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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, 1999
Commission File No. 0-19128
CAPITAL GAMING INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-3061189
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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 [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]
The aggregate market value of the Registrant's Common Stock, no par
value, held by non-affiliates, computed by reference to the average of the
closing bid and asked prices of the Common Stock as reported by the
"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 28, 1999 was 1,999,745
DOCUMENTS INCORPORATED BY REFERENCE
NONE
*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....................................................................................... 25
ITEM 3. LEGAL PROCEEDINGS................................................................................. 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................... 26
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............................. 26
ITEM 6. SELECTED FINANCIAL DATA........................................................................... 28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 29
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKS ...................................... 39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................... 39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.............. 39
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.................................................................. 40
ITEM 11. EXECUTIVE COMPENSATION............................................................................ 42
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................... 47
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................... 48
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K................................... 49
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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 Company is also engaged in the
development of the Narragansett casino project in Rhode Island ("Rhode Island
Project"). The development of the Rhode Island Project is conducted through
Capital Development Gaming Corp. ("CDGC"), a wholly-owned subsidiary of the
Company.
CGMI developed and currently manages two Class III (as hereinafter
defined) Native American casinos.
Tonto Apache Tribe - Mazatzal Casino in Payson, Arizona (Class III
facility opened in April 1995)
Umatilla Tribes - Wildhorse Gaming Resort in Pendleton, Oregon (Class
III facility opened in March 1995)
On July 24, 1998 CGMI entered into a management and development
agreement with the Pueblo of Laguna to exclusively develop, construct, operate
and manage a Class III casino to be located at the Casa Blanca exit on
Interstate 40 on the Pueblo's sovereign reservation lands approximately 45 miles
west of Albuquerque, New Mexico ("Dancing Eagle Casino Project"). The proposed
21,000 square foot casino will offer 10 Las Vegas-style table games, 300 slot
machines, a 72-seat full service restaurant, a gift shop and other amenities. As
amended, the management and development agreement provides that the term of such
agreement is five (5) years from the official date of opening of the casino. The
agreement further provides that CGMI will receive a management fee of 30% of
adjusted net revenues (as defined in such agreement) during the first three
years of the term, and 20% of adjusted net revenues in the fourth and fifth
years of the term. The agreement further provides that the management fees shall
at all times be capped at 34.3% of net revenues as determined in accordance with
generally accepted accounting principles. Construction of the Dancing Eagle
Casino Project is expected to commence by October 1999 and the facility is
anticipated to open in the first quarter of calendar year 2000.
CDGC has a management and development contract 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".
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.
In September 1999 management of the Company streamlined and reorganized
and began implementation of a business strategy designed to achieve the
following goals: (i) increase revenues at the Company's managed casinos, (ii)
finance and develop the Dancing Eagle Casino project, (iii) build cash for use
in debt service and for future projects, (iv) further develop the Rhode Island
Project, (v) seek and obtain new project opportunities, (vi) decrease operating
expenses instituted by prior management and (vii) seek out ways to refinance or
restructure the Company's existing indebtedness. The progress of the Company's
new business strategy is discussed in Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Fiscal 1999
compared to Fiscal 1998". Management intends to continue implementation of its
business strategy in fiscal year 2000.
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 the Seminole decision, the Secretary of the
United States Department of the Interior ("Secretary") issued regulations
prescribing procedures to permit Class III gaming when a State interposes its
immunity from suit by an Indian Tribe in which the Tribe accuses the State of
failing to negotiate in good faith. The regulations took effect on May 12, 1999
(25 C.F.R. Part 291). The regulations are intended to end any stalemates in the
compact process and allow the Secretary's procedures to substitute for a
tribal-state compact.
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 Rhode Island 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, 1999, CGMI was owed approximately $1,441,000 on account of the original
tribal loans. In July 1998 CGMI entered into a management and development
agreement with the Pueblo of Laguna to exclusively develop, construct, operate
and manage a Class III casino to be located approximately 45 miles west of
Albuquerque, New Mexico on Interstate 40.
