Gallagher.
(2)
10.55 Non-qualified Stock Option Agreement dated January 7, 1993, by and between the Registrant and Joel Sterns. (2)
10.56 Non-Qualified Stock Option Agreement dated January 7, 1993, by and between the Registrant and Frank Gelb. (2)
10.62 Stock Option Agreement dated January 29, 1993, between the Registrant and Timothy G. Rose. (3)
10.70 Stock Option Agreement dated May 7, 1993, between the Registrant and Michael Barozzi. (6)
10.78 Stock Option Agreement dated September 15, 1993, by and between the Registrant and Peter Liguori. (6)
10.79 Letter of Intent by and between the Registrant and Republic Corporate Services, Inc. dated April 6, 1993, with
amendments dated June 11, 1993, and June 28, 1993. (6)
10.80 Escrow Agreement by and between the Registrant and Republic corporate Services, Inc. dated April 6, 1993, with
Amendment dated June 11, 1993. (6)
10.81 Non-Qualified Stock Option Agreement by and between the Registrant and Republic Corporate Services, Inc. dated
June 11, 1993. (6)
10.82 Option and Letter of Intent by and between the Registrant and Republic Corporate Services, Inc. dated August 25,
1993. (6)
10.83 Term Note by and between the Registrant and Joel Sterns dated June 11, 1993. (6)
10.84 Stock and Option Pledge Agreement by and between the Registrant and Joel Sterns dated June 11, 1993. (6)
10.86 Interim Agreement by and between the Board of commissioners of the Port of New Orleans and Crescent City Capital
Development corporation dated June 29, 1993. (6)
10.92 Common Stock Purchase Warrant by and between the Registrant and First National Bank of Commerce dated September 1,
1993. (6)
10.93 Berth Infrastructure Reimbursement Agreement by and between Crescent City Capital Development corporation and the
Board of Commissioners of the Port of New Orleans dated September 1, 1993. (6)
</TABLE>
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10.94 Engagement Letter by and between the Registrant and Stephen Edwards, Esq. dated July 20, 1993.
10.95 Common Stock Purchase Warrant by and between the Registrant and Ladenburg, Thalmann & Co. Inc. dated July 22,
1993. (6)
10.96 Common Stock Purchase Warrant by and between the Registrant and Ronnie Wohl dated July 22, 1993. (6)
10.97 Common Stock Purchase Warrant by and between the Registrant and Ronald J. Crammer dated July 22, 1993. (6)
10.98 Common Stock Purchase Warrant by and between the Registrant and Peter M. Graham dated July 22, 1993. (6)
10.99 Common Stock Purchase Warrant by and between the Registrant and Jay R. Petschek dated July 22, 1993. (6)
10.10 Common Stock Purchase Warrant by and between the Registrant and Brian M. Gonick dated July 22, 1993. (6)
10.101 Common Stock Purchase Arrant by and between the Registrant and Thomas M. Ryan dated July 22, 1993. (6)
10.109 Letter Agreement dated December 2, 1993 by and among the Registrant, Hospitality Franchise Systems, Inc., I.G.
Davis, Jr. and John E. Dell. (7)
10.110 Amended and Restated Agreement dated January 13, 1994, by and between the Registrant and Bender Shipyard, Inc. (8)
10.111 Purchase Agreement dated January 20, 1994, by and among the Registrant and the persons who are signatories thereto
(without exhibits and schedules) (multiple conformed signatures omitted). (10)
10.112 Amendment to Purchase Agreement dated February 3, 1994, by and among the Registrant and the persons who are
signatories thereto (without exhibits and schedules) (multiple conformed signatures omitted). (10)
10.113 Purchase Agreement dated January 20, 1994, by and between the Registrant and Hospitality Franchise Systems, Inc.
(without exhibits and schedules). (10)
10.114 Amendment to Purchase Agreement dated February 17, 1994, by and among the Registrant, Hospitality Franchise
Systems, Inc. and Samuel Levine (without exhibits and schedules). (10)
10.115 Purchase Agreement dated January 20, 1994, by and between the Registrant and MJM Partners, L.P. (without exhibits
and schedules). (10)
10.116 Purchase Agreement dated January 20, 1994, by and between the Registrant and MJM International Limited (without
exhibits and schedules). (10)
10.117 Purchase Agreement dated March 1, 1994, by and between the Registrant and MJM Partners, L.P. (without exhibits and
schedules). (10)
10.118 Purchase Agreement dated March 1, 1994, by and between the Registrant and MJM International Limited (without
exhibits and schedules). (10)
10.119 Cash Collateral and Disbursement Agreement dated February 17, 1994, by and among the Registrant, Crescent City
Capital Development Corp., British American Bingo, Inc., First Trust National Association and First National Bank
of commerce (without exhibits and schedules). (10)
10.120 Marketing Services Agreement dated February 17, 1994, by and between the Registrant and HFS Gaming Corp. (without
exhibits and schedules). (10)
10.122 Amendment to Option Letter of Intent dated December 15, 1993, by and between the Registrant and Republic Corporate
Services, Inc. (11)
10.123 Agreement of Purchase and Sale dated April 26, 1994, by and among New Orleans 2000 Partnership, Crescent City
Capital Development Corp. and Grand Palais Riverboat, Inc. (11)
10.125 Loan and Security Agreement dated February 17, 1994, by and between the Registrant and Republic Corporate
Services, Inc. (11)
10.126 $5,000,000 Note dated February 17, 1994 from Republic corporate Services, Inc. to Registrant. (11)
10.127 Letter Agreement dated May 4, 1994, by and between the Registrant and Republic Corporate Services, Inc. (11)
10.128 $19,000,000 Note from the Registrant to Republic Corporate Services, Inc. (11)
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.130 First Amendment dated June 24, 1994, to the Cash Collateral and Disbursement Agreement dated February 17, 1994, by
and among the Registrant, Crescent City Capital Development Corp., Capital Gaming International Casino Management
Division, Inc. (formerly British American Bingo, Inc.), First Trust National Association and First National Bank
of Commerce. (12)
10.131 Agreement to Purchase and Sell dated June 30, 1994, by and between River City Joint Venture and The Alabama Great
Southern Railroad. (12)
10.132 Term Note by River City Joint Venture to New Orleans 2000 Partnership dated July 13, 1994. (13)
10.133 Assignment of Agreement and Sale dated July 13, 1994. (13)
10.134 Mortgage and Assignment of Leases and Rentals by River City Joint Venture in favor of New Orleans 2000 Partnership
dated July 13, 1994. (13)
10.135 Amended and Restated partnership Agreement between Grand Palais Riverboat, Inc. and Crescent City Capital
Development Corp. dated July 7, 1994. (13)
10.136 First Amendment dated June 1, 1994, to the Marketing Services Agreement dated February 17, 1994, by and between
the Registrant and HFS Gaming Corp. (14)
10.137 Amendment effective as of October 1, 1994, to the Executive Employment Agreement effective asof October 17, 1993,
by and between the Registrant and Clinton L. Pagano. (16)
10.139 Stock Option Agreement dated June 2, 1994, by and between Registrant and William S. Papazian.
10.143 Stock Option Agreement dated August 24, 1994, by and between Registrant and James F. Ahearn.
10.144 Letter Amendment to Warrant Agreements by and between Registrant, Ladenberg, Thalmann & Company, Inc., and certain
affiliates, dated October 11, 1994 (without exhibits). (16)
10.145 Construction Agreement by and between Crescent City Capital Development Corp., Grand Palais Riverboat, Inc., and
Grimaldi Construction, Inc., dated October 25, 1994 (without exhibits). (17)
10.146 Stock Purchase Agreement by and between Registrant, Fidelity Galileo Fund, L.P., and Fidelity Copernicus Fund,
L.P., dated as of March 30, 1995. (18)
10.147 Registration Rights Agreement by and between Registrant, Fidelity Galileo Fund, L.P., and Fidelity Copernicus
Fund, L.P. dated as of March 30 1995. (18)
10.148 Riverboat Casino Operating Agreement by and between Crescent City Capital Development Corp. and River Marine
Services, Inc., dated as of January 13, 1995. (18)
10.152 Promissory Note dated March 27, 1995, between Crescent City Capital Development Corp. and First National Bank of
Commerce. (18)
10.153 Commercial Guaranty dated March 27, 1995, between Registrant and First National Bank of Commerce. (18)
10.154 Credit Agreement dated March 10, 1995, by and among River City Joint Venture, Crescent City Capital Development
Corp., Grand Palais Riverboat, Inc., and First National Bank of Commerce. (18)
10.155 Promissory Note dated March 10, 1995, between River City Joint Venture and First National Bank of Commerce. (18)
10.156 Mortgage dated March 9, 1995, between River City Joint Venture and First National Bank of Commerce, relating to
certain property owned by the River City Joint Venture (the "Orange Street Parcels"). (18)
10.157 Mortgage dated March 9, 1995, between River City Joint Venture and First National Bank of Commerce, relating to
certain Property owned by the River City Joint Venture (the "Cusimano Parcels"). (18)
10.162 Employment Agreement dated May 30, 1995, by and between the Registrant and Edward Tracy. (19)
10.163 Employment Agreement dated May 30, 1995, by and between the Registrant and I.G. Davis, Jr. (19)
10.167 Buy-Out Agreement dated September 1, 1995, by and among Registrant, Capital Gaming Management, Inc. and the Cow
Creek Band of Umpqua Tribe of Indians. (19)
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.168 Amendments to the January 13, 1994, Amended and Restated Riverboat Construction Agreement by and between the
Registrant, Crescent City Capital Development Corp. and Bender Shipyard, Inc. dated October 19, 1994, February 3,
1995, and February 9, 1995. (19)
10.169 First Preferred Ship Mortgage by Crescent City Capital Development Corporation in favor of First Trust National
Association dated March 23, 1995. (19)
10.170 Engagement Agreement between Registrant and Donaldson, Lufkin & Jenrette dated June 20, 1995. (19)
10.171 Employment Agreement dated May 17, 1996, by and between Registrant and William S. Papazian. (24)
10.172 Amendment No. 1 to Employment Agreement dated May 28, 1997, by and between Registrant and William S. Papazian.
(27)
10.173 Amendment No. 1 to Employment Agreement dated May 28, 1997, by and between the Registrant and Edward M. Tracy.
(27)
10.174 Employment Agreement as of June 1, 1997, by and between Registrant and Michael Barozzi
10.175 Employment Agreement dated February 11, 1998, by and between Registrant and Bradley A. Denton.
10.176 Letter regarding confidentiality of Management Agreement between Capital Gaming Management Inc. and the Pueblo
of Laguna.
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
11.0 Schedule of Computation of Earnings Per Share #
12.0 Computation of Ratio of Earnings to Fixed Charges #
27. Financial Data Schedule #
</TABLE>
- --------------------------------
# Filed herewith.
1 Incorporated by reference to the exhibit with the same number, filed
in connection with the Registrant's form 10-K filed with the
Securities and Exchange Commission on September 28, 1992.
2 Incorporated by reference to the exhibit with the same number, filed
in connection with the Registrant's Post-Effective Amendment No. 5 to
the Registration Statement on Form S-1, File No. 33-36618, declared
effective by the Securities and Exchange Commission on November 21,
1990.
3 Incorporated by reference to the exhibit with the same number, filed
in connection with the Registrant's Post-Effective Amendment No. 6 to
the Registration Statement on Form S-1, File No. 33-36618, declared
effective by the Securities and Exchange Commission on November 21,
1990.
4 Incorporated by reference to the exhibit with the same number, filed
in connection with the Registrant's Post-Effective Amendment No. 8 to
the Registration Statement on form S-1, File No. 33-36618, declared
effective by the Securities and Exchange Commission on November 21,
1990.
5 Incorporated by reference to the exhibit with the same number filed
in connection with the Registrant's Current Report on Form 8-K filed
with the Securities and Exchange Commission on September 27, 1993.
6 Incorporated by reference to the exhibit with the same number filed
in connection with the Registrant's Form 10-K filed with the
Securities and Exchange Commission on September 28, 1993.
7 Incorporated by reference to the exhibit with the same number filed
in connection with the Registrant's Current Report on Form 8-K filed
with the Securities and Exchange Commission on January 3, 1994.
8 Incorporated by reference to the exhibit numbered 10.109 filed in
connection with the Registrant's Current Report on form 8-K filed
with the Securities and Exchange commission on February 1, 1994.
9 Incorporated by reference to the exhibit with the same number filed
in connection with the Registrant's Current Report on form 8-K filed
with the Securities and Exchange commission on March 4, 1994.
10 Incorporated by reference to the exhibits numbered 10.110, 10.111,
10.112, 10.113, 10.114, 10.115, 10.116, 10.117, 10.118 and 10.119,
respectively, filed in connection with the Registrant's Current
Report on form 8-K filed with the Securities and Exchange commission
on March 4, 1994.
11 Incorporated by reference to the exhibits with the same number, filed
in connection with the Registrant's Registration Statement on Form
S-1, File No. 33-79082, which was filed with the Securities and
Exchange Commission on May 18, 1994.
12 Incorporated by reference to the exhibits with the same number, filed
i connection with the Registrant's Pre-Effective Amendment No. 1 to
the Registration Statement on Form S-1, File No. 33-79082, which was
filed with the Securities and Exchange Commission on July 11, 1994.
13 Incorporated by reference to the exhibit with the same number, filed
in connection with the Registrant's Current Report on form 8-K filed
with the Securities and Exchange Commission on July 29, 1994.
52
<PAGE>
14 Incorporated by reference to the exhibit with the same number, filed
in connection with the Registrant's Pre-Effective Amendment No. 2 to
the Registration Statement on Form S-1, File No. 33-79082, which was
filed with the Securities and Exchange Commission on August 11, 1994.
15 Incorporated by reference to the exhibit with the same number filed
in connection with the Registrant's Form 10-K filed with the
Securities and Exchange commission on September 28, 1994.
16 Incorporated by reference to the exhibit with the same number filed
in connection with the Registrant's Registration Statement on Form
S-1, File No. 33-86094, which was filed with the Securities and
Exchange Commission on November 7, 1994.
17 Incorporated by reference to the exhibit with the same number filed
in connection with the Registrant's Pre-Effective Amendment No. 1 to
the Registration Statement on Form S-1, File No. 33-86094, which was
filed with the Securities and Exchange Commission on November 15,
1994.
18 Incorporated by reference to the exhibit with the same number filed
in connection with the Registration Statement on Form S-1, File No.
33-91024, which was filed with the Securities and Exchange Commission
on April 7, 1995.
19 Incorporated by reference to the exhibit with the same number filed
in connection with the Registrant's Form 10-K filed with the
Securities and Exchange Commission on October 12, 1995.
20 Incorporated by reference to the exhibit with the same number, filed
in connection with the Registrant's Current Report on Form 8-K filed
with the Securities and Exchange Commission on January 31, 1996.
21 Incorporated by reference to the exhibit with the same number, filed
in connection with the Registrant's Form 10-Q filed with the
Securities and Exchange Commission on May 10, 1996.
22 Incorporated by reference to the exhibit with the same number, filed
in connection with the Registrant's Form 8-K filed with the
Securities and Exchange Commission on April 3, 1997.
23 Incorporated by reference to exhibit 4.1, filed in connection with
the Registrant's Form 8-K filed with the Securities and Exchange
Commission on April 3, 1997.
24 Incorporated by reference to the exhibit with the same number with
the Registrant's Form 10-K filed with the Securities and Exchange
Commission on October 15, 1996
25 Incorporated by reference to exhibit A to exhibit 4.1, filed in
connection with the Registrant's Form 8-K filed with the Securities
and Exchange Commission on April 3, 1997.
26 Incorporated by reference to exhibit B to exhibit 2.1, filed in
connection with the Registrant's Form 8-K filed in connection with
the Securities and Exchange Commission on April 3, 1997.
27 Incorporated by reference to the exhibit with the same number with
Registrant's Form 10-K filed with the Securities and Exchange
Commission on October 14, 1997.
(b) Reports on Form 8-K.
Current Report on Form 8-K filed with the Securities and Exchange
Commission on April 3, 1997.
Current Report on Form 8-K filed with the Securities and Exchange
Commission on June 11, 1997.
Current Report on Form 8-K filed with the Securities and Exchange
Commission on April 2, 1998.
Current Report on Form 8-K filed with the Securities and Exchange
Commission on July 31, 1998.
Current Report on Form 8-K filed with the Securities and Exchange
Commission on September 10, 1998.
Current Report on Form 8-K filed with the Securities and Exchange
Commission on October 13, 1998.
53
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CAPITAL GAMING INTERNATIONAL, INC.
Dated: October 23, 1998 By: /s/ Michael W. Barozzi
------------------------------------------
Michael W. Barozzi, President and Chief
Operating Officer
(Authorized Representative)
Dated: October 23, 1998 By: /s/ William S. Papazian
------------------------------------------
William S. Papazian, Executive Vice
President and General Counsel and
Secretary
(Authorized Representative)
Dated: October 23, 1998 By: /s/ Bradley A. Denton
------------------------------------------
Bradley A. Denton, Vice President and
Chief Financial Officer
(Principal Accounting Officer)
54
<PAGE>
CAPITAL GAMING INTERNATIONAL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditor's Report..............................................F-2
Consolidated Balance Sheets as of June 30, 1998 and 1997..................F-3
Consolidated Statements of Operations for the year ended June 30, 1998,
the period May 29, 1997 through June 30, 1997, the period July 1, 1996
through May 28, 1997, and the year ended June 30, 1996..................F-5
Consolidated Statements of Changes in Stockholders' Equity [Deficit]
for the year ended June 30, 1998, the period May 29, 1997 through June
30, 1997, the period July 1, 1996 through May 28, 1997, and the year
ended June 30, 1996.....................................................F-6
Consolidated Statements of Cash Flows for the year ended June 30, 1998,
the period May 29, 1997 through June 30, 1997, the period July 1, 1996
through May 28, 1997 and the year ended June 30, 1996...................F-7
Notes to Consolidated Financial Statements................................F-11
Independent Auditor's Report on Supplementary Schedule....................S-1
Schedule II - Valuation and Qualifying Accounts...........................S-2
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Capital Gaming International, Inc.
Phoenix, Arizona
We have audited the accompanying consolidated balance sheets of Capital
Gaming International, Inc. and its subsidiaries as of June 30, 1998 and 1997,
and the related consolidated statements of operations, changes in stockholders'
equity [deficit], and cash flows for the fiscal year ended June 30, 1998, the
period May 29, 1997 to June 30, 1997, the period July 1, 1996 to May 28, 1997,
and for the fiscal year ended June 30, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Capital Gaming International, Inc. and its subsidiaries as of June
30, 1998 and 1997, and the consolidated results of their operations and their
cash flows for the fiscal year ended June 30, 1998, the period May 29, 1997 to
June 30, 1997, the period July 1, 1996 to May 28, 1997, and for the fiscal
year ended June 30, 1996, in conformity with generally accepted accounting
principles.
As more fully described in Note 1 to the consolidated financial
statements, effective May 29, 1997, the Company emerged from bankruptcy. In
accordance with an American Institute of Certified Public Accountants'
Statement of Position, the Company has adopted "fresh start" reporting whereby
its assets, liabilities and new capital structure have been adjusted to
reflect estimated fair values as of May 28, 1997. As a result, the
consolidated financial statements for the period subsequent to May 28, 1997,
reflect this basis of reporting and are not comparable to the Company's
prereorganization consolidated financial statements.
MOORE STEPHENS, P.C.
Certified Public Accountants.
Cranford, New Jersey
August 7, 1998
F-2
<PAGE>
CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(ROUNDED)
ASSETS
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
------------------- -------------------
<S> <C> <C>
CURRENT ASSETS
Cash & Cash Equivalents $ 4,498,000 $ 3,923,000
Interest Receivable 29,000 72,000
Native American Management Fees and Other Receivables 709,000 771,000
Current Portion-Native American Loan Receivable [Note 7] 2,249,000 3,943,000
Current Portion-Notes Receivable, Other -- 20,000
Notes Receivable From Officers [Note 10] -- 250,000
Prepaid Expenses and Other Current Assets 232,000 417,000
----------- -----------
TOTAL CURRENT ASSETS 7,717,000 9,396,000
----------- -----------
FURNITURE, FIXTURES AND EQUIPMENT, net [Note 8] 23,000 15,000
----------- -----------
EXCESS REORGANIZATION VALUE, net [Notes 1 & 5] 5,767,000 9,072,000
----------- -----------
OTHER ASSETS
Restricted Funds In Escrow [Note 20] 541,000 926,000
Native American Loans Receivable [Note 7] 1,444,000 3,688,000
Investment In Native American Management
Agreements, net [Note 9] 1,229,000 1,937,000
Notes Receivable, Other -- 80,000
----------- -----------
TOTAL OTHER ASSETS 3,214,000 6,631,000
----------- -----------
TOTAL ASSETS $16,721,000 $25,114,000
=========== ===========
</TABLE>
Due to the reorganization and implementation of fresh-start reporting, financial
statements for the Reorganized Company (Period starting May 29, 1997) are not
comparable to those of the predecessor Company. See Notes to the Financial
Statements for additional information.
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements
F-3
<PAGE>
CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(ROUNDED)
<TABLE>
<CAPTION>
LIABILITIES
June 30, 1998 June 30, 1997
------------------ -----------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 1,233,000 $ 2,714,000
Accrued Interest 346,000 251,000
State Income Taxes Payable 147,000 --
----------- -----------
TOTAL CURRENT LIABILITIES 1,726,000 2,965,000
LONG-TERM DEBT
12.0% Senior Secured Notes Payable [Notes 11 & 18] 23,100,000 23,100,000
----------- -----------
TOTAL LIABILITIES 24,826,000 26,065,000
----------- -----------
STOCKHOLDERS' EQUITY
Common Stock, No Par Value, Authorized 3,200,000 Shares; Issued
and Outstanding 1,933,333 and 1,866,667 Shares at June
30, 1998 and 1997 [Note 12] 400,000 400,000
Additional Paid In Capital -- --
Retained Deficit (Since May 29, 1997, date of Reorganization,
total deficit eliminated was $145,754,000) (8,505,000) (1,351,000)
----------- -----------
TOTAL STOCKHOLDERS' DEFICIT (8,105,000) (951,000)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $16,721,000 $25,114,000
=========== ===========
</TABLE>
Due to the reorganization and implementation of fresh-start reporting, financial
statements for the Reorganized Company (Period starting May 29, 1997) are not
comparable to those of the predecessor Company. See Notes to the Financial
Statements for additional information.
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements
F-4
<PAGE>
CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(ROUNDED EXCEPT NUMBER OF SHARES
AND PER SHARE DATA)
<TABLE>
<CAPTION>
Reorganized Company | Predecessor Company
---------------------------- | ------------------------------
May 29, 1997 | July 1 1996
Year Ended through | through Year Ended
June 30, 1998 June 30, 1997 | May 28, 1997 June 30, 1996
------------- ------------- | ------------ ------------
<S> <C> <C> | <C> <C>
REVENUES: |
Native American Casino Management Fees [Note 4] $8,150,000 $ 753,000 | $ 7,447,000 $ 7,663,000
---------- ---------- | ----------- ------------
COSTS AND EXPENSES: |
Salaries Wages and Related Costs 3,284,000 188,000 | 1,818,000 2,862,000
Gaming Development Costs 2,317,000 532,000 | 1,910,000 1,907,000
Professional Fees 1,380,000 469,000 | 1,387,000 1,795,000
General & Administrative 1,447,000 470,000 | 1,388,000 2,034,000
Depreciation and Amortization 3,153,000 262,000 | 735,000 940,000
Costs of Operations of Riverboat Gaming Facility |
[Note 1] -- -- | -- 4,903,000
Write Down of Excess Reorganization Value [Note 5] 1,300,000 -- | -- --
---------- ---------- | ----------- ------------
TOTAL COSTS AND EXPENSES 12,881,000 1,921,000 | 7,238,000 14,441,000
---------- ---------- | ----------- ------------
[LOSS] INCOME FROM OPERATIONS (4,731,000) (1,168,000) | 209,000 (6,778,000)
---------- ---------- | ----------- ------------
|
REORGANIZATION ITEMS: |
Reorganization Adjustments -- -- | 52,268,000 (600,000)
Reorganization Fees Paid To Management -- -- | (1,463,000) --
---------- ---------- | ----------- ------------
TOTAL REORGANIZATION ITEMS -- -- | 50,805,000 (600,000)
---------- ---------- | ----------- ------------
OTHER INCOME [EXPENSE]: |
Interest Income 798,000 83,000 | 875,000 1,959,000
Interest Expense (Total Contractual Interest was |
$13,610,000 for the 156 Days Ended May 28, 1997) (2,885,000) (251,000) | (7,842,000) (19,062,000)
Gain on Sale of Development Agreement -- -- | -- 221,000
Sale of Management Contract -- -- | -- 3,000,000
Gain on Disposal of Riverboat Gaming Assets[Note1] -- -- | 364,000 17,542,000
---------- ---------- | ----------- ------------
TOTAL OTHER INCOME [EXPENSE] (2,087,000) (168,000) | (6,603,000) 3,660,000
---------- ---------- | ----------- ------------
[LOSS] INCOME BEFORE INCOME TAX (6,818,000) (1,336,000) | 44,411,000 (3,718,000)
|
PROVISION FOR INCOME TAX EXPENSE [NOTE 6] (336,000) (15,000) | (123,000) (321,000)
---------- ---------- | ----------- ------------
[LOSS] INCOME BEFORE EXTRAORDINARY ITEM (7,154,000) (1,351,000) | 44,288,000 (4,039,000)
Extraordinary Item - Loss on Early Extinguishment |
of Debt [Notes 1,2 & 19] -- -- | (1,998,000) --
Extraordinary Item - Gain From |
Reorganization Items [Notes 1,2 & 19] -- -- | 103,464,000 --
---------- ----------- | ----------- ------------
NET [LOSS] INCOME $(7,154,000) $(1,351,000) | $ 145,754,000 $ (4,039,000)
============ ============ | ============= ============
BASIC [LOSS] PER SHARE (a) $ (3.82) $ (0.72) | N/A N/A
============ =========== | ============= ============
Weighted Average Common And Equivalent |
Shares Outstanding 1,872,694 1,866,667 | N/A N/A
============ =========== | ============= ============
</TABLE>
Due to the reorganization and implementation of fresh-start reporting,
financial statements for the Reorganized Company (Period starting May 29,
1997) are not comparable to those of the predecessor Company. See Notes to
the Financial Statements for additional information.
a) The weighted average number of common shares outstanding and basic income per
common share for the predecessor company (periods through May 28, 1997 (the
Effective Date)) have not been presented because, due to the Company's
reorganization and implementation of fresh start reporting, they are not
comparable to subsequent periods and are irrelevant.
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements
F-5
<PAGE>
CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY [DEFICIT]
(ROUNDED EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
Common Stock Additional Accumulated
------------ ---------- -----------
Shares Amount Capital Deficit
------ ------ ------- -------
<S> <C> <C> <C> <C>
Balance - June 30, 1995 19,329,574 $ 37,617,000 $ 7,877,000 $(141,715,000)
Net Loss Year Ended June 30, 1996 -- -- -- (4,039,000)
----------- ------------ ----------- -------------
Balance - June 30, 1996 19,329,574 37,617,000 7,877,000 (145,754,000)
Cancellation of Predecessor Company
Common Stock and Elimination Of
Deficit (Pursuant to Fresh Start
Reporting) [Notes 1 & 2] (19,329,574) (37,617,000) (7,877,000) 145,754,000
----------- ------------ ----------- -------------
Balance - May 28, 1997 -- -- -- --
Issuance of New Common Stock (Pursuant to
Fresh Start Reporting) 1,800,000 387,000 -- --
Stock Grants to Officers and Directors 66,667 13,000 -- --
Net Loss May 29 through June 30, 1997 -- -- -- (1,351,000)
----------- ------------ ----------- ------------
Balance - June 30, 1997 1,866,667 400,000 -- (1,351,000)
Stock Grants to Officers and Directors 66,666 -- -- --
Net Loss Year Ended June 30, 1998 -- -- -- (7,154,000)
----------- ------------ ----------- ------------
Balance - June 30, 1998 1,933,333 $ 400,000 $ -- $ (8,505,000)
=========== ============ =========== ============
</TABLE>
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements
F-6
<PAGE>
CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(ROUNDED)
<TABLE>
<CAPTION>
Reorganized Company | Predecessor Company
---------------------------------- | ---------------------------------
May 29, 1997 | July 1 1996
Year Ended through | through Year Ended
June 30, 1998 June 30, 1997 | May 28, 1997 June 30, 1996
--------------- ------------- | ------------ -------------
<S> <C> <C> | <C> <C>
|
OPERATING ACTIVITIES: |
|
Net [Loss] Income $ (7,154,000) $ (1,351,000) | $ 145,754,000 $ (4,039,000)
------------ ------------ | -------------- ------------
Adjustments to Reconcile Net [Loss] Income to |
Net Cash Provided by Operations: |
Depreciation and Amortization 3,153,000 262,000 | 735,000 940,000
Loss on Sale of Assets -- -- | -- 1,000
[Gain] on Sale of Development Agreement -- -- | -- (221,000)
Loss on Early Extinguishment of Debt -- -- | 1,998,000 --
Extraordinary Gain From Reorganization -- -- | (103,464,000) --
Reorganization Adjustments (426,000) -- | (53,954,000) --
Reorganization Fees Paid To Management -- -- | 550,000 --
Amortization of Deferred Financing Cost -- -- | 552,000 1,431,000
Amortization of Original Issue Discount -- -- | 261,000 643,000
Abondonment of Capital Asset -- 75,000 | -- --
Write-Down of Excess Reorganization Value 1,300,000 -- | -- --
Equity in (Gain) Lossses of Unconsolidated |
Affiliate -- -- | -- 1,262,000
Adjustments to Basis of Disposed Assets -- -- | -- (5,981,000)
[Gain] on Sale of Riverboat Gaming Operations -- -- | (364,000) (17,542,000)
Proceeds from Sale of Riverboat Gaming |
Operations -- -- | -- 15,000,000
Cash Disbursed to Liquidating Trust -- -- | -- (4,741,000)
Repayment of Debtor in Possession Financing -- -- | -- (3,009,000)
Accrued Expenses Due To Liquidating Trust -- -- | -- 7,000,000
Operations -- -- | -- 500,000
(Increase) decrease in: |
Native American Management Fees and Other Receivables 62,000 42,000 | (146,000) 1,329,000
Interest Receivable 43,000 6,000 | 539,000 (29,000)
Prepaid Expenses and Other Assets |
[Including Income Taxes Receivable] 185,000 200,000 | (512,000) (53,000)
Notes Receivable, Other 100,000 -- | -- --
Officer Loans 250,000 -- | (250,000) --
Increase (decrease) in: |
Accounts Payable and accrued expenses (1,481,000) 858,000 | 821,000 1,496,000
Accrued Interest 95,000 251,000 | 6,979,000 16,795,000
State Income Taxes Payable 147,000 -- | -- --
---------- ---------- | ------------ -----------
Total Adjustments 3,428,000 1,694,000 | (146,255,000) 14,821,000
---------- ---------- | ------------ -----------
TOTAL PROVIDED BY (USED IN) OPERATING ACTIVITIES (3,726,000) 343,000 | (501,000) 10,782,000
---------- ---------- | ------------ -----------
</TABLE>
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements
F-7
<PAGE>
CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(ROUNDED)
<TABLE>
<CAPTION>
Reorganized Company | Predecessor Company
--------------------------------- | -------------------------------
May 29, 1997 | July 1, 1996
Year Ended through | through Year Ended
June 30, 1998 June 30, 1997 | May 28, 1997 June 30, 1996
--------------- ------------- | ------------ -------------
<S> <C> <C> | <C> <C>
|
INVESTING ACTIVITIES |
|
Repayment of Native American |
Loans/Advances 3,939,000 332,000 | 3,363,000 12,097,000
(Increase) Decrease in Restricted Funds 385,000 (2,000) (11,000) --
Proceeds From Sale of Assets -- -- | -- 293,000
Advances to Affiliates -- -- | -- (335,000)
Net Transfers (To) From Restricted Cash -- -- | (413,000) 4,064,000
Investments in Management Agreements -- -- | -- (243,000)
Loans To Tribes -- -- | -- (1,069,000)
Cash Held in Escrow -- -- | -- (500,000)
Purchase of Furniture, Fixtures and Equipment (23,000) -- | -- --
---------- --------- | ---------- ----------
|
TOTAL PROVIDED BY INVESTING ACTIVITIES 4,301,000 330,000 | 2,939,000 14,307,000
---------- --------- | ---------- -----------
</TABLE>
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements
F-8
<PAGE>
CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(ROUNDED)
<TABLE>
<CAPTION>
Reorganized Company | Predecessor Company
--------------------------------- | -------------------------------
May 29, 1997 | July 1, 1996
Year Ended through | through Year Ended
June 30, 1998 June 30, 1997 | May 28, 1997 June 30, 1996
--------------- ------------- | ------------ -------------
<S> <C> <C> |<C> <C>
|
FINANCING ACTIVITIES |
Proceeds From Issuance of Notes -- -- | --
Reduction in Equipment Notes -- -- | (1,290,000) (1,686,000)
Payments to Trustee for Senior Secured |
Noteholders -- -- | -- (22,489,000)
-------------------------------------|------------------------------------
TOTAL USED IN FINANCING ACTIVITIES -- -- | (1,290,000) (24,175,000)
-------------------------------------|------------------------------------
NET INCREASE 575,000 673,000 | 1,148,000 914,000
|
CASH AND CASH EQUIVALENTS - |
BEGINNING OF PERIODS 3,923,000 3,250,000 | 2,102,000 1,188,000
-------------------------------------|------------------------------------
CASH AND CASH EQUIVALENTS - |
END OF PERIODS $4,498,000 $ 3,923,000 | $ 3,250,000 $ 2,102,000
=====================================|====================================
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW |
INFORMATION: |
|
Cash Paid During The Periods For: |
Interest $2,671,896 $ 50,000 | $ 2,510,000 $ 17,252,000
Income Taxes $ 2,000 $ -- | $ 423,000 $ -
</TABLE>
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements
F-9
<PAGE>
CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
In May 1996, the Company sold all the outstanding common stock of
its wholly owned subsidiary, CCCD for $50,000,000, plus assumptions of
equipment liabilities of $6,500,000. The Company received cash of
$15,000,000, a note for $35,000,000 and Casino Magic assumed equipment
Notes of $6,500,000.
In May 1996, the Company, as guarantor, assumed the liability from
CCCD of the bank note payable of $2,000,000 to FNBC.
On July 29, 1996, the Indenture Trustee for the Company's Senior
Secured Noteholders distributed an aggregate of $49,986,000 in cash and
Purchaser's Notes to the Senior Secured Noteholders on account of principal
and accrued interest ("Noteholder Distribution"). The Noteholder
Distribution included $28,000,000 in Purchaser's Notes, as well as cash
from the sale of CCCD and CMC, proceeds from the early payment of the
development loan to the Muckleshoot Tribe, proceeds from the buyout of the
Cow Creek contract, $3,200,000 in unused restricted cash and other sources.
Subsequently, in August 1996 the Purchaser's Notes were redeemed by CMC at
100% of the principal amount plus accrued interest. The remainder of
$413,000 was held in a cash escrow account by the trustee of the Company's
Senior Secured Noteholders.
F-10
<PAGE>
CAPITAL GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) 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 the
Company's 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.
In order to enter the Native American, riverboat, dockside casino or
any other aspect of the gaming industry, the Company will be subject to
regulation by each state in which it conducts business, and to a certain
extent under Federal, Tribal and (in some cases) state law with respect to
Native American gaming. In jurisdictions where gaming has recently been
legalized, gaming cannot begin until a licensing and regulatory framework is
promulgated and regulatory commissions are appointed, staffed and funded. The
regulatory framework adopted by any jurisdiction may impose delays in
licensure, restrictions or costs that would materially detract from the
profitability of gaming operations. The Company must obtain a gaming license
for each location where it will operate or manage a gaming casino, and each of
the Company's officers, directors, managers and principal shareholders are
subject to strict scrutiny and approval of the gaming commission or other
regulatory body of each state in which the Company may conduct gaming
operations. In addition, gaming on Native American lands is extensively
regulated, and the terms and conditions of management contracts must be
approved by the Tribes and certain regulatory entities. Changes in the
interests of principals must be approved, and the Company and certain of its
principals must be licensed, by Tribal and in some cases, state authorities.
There can be no assurance that the Company or any of its key personnel will
obtain the requisite licenses and approvals of the various state and Tribal
gaming commissions and the National Indian Gaming Commission ("NIGC") in a
timely fashion, if at all.
The Company must also obtain liquor licenses from state regulatory
agencies for each of its proposed operations. Rules and regulations in this
regard are strict and the loss of such licenses is possible for regulatory
violations. The loss or suspension of a liquor license could significantly
impact a licensee's operations. Local building, health and fire codes and
similar regulations could also impact the Company's operations. Violations of
any such statutes, codes or regulations could have a material adverse impact
on the financial condition or operations of the Company.
The Company's CGMI subsidiary currently manages and operates two
Native American gaming facilities, which CGMI has developed or expanded into
Class III gaming facilities.
o Tonto Apache Tribe - Payson, Arizona (Class III facility
became operational in April 1995)
o Umatilla Tribes - Pendleton, Oregon (Class III facility
became operational in March 1995)
CGMI also has a management and development agreement with the Pueblo of
Laguna tribe pursuant to which CGMI is developing a Class III gaming facility on
the tribe's sovereign lands located on I-40 west of Albuquerque, New Mexico.
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.
F-11
<PAGE>
Disposal of Riverboat Gaming Operation
The Company's former wholly-owned subsidiary, Crescent City Capital
Development Corp. ("CCCD"), was a 50% partner with Grand Palais Inc. in a
River City Joint Venture ("RCJV"), a general partnership formed to develop and
operate two riverboats in New Orleans, Louisiana. The joint venture, which was
accounted for on the equity method, was terminated in July 1995. The Company's
riverboat, the Crescent City Queen, opened on April 4, 1995. On June 9, 1995,
the riverboat casino operations in New Orleans was forced to cease due
primarily to significant revenue shortfalls which resulted in operating losses
that the Company could not continue to fund. On July 26, 1995, CCCD was
involuntarily petitioned for reorganization under Chapter 11 of the Federal
Bankruptcy Code. On July 28, 1995, the petition was changed to a voluntary
filing. On October 13, 1996, CCCD filed a Plan of Reorganization (the "January
Plan") under Chapter 11 which was confirmed on January 12, 1996. The January
Plan was predicated upon an agreement (the "MRI Agreement") to sell CCCD to
Mirage Resorts, Inc. ("Mirage") for $55,000,000 plus the assumption of certain
equipment liabilities of up to $6,500,000. The sale was contingent upon
certain waivers and conditions being achieved on or before January 24, 1996.
On January 24, 1996, Mirage announced that conditions to the closing of the
purchase were not satisfied by the contractual deadline and terminated the MRI
Agreement. On February 21, 1996, the Company entered into a stock purchase
agreement (the "CMC Agreement") with Casino Magic Corp. ("CMC") to transfer
the ownership of CCCD and substantially all of its assets to a wholly-owned
subsidiary of CMC. An Amended Plan of Reorganization (the "Amended Plan"),
which was predicated upon the CMC Agreement, was filed by CCCD and was
confirmed by the Bankruptcy Court on April 29, 1996. On May 13, 1996, the
Company completed the sale of CCCD for an aggregate purchase price of
$56,500,000, consisting of $15,000,000 in cash, Purchaser Notes of
$35,000,000, and the assumption of up to $6,500,000 in certain equipment
liabilities. The Purchaser Notes, due no later than May 13, 1999, had an
interest rate of 11-1/2% per annum, payable quarterly beginning August 13,
1996, and was guaranteed by CMC. The Purchaser Notes were paid in full on July
29, 1996.
For the period ended May 28, 1997, the Company recorded a gain on the
disposal of the riverboat gaming asset of $364,000 which represented an
adjustment to the carrying value of liabilities relative to the sale.
For the year ended June 30, 1996, the Company recorded costs of
operations of the riverboat gaming facility of $4,903,000, which included (i)
legal fees of $2,192,000, (ii) equity in loss of the RVJV of $1,262,000, (iii)
other reorganization items of $1,240,000, (iv) interest income of $11,000 and,
(v) interest expense of $220,000. Additionally, the Company recorded a gain on
sale of the riverboat gaming assets of $17,542,000.
Funds Held By Trustee for Old Senior Secured Noteholders
As of June 30, 1996, approximately $22,500,000 was reflected as a
contra-liability to the Old Senior Secured Notes and represented cash held by
the Trustee for the benefit of the Old Senior Secured Noteholders against
obligations owed by the Company to the Noteholders. The obligations included
approximately $124,000,000 in Old Senior Secured Notes, a consent fee note
payable of $1,350,000 and accrued interest of approximately $20,700,000. In
addition, the Trustee held $28,000,000 in Purchaser Notes due from CMC as a
result of the sale of CCCD which was reflected as notes receivable of
$35,000,000 and accrued expenses of $7,000,000. On July 29, 1996, the Trustee
distributed to the Old Senior Secured Noteholders, an aggregate of
approximately $50,000,000, consisting of $28,000,000 in Purchaser Notes and
approximately $22,000,000 in cash. The remaining $500,000 was held in escrow
to indemnify CMC for any undisclosed liabilities arising from the sale of
CCCD.
F-12
<PAGE>
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, New Jersey
(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.
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 the 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 provided for the continuation of Capital Gaming
International, Inc.'s operations. Under the Plan, the old common stock interests
in Capital Gaming International, Inc. were canceled 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: (1) holders of Old Secured Notes received in
the aggregate (A) on account of their Allowed Secured Claims, their Pro Rata
Share of the New Secured Notes having a principal face amount of $21,450,000
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 holders 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 share the Indenture Trustee would otherwise
receive on account of its Class 4 Claim in excess of 375,000 shares and any
F-13
<PAGE>
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 canceled 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 their claims against subsidiaries of the Company arising
out of guaranties and pledges, except for the treatment of their Claims
provided under the Plan.
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.
Liabilities subject to compromise consisted of the following
immediately preceding the Effective Date:
Senior Secured Notes $ 102,971,000
Consent Fee, Payable to Noteholders 1,350,000
Guarantee of Notes Payable to Banks 2,141,000
Notes Payable to Republic Corporate Services 22,630,000
Trade Payables and Accrued Expenses 3,297,000
------------------
$ 132,389,000
==================
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 effect of the adoption of fresh-start reporting is reflected in the June 30,
1998 and 1997 Consolidated Balance Sheets. 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. In order to accomplish this, the
Company provided its financial advisors with cash flow projections for the
post-reorganization operation of the Company's business under different
scenarios. The scenarios, which ranged from three to eight years of
post-reorganization operation, included assumptions related to the completion of
the Narragansett project and the attraction of new management agreements. Due to
the uncertainty surrounding the Narragansett project and the ability of the
Company to attract and enter into new management agreements, there were
significant differences in the cash flow projections under the various
scenarios. Based upon their knowledge and experience in the gaming industry
F-14
<PAGE>
generally, and their familiarity with the Company's business and description
of its contracts, the financial advisors applied appropriate probability
factors to each of the scenarios, which reflected, among other things, the
inherent risks in realizing the assumptions underlying each of the scenarios.
The result of applying the factors to each of the scenarios produced a
probability weighted cash flow projection for the Company as a whole. Due to
the Company's expected NOL carryforwards, no consideration was given to the
effect of federal income taxes. Further, as the Company has no significant
tangible fixed assets, no consideration was given to the terminal value of the
Company. A discount rate of 12% was then applied to the combined cash flow
projections to determine their present value. This resulted in as estimated
fair value of the Reorganized Company of approximately $23,500,000, which was
approved by the Bankruptcy Court during its confirmation hearings. The excess
of the reorganization value over the fair market value of the net assets,
totaling approximately $9,339,000, is reported as excess reorganization value
in the accompanying consolidated balance sheet as of June 30, 1997 and will be
amortized over a period of four years.
Excess Reorganization Value at June 30, 1998 includes the effect of a
reclassification of approximately $426,000 of Restricted Funds. The $426,000
was previously reported as held by the Indenture Trustee for the benefit of
the Senior Secured Noteholders. An audit conducted by the Indenture Trustee
determined that these funds were held for the benefit of the Old Senior
Secured Noteholders as a result of the sale of the Company's wholly-owned
subsidiary, Crescent City Capital Development Corp. (CCCD) in May 1996. The
sale of CCCD and the previously reported $426,000 in Restricted Funds relate
to the Predecessor Company. Had the $426,000 not been reported for the benefit
of The New Senior Secured Noteholders on the Consolidated Balance sheets of
the Predecessor Company, the Excess Reorganization Value of the Reorganized
Company would have been $9,765,000 or $426,000 higher than the $9,339,000
recorded on May 28, 1997, the Date of Reorganization.
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 June 30, 1998 and 1997 consolidated financial
statements. Accordingly, a vertical black line is shown in the consolidated
financial statements to separate post-Reorganization operations from those
prior to May 28, 1997. 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.
Reorganization adjustments for the period ended May 28, 1997 were
comprised of:
Legal/Professional Fees $(1,716,000)
Interest Income 30,000
Write-off of Goodwill (405,000)
Excess Reorganization Value 9,265,000
Adjustments to Capital Stock 37,217,000
Adjustment to Paid in Capital 7,877,000
-----------
Total $52,268,000
===========
Reorganization fees paid to management for the period ended May 28,
1997, included in Reorganization Items amounted to $1,463,000 for the year
ended June 30, 1997. According to the Plan of Reorganization, this was
comprised of (i) $900,000 from the discontinuance and sale of the riverboat
operation in New Orleans, (ii) $550,000 in New Senior Secured Notes, and (iii)
$13,000 in New Common Stock grants.