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
1999, the Company received management certification from the Arizona Department
of Gaming.
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.
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Pueblo of Laguna Contract (Dancing Eagle Casino - Casablanca, New Mexico)
On July 24, 1998 CGMI entered into a five (5) year management and
development agreement (as amended from time to time, the "Management Agreement")
with the Pueblo of Laguna and its wholly-owned corporation, Laguna Development
Corporation ("LDC"), to exclusively develop, finance, construct, operate and
manage a casino to be located at the Casa Blanca exit on Interstate 40 on the
Pueblo's sovereign reservation lands approximately 45 miles west of Albuquerque,
New Mexico. The Dancing Eagle Casino will be a 21,000 square foot facility which
will offer 10 Las Vegas-style table games, 300 slot machines, a 72-seat full
service restaurant, a gift shop and other amenities. The Management Agreement
provides that CGMI will receive a management fee of 30% of "adjusted net
revenues" (as defined therein) during the first three years of the term and 20%
of adjusted net revenues in the fourth and fifth years of the term. The
Management Agreement further provides that the management fees shall at all
times be capped at 34.3% of net revenues as determined in accordance with
generally accepted accounting principles.
The Dancing Eagle Casino will be designed, constructed, equipped and
opened for a total project cost of approximately $10.1 Million. In order to
finance the Dancing Eagle Casino Project, CGMI has secured, in the name of LDC,
third-party project financing in the amount of approximately $7.2 Million which
has been placed by Miller & Schroeder Investments Corporation (the "Senior
Secured Loan"). Additionally, CGMI is making a subordinate loan ("Subordinate
Loan") to LDC in the aggregate amount of approximately $1,713,424 pursuant to a
certain Construction and Pre-opening Cost Loan Agreement dated September 14,
1999 between CGMI and LDC ("Subordinate Loan Agreement"). Pursuant to the
Subordinate Loan Agreement, LDC has executed certain subordinate notes dated
September 14, 1999 in the principal amounts of $1,291,424 ("Subordinate Loan I")
and $422,000 ("Subordinate Loan II"). Subordinate Loan I and Subordinate Loan II
will be repaid by the LDC to CGMI out of the LDC's share of net revenues in
accordance with generally accepted accounting principles. Subordinate Loan I and
Subordinate Loan II are fully subordinate to the Senior Secured Loan.
Subordinate Loan I is payable in equal monthly installments of principal and
interest over a period of thirty-six (36) months from the date of opening of the
Dancing Eagle Casino and bears interest at the rate of prime plus one (1%)
percent. Subordinate Loan II is payable interest free such that $240,000 is to
be paid at funding and the remaining principal is to be paid in equal monthly
installments over a period of twelve (12) months from the date of opening of the
Dancing Eagle Casino. CGMI has agreed to fund a $168,000 interest reserve on the
Senior Secured Loan which will be released to CGMI on the first monthly payment
date pursuant to the Senior Secured Loan occurring after all monthly
installments of interest on the Senior Secured Loan have been paid by the LDC on
time and in full for three (3) consecutive monthly payment dates. As part of the
development for the Dancing Eagle Casino Project, CGMI has entered into an
agreement to purchase a building for lease by CGMI to the LDC for a period of
five (5) years from the date of commencement of operations at the Dancing Eagle
Casino as well as certain furniture to be used in connection with the Dancing
Eagle Casino. Monthly payments to CGMI pursuant to these two leases is also
subordinate to the payment of the Senior Secured Loan.
The Management Agreement was approved by the Chairman of the National
Indian Gaming Commission on September 27, 1999. The parties anticipate that the
Bureau of Indian Affairs will issue an approval of all loan and related
documents on or prior to October 15, 1999. The parties further anticipate
closing and funding of the Senior Secured Loan and the Subordinate Loan
immediately following receipt of the approval of the Bureau of Indian Affairs.
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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 has advanced 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 Management Agreement.
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.