F-15
<PAGE>
The effect of the Plan of Reorganization on the Balance
Sheet as of May 28, 1997, is as follows:
<TABLE>
<CAPTION>
Prereorganized Exchange of Reorganized
Balance Sheet Debt Discharge Stock Fresh Start Balance Sheet
--------------- -------------- ----------- ----------- -------------
Assets
- ------
<S> <C> <C> <C> <C> <C>
Current Assets
Cash and Cash Equivalents $3,250,000 $ 0 $ 0 $ 0 $3,250,000
Restricted Funds in Escrow 924,000 0 0 0 924,000
Interest Receivable 78,000 0 0 0 78,000
Native American Management Fees
and Expenses Receivable 813,000 0 0 0 813,000
Current Portion-Native American
& Other Loans Receivable 3,931,000 0 0 0 3,931,000
Notes Receivable From Officers' 250,000 0 0 0 250,000
Prepaid Expenses and Other Current
Assets 638,000 0 0 0 638,000
Property and Equipment 93,000 0 0 0 93,000
Excess Reorganization Value 0 0 0 9,339,000 9,339,000
Other Assets 0 0 0 0 0
Native American Loans Receivable 4,032,000 0 0 0 4,032,000
Investments in Native American
Management Agreement 2,002,000 0 0 0 2,002,000
Notes Receivable, Other 80,000 0 0 0 80,000
Deferred Financing Costs 4,311,000 0 0 (4,311,000) 0
Goodwill 405,000 0 0 (405,000) 0
Deposits and Other Assets 0 0 0 0 0
----------- ------------- --------------- ---------- -----------
TOTAL ASSETS $20,807,000 $ 0 $ 0 $4,623,000 $25,430,000
=========== ============= =============== ========== ===========
Liabilities and Shareholders'
Equity (Deficit)
- -----------------------------
Current Liabilities
Accounts Payable and Accrued Expenses $1,930,000 $ 0 $ 0 $ 0 $1,930,000
Accrued Interest on Secured Notes 0 0 0 0 0
12.0% Senior Secured Notes Payable 0 23,100,000 0 0 23,100,000
Liabilities Subject to Compromise 132,389,000 (132,389,000) 0 0 0
Common Stock 37,617,000 0 (37,617,000) 400,000 400,000
Additional Paid In Capital 7,877,000 0 (7,877,000) 0 0
Retained Earnings (Deficit) (159,006,000) (550,000) 45,494,000 4,223,000 0
0 132,389,000 0 0 0
0 (22,550,000) 0 0 0
----------- ------------- --------------- ---------- -----------
TOTAL LIABILITIES & EQUITY $20,807,000 $ 0 $ 0 $4,623,000 $25,430,000
=========== ============= =============== ========== ===========
</TABLE>
F-16
<PAGE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements of the Reorganized
Company (Period beginning May 29, 1997) and the Predecessor Company (Periods
prior to May 29, 1997) include the accounts of Capital Gaming International,
Inc. and its wholly owned subsidiaries Capital Gaming Management Inc. (CGMI)
and Capital Development Gaming Corp. (CDGC). Periods prior to July 1, 1996
also include a former subsidiary, Cresent City Development Corp. (CCCD).
Intercompany balances and transactions have been eliminated.
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 3 to 7 years.
Revenue Recognition
The revenues recognized in these financial statements from Native
American Casino Management Fees are those of CGMI and represent management
fees derived primarily from Class III (gaming) facilities. Management fees are
recognized as revenue when earned based upon earnings sharing arrangements
detailed in the respective management contracts with the Native American
Tribes.
Excess Reorganization Value
Excess Reorganization Value is amortized on a straight line basis
over four years. When changes in circumstances require, management evaluates
events and circumstances in order to determine whether the recorded balance
has been impaired. If impairment is deemed to exist, the excess reorganization
value will be written down to fair value. (See Note [5]).
Income Taxes
The Company accounts for income taxes pursuant to Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. SFAS
No. 109 requires the measurement of deferred tax assets for deductible temporary
differences and operating loss carryforwards and of deferred tax liabilities
for taxable temporary differences. Measurement of the current deferred tax
liabilities and assets is based on provisions of enacted tax law; the effects
of future changes in tax laws or rates are not anticipated. Deferred tax
assets primarily result from net operating loss carryforwards and impairment
of assets recognized in different periods for financial reporting and tax
purposes.
Capitalization of Development Costs
The costs associated with developing, negotiating and securing new
management agreements are expensed as incurred until such time when management
believes the development of a casino facility is likely. This juncture in
development requires, at a minimum, a management contract in effect 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.
F-17
<PAGE>
Earnings Per Share
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share", which is
effective for financial statements issued for periods ending after December 15,
1997. Accordingly, earnings per share data in the financial statements for the
year ended June 30, 1998 have been calculated in accordance with SFAS No. 128.
Prior period earnings per share data have been recalculated as necessary to
conform prior year data to SFAS No. 128. Earnings per share data for the
Predecessor Company have not been presented because, due to the reorganization
and implementation of fresh start reporting, they are not comparable to
subsequent periods.
SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15,
"Earnings per Share," and replaces its primary earnings per share with a new
basic earnings per share representing the amount of earnings for the period
available to each share of common stock outstanding during the reporting period.
SFAS No. 128 also requires a dual presentation of basic and diluted earnings per
share on the face of the statement of operations for all companies with complex
capital structures. Diluted earnings per share reflects the amount of earnings
for the period available to each share of common stock outstanding during the
reporting period, while giving effect to all dilutive potential common shares
that were outstanding during the period, such as common shares that could result
from the potential exercise or conversion of securities into common stock.
The computation of diluted earnings per share does not assume
conversion, exercise, or contingent issuance of securities that would have an
antidilutive effect on earnings per share (i.e., increasing earnings per share
or reducing loss per share). The dilutive effect of outstanding options and
warrants and their equivalents are reflected in dilutive earnings per share by
the application of the treasury stock method which recognizes the use of
proceeds that could be obtained upon exercise of options and warrants in
computing diluted earnings per share. It assumes that any proceeds would be used
to purchase common stock at the average market price during the period. Options
and warrants will have a dilutive effect only when the average market price of
the common stock during the period exceeds the exercise price of the options or
warrants. As of June 30, 1998 and 1997, the Company has contingently issuable
shares of a common stock which are not included in earnings per share
calculations as they have on antidilutived effect on earning per share.
Reorganization Items
Reorganization items consist of income, expenses and other costs
directly related to the reorganization of the Company, the Chapter 11 filings
of both its former CCCD subsidiary and the reorganization of the parent
company, and subsequent reorganization efforts.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
(3) NATIVE AMERICAN GAMING OPERATIONS
Facility Openings and Summarized Financial Information - On March 10,
1995, the Umatilla Tribe opened the 40,000 square foot Wildhorse Gaming Resort
in Pendleton, Oregon. This facility, under management by the Company offers
video slot machines, keno, non-banking table games, off-track betting (OTB) and
high stakes bingo. The first phase of this development opened on November 5,
1994. During the year ended June 30, 1998, the periods May 29, 1997 to June 30,
1997 and July 1, 1996 to May 28, 1997 and the year ended June 30, 1996 the
facility produced approximately $4,754,000, $337,000, $3,529,000, and
$3,210,000, respectively, in management fees for the Company.
On April 27, 1995, the Tonto Apache Tribe opened the 35,000 square foot
Mazatzal Casino located approximately 70 miles north of Phoenix, Arizona. The
casino features slot machines, keno, non-banking table games and high stakes
bingo. The Company, as manager of the casino, collected approximately
$2,276,000, $232,000, $1,823,000, and $1,961,000 in management fees for the year
ended June 30, 1998, the periods May 29, 1997 to June 30, 1997 and July 1, 1996
to May 28, 1997 and the year ended June 30, 1996, respectively.
The Muckleshoot Tribe opened the first phase of its Muckleshoot Casino
on April 28, 1995, and presently offers table games, poker games, keno and OTB.
The facility is located in the Seattle-Tacoma metropolitan area. The final phase
of this facility opened on September 8, 1995 with gaming space of 65,000 square
feet. The Company, as manager of the facility, collected approximately
$1,120,000, $184,000, $2,176,000, and $2,038,000 for the year ended June 30,
1998, the periods May 29, 1997 to June 30, 1997 and July 1, 1996 to May 28, 1997
and the year ended June 30, 1996, respectively.
<PAGE>
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.
In response to the termination of the 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 (See
footnote [23]).
During the year ended June 30, 1996, the Cow Creek Management
contract was terminated in exchange for a payment of $3,000,000. The Cow Creek
facility generated an additional $618,000 in management fees during the year
ended June 30, 1996.
F-18
<PAGE>
(4) 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 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 National Indian Gaming Commission
("NIGC") for approval in June 1995.
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, such approval 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 October and November of 1994, two lawsuits were filed, including
one 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 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") had
requested comments 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.
F-19
<PAGE>
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 for 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 under which such procedures would be adopted. Written comments
concerning the proposed rule were due with the Department on or before June 22,
1998. The comments are currently under review. In March, 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 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 voted in
July 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 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 be no assurance that
the Secretary will have the authority under the final rules to impose a
Tribal/State Compact between the Narragansett Tribe and the State of Rhode
Island.
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, which
the Company believes discriminates against the Narragansett Tribe by treating
it differently than every other Tribe in the United States, 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 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, the Chafee Rider is unconstitutional under the equal protection
component of the Fifth Amendment to the U.S. Constitution, and 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 has been filed by the Narragansett Tribe in the United States Court of
Appeals for the District of Columbia and is pending. The United States Court of
Appeals has held oral argument on the matter and the parties are awaiting the
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 U.S.
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 several political leaders from the State of Rhode Island who
supported 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.
<PAGE>
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 had focused 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 host city or town must also approve any such referendum
question prior to it 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.
In spite of the set-backs caused by the invalidation of the Compact and
the application of the Chafee Rider, the Company intends to pursue the Rhode
Island Project. There can be no assurance that any legislative, judicial or
administrative efforts will be successful.
F-20
<PAGE>
The Company has continued funding the on-going development costs of the
Rhode Island Development Project. None of these costs have been capitalized.
Included in Native American Gaming Development Costs in the statement of
operations for year ended June 30, 1998, the periods May 29, 1997 to June 30,
1997 and July 1, 1996 to May 28, 1997 and the year ended June 30, 1996 are
approximately $2,212,000, $532,000, $1,799,000, and $1,899,000, respectively in
costs related to the development of this management contract. At June 30, 1998,
and 1997 approximately $9,318,000, and $7,432,000 is expected to be recoverable
by the Company only if and when a gaming facility is established by the
Narragansett Tribe as repayment will be made from the Net Distributable Profits
of the gaming facility.
In March 1998, the Company entered into an option agreement for the
purchase of approximately 64 acres of fee simple real property in the cities of
Providence and Cranston, Rhode Island, some acres of which are underwater in the
Narragansett Bay (the "Optional Property"), to be utilized for the development
of the proposed Narragansett Casino (the "Option Agreement"). The Option
Agreement calls for option payments by the Company as follows: four monthly
payments of $5,333 from March 1998 through June 1998, six monthly payments of
$16,000 from July 1998 through December 1998, six monthly payments of $5,333
from January 1999 through June 1999, and six monthly payments of $16,000 from
July 1999 through December 1999 (collectively the "Option Payments"). Upon the
Company's timely payment of all Option Payments and prior to the Option
Agreement's expiration on December 31, 1999, the Company will have the option to
purchase the Optioned Property for $9.5 million. The Company may terminate the
Option Agreement at any time without cause by notifying the seller of the
Optioned Property; however, the Company will continue to be obligated to make
the Option Payments to the seller through December 1998. Minimum required Option
Payments for the next five fiscal years are scheduled as follows:
Fiscal Year Ending June 30, 1999 $96,000
Fiscal Years Thereafter 0
-------
$96,000
=======
(5) EXCESS REORGANIZATION VALUE
Accumulated amortization and amortization expense of excess
reorganization value was approximately $2,625,000, and $2,432,000 as of June 30,
1998 and for the year ended June 30, 1998, and both accumulated amortization and
amortization expense was approximately $193,000 as of June 30, 1997 and for the
period May 28, 1997 to June 30, 1997.
On June 30, 1998, the Company recorded a non-cash impairment loss of
$1,300,000 related to the write-down of the Company's excess reorganization
value. The Company has experienced an operating loss and an operating cash flow
loss for the year ended June 30, 1998. In addition, due to recent developments
relating to the Company's Narragansett gaming project in Rhode Island,
management has determined that this project has a lesser probability of becoming
operational. As a result of these circumstances, the projected future cash flows
of the Company are less than the carrying value of the asset; therefore, an
impairment loss has been recognized. The impairment asset is the excess
reorganization value which resulted from the Company's emergence from a Chapter
11 bankruptcy filing on May 28, 1997. This asset was written down to its
estimated fair value based on the discounted cash flows projected through May,
2001, the end of the asset's estimated life. The recognition of this impairment
was in accordance with the provisions of Statement of Financial Accounting
Standards No. 121 - "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of."
<PAGE>
(6) INCOME TAXES
<TABLE>
<CAPTION>
Components of Income tax expense:
Reorganized Company | Predecessor Company
---------------------------------- | -----------------------------------------
|
May 29, 1997 | July 1, 1996
Year ended Through | Through Year ended
June 30, 1998 June 30, 1997 | May 28, 1997 June 30, 1996
------------- ------------- | ------------ -------------
<S> <C> <C> | <C> <C>
Current: |
Federal $ -- $ -- | $ -- $ --
State 336,000 (15,000) | ($123,000) (321,000)
------------- --------- | --------- ---------
Current Expense $ 336,000 ($ 15,000) | ($123,000) ($321,000)
============= ========= ========= =========
</TABLE>
A reconciliation of Income tax (expense) benefit at the federal
statutory rate to the Company's effective Income tax (expense) benefit is as
follows:
<TABLE>
<CAPTION>
Reorganized Company | Predecessor Company
---------------------------------- | -----------------------------------------
|
May 29, 1997 | July 1, 1996
Year ended Through | Through Year ended
June 30, 1998 June 30, 1997 | May 28, 1997 June 30, 1996
------------- ------------- | ------------ -------------
<S> <C> <C> | <C> <C>
Federal Income Tax Benefit |
(Expense) at the Statutory 2,318,000 $454,000 | ($15,100,000) $5,098,000
Rate |
Amortization of Excess |
Reorganization Value (827,000) -- | -- --
State Tax Benefit, (Expense) |
Net of Federal Tax Benefit (336,000) (15,000) | (123,000) (321,000)
(Non) Recognition of NOL |
Carryforward (1,491,000) (454,000) | 15,100,000 (5,098,000)
Current Expense $ (336,000) $(15,000) | $(123,000) ($321,000)
</TABLE>
F-21
<PAGE>
(6) Net Operating Loss Carryforwards ("NOLs")
The following description of the Company's net operating loss
carryforwards is based upon management's analysis of the application of the
relevant sections of the Tax Code to the net operating loss carryforwards of
the Company. There can be no assurance that the Internal Revenue Service or
the courts will agree with management's analysis. There are substantial risks
associated with the Company's utilization of the NOLs.
The term "Gross NOLs" means the local 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. 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") as 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.
Under the Plan, 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 $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.
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. After taking into account the reorganization of the
Company pursuant to the Plan and assuming that Tax ss. 382(1)(5) applies,
management of the Company believes the Net NOLs of the Company and its
subsidiaries as of June 30, 1997 are approximately $31,500,000, although no
assurance can be given that the Company will be able to utilize these NOLs.
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.
Although a 50% ownership charge was expected to occur as a result of
the transfer of stock of the Company to creditors pursuant to the Plan, 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
jurisdiction of a court in a United States Code Title 11 or similar case and
F-22
<PAGE>
(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 certain 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.
If the Company is subject to the Section 382 Limitation as a result
of the consummation of the Plan, 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, based on the value of the equity of the Company as of
the Effective Date of the Plan of $400,000, then the Company could use
approximately $23,000 of its NOLs each year until they expire.
As a result of the Company's Chapter 11 proceedings, for financial
reporting, the Company recorded significant tax changes. Such changes are
reflected in the June 30, 1998 deferred tax asset amount as set forth below.
Substantial net operating loss carryforwards ("NOL's") generated in previous
years totaling approximately $107,000,000 were reduced by approximately
$75,500,000, leaving the Company with remaining NOL's totaling approximately
$31,500,000 assuming that section 382(1)(5) applies. The reductions are mainly
a result of the cancellation of Indebtedness income effected by the
reorganization.
As of June 30, 1998, the Company has a net operating loss
carryforward of approximately $35,214,000 expiring as follows:
June 30, 2009 6,778,000
June 30, 2010 14,230,000
June 30, 2011 10,152,000
June 30, 2012 1,255,000
June 30, 2018 2,799,000
-----------
Total $35,214,000
===========
Pursuant to SOP 90-7 any benefits the Company may receive from the
utilization of preconfirmation net operating loss carryforwards will first
reduce excess reorganization value until exhausted and thereafter be reported
as a direct addition to paid-in capital.
F-23
<PAGE>
The Income tax effects of temporary differences that give rise to
significant portions of deferred income tax assets as of June 30, 1998 and
1997 are as follows:
1998 1997
---- ----
Deferred Income Tax Assets:
Federal Net Operating Losses $ 11,973,000 $ 10,698,000
State Net Operating Losses 6,949,000 2,138,000
--------------- ---------------
Total Deferred Income Tax Assets 18,922,000 12,836,000
Valuation Allowance (18,922,000) (12,836,000)
=============== ===============
Net Deferred Income Tax Assets $ 0 $ 0
=============== ===============
The deferred tax asset valuation allowance is equal to the full
amount of the gross deferred tax asset because the realization of the assets
cannot be assured at this time.
(7) 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 $3,300,000. As of June 30, 1998,
there was a total of approximately $3,693,000, in loans outstanding with
$2,249,000, to be realized within one year and $1,444,000, classified as
long-term. These notes bear interest rates at prime +1% (9.5% at June 30, 1998)
and have original scheduled repayments of 36 to 60 months. A maturity table is
presented below:
For the years ended:
June 30, 1999 2,249,000
June 30, 2000 1,444,000
June 30, 2001 and thereafter -0-
----------
TOTAL $3,693,000
==========
Federally recognized Native American Indian tribes are sovereign
nations governed by federal statutes that are different than statutes
governing commercial enterprises in the United States. These receivables are
due from these 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 collectibility is forced into litigation. The
Company does not require collateral from the Tribes to secure its receivable.
Management has no disputes with any Native American tribe that would place
doubt on the full collectibility of any of the Native American loan
receivables. The Company takes all necessary legal measures in the
documentation and preparation of agreement executed with Native American
Tribes, including the Tribe's waiver of sovereign immunity related to contract
enforcement.
Loan Repayment and Contract Buy-out - Pursuant to the terms of the
Class III management contract between the Muckleshhot Tribe and the Company's
Native American gaming subsidiary - Capital Gaming Management, Inc. (CGMI) - the
Tribe has repaid CGMI approximately $7,600,000 that was advanced for developing,
constructing and equipping the gaming facility. Additionally, under the terms of
the Class III management contract, the annual management fee of 11.5% of gross
gaming revenues had been reduced to 3.9% simultaneously upon the repayment of
the loan by the Tribe in September 1995.
The Company closed an agreement effective September 1, 1995 pursuant to
which the Cow Creek Bank of Umpqua Tribe of Indians bought out the remaining
term of the Management Agreement for the Tribe's gaming facility in Canyonville,
Oregon. The Tribe has paid the Company and its Native American
F-24
<PAGE>
subsidiary $3,000,000 in consideration for early termination of the Management
Agreement and principal repayment of approximately $823,000. The buy-out of
future management fees of $3,000,000 and the principal repayment of $823,000
was paid to the Trustee for the Senior Secured Noteholders, less $200,000 for
expenses in connection with the transaction which was reimbursed to the
Company. The five year Management Agreement had less than two years remaining
prior to its expiration.
(8) PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of June 30, 1998 and
1997:
1998 1997
---- ----
Office furniture, fixtures and equipment $ 131,000 $ 112,000
Less accumulated depreciation (108,000) (97,000)
----------- -------------
$ 23,000 $ 15,000
=========== ============
Depreciation expense for the year ended June 30, 1998, the periods May
29, 1997 to June 30, 1997 and July 1, 1996 to May 28, 1997 and the year ended
June 30, 1996 is $13,000, $3,000, $34,000, and $37,000, respectively, and is
included as part of depreciation and amortization expense.
(9) INVESTMENT IN NATIVE AMERICAN MANAGEMENT AGREEMENTS
The balance of $1,229,000, and $1,937,000 as of June 30, 1998 and 1997
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 five years on the straight line method. The
remaining lives of these management contracts is approximately two years.
Amortization for the year ended June 30, 1998, periods May 29, 1997 to June 30,
1997 and July 1, 1996 to May 28, 1997 and the year ended June 30, 1996, was
approximately $708,000, and $59,000, $687,000, and $860,000, respectively.
Accumulated amortization as of June 30, 1998 and 1997 was approximately
$2,119,000 and $1,290,000, respectively. When changes in circumstances require,
the management of the Company will evaluate whether the individual carrying
value of these assets has been impaired by comparing the carrying value to the
value of the projected net cash flow from related operations. As of June 30,
1998, management expects the assets to be fully recoverable (See footnote [23]
Subsequent Events).
(10) NOTES RECEIVABLE FROM OFFICERS
Pursuant to the Reorganization Plan and their respective amended
employment agreements, the Company's two senior executives borrowed a total of
$250,000 from the Company. These loans were evidenced by unsecured notes which
bore six percent (6%) simple interest. Both notes had a maturity date of May
28, 1998 and both were paid in full in December 1997.
F-25
<PAGE>
(11) 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 New Senior Secured Notes having an aggregate principal
amount of $23,100,000. 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 Amended Indenture includes
certain restrictive covenants. The Company has complied with substantially all
of the covenants as of June 30, 1998, except as more fully described below.
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 of 2001. Required principal payments
through maturity is as follows:
June 30, 1999 --
June 30, 2000 4,620,000
June 30, 2001 18,480,000
Thereafter --
---------------
Total $ 23,100,000
===============
The indenture - The proceeds from the issuance of the Company's New
Senior Secured Notes are subject to certain restrictions, and the Company is
subject to certain restrictive covenants, including dividend restrictions,
pursuant to the Amended Indenture. The Company is also required to repurchase
the New Senior Secured Notes under certain conditions.
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 (as defined in the Plan) 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 gaming regulators.
On August 7, 1998, the Company was notified by counsel for the
Indenture Trustee of the occurrance 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 majority noteholder 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. (See Note [23]).
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.
F-26
<PAGE>
(12) CAPITAL STRUCTURE
Capital Structure After Reorganization
Pursuant to the Plan, the Predecessor Company's common stock and
outstanding options were canceled 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 3,200,000 shares of no par value common
stock. Upon the Effective Date, 1,800,000 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 and 66,667 shares on the
one year anniversary following the Effective Date. Also on the Effective Date,
133,333 shares were reserved to be issued to executive management pursuant to
the Plan. The 66,666 remaining shares will be issued on the second anniversary
of the Effective Date.
In accordance with Section 10 of the Company's Certificate of
Incorporation, the Company is imposing certain transferability restrictions
upon its 5-percent shareholders for purposes of Tax Code ss. 382. These
restrictions generally provide that the 5-percent shareholders shall be
prohibited from transferring shares of New Common Stock without the consent of
a designated Tax Advisor (the "Tax Advisor"). The Tax Advisor shall have no
obligation to consent to a transfer unless it determines that the proposed
transfer and any related proposed transfers do not create an unreasonable risk
of loss of, or material litigation on, the Company's use of its net operating
loss carryforwards.
Preferred and Common Stock
Preferred stock of the predecessor Company consisted of 5,000,000
authorized shares, of which none where issued. Common stock of the predecessor
Company consisted of 75,000,000 authorized shares. All predecessor common and
preferred stock were canceled under the Reorganization.
The predecessor Company had adopted a Stock Option Plan. All
outstanding options were canceled pursuant to the Reorganization.
(13) STOCK OPTION PLAN
Pursuant to the Reorganization, the Company canceled 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 amounts 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 provision. As of June 30, 1998 there
were no options granted under the Plan.
(14) COMMITMENTS AND CONTINGENCIES
The Company has employment agreements with the Company's President and
Chief Operating Officer and Executive Vice President and General Counsel which
provide for two year terms expiring in May 2000 at the annual salary of $275,000
each. The agreements also provide for severance payments upon the occurrence of
certain terminations. An employment agreement with the Vice President of
Compliance requires annual compensation of $150,000 expiring May 2000. An
employment agreement with the Vice President and Chief Financial Officer
requires annual compensation of $100,000 expiring May 2000.
The Company has covenanted to file, upon request from a majority of 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. The Company also has agreed
to use its 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.
F-27
<PAGE>
(15) 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 100% of the employee's contribution up to a maximum of 6% of
salary. Expenses to the Company for the Plan for the year ended June 30, 1998,
the periods May 29, 1997 to June 30, 1997 and July 1, 1996 to May 28, 1997 and
the year ended June 30, 1996 was approximately $71,000, and $22,000, $51,000,
and $22,000 respectively.
(16) PROPERTY LEASE
The Company leases 2,646 square foot of office space in Phoenix,
Arizona under an operating lease which expires on December 31, 2000. The
Company's lease commitments under this non-cancelable lease will require annual
lease payments of approximately $50,000, and $25,000, for the fiscal years
ending June 30, 1999 and 2000. Rent expense for the year ended June 30, 1998,
the period May 29, 1997 to June 30, 1997, July 1, 1996 to May 28, 1997, and the
year ended June 30, 1996 was approximately $92,000, $8,000, $74,000, and
$129,000, respectively.
(17) CONCENTRATION 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 in 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 had cash of approximately $830,000 as
of June 30, 1998, that is subject to credit risk beyond FDIC insured limits. The
Company had approximately $3,800,000 at June 30, 1998, in repurchase
agreements, cash management funds and Euro investments which are not insured.
The Company has recorded as of June 30, 1998, $709,000, in management
fees due from Native American Tribes under management contracts as well as
$3,693,000, 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 June 30, 1998, 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 require
collateral or other security to support financial instruments subject to credit
risk, beyond the pledge of each Tribe of their gaming reserves. Management has
no dispute 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.
The Company's management fee revenues are derived from three Native
American Indian tribes as follows: (the fiscal year ended June 30,1997 includes
the two periods July 1, 1996 through May 28, 1997 and May 29, 1997 through June
30, 1998)
Fiscal Year Ended June 30,
--------------------------
1998 1997
---- ----
Muckleshoot Tribe 14% 28%
Tonto Apache 28% 25%
Umatilla 58% 47%
The loss of any one of these Tribes could have a material adverse
effect on the Company's financial condition.
(18) 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
F-28
<PAGE>
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 the 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, it was
concluded that the carrying amount approximated fair value because of their
short maturities.
The 12.0% Senior Secured notes due 2001 are carried at their face value
of $23,100,000. The fair value of the Company was determined to be $23,500,000
of which $23,100,000 was attributed to senior secured notes and $400,000 to
common stock.
(19) EXTRAORDINARY ITEMS
Approximately $1,998,000 was recorded as early extinguishment of debt
related to the distribution of an aggregate $49,986,000 on July 29, 1996 in
cash and Purchasers Notes to the Senior Secured Noteholders from the sale of
CCCD and CMC. The $1,998,000 is comprised of the accelerated write-off of
$1,350,000 in Deferred Finance Costs and $648,000 in Original Issue Discounts.
Approximately $103,464,000 was recorded as an extraordinary gain as
the result of the Company's debt restructuring under Chapter 11 and the adoption
of fresh-start reporting. The $103,464,000 is comprised of the following:
Write-off Deferred Finance Costs and
Original Issue Discounts $ (4,311,000)
Record New Notes in exchange for old debt (23,100,000)
Record New Notes issued to management
included in Reorganization Items 550,000
Reduce Liabilities Subject to Compromise to zero 130,325,000
-------------
Total $103,464,000
============
There is no income tax effect on the extraordinary items due to the
cancellation of indebtedness as more fully described in Note 6.
(20) RESTRICTED FUNDS IN ESCROW
Restricted funds in escrow as of June 30, 1998 consist of $541,000 held
in escrow by the Bond Indenture Trustee. Restricted funds in escrow as of June
30, 1997 consists of $500,000 held by an escrow agent in New Orleans, Louisiana,
represents funds withheld from the sale of CCCD and $426,000 held in escrow by
the Bond Indenture Trustee. On July 17, 1997, the $500,000 was transferred to
the Bond Indenture Trustee. The $541,000 held by the Bond Indenture Trustee as
of June 30, 1998, is for the benefit of the New Senior Secured Noteholders for
payment of the New Senior Secured Notes, and is classified as non-current.
(21) LEGAL PROCEEDINGS
Pursuant to the Plan, all legal proceedings against the parent
company prior to the Effective Date of May 28, 1997 were settled pursuant to
the Plan. As a result there was no litigation pending against the parent
company on the May 28, 1997 Effective Date. The Company may be subject to
various 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.
F-29
<PAGE>
1. Republic Litigation
In connection with the consummation of the Company's Plan of
Reogranization, Republic Corporate Services, Inc. ("Republic") is to receive a
distribution on account of its unsecured claims equal to its pro-rata share of
the 150,000 shares of New Common Stock and of the $550,000 in New Secured Notes
to be distributed to the holders of Allowed Class 4 Claims other than the
Indenture Trustee. On August 20, 1997 the Arizona Department of Gaming ("ADOG")
notified the Company that ADOG would conduct a background investigation of
Republic prior to issuing a permanent certification to the Company. This
notification was communicated to Republic by the Company and ADOG sent further
notification to Republic on October 5, 1997. In response to ADOG's August 20,
1997 notification, the Company had notified Republic that a License Event had
occurred as defined in, and pursuant to, the Company's Amended and Restated
Certificate of Incorporation ("Amended Certificate") and that the Company
invoked its right to have Republic's equity securities distributed to an
independent trustee and that the Company further intended to redeem such
securities in accordance with the terms of the Amended Certificate. On November
5, 1997 Republic filed a Complaint for Declaratory Judgment, Specific
Performance and Other Relief with the U.S. Bankruptcy Court for the District of
New Jersey seeking a declaration that its ownership of equity securities is not
a License Event or, in the alterative, that if such equity ownership is a
License Event then, in effect, that Republic's equity securities should be
redeemed at $2.38 per share and its New Secured Notes should be redeemed at par.
On April 16, 1998 the Company and Republic entered into a stipulation of
settlement which provides, among other things, that any equity securities slated
for distribution to Republic pursuant to the Plans will be distributed to a
possession trustee and provides that William S. Papazian, Executive Vice
President and General Counsel of the Company, will maintain all voting rights
with respect to such equity securities pursuant to a Voting Trust until such
time as such securities are sold to a suitable purchaser.
2. Muckleshoot Litigation
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 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 (See
footnote [23]).
<PAGE>
(22) 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.
<PAGE>
(23) SUBSEQUENT EVENTS
Muckleshoot Litigation
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.
As a result of the Company's Casino Management Agreement dispute with
the Muckleshoot Indian Tribe, (the "Muckleshoot Dispute"), the Company recorded
only six months revenues for the period June 30, 1997 through December 31, 1997,
of $1,120,000, for the management of the Muckleshoot Casino in its resutls of
operations for the fiscal year ended June 30, 1998. For the year ended June 30,
1998, the Company continued to amortize its deferred assets -- Investment in
Muckleshoot Agreement, for the full twelve months, and recorded a receivable of
$198,804 for the Muckleshoot management fee receivable for the month of December
1997.
In fiscal year 1999, upon the execution of the Settlement Agreement of
the Muckleshoot dispute on or around July 20, 1998, which required the
Muckleshoot Indian Tribe to pay the Company $3.3 million, $1 million paid at
settlement with the remaining balance paid in equal increments over a 24 month
period commencing August 1, 1998, in complete settlement of the Muckleshoot
Dispute, the Company recorded management fee revenues of $3.3 million, less the
$198,804 reveivable as of June 30, 1998, wrote-off the unamortized balance of
the Investment in the Muckleshoot Agreement as of July 20, 1998, and established
a receivable for the $2.3 million settlement balance due the Company as of July
20, 1998.
Pueblo of Laguna Management Agreement
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
trbe's sovereign reservation lands aproximately 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 oficial data of opening of the casino.
<PAGE>
Amended Bond Indenture
On August 7, 1998, the Company was notified by counsel for the
Indenture Trustee of the occurrance 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, anbd has not taken any
action to accelerate the New Senior Secured Notes, foreclosure 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.
(24) SUBSEQUENT EVENTS (unaudited)
Bureau of Indian Affairs Aproval
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 significnat 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.
F-30
<PAGE>
INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTARY SCHEDULE
To the Board of Directors and Stockholders of
Capital Gaming International, Inc.
Phoenix, Arizona
Our report on the consolidated financial statements of Capital Gaming
International, Inc. and its subsidiaries is included on page F-2 of this Form
10-K. In connection with our audits of such financial statements, we have also
audited the related consolidated financial statement Schedule II, Valuation
and Qualifying Accounts, on page S-2 of Form 10-K.
In our opinion, the consolidated financial statement schedule
referred to above, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
MOORE STEPHENS, P.C.
Certified Public Accountants
Cranford, New Jersey
August 7, 1998
S-1
<PAGE>
CAPITAL GAMING INTERNATIONAL, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(ROUNDED)
<TABLE>
<CAPTION>
Balance at Charged to Other
Beginning of Cost and [Deductions] Balance at End
Description Period Expenses Additions of Period
- ---------------------------------------- ------------ ---------- ------------- ---------------
<S> <C> <C> <C> <C>
June 30, 1998: N/A N/A N/A N/A
June 30, 1997: N/A N/A N/A N/A
June 30, 1996:
Prepaid Rent - Reserve (New Orleans $ 4,859,000 $ - $ (4,859,000) $ -
Dock Board)
Cash Held in Escrow - Port of New 2,192,000 - (2,192,000) -
Orleans - Reserve
Uncollectible Patron Markers - Reserve 14,000 - (14,000) -
Employee Advance - Reserve 9,000 - (9,000) -
------------ ---------- -------------- -----------
TOTALS $ 7,074,000 $ - $ (7,074,000) $ -
============ ========== ============== ===========
</TABLE>
S-2
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is effective as of the 1st day of June, 1997,
by and between Capital Gaming International, Inc., a New Jersey corporation (the
"Company"), and Michael W. Barozzi (the "Employee"), an individual, residing at
8223 Turtle Creek Circle, Las Vegas, Nevada 89113.
RECITALS
A. Employee presently consults for the Company and its subsidiary
pursuant to a Consulting Agreement; and
B. It is deemed by the Company to be in the best interests of the
Company and its shareholders and creditors to obtain Employee's full-time
employment with the Company upon the terms and conditions set forth herein; and
C. Employee desires assurance of a long-term future with the Company,
and is willing to enter into a long-term agreement with the Company upon the
terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants and
obligations set forth herein, the parties hereby agree as follows:
AGREEMENT
1. Term of Employment: Unless earlier terminated as herein provided,
the Term of Employee's employment with the Company shall be for a period of
three (3) years from June 1, 1997 and such term shall end on May 31, 2000;
provided, however, that this Agreement and the Term of the Employee's employment
with the Company hereunder shall automatically be extended for one year
commencing on May 31, 2000 unless the Employee or the Company shall have given
written
<PAGE>
notice to the other at least ninety (90) days prior to such anniversary that the
Term shall expire at the end of the then-current Term, as applicable. For
purposes of this Agreement, the "Term" of this Agreement shall mean and include
cumulatively (a) the initial term of this Agreement from the effective date
hereof through May 31, 2000 and (b) any and all one-year extension(s) of the
initial term of this Agreement. In the event of the occurrence of any of the
one-year extensions of this Agreement, the Employee's salary and other
compensation for the extension year shall be negotiated in good faith; and in
the event that agreement is not reached by the beginning of the one-year
extension period, then all of the terms of this Agreement in effect immediately
prior to the commencement of the one-year extension shall be continued for the
then-commencing year. Various provisions of this Agreement are intended to
survive the expiration or termination of the Term as expressly stated therein.
2. Duties and Authority of Employee: During the Term, the Employee
shall be Senior Vice President of Operations of the Company, and shall devote
his best efforts to rendering services to the Company and its subsidiaries in
such capacity. As Senior Vice President of Operations, the Employee shall report
to the Chief Executive Officer and the Board of Directors. The Employee shall
perform such duties and services, consistent with his position as senior officer
of the Company, as may be assigned to him from time to time by the Chief
Executive Officer or the Board of Directors. Employee warrants and agrees to use
his best efforts to perform well and faithfully such duties and other reasonable
executive duties and responsibilities, consistent with his position as Senior
Vice President of Operations as are properly assigned to him. Employee shall not
be required, without his consent, to undertake responsibilities not commensurate
with his position, nor shall the Company limit or restrict his authority or
responsibility in the performance of those duties.
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3. Time to be Devoted to Employment. The Employee agrees to devote his
full business time, attention and energies to the best interests of the
Corporation.
4. Restrictions on Other Employment. During the Term of employment, the
Employee agrees that, unless he has the express prior written approval of the
Chairman of the Board of Directors or CEO of the Company, he shall not accept a
membership on a Board of Directors, act as an officer, employee or consultant,
or engage in any other business activity that would in any way conflict with the
business of the Company or the time needed by Employee to perform his duties. It
is understood that the Employee's employment during the Term shall be on an
exclusive basis, except that the Employee may, subject to the provisions of
Paragraph 10 hereof, undertake, or continue to conduct, other business, civic or
charitable activities during the Term if such activities do not materially
interfere, directly or indirectly, with the duties of the Employee hereunder,
and do not compete with any business of the Company; provided, however, that no
additional outside business activities shall be undertaken without the prior
written consent of the Board. Notwithstanding the foregoing, nothing contained
in this Employment Agreement shall be deemed to preclude Employee from owning
less than one percent (1%) in market value of the publicly traded capital stock
of an entity, whether or not in competition with the business of the Company or
its subsidiaries or affiliates, or from carrying on activities normally incident
to managing passive investments. Employee shall be deemed to be engaged in or
concerned with a duty or pursuit which is contrary to any provision of this
Agreement only if he has received written notice to such effect, setting forth
with reasonable specificity the basis of such claim, from the Company and has
not, within thirty (30) days from the date of his receipt of any such written
notice, initiated steps to eliminate his engagement in or concern with such
duties or pursuits as are specified in such notice
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as being contrary to this Agreement.
5. Obligations of the Company. All obligations of the Company hereunder
shall in all respects be joint and several obligations of the Company and each
of the subsidiaries of the Company.
6. Compensation:
a. Salary:
i. During the Term, the Employee shall be paid an
annual base salary of Two Hundred Fifty Thousand ($250,000) Dollars (herein
"Salary"), which may be increased, from time to time, at the election of the
Board, or any committee of the Board to which such power has been delegated by
the Board. Employee shall be entitled to annual salary reviews in June of each
year of this Agreement (or as soon as is practicable after the fiscal year-end
audit is complete).
ii. The Employee's Salary shall be paid in the same
installments which prevail for other senior corporate officers of the Company
(but in no event less frequently than monthly), or such other installments as
are agreed upon between the Employee and the Company.
b. Bonus and Incentive Compensation: Employee shall be paid
bonus or other additional cash compensation (herein "Incentive Compensation") in
such amounts and at such times as shall be determined before the end of each
fiscal year by the Executive Compensation Committee of the Board of Directors.
Additionally, within thirty (30) days following the end of each fiscal year,
Employee shall be paid such amount as is necessary so that Employee's total cash
compensation for such fiscal year is no less than fifty (50%) percent of the
total cash compensation paid to the Chairman and CEO in such fiscal year.
c. Stock Grant: Employee shall be entitled to his pro rata
share of all
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distributions of New Common Stock as defined in and pursuant to the Company's
First Amended Plan of Reorganization, it being understood and agreed that all
such distributions shall be shared equally between four or five members of
senior management.
d. Other Benefits: The Employee shall, to the extent deemed
appropriate by the Board (or any applicable committee of the Board), participate
at a level consistent with his rank as a senior executive in profit sharing,
stock appreciation rights, stock bonus, stock option, deferred compensation, and
other similar plans or benefits which are made available to other senior
executives employed by the Company during the Term. Also, during the Term,
Employee shall continue to participate in all fringe benefits and perquisites
currently being provided to Employee and other senior executives of the Company.
In the event that the Company establishes an individual or group retirement
plan, or continues with the existing plan, the Employee shall be entitled to
participate, to the extent deemed appropriate by the Board (or any applicable
committee of the Board), in such retirement plan consistent with his rank in the
Company. In addition, Employee shall participate, to the extent deemed
appropriate by the Board (or any applicable committee of the Board), consistent
with his rank in any other fringe benefits or perquisites hereafter adopted by
the Company and made applicable to its senior executives. Further, during the
Term, the Company will provide, at its expense, life, business travel,
disability (in an amount sufficient to fund not more than Employee's Salary),
medical, dental and hospitalization insurance for the Employee and his
dependents in amounts and on terms as favorable as those provided for any other
senior executive officer of the Company.
e. Withholding: All compensation shall be subject to normal
required tax withholdings.
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f. Reimbursement for Professional Memberships: The Corporation
shall reimburse the Employee, in accordance with standard business practices of
accounting and receipts, for the cost of all professional association
memberships and/or seminars reasonably attendant thereto.
7. Vacation: Employee shall be entitled to four (4) weeks vacation time
for each year during the Term. At Employee's option, vacation may be taken,
either in whole or in part, consecutively or not, in the year that Employee's
entitlement to that vacation accrues or, if unused during such year, such
vacation time shall be carried over (subject to no limitation on maximum
accrual), and may be used in any subsequent year during the Term, provided that
no more than thirty (30) days of vacation may be taken in any one calendar year.
Upon termination of Employee's employment with the Company for any reason
whatsoever, Employee shall be paid his Salary for all unused then accrued
vacation (except for vacation days for which Employee shall have received
payment pursuant to the immediately following sentence), at the Salary rate then
existing at the date of termination of Employee's employment with the Company,
with no limitation on the maximum accrual of such vacation days for which the
Employee shall receive such payment. At any time or times upon written request
made by Employee to the Company (with no limitation as to the number or
frequency of such requests), Employee shall be paid his Salary for the quantity
(as specified in such request) of the unused then accrued vacation days, at the
Salary rate existing on the date of such request, with no limitation on the
maximum accrual of such vacation days for which the Employee may receive such
payment.
8. Expenses: The Company will reimburse Employee for all expenses
reasonably incurred by Employee in the performance of his duties under this
Agreement. Reimbursement shall
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be made in accordance with the practices and requirements generally applied by
the Company in connection with reimbursement of expenses incurred by its
employees. In the event that the Company is ever the subject of an audit, and
expenses of the Employee which the Company has reimbursed to the Employee
pursuant to this Agreement are ever found to have been expended for a personal
use by the Employee, such reimbursement of the Employee's business expenses
shall be considered to be additional Salary, and the Employee shall not be
liable for such reimbursed business expenses.