Department of the Interior Issues Regulations for Class III Gaming Compacts
In April, 1999, the Secretary issued regulations prescribing
procedures to permit Class III gaming when a State interposes its immunity from
suit by an Indian Tribe in which the Tribe accuses the State of failing to
negotiate in good faith. The rule announces the Secretary's determination that
the Secretary may promulgate Class III gaming procedures under certain
specified procedures; it also sets forth the process and standards pursuant to
which any procedures would be adopted. These regulations took effect on May 12,
1999. The rules, however, have not yet been acted upon in light of litigation
pending in the Florida Federal Court. The States of Florida and Alabama filed a
complaint in April, 1999, challenging the rules on various grounds. The
Seminole Tribe of Florida, the Miccosukee Tribe and the Poarch Band of Creek
Indians have intervened in the litigation. These Tribes, along with the
Secretary, have filed motions to dismiss. As of September 28, 1999, the Florida
Federal Court had not yet ruled on the pending motions. There can be no
assurance as to when the regulations will actually become effective, since no
such action will occur until the foregoing litigation is resolved. At this
juncture, it is unknown when and how the Court will rule on the pending motions
and how that ruling will impact the regulations. It also is unknown how such
ruling and its impact (if any) on the regulations will apply to the
Narragansett Tribe in light of the Chafee Rider. However, as a result of the
Chafee Rider, there can also be no assurance that the Secretary will have the
authority under any regulations 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 - West Warwick, Rhode Island
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 in a general election. As a
result of the Chafee Rider, the Narragansett Tribe had focused its efforts on
seeking voter approval of a gaming facility to be located in Providence, Rhode
Island and subsequently focused such efforts on seeking voter approval of a
gaming facility to be located near Interstate 95 in West Warwick, 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 the state legislature will approve placement of
the referendum question on the November 2000 ballot or any other general
election ballot, or that any such referendum would be successful or, if
successful, what the ultimate scope of permitted gaming would be.
In January 1999 a grassroots group calling itself West Warwick 2000 was
formed in the town of West Warwick, Rhode Island. West Warwick 2000 sought out
the Narragansett Tribe and invited the Tribe to propose a potential casino to be
located in the town of West Warwick. Following public hearings on the issue, the
West Warwick Town Council voted 5 to 0 to hold a non-binding town referendum on
June 8, 1999. On June 8, 1999 the non-binding town referendum was held and
approximately 67% of those voting approved the idea of a Narragansett Casino
being sited in the town of West Warwick. Following the non-binding referendum,
the Town Council of the town of West Warwick sent a resolution to the Rhode
Island General Assembly requesting that the question of a Narragansett Casino in
West Warwick be placed on the ballot in the State's next general election being
held in November 2000. It is expected that the Rhode Island General Assembly
will take up this issue in the Legislative Session beginning in January 2000. If
the Town Council Resolution is ratified by the Rhode Island General Assembly, it
is then subject to gubernatorial veto which can be overriden with a vote of 60%
of each of the state senate and state house of representatives.
As a result of the set-backs caused by the invalidation of the Compact
and the application of the Chafee Rider, and other factors, there can be no
assurance that any legislative, judicial or administrative efforts will be
successful.
7
<PAGE> 10
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.
8
<PAGE> 11
Other Matters
In connection with the Narragansett Tribe's efforts to seek statewide
voter approval of a gaming facility to be located in Providence, Rhode Island in
the November 1998 general election, the Company had retained Donaldson, Lufkin
and Jenrette Securities Corporation ("DLJ") to act as its exclusive financial
advisor with respect to the review and analysis of financial and structural
alternatives available to the Company. As part of such engagement, the Company
agreed to issue warrants to DLJ to purchase five (5%) percent of the Company's
issued and outstanding common stock on a fully diluted basis, to be exercisable
only if the Narragansett Tribe succeeded in winning voter approval for a
Narragansett gaming facility. In light of the fact that a voter referendum did
not occur in November 1998, and the uncertainty surrounding any future voter
referendum including the West Warwick effort, the Company has not issued and
does not intend to issue such warrants.
The Company has continued funding the on-going development costs of the
Rhode Island Project, which at June 30, 1999, 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, 1999,
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 Rhode Island