9. Termination of Term and/or Agreement:
a. Termination by the Company for Cause:
i. The Company may, at any time, at its election,
terminate the Term for cause prior to the Term's expiration as a result of any
of the following events: (1) Employee acting fraudulently in his relations with
the Company or on behalf of the Company, (2) Employee misappropriating or doing
material, intentional damage to the property of the Company, (3) Employee being
convicted of a felony, (4) Employee's acts or omissions amounting to willful
misconduct or recklessness by the Employee in the performance of his duties
under this Agreement or the habitual neglect of such duties, (5) failure of the
Employee to obtain or retain for any reason, any permit, license or approval
which shall be required by any regulatory agency or entity with jurisdiction
over any portion of the Company's business or any business of a subsidiary of
the Company, or (6) any other material breach by the Employee of any of the
terms of this Agreement.
ii. Any such termination shall be effective upon the
Company's giving of written notice to the Employee setting forth in reasonable
detail the grounds for the termination, provided, however, that in the event of
a notice of termination under Paragraph 9(a)(i)(5) hereof, if
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Employee first failed to cure such condition within thirty (30) days after
notice hereof or, if a cure was not possible within thirty (30) days, failed to
take all diligent action within such period leading to a cure within 120 days
after such notice, the Company may elect to terminate the Term notwithstanding
the Employee's diligent action to cure.
iii. In the event that there is a termination of the
Term by the Company under this Paragraph 9(a), and the cause is solely the cause
described under Paragraph 9(a)(i)(5) above, and not within any other
subparagraph of Paragraph 9(a)(i), Employee shall be entitled to severance pay
equivalent t one (1) year's Salary payable on the same basis as his Salary had
been paid at the date of termination, and to the continuation of all fringe
benefits and insurance described in Paragraph 6(d) for a one (1) year period
following such termination (which continuation shall not, however, duplicate
insurance already provided by Paragraph 6(d) for such period), provided that the
actions or inactions of Employee leading to the loss of or failure to obtain or
retain the applicable permit, license or approval were made in the good faith
belief that his actions or inactions were for the benefit of, and in the best
interests of, the Company, and not in violation of any law, and provided further
that Employee used his best efforts to obtain or retain (as the case may be)
such license, permit or approval.
iv. In the event of a termination for cause under
this Paragraph 9(a), the Company's obligations to pay Salary and other
compensation and benefits to the Employee shall terminate simultaneously with
the effectiveness of the termination of the Term.
b. Disability: In the event that Employee shall become subject
to a Disability (as defined below) during the Term, the Term shall immediately
terminate, but the current Salary payable to Employee shall be continued for a
period of (6) months, and shall thereafter be reduced
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to sixty percent (60%) of the Salary in effect at the date of the Disability,
subject to maximum annual compensation equal to Employee's Salary then in
effect. Such reduced compensation shall continue until the termination of
Employee's Disability, the expiration of the Term, the Employee's attaining age
65, or the expiration of thirty-six (36) months from the inception of the
Disability, whichever occurs first (the "Disability Period"). During any such
Disability Period, the Company shall also keep in force for the benefit of
Employee and Employee's dependents all life, health and medical insurance
policies maintained for Employee's benefit under the terms of this Agreement,
and Employee shall be considered to be employed for purposes of the vesting and
accrual of benefits of all other plans and programs of the Company in which
Employee is a participant, and which vest or accrue benefits over a period of
time. All stock options which vest during the Disability Period shall be
exercisable until the fifth (5th) anniversary date from the date they became
first exercisable by the Employee. Notwithstanding the foregoing, the Company
shall not be required to add Employee to any bonus, profit sharing, stock bonus,
stock option, deferred compensation, and other similar plans, or make any new
awards to Employee under this Agreement with respect to such new or presently
existing plans during the period of such Disability. All Salary payments
pursuant to this Paragraph 9(b) due to Employee under its terms shall be reduced
by any disability program or disability insurance of the Company. Employee
expressly acknowledges that the Company may obtain disability insurance with
respect to the Employee in order to fund Salary payments to Employee during any
period of Disability. Employee also expressly acknowledges that he will fully
cooperate with the Company in submitting to all necessary physical or mental
examinations requested by the Company in determining Employee's Disability. For
purposes of this Agreement, Employee shall be deemed to have become subject to a
disability (herein "Disability") if, because
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of any physical or mental condition, Employee shall be unable to perform his
duties and responsibilities to the extent reasonably necessary for Employee to
give the Company substantially the value of his services for a consecutive one
hundred eighty (180) day period, or for an aggregate of one hundred eighty (180)
days within any period of twelve (12) consecutive months, and either the Company
or the Employee shall thereafter give written notice to the other of such
party's election that Employee be treated as subject to a Disability. The date
of such Disability shall be the third calendar day immediately following
transmittal of such written notice of Disability.
c. Death: The term will automatically terminate upon the death
of the Employee; however, the Company will pay death benefits equal to sixty
percent (60%) of Employee's Salary (up to an annual maximum equal to Employee's
then current Salary in effect) at his death to any surviving spouse of Employee
(or, if there shall be no surviving spouse, to Employee's surviving children)
for twelve (12) months after Employee's death, or so long as the spouse (or
children, if applicable) survives Employee, whichever ends first, and there
shall be full acceleration of vesting or exercisability upon death of all
outstanding unvested stock options and stock awards (whether such awards are
made before or after the date of this Agreement), and delivery to the
appropriate person of all stock pursuant to the terms of any such plans or
agreements. All stock options which have their vesting accelerated pursuant to
this Paragraph 9(c) shall, notwithstanding the provisions of the relevant stock
option agreement to which they pertain, terminate unless previously exercised by
Employee's heirs or assigns prior to the fifth anniversary date from the date of
Employee's death.
d. Termination by the Company Without Cause:
i. Termination Without Cause Described: If, during
the Term, Employee
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is not re-elected to, or is removed from, the position of Senior Vice President
of Operations, other than pursuant to Paragraph 9(a), (b), (c) or (f), or if the
Company otherwise materially breaches this Agreement and fails to complete the
cure of such breach within thirty (30) days after written notice from Employee,
then at any time within three (3) months after the date upon which Employee is
removed from such position or the breach date, as the case may be, Employee may
elect, by notice in writing to the Chief Executive Officer of the Company, to
treat the situation as a "Termination Without Cause" of Employee's employment by
the Company effective one (1) week after the notice, and to discontinue his
obligations to perform services hereunder. The Term shall end at such effective
date.
ii. Employee's Obligations After Termination Without
Cause: In the event of a Termination Without Cause, Employee's obligations under
Paragraph 2 shall cease as of the date notice of such termination is given;
provided, however, that all payments and benefits provided to Employee hereunder
because of a Termination Without Cause shall be upon the condition of, and
partly in consideration for, Employee's continued compliance with any covenants
in this Agreement (including the covenants contained in Paragraph 10) which, by
their terms, apply during the Term or thereafter.
iii. Payments and Benefits to Employee after a
Termination Without Cause: In the event of any Termination Without Cause, the
Employee shall be entitled to and the Company shall be obligated to pay the
Employee a lump sum severance payment of $600,000.
e. Employee's Additional Election and Rights after a Change in
Control:
i. Employee's Right to Elect Termination after a
Change in Control:
(1) Permitted Period for Elective
Termination: In the event of a
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Change in Control (as defined in Paragraph 15 hereof), Employee shall have the
right to elect to terminate the Term (and his obligation to render services
under this Agreement) by notice in writing to the Chief Executive Officer of the
Company within twenty-four (24) months after the Change in Control.
(2) Payments and Benefits to Employee after
Elective Termination: If the Employee elects termination under Paragraph
9(e)(i)(1), the Employee shall be entitled to and the Company shall be obligated
to provide the Employee with all rights and benefits he would be entitled to
upon a Termination Without Cause pursuant to Paragraph 9(d)(iii).
(3) Limitation on Amounts:
(a) Notwithstanding the foregoing,
in the event that any payment or benefit received, or to be received, by
Employee (whether pursuant to the terms of this Agreement or any other plan,
arrangement or agreement with the Company, or any other plan, arrangement or
agreement with any person whose actions result in a Change of Control, or any
person affiliated with the Company or such person) (all such payments and
benefits being hereinafter called "Total Payments") would not be deductible (in
whole or in part) as a result of Section 280G of the Internal Revenue Code of
1986, as amended (the "Code"), by the Company, an affiliate or other person
making such payment or providing such benefit, then, to the extent necessary to
make such portion of the Total Payments deductible, the Total Payments shall be
reduced in one of the two alternative orders set forth in Paragraph
9(e)(i)(3)(b) hereof.
(b) If the Total Payments all
become payable at approximately the same time, (i) the benefits under the first
sentence of Paragraph 9(d)(iii)(2) shall first be reduced (if necessary, to
zero), (ii) the payment pursuant to Paragraph 9(e)(iii), if applicable,
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shall then be reduced (if necessary, to zero), (iii) acceleration of vesting of
awards under stock options, the 1990 Stock Option Plan, or any similar stock
plans or agreement of the Company under Paragraph 9(d)(iii)(2) shall next be
reduced (if necessary, to zero), and (iv) other portions of the Total Payments
shall be reduced as necessary. If the Total Payments do not become payable until
any portion thereof would not be deductible, and such portion (and any
subsequent portions) of the Total Payments shall be reduced to zero.
(c) For purposes of this
limitation, (i) no portion of the Total Payments, the receipt or enjoyment of
which the Employee shall have effectively waived in writing prior to the date of
termination shall be taken into account; (ii) no portion of the Total Payments
shall be taken into account which, in the opinion of tax counsel selected by the
Company's independent auditors and acceptable to the Employee, does not
constitute a "parachute payment" within the meaning of Section 280G(b)(4)(A) of
the Code; (iii) the payments in Paragraph 9(d)(iii) (1) through (3), and
Paragraph 9(e)(iii), if applicable, shall be reduced only to the extent
necessary so that the Total Payments (other than those referred to in Paragraphs
9(e)(i)(3)(c) (i) or (ii)) in their entirety constitute reasonable compensation
for services actually rendered within the meaning of Section 280G(b)(4) of the
Code, or are otherwise not subject to disallowance as deductions, in the opinion
of the tax counsel referred to in Paragraph 9(e)(i)(3)(c)(ii); and (iv) the
value of any non-cash benefit or any deferred payment or benefit included in the
Total Payments shall be determined by the Company's independent auditors in
accordance with the principles of Section 280G(d) (3) and (4) of the Code.
Notwithstanding any dispute as to the total amount to be paid to Employee,
payments will be made with respect to the amounts clearly deductible under
Section 280G of the Code within the time period specified above in Paragraph
9(d)(iii) and 9(e)(iii), as applicable.
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(d) If it is established, pursuant
to a final determination of a court or an Internal Revenue Service proceeding
that, notwithstanding the good faith of Employee and the company in applying the
terms of this Paragraph 9(e)(i)(3), the aggregate Total Payments paid to or for
Employee's benefit are in an amount that would result in any portion of such
Total Payments not being deductible by reason of Section 280G of the Code, then
Employee shall have an obligation to pay the Company, an amount equal to the sum
of (i) the excess of the aggregate Total Payments that could have been paid to
or for Employee's benefit without any portion of such Total Payments not being
deductible by reason of Section 280G of the Code (such excess constituting a
loan by the Company to Employee); and (ii) notwithstanding Paragraph 16(c)
hereof, interest on the loan amount set forth in clause (i) of this sentence at
the rate provided in Section 1274(b)(2)(B) of the Code from the date of
Employee's receipt of such excess until the date of such payment.
(4) Employee's Obligations After Elective
Termination: If Employee elects to terminate his obligations to render services
under this Agreement pursuant to Paragraph 9(e)(i)(1), his obligations under
Paragraph 2 shall cease as of the date notice of such termination is given.
Employee agrees that all payments made because of such elective termination
shall be upon the condition of, and partly in consideration for, his continued
compliance with any covenants under Paragraph 10 and Paragraph 11 of this
Agreement, which by their terms apply during the Term, or thereafter.
ii. Agreement in Full Effect after a Change in
Control: Upon and after a Change in Control, until and unless Employee makes a
written election pursuant to Paragraph 9(e)(i)(1), this Agreement shall continue
in full force and effect, in accordance with all the provisions hereof.
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iii. Additional Payments and Provisions after
Termination Without Cause upon or after a Change in Control: In the event of a
Termination Without Cause of Employee by the Company upon or after a Change in
Control (or upon or after the occurrence of any other event which constitutes a
change of ownership or effective control of the Company, or in the ownership of
its assets, or which would be deemed to be such a change under Section 280G of
the Code, or the regulations or other legal authority developed thereunder), the
Company shall provide Employee with the payments and benefits required by
Paragraph 9(d)(iii), and shall also pay Employee to the extent permitted by law
and without regard to any forfeiture provisions, a lump sum payment equal to the
benefits payable to Employee pursuant to any retirement plan which may be
established for the benefit of Employee.
f. Voluntary Resignation: A "Voluntary Resignation" shall mean
a termination of employment by the Employee on his own initiative other than a
termination due to Disability or pursuant to Paragraph 9(e) hereof. In the event
of Voluntary Resignation, the Employee is entitled to payment equal to one year
Salary, payable in twelve (12) equal monthly installments and in consideration
of such payments, the Employee consents and covenants to use his good faith best
efforts to effectuate a transition of new management in a manner which maintains
the then existing Indian gaming management agreements, or at the option of the
Company, effectuate a run-off of the then existing Indian gaming management
agreements and tribal loans for as long as necessary after such resignation, but
in no event more than twelve (12) months. As used herein, the term "best
efforts" shall not require the Employee to incur non-reimbursable business
expenses and shall not require that the Employee be employed exclusively by the
Company.
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10. Confidential Information; Restriction on Competition:
a. Confidential Information: "Confidential Information" is
defined as information obtained by Employee as a result of his current or prior
positions with the Company, concerning the businesses, finances, clients,
affairs, business plans, strategies, methods, results from operations,
regulatory matters or investigations by others, and present and future plans
relating to the Company, any subsidiaries, parent or affiliates thereof or any
company formed or funded by the Company at any time for any reason or purpose
whatsoever. It is not intended to include business information that is available
in the public domain or information that was possessed by Employee prior to his
employment with the Company. Employee agrees that he will not, at any time
during or after the Term of employment, disclose, reproduce, assign or transfer
to any person, firm, corporation or other business entity, except as required by
law, any Confidential Information without the Company's express written consent;
nor shall Employee make use of any such Confidential Information for his own
purpose or for the benefit of any person, firm, corporation or other business
entity, except the Company or any subsidiary or affiliate thereof. Upon
termination of employment for any reason, Employee will immediately return all
books, files, papers, records and documents (including those contained in
computer disks) relating to the business of the Company.
b. Restriction on Competition: During the Term and for a
period of nine (9) months thereafter, the Employee will not in the Western
Hemisphere north of the Equator compete, directly or indirectly, with the
business of the Company or any of its subsidiaries or affiliates or, as an
officer, director, shareholder, employee, partner, agent or consultant or
otherwise, associate himself directly or indirectly, whether or not for
compensation, with any person or entity engaged in a business competing with any
business of the Company or its subsidiaries or its affiliates in the
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Western Hemisphere north of the Equator. The term "associate directly or
indirectly" shall mean that for the applicable period, Employee shall not cause,
assist or in any way influence any other individual, company or entity to engage
in any of the activities prohibited by this Paragraph 10.
11. Right to Injunctive Relief: The Employee acknowledges that the
Company will suffer irreparable injury, not readily susceptible of valuation in
monetary damages, if the Employee breaches any of its obligations under
Paragraph 10 above. Accordingly, the Employee agrees that the Company shall e
entitled, in addition to, and not in lieu of, any other available remedies, to
seek and obtain injunctive relief against any breach or prospective breach by
the Employee of the Employee's obligations under Paragraph 10 of this Agreement,
in any Federal or State court sitting in the State of Arizona. The Employee
hereby submits to the jurisdiction of those courts for the purposes of any
actions or proceedings instituted by the Company to obtain such injunctive
relief, and agrees that process may be served by registered mail, addressed to
the last address of the Employee known to the Company, or in any other manner
authorized by law.
12. Liability Insurance:
a. Insurance: Subject only to the provisions of Paragraph
12(b) below, the Company hereby agrees that, so long as Employee shall continue
to serve as a director, officer, employee or consultant of the Company (or shall
continue at the request of the Company to serve as a director, officer,
employee, partner, consultant, or agent of another corporation, partnership,
joint venture, trust or other enterprise), and thereafter so long as Employee
shall be subject to any possible claim or threatened, pending or completed
action, suit or proceeding, whether civil, criminal or investigative by reason
of the fact that Employee was a director, officer, or employee of the Company
(or served in any of said other capacities), the Company will purchase and
maintain in
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effect for the benefit of Employee one or more valid, binding and enforceable
policies of directors and officers insurance providing, in all respect,
aggregate coverage of at least $20,000,000, after a deductible payable by
Employee of at least $150,000 (the "Insurance Policies").
b. Limitation on Company Obligation: The Company shall not be
required to maintain the Insurance Policies in effect if said insurance is not
reasonably available or if, in the reasonable business judgment of the then
Board, either (i) the premium cost for such insurance is substantially
disproportionate to the amount of coverage, or (ii) the coverage provided by
such insurance is so limited by exclusions that there is insufficient benefit
from such insurance.
13. Indemnity:
a. Subject only to the exclusions set forth in Paragraph 13(b)
below and the restrictions set forth in the New Jersey Business Corporation Act,
and in addition to any rights of Employee under the By-Laws of the Company, any
applicable state law, Paragraph 12 of this Agreement, or any other agreement,
the Company hereby further agrees to hold harmless and indemnify Employee:
i. Against any and all expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by Employee in connection with any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (including an action by or in the right of the Company, its
subsidiaries and/or affiliates) to which Employee is, was, or at any time
becomes a party, or is threatened to be made a party, by reason of the fact that
Employee is, was, or at any time becomes, a director, officer, employee,
consultant, or agent of the Company (its subsidiaries and/or affiliates), or is,
or was, serving, or at any time serves, at the request of the Company, as a
director, officer, employee,
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consultant, partner, trustee or agent (regardless of his title) of another
corporation, partnership, joint venture, trust or other enterprise; and
ii. Otherwise to the fullest extent as may be
provided to Employee by the Company under the provisions of the By-Laws of the
Company and the New Jersey Business Corporation Act; and
iii. From any and all income and excise taxes (and
interest and penalties relating thereto) imposed on Employee with reference to
any payment under this Paragraph 13 (including, without limitation, payments in
indemnity for such taxes).
b. Notwithstanding the foregoing, no indemnity pursuant to
this Paragraph 13 shall be paid by the Company:
i. except to the extent the aggregate of losses to be
indemnified thereunder exceed the sum of Five Hundred ($500) Dollars, plus the
amount of such losses for which the Employee has already been indemnified,
either pursuant to any Insurance Policies purchased and maintained by the
Company pursuant to Paragraph 12 above;
ii. in respect to remuneration paid to Employee if it
shall be determined by a final judgment or other final adjudication that such
remuneration was in violation of law;
iii. on account of any suit in which judgment is
rendered against Employee for an accounting of profits made from the purchase or
sale by Employee of securities of the Company pursuant to the provisions of
Section 16(b) of the Securities Exchange Act of 1934, and amendments thereto, or
similar provisions of any Federal, state or local statutory law;
iv. on account of actions or omissions by the
Employee which are finally adjudicated to have been material to the cause of
action adjudicated and (x) were in breach of his
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duty of loyalty to the Company or its shareholders, (y) were not in good faith
or involved a knowing violation of law or (z) resulted in receipt by Employee of
an improper personal benefit; or
v. if a final decision by a court having jurisdiction
in the matter shall determine that such indemnification to Employee is not
lawful.
c. All agreements and obligations of the Company contained
herein shall continue during the period Employee is a director, officer,
employee, consultant or agent of the Company (or is, or was, serving at the
request of the Company as a director, officer, employee, partner, consultant, or
agent of another corporation, partnership, joint venture, trust or other
enterprise), and shall continue thereafter so long as Employee shall be subject
to any possible claim or threatened, pending or completed action, suit or
proceeding, whether civil, criminal or investigative, by reason of the fact that
Employee was an officer or director of the Company, or serving in any other
capacity referred to herein.
d. The Company shall not be liable to indemnify Employee under
this Agreement for any amounts paid in settlement of any action or claim
effected without its written consent. The Company shall not settle any action or
claim in any manner which would impose any penalty or limitation on Employee
without Employee's written consent. Neither the Company nor Employee will
unreasonably withhold consent to any proposed settlement.
e. The Company will pay all expenses immediately upon the
presentment of bills for such expenses. Employee agrees that Employee will
reimburse the Company for all reasonable expenses paid by the Company in
defending any civil or criminal action, suit or proceeding against Employee in
the event, and only to the extent, that it shall be ultimately determined that
Employee is not entitled to be indemnified by the Company for such expenses
under the provisions of the
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applicable state statute, the By-Laws, this Agreement, or otherwise. This
Agreement shall not affect any rights of Employee against the Company, any
insurer, or any other person to seek indemnification or contribution.
f. If the Company fails to pay any expenses (including,
without limiting the generality of the foregoing, legal fees and expenses
incurred in defending any action, suit or proceeding), Employee shall be
entitled to institute suit against the Company to compel such payment, and the
Company shall pay Employee all costs and legal fees incurred in enforcing such
right to prompt payment.
g. To the extent allowable under New Jersey law, the burden of
proof with respect to any proceeding or determination with respect to Employee's
entitlement to indemnification under this Agreement shall be on the Company.
h. Neither the failure of the Company, its Board of Directors,
independent legal counsel, nor its stockholders, to have made a determination
that indemnification of the Employee is proper in the circumstances because he
has met the applicable standard of conduct set forth in the New Jersey Business
Corporation Act, nor an actual determination by the Company, its Board of
Directors, independent legal counsel, or its shareholders, that the Employee has
not met such applicable standard of conduct shall be a defense to any action on
the part of Employee to recover indemnification under this Agreement, or create
a presumption that Employee has not met the applicable standard of conduct.
14. Change in Control:
a. For purposes of this Agreement, "Change in Control" shall
have the meaning given to the term "Change of Control" in Section 1.1 of the
Indenture dated February 17, 1994
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among the Company, certain of its subsidiaries and First Trust National
Association, as Trustee, relating to the Company's $135,000,000 11-1/2% Senior
Secured Notes due 2001 (the "Indenture"); provided, however, that for purposes
of this Agreement, all references to "35% of the total voting power" of the
Company in such definition shall be amended to read "25% of the total voting
power."
15. Miscellaneous:
a. Employee Representations: The Employee represents and
warrants to the Company that there is no restriction or limitation, by reason of
any agreement or otherwise, upon the Employee's right or ability to enter into
this Agreement and fulfill his obligations under this Agreement.
b. Termination of Employment Agreements: All other agreements
between the Company and Employee with respect to employment and/or consulting
(except stock option agreements) shall be terminated and superseded hereby upon
execution of this Agreement.
c. Interest on Amounts Due: In the event any amount due either
to Employee or the Company under this Agreement is not paid when due, it shall
thereafter bear interest at the rate equivalent to the Citibank, N.A., New York,
New York (or its successor), prime rate as it shall vary from time to time over
the period until paid. Such interest shall be compounded on a monthly basis.
d. Key Man Insurance: Employee expressly acknowledges that the
Company may obtain up to $5 million in Key Man insurance coverage with respect
to Employee and Employee shall cooperate fully in order for the Company to
obtain such insurance.
e. Priority Over Stock Option Agreements: In the event of a
conflict between this Agreement and any of the stock option agreements
previously entered into between the Company an Employee, the terms and
conditions of this Agreement shall control.
22
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f. Amendment: This Agreement shall not be changed or
terminated except in writing signed by both parties.
g. Governing Law: This Agreement shall be governed by, and
construed under, the substantial laws of the State of Arizona without regard to
choice of law doctrines.
h. Successors and Assigns: The terms and provisions of this
Agreement shall inure to the benefit of the personal representatives, heirs and
legatees of the Employee, and shall be binding upon and inure to the benefit of
any successors or assigns of the Company. This Agreement shall survive any
merger or voluntary or involuntary dissolution, and shall bind any person
acquiring the Company's assets in such event.
i. Notices: Any notices or other communications required or
permitted to be given under this Agreement shall be deemed given on the day when
delivered in person, on the next day after being sent via overnight mail (such
as Federal Express), or on the third business day after the day on which mailed
by first class mail from within the United States of America addressed to the
party receiving the communication at the principal office of the Company, or
such other address as the party receiving the communication shall have
designated to the other in writing.
j. Consents and Approvals: As to any paragraph of this
Agreement providing for the consent or approval of any party to this Agreement,
such provision shall be deemed to include the restriction that any such exercise
of approval or consent shall be reasonable and not unreasonably denied
regardless of whether such provision actually sets forth a specification that
such an approval or consent shall not be unreasonably denied.
k. Severability: If any provision of this Agreement is found
to be invalid or unenforceable, the remainder of this Agreement shall,
nevertheless, remain in full force and effect.
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If any provision is held invalid or unenforceable with respect to particular
circumstances, it shall nevertheless remain in full force and effect in all
other circumstances. If the provision held invalid or substantially limited
involves the compensation or benefits of Employee, Employee shall have the
option for thirty (30) days following the final decision holding such provision
to be invalid to terminate this Agreement by written notice to the Company.
l. Captions: Captions in this Agreement are merely to
facilitate references, and shall not affect the interpretation of any of the
provisions.
m. Dispute Resolution: Except as provided for in Paragraph 11
hereof, all claims or disputes regarding or arising out of this Agreement shall
be resolved using arbitration. Such dispute shall be resolved pursuant to the
procedural rules of the American Arbitration Association using a panel of three
(3) arbitrators. Either party may deliver a written demand for arbitration of
the claim or dispute to the other and to the American Arbitration Association.
Both parties must then select one (1) arbitrator no later than twenty (20) days
after delivery and receipt of such notice of arbitration. Both such arbitrators
shall have experience in the gaming industry. The third arbitrator will be
selected by the first two arbitrators from a panel obtained from the American
Arbitration Association and shall be an attorney. Once the panel is established,
it shall hold a hearing in Phoenix, Arizona within thirty (30) days to resolve
the dispute under the Agreement. The determination and award of the panel shall
be binding on both parties and may be enforced in any court of competent
jurisdiction.
n. Independent Counsel: Employee and the Company acknowledge
and agree that the Company has been represented in connection with this
Agreement by its in-house counsel and Employee has had an opportunity to consult
with his own independent counsel with respect to this Agreement.
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed as of the day
and year first above written.
CAPITAL GAMING INTERNATIONAL, INC.
Dated:___________________ By:______________________________________
Edward M. Tracy
Chairman and CEO
EMPLOYEE
Dated:___________________ _________________________________________
Michael W. Barozzi
a:\barozzi.emp
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<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENT BETWEEN
CAPITAL GAMING INTERNATIONAL, INC.
AND BRADLEY A. DENTON
THIS AGREEMENT is effective as of the 11th day of February, 1998,
between Capital Gaming International, Inc., its successors or subsidiaries, a
New Jersey corporation, presently located at 2701 East Camelback Road, Suite
484, Phoenix, Arizona 85016 (the "Corporation"), and Bradley A. Denton, with a
mailing address of 11625 East Carol Avenue, Scottsdale, Arizona 85259
("Employee").
WHEREAS, the Corporation and the Employee desire to set forth the terms
and conditions applicable to the Employee's employment with the Corporation as
its Vice President and Chief Financial Officer;
NOW, THEREFORE, in consideration of the mutual covenants and
obligations set forth herein, the parties agree as follows:
1. Employment and Duties
a. The Corporation hereby employs Employee and Employee hereby
accepts the position of the Corporation's Vice President and Chief Financial
Officer. As Vice President and Chief Financial Officer of the Corporation, the
Employee shall report to the Chairman and Chief Executive Officer and Board of
Directors of the Corporation.
b. As Vice President and Chief Financial Officer of the
Corporation, Employee shall perform such duties and services, consistent with
his position, as may be assigned to him from time to time by the Chairman and
Chief Executive Officer and Board of Directors of the Corporation.
<PAGE>
c. Employee warrants and agrees to use his best efforts to
perform well and faithfully such duties and other reasonable Employee duties and
responsibilities as are properly assigned to him.
2. Duration of Agreement Unless earlier terminated as herein provided,
the term of Employee's employment with the Corporation shall be in effect until
May 28, 2000. Various provisions of this Agreement are intended to survive the
expiration or termination of this Agreement as expressly stated herein.
3. Time to be Devoted to Employment The Employee agrees to devote his
full business time, attention, and energies to the best interests of the
Corporation.
4. Restrictions on Other Employment During the term of employment, the
Employee agrees that, unless he has the express prior written approval of the
Chairman and Chief Executive Officer of the Corporation, he shall not accept a
membership on the Board of Directors, act as an officer, employee or consultant,
or engage in any other business activity that would in any way conflict with the
business of the Corporation or the time needed by Employee to perform his duties
for the Corporation.
5. Compensation; Benefits; Reimbursements
a. Salary; Bonuses During the term of this Agreement, the
Employee's salary shall be Eighty Thousand ($80,000) Dollars per year, which
shall be payable in equal monthly installments (or at such other intervals as
the parties may mutually agree). Employee's salary may be increased, from time
to time, at the election of the Board, or any committee of the Board to which
such power has been delegated by the Board. Employee shall be entitled to annual
salary reviews in February of each year of this Agreement. Employee shall also
be eligible for bonuses or other
2
<PAGE>
additional cash compensation in such other amounts and at such times as shall be
determined before the end of each fiscal year by the Executive Compensation
Committee of the Board of Directors.
b. Benefits During his employment, Employee shall be entitled
to such benefits, including, but not limited to, standard medical, health and
other insurance coverage and benefits, as are made available from time to time
to other employees of the Corporation. Additionally, Employee shall, to the
extent deemed appropriate by the Board of Directors (or any applicable committee
of the Board of Directors) in its or their sole discretion, participate at a
level consistent with his rank as a Vice President of the Corporation in profit
sharing, stock appreciation rights, stock bonus, stock option, deferred
compensation and other similar plans or benefits which are made available to
other executives of similar rank employed by the Corporation. In the event that
the Corporation establishes an individual or group retirement plan, or continues
with the existing plan, Employee shall be entitled to participate, to the extent
deemed appropriate by the Board of Directors (or any applicable committee of the
Board of Directors), in such retirement plan consistent with his rank in the
Corporation. Further, the Corporation will provide, at its expense, life,
disability (in an amount sufficient to fund not more than Employee's salary),
medical, dental and hospitalization insurance for the Employee and his
dependents in amounts and on terms as favorable as those provided for any other
executive officer of the Corporation. Employee shall be entitled to full
indemnity against personal liability for acts done in good faith on behalf of
Corporation in accordance with paragraph 11.
c. Reimbursement of Business Expenses The Corporation shall
reimburse the Employee, in accordance with standard business practices of
accounting and receipts, for all reasonable and necessary business and traveling
expenses, and other disbursements incurred by him
3
<PAGE>
for or on behalf of the Corporation in the performance of his duties.
d. Reimbursement for Professional Memberships The Corporation
shall reimburse Employee, in accordance with standard business practices of
accounting and receipts, for the cost of all customary professional memberships
and applicable continuing accounting education and gaming conference expenses.
e. Withholding All compensation paid to Employee shall be
subject to normal required tax withholdings.
f. Vacation Employee shall be entitled to two (2) weeks
vacation time for each year during the term of this Agreement. Employee shall
receive one (1) additional week's vacation on the 1st and 2nd anniversary date
of his employment, to a maximum of four (4) weeks. At Employee's option,
vacation may be taken, either in whole or in part, consecutively or not, in the
year that Employee's entitlement to that vacation accrues or, if unused during
such year, such vacation time shall be carried over (subject to no limitation on
maximum accrual), and may be used in any subsequent year during the term of the
Agreement, provided that no more than thirty (30) days of vacation may be taken
in any one calendar year. Upon termination of Employee's employment with the
Corporation for any reason whatsoever, Employee shall be paid his salary for all
unused and accrued vacation (except for vacation days for which employee shall
have received payment pursuant to the immediately following sentence), at the
salary rate then existing at the date of termination of Employee's employment
with the Corporation, with no limitation on the maximum accrual of such vacation
days for which the Employee shall receive such payment. Employee shall be fully
eligible for coverage by the Corporation's policies and procedures for payment
in lieu of vacation.
4
<PAGE>
6. Termination
a. Probation Employee and the Corporation agree that Employee
shall have a six (6) month probationary period ("Probationary Period") which
will end on July 31, 1998. The parties agree that at any time prior to the
expiration of such Probationary Period Employee will be considered an "at will"
employee of the Corporation and may be terminated with or without cause without
further liability to the Corporation.
b. Without Cause Following the Probationary Period, the
Corporation may terminate this Agreement at any time upon five (5) days' notice;
however, in the event this provision is exercised by Corporation, Employee shall
receive as severance in six (6) equal monthly installments his monthly salary at
his then current rate, and shall continue to receive his benefits during such
period. Employee shall not be required to seek or accept other employment in
order to mitigate his damages hereunder and the Corporation's obligation to pay
him following such termination shall not be reduced by the amount of any
compensation actually received by the Employee for employment with any other
person during such six (6) month period. It shall be a condition to receipt of
severance that Employee sign a general release in favor of the Corporation and
its affiliates. Such general release shall, among other things, reaffirm
Employee's obligations pursuant to Paragraph 7 hereof relating to
confidentiality, non-competition and non-disparagement. For purposes of this
Agreement, Employee may elect to notify the Corporation that he has been
terminated without cause if, during the term of this Agreement, Employee is not
re-elected to, or is removed from, the position of Vice President and Chief
Financial Officer (other than pursuant to Paragraph 6.c below), or if the
Corporation otherwise materially breaches this Agreement and fails to complete
the cure of such breach within thirty (30) days after written notice from
Employee. In
5
<PAGE>
such event, the provisions of this Paragraph 6.a shall apply.
c. With Cause The Corporation may terminate this Agreement for
cause, and the Corporation shall be obligated to pay the Employee his salary and
any vested benefits only through the date of any such termination. Before
termination for cause, the Corporation must give Employee reasonable written
notice and adequate opportunity to respond to the reasons for his termination.
For purposes of this paragraph, "cause" shall mean that the Employee has (1)
acted fraudulently in his relations with the Corporation or on behalf of the
Corporation, (2) misappropriated or done material, intentional damage to the
property of the Corporation, (3) been convicted of a felony, (4) intentionally
or unintentionally acted in a manner that results in a serious omission of the
Corporation's interest, (5) failed to obtain or retain for any reason, any
permit, license or approval which shall be required by any regulatory agency or
entity with jurisdiction over any portion of the Corporation's business or any
business of a subsidiary of the Corporation, (6) breached any of the material
terms of this Agreement, or (7) willfully and materially failed to follow a
legal and reasonable order or directive by the Chairman and Chief Executive
Officer or willfully and materially failed to perform duties as directed, which
a majority of the Board of Directors in good faith finds to be in the best
interest of the Corporation. At any time during the period covered by this
Agreement, including during the Probationary Period as previously described
under Paragraph 6.a., in the event that there is a termination of this Agreement
for cause under this Paragraph 6.c, and the cause is solely the cause described
under Paragraph 6.c(5) above, and not within any other sub-paragraph of
Paragraph 6.c, Employee shall receive as severance in six (6) equal monthly
installments his monthly salary at his then current rate, and shall continue to
receive his benefits during such period. In such event, Employee shall not be
required to seek or accept
6
<PAGE>
other employment and the Corporation's obligation to pay him following such
termination shall not be reduced by the amount of any compensation actually
received by the Employee for employment with any other person during such six
(6) month period. It shall be a condition to receipt of severance that Employee
sign a general release in favor of the Corporation and its affiliates. Such
general release shall, among other things, reaffirm Employee's obligations
pursuant to Paragraph 7 hereof relating to confidentiality, non-competition and
non-disparagement.
d. Termination by Death or Disability If the Employee shall
die during the term of this Agreement or if, during the term of this Agreement,
the Employee becomes disabled so that he is unable substantially to perform his
services hereunder (i) for a period of three (3) consecutive months or for an
aggregate of three (3) months during the term of this Agreement, this Agreement
and the Corporation's obligations hereunder shall terminate and the Employee
shall continue to receive compensation and benefits at his then current rate for
six (6) months following the date of death or disability. This amount shall be
in addition to any life insurance or disability policy then in effect.
e. Voluntary Resignation The Employee may voluntarily resign
and terminate this Agreement at any time upon thirty (30) days' notice. The
Corporation shall then only be obligated to pay Employee any compensation due up
to his last day of employment. The provisions of Paragraph 7 relating to
confidentiality, non-competition and non-disparagement shall remain in effect
notwithstanding such voluntary resignation and/or termination.
f. Change of Control
(i) Definitions For purposes of this Agreement, a
"Change of Control" shall be deemed to have taken place only if: (a) any person
or entity becomes the owner or
7
<PAGE>
beneficial owner of the Corporation's securities, after the date of execution of
this Agreement, having 50% or more of the combined voting power of the then
outstanding securities of the Corporation that may be cast for the election of
directors of the Corporation (other than as a result of an issuance of
securities initiated by the Corporation, or open market purchases), or (b) the
persons who were directors of the Corporation before such transaction shall
cease to constitute a majority of the Board of the Corporation, or any successor
to the Corporation, as the direct or indirect result of, or in connection with,
any tender or exchange offer, merger or other business combination, sale of
assets or contested election, or any combination of the foregoing transactions.
(ii) Agreement Regarding Provision of Services by
Employee The Corporation and Employee hereby agree that, if Employee is
performing services pursuant to this Agreement with the Corporation on the date
on which a Change of Control occurs (the "Change of Control Date") the
Corporation, and any successors, will continue to honor and be bound by the
terms of this Agreement.
(iii) Compensation and Benefits During the duration
of this Agreement, the Corporation (or its successors) will (a) continue to pay
a level of compensation not less than the level applicable to Employee on the
Change of Control Date, (b) fully perform and otherwise discharge Corporation's
obligations under the terms of this Agreement as in effect on the Change of
Control Date, and (c) continue benefit programs as to Employee at levels in
effect on the Change of Control Date.
(iv) Effective Termination of the Employment
Agreement by Change in Control If during the term of this Agreement as a result
of the Change in Control as defined in Paragraph 6.f.(i): (a) Employee's
Agreement is terminated by the Corporation or the successor, or
8
<PAGE>
(b) there is a material reduction in Employee's method of compensation or
related benefits, or (c) a material change in Employee's office, place of
employment, working conditions or duties and responsibilities, Employee may
voluntarily terminate this Agreement for a period of ninety (90) days following
the occurrence of such conditions. If Employee voluntarily terminates this
Agreement as provided in this Paragraph 6.f., Employee shall be entitled to
treat his Employment Contract as having been terminated without cause and shall
be entitled to the payments set forth in Paragraph 6.b. above.
7. Non-Disclosure of Confidential Business Information
a. Non-Disclosure "Confidential Business Information" is
defined as unique and extraordinary information obtained by the Employee solely
as a result of his position with the Corporation. It is not intended to include
business information that is available in the public domain or information that
was possessed by Employee prior to his employment with the Corporation. Employee
agrees that he will not, at any time during or after the term of employment,
disclose, reproduce, assign or transfer to any person, firm, corporation or
other business entity, except as required by law, any Confidential Business
Information concerning the business, finances, clients, affairs, business plans,
strategies, compounds, formulations, methods, devices, apparatus, preparations,
results from ongoing investigations by others, and present and future plans of
the Corporation, any subsidiary, parent company or affiliate thereof or any
company formed or funded by the Corporation at any time for any reason or
purpose whatsoever, without the Corporation's express written consent; nor shall
the Employee make use of any such Confidential Business Information for his own
purposes or for the benefit of any person, firm, corporation or other business
entity, except the Corporation or any parent company, subsidiary or affiliate
thereof. Upon
9
<PAGE>
termination of employment for any reason, Employee will immediately return all
books, files, papers, records and documents of any kind (including those
contained in computer disks), whether deemed Confidential Business Information
or not, relating to the business of the Corporation.
b. Covenant Not to Compete Employee recognizes that in
connection with his duties as Vice President and Chief Financial Officer, he
occupies a position of trust with the Corporation and, among other things, is
responsible for ensuring that the Corporation's interests in maintaining its
relationships with the various Tribes for whom the Corporation manages or
proposes to manage or develop casinos are protected. Employee acknowledges that
an important responsibility of his position is to assist the Corporation in
maintaining, at all times, the best possible business and professional
relationship with such Tribes. Additionally, Employee recognizes that the
Corporation must necessarily furnish him with Confidential Business Information
in order for Employee to perform his duties. Employee further recognizes and
acknowledges that the furnishing of such Confidential Business Information by
Corporation and the position of trust which he occupies gives Employee an
advantage over competitors of the Corporation in securing business with (i)
Native American Tribes who are or were parties to contracts with the Corporation
or any affiliate, (ii) have been contacted by or otherwise received proposals
from the Corporation or any affiliate in the past twelve (12) months, or (iii)
Native American or non-Native American entities which have entered into
discussions with the Corporation or any affiliate or otherwise received
proposals from the Corporation or any affiliate (collectively, "Applicable
Corporate Opportunity"). In recognition of the foregoing, Employee hereby agrees
that:
(i) During the term of this Agreement and for a
period of three (3) years following the termination of his employment for any
reason, Employee shall not compete with the
10
<PAGE>
business of Corporation with respect to an Applicable Corporate Opportunity or
associate himself directly or indirectly, whether or not for compensation, as an
employee, consultant, advisor, proprietor, manager, stockholder, director,
partner, agent, officer or in any capacity with any Applicable Corporate
Opportunity or with the operations of any business competitive to the
Corporation. This restriction shall only apply to competitive activities
directly or indirectly related to the Applicable Corporate Opportunity. The term
"associate indirectly" shall mean that for the applicable period, Employee shall
not cause, assist or in any way influence any other individual, company or
entity to solicit an Applicable Corporate Opportunity.
(ii) Employee shall not, at any time, directly,
indirectly or otherwise induce or solicit any general manager placed by the
Corporation or employee of the Corporation to leave the Corporation and
terminate his or her employment relationship with the Corporation.
c. Non-Disparagement Employee agrees that he shall not
communicate to the news media, shareholders, holders of any indebtedness of the
Corporation and its affiliated entities (including their representatives or
attorneys), or to any other person, any written or oral uncomplimentary or
disparaging statements concerning, or other statements which tend to reflect
negatively on, the Corporation, its affiliated entities, or any of their
respective officers, directors, employees, agents or results of or methods of
operation. Employee shall further refrain from disclosing to any third party any
information concerning any officer, director, employee or agent of the
Corporation or its affiliated entities. Employee acknowledges that the provision
of this non-disparagement clause are an essential element of this Agreement.
d. Survival of Restrictions It is expressly acknowledged and
agreed that the provisions of this Agreement pertaining to confidentiality,
non-competition and non-disparagement
11
<PAGE>
are reasonable and shall survive the termination of this Agreement and remain in
full force and effect until released by the Corporation. Other than the
execution of this Employment Agreement, no further act by Employee or the
Corporation shall be necessary in order to specifically enforce this Paragraph
7.
8. Representations, Warranties and Covenants of the Employee The
Employee represents that he has the capacity and desire to enter into this
Agreement, and the voluntary execution, delivery and performance of this
Agreement and compliance with its provisions will not conflict with or result in
any breach of any of the terms, conditions, obligations, covenants or provisions
of, or constitute a default under, any note, mortgage, agreement, contract or
instrument to which the Employee is a party or by which he may be bound or
affected, including specifically any preexisting or existing consulting,
employment or independent contractor arrangements, understandings or agreements
whether oral or written. Furthermore, Employee agrees to indemnify Corporation
against any claims brought by any predecessor employer alleging breach of
employment contract or fiduciary responsibilities.
9. Enforcement This Agreement shall be enforced to the fullest extent
permissible under the laws and public policies of the State of Arizona.
Accordingly, to the extent a restriction contained in this Agreement is more
restrictive than permitted by the laws of any jurisdiction where this Agreement
may be subject to review and interpretation, the terms of such restriction, for
the purpose only of the operation of such restriction in such jurisdiction,
shall be the maximum restriction allowed by the laws of such jurisdiction and
such restriction shall be deemed to have been revised accordingly herein.
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<PAGE>
10. Remedies for Breach; Injunctive Relief; Arbitration
a. Remedy for Breach of Paragraph 7 It is acknowledged by the
Employee that he will be devoting his work efforts towards representing the
legal interests of the Corporation; that Employee will be knowledgeable in all
aspects of the business of the Corporation, including the type of transactions
the Corporation is involved with, thus, the Employee would be enabled to enter
the same business as the Corporation and unfairly compete against the
Corporation to its detriment. Accordingly, the restrictions contained in
paragraph 7 of this Agreement and the injunctive relief provided for in this
paragraph are reasonable and justified. The Employee recognizes that irreparable
injury to the Corporation will inevitably occur in the event of any breach of
the terms and conditions of this Agreement and, specifically, if paragraph 7 is
breached by the Employee. The Employee agrees in such event that the Corporation
shall be entitled, in addition to any other remedies available to it, without
proof of monetary or immediate damage or the necessity to post bond, to obtain
an injunction against the Employee and all persons acting for or with the
Employee.
b. Resolution of All Other Disputes Concerning Agreement
Except as provided for in paragraph 10.a, all disputes regarding the
interpretation and enforcement of this Agreement shall be resolved using binding
arbitration. Such dispute shall be resolved pursuant to the procedural rules of
the American Arbitration Association ("AAA") using a panel of three (3)
arbitrators in Arizona. The determination and award of the panel shall be
binding on both parties and may be enforced in any court of competent
jurisdiction.
11. Indemnification The Corporation agrees to indemnify Employee and
hold him harmless against any and all losses, claims, damages, liabilities and
costs (and all actions in respect thereof and any legal or other expenses in
giving testimony or furnishing documents in response to
13
<PAGE>
a subpoena or otherwise), including without limitation, the costs of
investigating, preparing or defending any such action or claim, whether or not
in connection with litigation in which Employee is a party, as and when
incurred, directly or indirectly caused by, relating to, based upon or arising
out of any work performed by Employee in connection with this Agreement to the
fullest extent permitted by the General Corporation Law of New Jersey and by the
bylaws of the Corporation. The indemnification provisions shall be in addition
to any liability which the Corporation may otherwise have to Employee.
If any action, proceeding or investigation is commenced as to which
Employee proposes to demand such indemnification, he shall notify the
Corporation with reasonable promptness. Employee shall have the right to retain
counsel of his own choice to represent him and the Corporation shall pay all
reasonable fees and expenses of such counsel; and such counsel shall, to the
fullest extent consistent with its professional responsibilities, cooperate with
the Corporation and any counsel designated by it. The Corporation shall be
liable for any settlement of any claim against Employee made with its written
consent, which consent shall not be unreasonably withheld, to the fullest extent
permitted by the General Corporation Law of New Jersey and the bylaws of the
Corporation.
12. Attorney's Fees In the event of any litigation or arbitral
procedures between the parties to this Agreement, or any of them, concerning
this Agreement, each party shall be responsible for its own attorney's fees.
13. Binding Agreement; Benefit The provisions of this Agreement will be
binding upon, and will inure to the benefit of, the respective heirs, legal
representatives and successors of the parties hereto.
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<PAGE>
14. Governing Law This Agreement will be governed by, and construed and
enforced in accordance with the laws of the State of Arizona which shall be the
venue for any disputes hereunder.
15. Waiver or Breach The waiver by either party of a breach of any
provision of this Agreement by the other party must be in writing and shall not
operate or be construed as a waiver of any subsequent breach by such other
party.
16. Entire Agreement; Amendments This Agreement contains the entire
agreement between the parties with respect to the subject matter hereof and
supersedes all prior agreements or understandings among the parties with respect
thereto. This Agreement may be amended only by an agreement in writing signed by
the parties hereto.
17. Headings The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
18. Severability Any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
19. Assignment This Agreement is personal in its nature and the parties
hereto shall not, without the written consent of the other, assign and transfer
this Agreement or any rights or obligations hereunder; provided, however, that
the provisions hereof shall inure to the benefit of, and be binding upon each
successor of the Corporation whether by merger, consolidation, transfer of all
or substantially all assets, or otherwise.
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20. Notices All notices and other communications which are required or
permitted hereunder shall be in writing and shall be delivered personally or
sent by air courier (e.g., Federal Express) or first class certified or
registered mail, postage prepaid, return receipt requested:
If to Employee:
Mr. Bradley A. Denton
11625 East Carol Avenue
Scottsdale, Arizona 85259
If to Corporation:
Capital Gaming International, Inc.
2701 East Camelback Road, Suite 484
Phoenix, Arizona 85016
Attention: Edward M. Tracy, Chairman and CEO
With a copy to:
William S. Papazian, Senior Vice President and General Counsel
Capital Gaming International, Inc.
2701 East Camelback Road, Suite 484
Phoenix, Arizona 85016
All notices and other communications given to any party hereto in
accordance with the provisions of this Agreement shall be deemed to have been
given on the date of delivery if personally delivered; on the business day after
the date when sent if sent by air courier; and on the third business day after
the date when sent if sent by mail, in each case addressed to such party as
provided in this Section or in accordance with the latest unrevoked direction
from such party.
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IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.
EMPLOYEE: FOR CORPORATION:
BRADLEY A. DENTON CAPITAL GAMING INTERNATIONAL, INC.
_____________________________ By:___________________________________
Edward M. Tracy
Title: Chairman and CEO
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EXHIBIT 10.176
MANAGEMENT AND DEVELOPMENT AGREEMENT
MANAGEMENT AND DEVELOPMENT AGREEMENT ("Agreement"), made and
entered into this 23rd day of June, 1998 by and between the Pueblo of Laguna,
with offices located at P.O. Box 194, Laguna, New Mexico 87026 ("Owner"), a
federally recognized Indian tribe, and Capital Gaming Management, Inc., a
business corporation incorporated under the laws of the State of New Jersey with
offices located at 2701 East Camelback Road, Suite 484, Phoenix, Arizona 85016
("Manager"), for the purpose of developing and operating a tribal gaming
enterprise.
RECITALS:
WHEREAS, Owner is a federally recognized Indian tribe possessing
sovereign power over its trust lands known as the Pueblo of Laguna Reservation
("Reservation") located in the State of New Mexico; and
WHEREAS, Owner, acting through its Tribal Council as its governing body
("Tribal Council"), has determined that the commercial development of the Casa
Blanca Interchange including the establishment of a tribal gaming enterprise
under the Indian Gaming Regulatory Act [25 U.S.C. ss.2701 et seq.] ("IGRA") will
assist Owner in promoting economic development and tribal employment; and
WHEREAS, Owner seeks to employ an experienced gaming management company
to develop and manage a tribal gaming enterprise; and
WHEREAS, Manager has the requisite expertise, and is capable of
providing financing to or on behalf of Owner to improve, develop, manage,
operate and maintain a tribal gaming enterprise.
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NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties agree as follows:
I. LOCATION; GAMING COVERED BY THIS AGREEMENT
A. Location
The purpose of this Agreement is to provide for the exclusive
development, financing, construction, operation and management by Manager of a
tribal gaming enterprise ("Enterprise") to be located generally on the southeast
portion of the Casa Blanca Interchange on Interstate 40 which is located on the
Reservation, the specific location of which shall be subject to Tribal Council
approval, and to provide assistance in funding the architectural and engineering
costs for Owner's master planning of the commercial re-development of the Casa
Blanca Interchange.
B. Gaming Covered by this Agreement
All gaming covered by this Agreement will be conducted in accordance
with IGRA, the tribal/state gaming compact and applicable governing tribal
ordinances. [25 CFR ss.531.1(a)] Owner represents and warrants that a complete
copy of the applicable governing tribal ordinances is annexed as Exhibit A to
this Agreement and that a certified copy of the approved Compact between Owner
and the State of New Mexico ("Compact") is annexed as Exhibit B to this
Agreement. Owner and Manager each represent and warrant to the other that only
gaming which is legally permitted under both applicable federal and tribal law
will be permitted at the Enterprise.
II. TERM OF AGREEMENT
This Agreement shall be effective on the date of approval of this
Agreement by the Chairman of the National Indian Gaming Commission ("NIGC
Approval Date"). [25 CFR ss.531.1(n)] The term of this Agreement ("Term") shall
extend for seven (7) years from the date of official opening of the Enterprise
("Enterprise Opening Date"). [25 CFR ss. 531.1(h)].
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III. EXCLUSIVE ENGAGEMENT; COMPENSATION OF MANAGER
A. Exclusive Engagement of Manager
Owner exclusively retains and engages Manager to develop, finance,
construct, manage, operate and maintain the Enterprise which includes the right
to develop, manage, operate and maintain any and all Class II gaming and Class
III gaming activities at or adjacent to the Casa Blanca Interchange during the
term hereof, but not at other locations within the Reservation. The terms "Class
II" and "Class III" gaming are as defined and authorized under IGRA.
B. Compensation of Manager
Except as otherwise provided herein, in consideration of the
performance of its duties as described herein, during the term of this
Agreement, Manager shall receive a management fee of thirty percent (30%) of the
cumulative Net Distributable Profits from the gaming operation of the Enterprise
(hereinafter defined in Article VI, Paragraph A) resulting from the operation of
the Enterprise. [25 CFR ss.531.1(i)] Manager shall also receive the distribution
of non-gaming revenue set forth in Article VI, Paragraph E.
IV. CREDIT FACILITY
A. Credit Facility
Manager agrees on the terms and conditions set forth in this Article
IV to secure in the name of Owner a credit facility ("Credit Facility") in an
aggregate amount of up to Ten Million ($10,000,000) Dollars. The Credit Facility
shall, at the option of Manager in consultation with Owner, be either provided
directly by Manager to Owner and/or by a reputable third party lender to Owner
("Third Party Lender"). The actual amount of the Credit Facility will be fixed
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upon final budget approval of Owner and Manager and will depend on factors
including the final size and scope of the facility. Manager will also secure, in
the name of Owner, requisite furniture, fixtures and equipment financing ("F,F&E
Financing") for the Enterprise. The Credit Facility shall be the maximum dollar
amount, plus interest, which Manager and/or Third Party Lender may recover from
Owner for recoupment of construction and development costs. [25 CFR ss.531.1(g)]
The financing provided by Manager and/or Third Party Lender to Owner shall be
made in accordance with the Credit Facility Agreements between Owner and Manager
and/or Third Party Lender ("Credit Facility Agreements"). Funding pursuant to
the Credit Facility Agreements shall be made within sixty (60) days following
the NIGC Approval Date.
B. Pre-Development Costs
1. Manager agrees to advance to or on behalf of Owner up to Two
Hundred Forty Thousand ($240,000) Dollars prior to the NIGC Approval Date (the
"Pre-Development Advance") in order to cover the following pre-development costs
("Pre-Development Costs"):
(a) Preparation of the environmental assessment;
(b) Owner's administrative costs at the rate of Ten Thousand
($10,000) Dollars per month commencing on the first day of the month first
following execution of this Agreement by the parties and submission of this
Agreement to the National Indian Gaming Commission ("NIGC") for approval, and
continuing until the month immediately preceding Enterprise Opening Date;
(c) Architectural and engineering costs for the development of a
master plan for the Casa Blanca Interchange by Owner; and
(d) Facility development services and design work provided
through a development consulting agreement between the Pueblo and Greenbrier
Southwest Corporation.
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2. Upon approval of invoices by Owner and a direction letter being
provided by Owner to Manager with accompanying resolutions, Manager shall
promptly pay invoices relative to Pre-Development Costs directly to the third
party contractor performing such services.
3. The Pre-Development Advance shall be reimbursed to Manager at the
closing of the Credit Facility Agreements.
C. Limitation on Use of Proceeds of Credit Facility
Manager and Owner agree that the Credit Facility will only be used
by the Enterprise for purposes of funding federal approval of this Agreement,
NEPA compliance, start-up fees and expenses, construction, furniture, fixtures,
and equipment costs for the Enterprise as applicable and working capital fund as
agreed between Owner and Manager.
D. Interest
In the event Manager acts as lender pursuant to the Credit Facility,
Owner shall pay interest to the Manager on the outstanding and unpaid principal
amount of the Credit Facility at a rate per annum ("Credit Facility Rate") equal
to one percent (1%) over the Prime Rate, adjusted quarterly. Prime Rate shall be
as published in the Wall Street Journal on the NIGC Approval Date. Interest on
all outstanding amounts shall begin to accrue on the NIGC Approval Date. In the
event that a Third Party Lender provides all or a portion of the funding
pursuant to the Credit Facility, Manager shall reimburse Owner as an offset to
Manager's monthly management fee the spread between the Credit Facility Rate and
the rate charged by Third Party Lender to Owner.
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E. Repayment of Credit Facility
Owner and Manager agree that, unless otherwise agreed, repayment of
the Credit Facility, including interest, made pursuant to the Credit Facility
Agreements shall be amortized and shall be payable solely from the revenues of
the Enterprise, without any additional guarantee by Owner, in equal monthly
installments over a term of eighty four (84) months from the Enterprise Opening
Date, and shall be made in accordance with the provisions of the Credit Facility
Agreements. All interest payments on the Loan shall be an operating expense of
the Enterprise pursuant to Article VI, Paragraph A.
F. Acceleration of Credit Facility
If this Agreement is terminated by Owner for any reason prior to the
expiration of the Term or if Owner materially breaches any material term,
condition, covenant, representation or warranty contained in this Agreement, the
entire remaining unpaid balance of the Credit Facility shall be immediately due
and payable if the Credit Facility is provided by Manager; and Manager and/or
Third Party Lender shall retain a continuing lien on all past, present and
future revenues of the Enterprise.
G. Additional Capital
If, in the opinion of the Manager and Owner, money in addition to
that described above is to be borrowed by Owner or Enterprise for the
replacement of assets or for expanding or developing the Enterprise ("Additional
Capital Expenses"), Owner shall make every reasonable effort based solely on the
revenues of the Enterprise to borrow the funds necessary to pay for such
Additional Capital Expenses from commercial lending institutions or other
financial sources. At the request of Owner in order to assist it in reaching a
determination of whether or not such Additional Capital Expenses are necessary,
Manager shall provide a detailed budget and expenditure proposal to Owner.
Manager shall assist the Owner in obtaining additional financing, if feasible,
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for additional development capital. To the extent Manager agrees in its
discretion to loan additional money to Owner for such Additional Capital
Expenses, such loan shall be upon terms substantially similar to those which
Manager obligates itself to borrow the funds necessary to make such loan to
Owner.
V. MANAGEMENT OF THE ENTERPRISE
A. Distribution of Managerial Authority
To ensure proper and consistent management of the Enterprise,
Manager shall be vested with exclusive management responsibility and authority
for the development, start-up and day-to-day operation of the Enterprise. As
such, Manager shall have exclusive management responsibility for all management
functions of the Enterprise including, but not limited to the following:
1. Selecting both the initial and any subsequent employees to
serve in the following functions (collectively, "Key Employees"): Enterprise
General Manager, Assistant General Manager, Controller, Casino Manager, Shift
Manager(s), Director of Human Resources, Director of Security, Director of
Surveillance, Director of Marketing, Director of Slot Operations, Director of
Table Games Operations, Director of Food and Beverage Operations and Director of
Facilities Maintenance. All Key Employees shall be deemed employees of the
Enterprise;
2. Maintenance and improvement of the Enterprise. [25 CFR
ss.531.1(b)(1)];
3. Provision of operating capital (through Credit Facility
Agreements. [25 CFR ss.531.1(b)(2)];
4. Establishment of operating days and hours. [25 CFR
ss.531.1(b)(3)];
5. Hiring, firing, training, supervising and promoting employees
including hiring and supervision of security personnel. [25 CFR ss.531.1(b)(4)
and 25 CFR ss.531.1(b)(8)];
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6. Maintenance of Enterprise books and records. [25 CFR
ss.531.1(b)(5)];
7. Preparation of the Enterprise's financial statements and
report. [25 CFR ss.531.1(b)(6)];
8. Payment by the Enterprise for services of the independent
auditor engaged pursuant to 25 CFR ss.571.12. [25 CFR ss.531.1(b)(7)];
9. Setting the advertising budget and placing advertising. [25
CFR ss.531.1(b)(10)];
10. Paying bills and expenses. [25 CFR ss.531.1(b)(11)];
11. Establishing and administering employment practices. [25 CFR
ss.531.1(b)(12)];
12. Obtaining and maintaining insurance coverage, including
coverage of public liability and property loss or damage. [25 CFR
ss.531.1(b)(13); and
13. Complying with all applicable provisions of the Internal
Revenue Code. [25 CFR ss.531.1(b)(14)].
14. Manager shall be represented at the Enterprise by the on-site
Enterprise General Manager and, as such, various duties delegated to Manager
pursuant to this Agreement may be assigned by Manager to the Enterprise General
Manager.
B. Other Management Duties and Guidelines
In managing the Enterprise, Manager shall adhere to the following
guidelines:
1. Training shall include, but not be limited to, a program of
instruction for job applicants who are accepted for employment. Manager shall
give preference in hiring to qualified applicants in the following order of
priority: (i) Owner's enrolled tribal members, (ii) spouses and children of
enrolled members, (iii) enrolled members of other federally recognized Indian
tribes and (iv) all other persons.
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2. In order to maximize the benefits of the Enterprise to Owner,
Manager shall ensure that the hiring practices of the Enterprise are in
compliance with the applicable tribal Ordinances.
3. Manager shall develop commercially reasonable policies and
procedures which, at a minimum, shall include a grievance procedure to settle
disputes between (a) Manager and Enterprise employees and (b) Manager and
customers. [25 CFR ss.531.1(k)(3) and 25 CFR ss.531.1(k)(1)].
C. Owner's Duties
Owner shall be responsible for providing fire protection services,
emergency medical and law enforcement services associated with the Enterprise as
required in the Compact between Owner and the State of New Mexico and/or other
applicable laws, rules or regulations. [25 CFR ss.531.1(b)(9)]. Owner shall be
responsible for paying the costs for any increased public safety services
associated with the Enterprise. [25 CFR ss.531.1(b)(15)]. Owner shall also be
responsible for directing Manager in the payment of all Compact taxes, fees and
expenses, state facility taxes and Tribal Gaming Office fees and expenses as an
operating expense of the Enterprise. Owner, in consultation with Manager, shall
be responsible for supplying to the NIGC all information necessary for NIGC
compliance with NEPA. [25 CFR ss.531.1(b)(16)].
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D. Cash Management and Internal Controls
Manager shall be responsible for supervising the handling and
counting of funds collected from patrons of the Enterprise. Manager shall
implement and maintain a system of internal controls for the safekeeping and
monitoring of all cash, chips, markers, inventory and other items of value in
connection with the Enterprise. At the expense of the Enterprise and subject to
Owner's approval, Manager shall procure necessary record-keeping, bookkeeping,
and accounting services associated with the handling of such funds. A qualified
representative of Owner shall be entitled to observe the physical receipt,
counting and deposit of all gross receipts from the operation of the Enterprise.
It shall be Manager's responsibility to ensure that daily receipts are promptly,
safely and securely transported to the depository agreed upon by the parties at
least once a day by an approved armored transport carrier. All receipts shall be
insured against theft.
E. Enterprise Bank Accounts
Manager and Owner shall agree upon a federally-insured financial
institution in which Enterprise funds shall be deposited and maintained. A
general operating checking account which bears interest at a reasonable
commercial rate will be established for the purpose of paying day-to-day
operating expenses. A separate payroll accounting system, such as a
bank-administered payroll system, shall be utilized, and routine transfers of
funds from the Enterprise's general account shall be made to payroll sufficient
for Manager to pay all employees of the operation. Each month, from the general
account, all direct and indirect costs of the operation shall be paid, and the
balance each month shall be divided and distributed as provided in Article VI,
Paragraph C. All checks drawn upon the account in excess of Twenty-Five Thousand
($25,000) Dollars shall require the signatures of a duly authorized
representative of Manager and a duly authorized representative of Owner;
provided, however, that checks for prizes will not require the signature of
Owner's representative. Manager shall provide Owner with a monthly financial
statement of all transactions affecting the general account.
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Upon agreement of Manager and Owner, cash in excess of that
reasonably necessary to meet operating expenses and payroll between monthly
distributions of profits may be invested and kept in interest-bearing accounts
at one or more financial institutions insured by any agency of the federal
government. All interest earned on Enterprise funds shall be included in the
revenues of the Enterprise.
F. Accounting/Audit
1. Manager shall provide a certified annual audit for the Enterprise
to be conducted by a certified public accounting firm to be recommended by
Manager and agreed upon by Owner. Such accounting firm shall be of national or
regional stature and reputation with experience in Class III gaming. A copy of
the audit and accompanying documents shall be provided to both Owner and Manager
immediately upon completion. The cost of the audit shall be an operating
expense.
2. Manager shall establish and maintain satisfactory accounting
systems and procedure that at a minimum:
(a) Include an adequate system of internal accounting controls.
[25 CFR ss.531.1(c)(1)];
(b) Permit the preparation of financial statements in accordance
with generally accepted accounting principles ("GAAP"). [25 CFR ss.531.1(c)(2)];
(c) Are susceptible to audit. [25 CFR ss.531.1(c)(3)];
(d) Allow a calculation of calculate annual fees under the IGRA
regulations;
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(e) Permit the calculation and payment of Manager's fees. [25 CFR
ss.531.1(c)(5)]; and
(f) Provide for the allocation of operating expenses or overhead
expenses among the Owner, the Enterprise, Manager and any other user of shared
facilities and services. [25 CFR ss.531.1(c)(6)].
3. Duly authorized representatives of Owner shall have the right to
immediately inspect, examine and copy such books and any other gaming related
information Owner deems appropriate at any time. [25 CFR ss.531.1(e)].
4. Manager shall provide Owner, not less frequently than monthly, a
financial report concerning the Enterprise. [25 CFR ss.531.1(d)].
5. Each party shall have the right to independently audit said books
at reasonable intervals at its own expense.
G. Statement of Budget
Manager shall prepare an estimated annual budget for the Enterprise
and submit same to Owner for review and approval at least thirty (30) calendar
days prior to the beginning of the fiscal year or, with respect to the initial
year of operation, at least thirty (30) calendar days prior to the opening of
the Enterprise to the public. Owner shall have thirty (30) calendar days from
receipt of the estimated budget to approve the budget or object thereto. Failure
of the Owner to object to the estimated budget within the time allowed shall be
deemed an approval. After approval of the annual budget, a determination of the
amount of Net Distributable Profits available for distribution shall be
performed on a monthly basis as provided in Article VI, Paragraph C.
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H. Construction and Development of the Enterprise
1. Architect and Supervisors; Plans. Manager shall designate and
engage, at Manager's cost and expense to be reimbursed as part of the Credit
Facility, such architects, engineers, contractors, construction supervisors and
designers as shall be necessary to prepare all site plans, grading plans,
construction drawings, surveys, materials, specifications, architectural plans
and drawings, elevations, construction models, engineering plans and drawings,
plats and other plans, drawings, studies or reports of any nature related to the
construction of the facility ("Plans and Specifications") and to the furniture,
fixtures and equipment of the facility ("F,F&E Specifications"). The various
components of the Plans and Specifications and F,F&E Specifications shall be
prepared in consultation with Owner and shall be submitted by Manager to Owner
for comment and approval. Owner will have thirty (30) days to review and to
approve the Plans and Specifications and F,F&E Specifications prior to
commencement of construction, which approval will not be unreasonably withheld.
2. Supervision, Development and Improvements. Manager is hereby
granted responsibility to supervise the completion of all the development,
improvements, and related activities undertaken pursuant to the terms and
conditions of this Agreement including, without limitation, arranging for and
acquiring in the name of Owner all necessary permits and approvals for the
construction and operation of the Enterprise (e.g., zoning, water and building
permits). Owner shall cooperate with and assist Manager in obtaining any and all
such permits or approvals, if any, which may be required by law. No permit from
Owner is or will be required with respect to the construction of the Enterprise.
Owner shall not impose any fees, taxes or charges or any rules, ordinances,
zoning laws or other regulations with respect to the construction of the
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Enterprise. The costs of development of the gaming facility, including
construction of the structure; supplying of furniture and furnishing; fixtures;
equipment and machinery related to the gaming operation as permitted under the
Compact and as mutually agreed; landscaping; and parking area, shall be paid out
of the proceeds of the Credit Facility. The construction supervisor will oversee
that all work, installation, and construction, be done timely and in a good and
workmanlike manner materially in accordance with construction contracts
negotiated by Manager in Owner's name. Manager will ensure that the general
contractor maintains an appropriate performance bond and that all construction
is in conformity with applicable building codes. Owner shall have the right to
inspect all work. Manager hereby agrees to pay from the Credit Facility all
legitimate debts, claims, and liabilities in connection with such construction
and improvements. All materials, improvements, equipment installed,
construction, and the like shall be the property of the Owner during and on
completion of construction. Manager will ensure compliance with applicable
federal and tribal Law with respect to contracting and sub-contracting of
construction.
3. Construction Budget. A detailed construction budget
("Construction Budget") shall be prepared and submitted to Owner. The
Construction Budget shall be subject to approval within thirty (30) days of
submission to Owner, which approval will not be unreasonably withheld.
4. Approval Authority. Owner shall have the right to approve the
selection of the construction contractor and construction supervisor, such
approval not to be unreasonably withheld.
VI. DISTRIBUTION OF ENTERPRISE REVENUES
A. Net Distributable Profits [25 CFR ss.531.1(i)]
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1. For the purpose of this Agreement, "Net Distributable Profits"
shall be defined as follows:
The amount by which all sales, receipts, and revenues of the
Enterprise gaming operation (as defined in 25 CFR Section 502.10)
exceeds reasonable, necessary and actual operating expenses. For
purposes of computing "Net Distributable Profits," operating
expenses to be deducted from gross revenues shall include
repayment of interest on the Credit Facility, taxes and fees
pursuant to the Compact, tribal gaming commission fees and
expenses, cost of goods sold, prizes and other gaming wins paid
out, employee and Key Employee salaries, wages and benefits,
payroll and other taxes or governmental levies, permit and
license fees, advertising, promotion, fees and expenses of
third-party contractors and agents, including but not limited to
various training, marketing and operations consultants, bus and
other transportation and coordinator costs and repairs, equipment
leases, uniforms, office expense, printing, supplies, utilities,
rent, insurance of all types, uninsured legal judgments and
settlements, maintenance, and Enterprise legal and accounting
expenses.
Subject to the above, Net Distributable Profits shall be computed in conformance
with generally accepted accounting principles consistently applied.
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B. Capital Expenditures
Capital Expenditures (hereinafter defined) shall be paid by the
Owner from its share of Net Distributable Profits. "Capital Expenditures" shall
be defined as any expenditures in excess of One Thousand Dollars ($1,000) for
items that have a useful life in excess of one (1) year. Upon commencement of
gaming operations at the gaming facility, Manager agrees to contribute from
Manager's share of Net Distributable Profits a monthly fixed capital
contribution of One Thousand Dollars ($1,000) to a Capital Expenditures fund.
Manager shall have no further obligation with respect to Capital Expenditures.
C. Distribution of Net Distributable Profits
Subject to Article VI, Paragraph D, all Enterprise revenues shall
first be applied to meeting Enterprise operating expenses. A calculation of the
amount of Net Distributable Profits available for distribution to the parties
shall be performed on a monthly basis by the twentieth day of the month, and the
Net Distributable Profits shall thereupon be distributed to the parties in
accordance with the percentages set forth in Article III, Paragraph B.
D. Guaranteed Payment [25 CFR ss.531.1(f)]
Notwithstanding anything else to the contrary in this Agreement,
commencing upon the Enterprise Opening Date, Owner shall receive a guaranteed
payment from Manager in the amount of Thirty Five Thousand ($35,000) Dollars per
month. This guaranteed payment shall have preference in payment over the
retirement of Enterprise construction or development debt. All guaranteed
payments shall be credited against Owner's cumulative Net Distributable Profits.
E. Distribution of Non-Gaming Revenue
All net revenues from the Enterprise other than revenue from gaming
operations, as defined in 25 CFR Section 502.10, ("Non-Gaming Revenue") shall be
allocated seventy (70%) percent to Owner and thirty (30%) percent to Manager and
shall be calculated and distributed to the parties at the same times as Net
Distributable Profits pursuant to Article VI, Paragraph C.
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VII. EVENTS OF DEFAULT; REMEDIES [25 CFR ss.531.1(j)]
A. Events of Default
Any one or more of the following shall constitute an event of
default ("Event of Default") pursuant to this Agreement:
1. Default in the payment by a party of any sum due hereunder when
due if such default continues for more than five (5) days after the due date
thereof ("Monetary Event of Default");
2. Any default (other than a Monetary Event of Default) in the
observance or performance of any material covenant, condition, agreement,
warranty, representation or provision of this Agreement where such default has
continued for more than sixty (60) days after written notice to the defaulting
party by the non-defaulting party; provided, however, that if the defaulting
party has, in good faith, taken steps towards effecting and/or tendering a cure
to the non-defaulting party within said sixty (60) days, the defaulting party
shall have an additional period of sixty (60) days to cure such default; or
3. In the event of a default by Owner pursuant to the Credit
Facility Agreement.
B. Remedies
When any Event of Default has occurred and is continuing, the
non-defaulting party may, at its option:
1. Proceed by appropriate dispute resolution as provided in this
Agreement;
2. Terminate this Agreement on written notice to the defaulting
party; or
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3. Recover any actual damages occasioned by such default but not
including any incidental, consequential or punitive damages. All damages
hereunder shall bear interest from the date due at the rate of ten (10%) percent
per annum, compounded annually, or the maximum permitted by law, whichever is
less, except that any claim for money damages against Owner shall be limited to
and payable only from the Net Distributable Profits of the Enterprise.
The remedies hereinabove provided shall be cumulative and in
addition to any other remedy available to the parties at law or in equity.
VIII. NOTICE
All notices, consents or other communications shall be in writing
and shall be deemed to have been duly given when delivered personally or by
messenger, or upon receipt when mailed by registered or certified mail, return
receipt requested, postage pre-paid, or when received via facsimile, telex or
other electronic transmission, in all cases addressed to the party for whom
intended at its address set forth below.
To the Owner: Governor
Pueblo of Laguna
P.O. Box 194
Laguna, New Mexico 87026
with a copy to: B. Reid Haltom, Esq.
Nordhaus, Haltom, Taylor, Taradash & Frye
500 Marquette Avenue, NW, Suite 1050
Albuquerque, New Mexico 87102
with a copy to: Teresa Isabel Leger, Esq.
Nordhaus, Haltom, Taylor, Taradash & Frye
200 West DeVargas Street, Suite 9
Santa Fe, New Mexico 87501
To the Manager: Senior Vice President and General Counsel
Capital Gaming Management, Inc.
2701 East Camelback Road, Suite 484
Phoenix, AZ 85016
with a copy to: Chairman and CEO
Senior Vice President of Operations
Capital Gaming International, Inc.
2701 East Camelback Road, Suite 484
Phoenix, AZ 85016
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or to such other address as a party shall have designated by notice in writing
to the other party given in a manner provided by this Article VIII.
IX. COVENANT OF GOOD FAITH AND FAIR DEALING
Manager and Owner hereby warrant and represent to each other that they
shall not act in any manner which would cause this Agreement to be altered,
amended, modified, cancelled, or terminated (except as allowed by Article VII)
without the consent of the other and that they shall at all times act in good
faith and deal fairly with the other party. Owner and Manager further warrant
and represent that they shall take all action necessary to ensure that this
Agreement shall remain in good standing at all times and will fully cooperate
with each other in achieving the goals of this Agreement.
X. INTERFERENCE IN TRIBAL AFFAIRS
Manager shall not directly or indirectly interfere with, become
involved in, or attempt to influence the internal tribal affairs of Owner.
XI. INSURANCE
Manager shall maintain in the name of the Enterprise public liability
insurance in the amount of at least Two Million Dollars ($2,000,000) per person
and Five Million Dollars $5,000,000) per occurrence. Manager shall also maintain
insurance on all Enterprise employees while such employees are engaged in any
activity, on or off the premises of the gaming Enterprise, which is properly
within the scope and in the course of their employment with Manager pursuant to
19
<PAGE>
this Agreement. Manager shall also keep the buildings, improvements, and
contents herein insured for their full replacement value against loss or damage
by fire, theft and/or vandalism with extended coverage endorsement.
Owner and Manager shall be named as co-beneficiaries of all insurance
policies and Manager will provide Owner satisfactory written evidence of such
coverage. The cost of such insurance shall be an operating expense.
XII. AUTHORITY TO EXECUTE; OPINIONS OF COUNSEL
Owner, Manager and the Pueblo of Laguna Tribal Gaming Commission each,
for themselves, warrants, represents and agrees that it has the authority to
enter into or approve this Agreement and/or the Credit Facility Agreements.
Attached hereto as Exhibits E and F, respectively, are a copy of Owner's
authorizing Council Resolution and Manager's authorizing Board of Directors
Resolution. Within five (5) business days of the NIGC Approval Date, each of the
parties shall deliver an opinion of counsel addressed to and for the benefit of
the other parties reasonably satisfactory to such other parties as to the
following matters:
1. Legal right and power of such party under its respective Tribal
Constitution, Corporate Charter, By-Laws or other governing documents, and under
all applicable laws and regulations, to enter into, execute, deliver and perform
this Agreement and/or the Credit Facility Agreements;
2. Good standing of such party;
3. Due authorization of the execution and delivery, and valid execution
and delivery of, this Agreement and/or the Credit Facility Agreements by such
parties; and
4. That this Agreement and/or the Credit Facility Agreements constitute
the legal, valid and binding obligations of such party, enforceable in
accordance with its respective terms.
20
<PAGE>
XIII. NO PRESENT LIEN OR LEASE
The parties to this Agreement agree and expressly warrant that this
Agreement is not a lease and does not convey to Manager any present interest
whatsoever in the building or property on which the Owner's Enterprise will be
located, or any proprietary interest in the Enterprise itself.
XIV. DISPUTES BETWEEN OWNER AND MANAGER; DISPUTES BETWEEN
TRIBAL GAMING COMMISSION AND MANAGER [25 CFR ss.531.1(k)]
(a) Resolution of Disputes. Owner and the Owner on behalf of Pueblo of
Laguna Tribal Gaming Commission expressly provides a limited waiver, on behalf
of itself and any of its administrative or regulatory agencies, of sovereign
immunity solely with respect to the resolution of any disputes with regard to
the interpretation of or enforcement of rights or duties under this Agreement
and the Credit Facility Agreements and consents to be sued and allow Manager to
enforce arbitration or any award of arbitration concluded as set forth in
paragraph XIV(b) below in any court of competent jurisdiction and expressly
agreeing to venue being in the United States District Court for the District of
New Mexico, and any applicable Federal Court of Appeals including the United
States Supreme Court. Owner and Owner on behalf of the Pueblo of Laguna Tribal
Gaming Commission each expressly waive any claim or defense of exhaustion of
Tribal administrative or judicial remedies, and each further covenants not to
sue Manager in any Tribal jurisdiction or Tribal venue. The limited waivers
granted herein shall extend solely to Manager and in its name alone, and no
others. The successful party in any litigation shall be entitled to recover all
reasonable costs and attorney's fees.
(b) Arbitration. All claims and controversies between the Owner and
Manager concerning this Agreement or arising out of the performance of this
Agreement shall be submitted to binding arbitration as set forth below.
21
<PAGE>
Appointment of Arbitrators. Either Manager or Owner may, by written
notice to the other party, within twenty (20) days after a controversy has
arisen appoint an arbitrator who shall be a disinterested party. The other party
shall, by written notice, within thirty (30) days after receipt of such notice
by first party, appoint a second arbitrator who shall be also a disinterested
party. The two arbitrators shall agree upon a third arbitrator and shall appoint
him by written notice signed by both of them and a copy mailed to Owner and
Manager within five (5) days after such appointment.
Arbitration Hearing. On appointment of the arbitrators such arbitrators
shall hold an arbitration hearing at a mutually agreed upon location within
thirty days of the appointment of the last arbitrator. At the hearing, each
party may submit statements of fact or memorandum of law as desired and the
arbitrators shall allow each party to present its case, evidence and witnesses,
if any, in the presence of both parties. The arbitrators shall render their own
decision promptly after the hearing. Each party shall bear its own costs of
arbitration, including its pro-rata portion of the cost of the third arbitrator.
Award. An award of a majority of the arbitrators shall be binding and
conclusive upon the Owner and Manager. Either the Owner or Manager shall be
entitled to confirmation of any award of the arbitrator and to judgment thereon
in a court of competent jurisdiction. The owner expressly provides a limited
waiver of sovereign immunity for the purpose of enforcement of the arbitration
award in any court of competent jurisdiction. This limited waiver of immunity is
for actual damages only and to be paid solely from revenues of the Enterprise
and is not intended, nor shall it be construed, (a) to extend to any claim for
incidental, consequential or punitive damages; (b) to waive the Owner's immunity
22
<PAGE>
from suit for any other purpose or with respect to any controversy, claim, or
other matter not specifically mentioned in this paragraph; (c) to extend the
benefit of any person other than the parties to this contract or their
successors or assigns; or (d) to extend the arbitration award in excess of the
value of the contract. This limited waiver of immunity from suit shall not be
construed as an admission of liability by the Owner as to any claim or damages
or as an agreement or willingness to pay any amount as damages absent an
arbitration determination of liability, and the Owner shall have the right to
defend any such claim full on the merits.
Manager will carry on the work of the contract and maintain the
progress schedule during any arbitration proceedings unless otherwise mutually
agreed upon in writing.
XV. SUCCESSORS [25 CFR ss.531.1(l)]
The benefits and obligations of this Agreement shall inure to and be
binding upon the parties hereto, their heirs, successors and assigns.
XVI. SEVERABILITY
In the event any portion of this Agreement is deemed unenforceable or
void by any court of competent jurisdiction, then and in that event, all other
aspects of this Agreement shall remain in full force and effect.
XVII. LICENSING
Owner and the Pueblo of Laguna Tribal Gaming Commission shall provide
all business permits and/or gaming licenses required by tribal laws or
ordinances, and the Compact, and Manager shall pay the reasonable license and
application fees. The Pueblo of Laguna Tribal Gaming Commission will provide to
Manager all required license applications within five (5) days of the execution
of this Agreement by all parties, and Manager shall submit such completed
23
<PAGE>
applications to the Pueblo of Laguna Tribal Gaming Commission within thirty (30)
days of receipt. Owner and the Pueblo of Laguna Tribal Gaming Commission
covenant and agree to expeditiously complete the background investigation and
licensure of Manager and, assuming appropriate findings of suitability, issue
its permanent gaming license, within thirty (30) days of the submission of the
required applications by Manager and in no event later than the NIGC Approval
Date. Owner and the Pueblo of Laguna Tribal Gaming Commission shall at all times
give due and fair consideration to the findings of Manager's suitability by
other state and federal gaming jurisdictions.
XVIII. COMPLIANCE WITH COMPACT, TRIBAL REGULATIONS AND ORDINANCES
In carrying out its obligations under this Agreement, Manager agrees to
comply with the Compact between Owner and the State of New Mexico and the
duly-executed gaming Ordinance of Owner (as approved by the NIGC) and with any
and all other regulations or ordinances of the Pueblo of Laguna Tribal Gaming
Commission that are presently in effect or which may in the future be enacted,
provided that said regulations or ordinances do not impose financial burdens on
the Enterprise or Manager which exceed industry standards. If a regulation or
ordinance does impose a financial burden on the Enterprise or Manager in excess
of industry standards, then the cost of the financial burden may be deducted as
an offset against the fees and payments otherwise due from the Enterprise to
Owner.
XIX. MISCELLANEOUS
A. Management of Enterprise
The term "Enterprise" shall be deemed to include the actual operation
of all forms of Class II and Class III gaming activities as those activities are
defined in the Indian Gaming Regulatory Act, P.L. 100-497 (Oct. 17, 1988), and
all matters directly related thereto, such as the management and maintenance of
the building within which the activities take place, the parking lot for
patrons, and concessions located in the facility for sale of food and beverages.
24
<PAGE>
Manager shall have the right to assign to third parties the concessions
for parking of patrons' vehicles, and sales of food and beverages, subject to
the approval of Owner, such approval not to be unreasonably withheld. In the
event of such assignment, preference shall be provided to qualified tribal
members. [25 CFR ss.531.1(l)].
Manager shall have the further right to engage, on behalf of the
Enterprise, various training, marketing and operations sub-contractors and/or
consultants on an as needed basis in accordance with its judgment as Manager.
[25 CFR ss.531.1(l)].
B. Tax Matters
1. Notwithstanding anything in this Agreement to the contrary, it is
the parties intent that Manager be an independent contractor, not a partner or
joint venturer, providing professional gaming management services to Owner.
Manager has no ownership interest in the Enterprise or the land upon which the
Enterprise operates. In this regard, it is further agreed and understood that
all employees and Key Employees of the Enterprise are employees of the
Enterprise for tax purposes.
2. If any non-tribal government attempts to impose any tax on any
party to this Agreement regarding the construction or operation of the
Enterprise, except for federal and state income and other similar taxes, both
parties shall take such action as is reasonably necessary to legally contest
such attempt. However, if a court of competent jurisdiction finally determines
that any such tax is legally due from Manager based on its contractual interests
under this Agreement, then such tax shall be deemed an operating expense.
25
<PAGE>
C. Parties' Approvals
Except as specifically provided to the contrary herein, on any occasion
where approval of a party is required by this Agreement, and written request for
approval is made to the other party, such approval shall be provided in writing
within the time frame specifically provided, or if no time period is provided,
within fifteen (15) days after receipt of written request for such. In the event
that the party from whom such approval is sought neither approves nor
disapproves within fifteen (15) days after the applicable time period ends, such
inaction shall be deemed to be the equivalent of approval.
D. Entire Agreement
This Agreement constitutes the entire agreement between the parties
hereto and, upon approval by the NIGC, supersedes any prior agreement between
the parties relating to this subject matter. [25 CFR ss.533.3(a)(2)]. Any
amendment, change or modification to this Agreement must be in writing and
signed by all of the parties hereto and will be subject to the approval of the
Chairman of the NIGC. [25 CFR ss.531.1(j)].
E. Tribal Tax; Increased Regulatory Burden
Except as provided in the Compact between Owner and the State of New
Mexico, Owner agrees that no license, tax or other charge may be imposed by
Owner upon Manager or upon the Enterprise or assets thereof that will adversely
affect Manager's share of Net Distributable Profits and that it shall endeavor
in good faith not to impose upon Manager any tribal regulatory or similar
burden, if the result of same would materially increase Manager's cost of
performance of this Agreement or materially decrease Manager's share of Net
Distributable Profits or Non-Gaming Revenues. In the event that Owner does in
26
<PAGE>
fact levy any such license fee, tax or charge, or impose such regulation or
similar burden, and (if contested by Manager) such tribal action is held valid
by a court of competent jurisdiction, Owner agrees that any payment of such
sums, increased cost of performance or decreased share of Net Distributable
Profit may be recovered by Manager as an offset against the fees and payments
otherwise due from the Enterprise to the Owner, including the Owner's share of
Net Distributable Profits.
F. Approvals
1. Tribal and Federal Approval
This Agreement shall not be binding until all tribal and federal
action required hereunder have been obtained from duly recognized
representatives of the Owner and the NIGC. The parties understand and agree that
this Agreement is not subject to review and approval of the U.S. Department of
the Interior pursuant to ss.81 of Title 25, USC. The Owner covenants, represents
and warrants to Manager that it shall submit this Agreement to the Chairman of
the NIGC and to the Pueblo of Laguna Tribal Gaming Commission for approval
within five (5) days of the execution hereof by the Owner and Manager.
2. Assignments and Sub-Contracts; Change in Ownership [25 CFR
ss.531.1(m)]
Except as provided herein, this Agreement cannot be assigned
without the prior written consent of Owner. Owner may assign to a wholly owned
tribal corporation or entity. Subject only to satisfaction of appropriate
regulatory requirements, if any, Manager may assign this Agreement without
Owner's consent to any of the following:
(a) To Manager's parent company, Capital Gaming International,
Inc. ("Capital");
(b) To any subsidiary or affiliate of Capital or Manager; or
(c) To any other entity owned or controlled by the existing
management of Capital or Manager.
27
<PAGE>
All other assignments of this Agreement shall require the advance written
approval of Owner, which approval will not unreasonably be withheld.
G. Commencement Date
All obligations, rights and duties arising from or required by this
Agreement shall commence upon the NIGC Approval Date.
H. Agreement to Pay Attorney's Fees and Expenses
In the event of any litigation pursuant to this Agreement or the
Credit Facility Agreements, in which a party seeks to enforce its rights as
against the other party pursuant hereto, the prevailing party in such litigation
shall be entitled to recover its reasonable attorney's fees and expenses.
I. Governing Law
This Agreement and the Credit Facility Agreements shall in all
respects be interpreted, enforced and governed by and under the laws of the
State of New Mexico and the laws of the United States.
J. No Presumption Against Draftsman
The parties agree that this Agreement was jointly negotiated and
drafted by each party and its respective legal counsel and, accordingly, shall
be deemed to have been prepared by all parties and not one or any group of them,
each party having had an opportunity to participate in the drafting of this
Agreement. This Agreement shall not be construed against any party on the basis
that such party prepared the document or was in any superior bargaining
position.
28
<PAGE>
XX. EXECUTION IN TRIPLICATE
This Agreement is being executed in three (3) original counterparts,
one to be retained by each party and one to be submitted to the NIGC. Each is
equally valid.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
on the day and year first above written.
PUEBLO OF LAGUNA CAPITAL GAMING MANAGEMENT, INC.
By: By:
------------------------------------ --------------------------------
Name: Roland E. Johnson Name: Edward M. Tracy
Title: Governor Title: Chairman and CEO
29
<PAGE>
CAPITAL GAMING INTERNATIONAL, INC.
EXHIBIT 12
SCHEDULE OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(ROUNDED)
<TABLE>
<CAPTION>
Reorganized Company | Predecessor Company
------------------------------------------- | ------------------------------------------
May 29, 1997 July 1, 1996 |
Year ended through through | Year Ended June 30,
June 30, 1998 June 30, 1997 May 28, 1997 | 1996 1995 1994
------------- ------------- ------------ | ---- ---- ----
<S> <C> <C> <C> | <C> <C> <C>
Consolidated Pre-Tax [Loss] |
Income From Operations $ (7,154,000) $ (1,351,000) $ 44,411,000 | $ (3,718,000) $ (116,876,000) $ (24,168,000)
Fixed Charges 2,885,000 251,000 8,394,000 | 21,846,000 20,388,000 7,838,000
------------ ------------ ------------- | ------------ ---------------- -------------
Earnings For Computation $ (4,269,000) $ (1,100,000) $ 52,805,000 | $ 18,128,000 $ (96,488,000) $ (16,330,000)
============ ============ ============= | ============ ================ =============
|
Interest Expense $ 2,885,000 $ 251,000 $ 7,842,000 | $ 19,062,000 $ 18,225,000 $ 7,024,000(1)
Capitalized Interest -- -- -- | -- 1,474,000 234,000
Deferred Financing Cost -- -- 552,000 | 2,784,000 2,115,000 777,000
Interest Portion |
Of Rent Expense -- -- -- | -- 48,000 37,000
------------ ------------ ------------- | ------------ ---------------- -------------
Fixed Charges $ 2,885,000 $ 251,000 $ 8,394,000 | $ 21,846,000 $ 21,862,000 $ 8,072,000
============ ============ ============ | ============ ================ =============
|
Ratio of Earnings to Fixed |
Charges -- -- 6.29 | -- -- --
============ ============ ============ | ============ ================ =============
|
Deficiency of Earnings $ 7,154,000 $ 1,351,000 $ -- | $ 3,718,000 $ 118,350,000 $ 24,402,000
============ ============ ============ | ============ ================ =============
</TABLE>
(1) Does not include a one time charge of $4,000,000 which was recognized as
interest expense as consideration for the termination of the company's
obligation to issue warrants to purchase 1,250,000 shares of the company's
stock.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000867443
<NAME> CAPITAL GAMING INTERNATIONAL, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 4,498,000
<SECURITIES> 0
<RECEIVABLES> 4,431,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,717,000
<PP&E> 131,000
<DEPRECIATION> 108,000
<TOTAL-ASSETS> 16,721,000
<CURRENT-LIABILITIES> 1,726,000
<BONDS> 23,100,000
0
0
<COMMON> 400,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 16,721,000
<SALES> 0
<TOTAL-REVENUES> 8,150,000
<CGS> 0
<TOTAL-COSTS> 12,881,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,885,000
<INCOME-PRETAX> (6,818,000)
<INCOME-TAX> 336,000
<INCOME-CONTINUING> (7,154,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,154,000)
<EPS-PRIMARY> (3.82)
<EPS-DILUTED> (3.82)
</TABLE>
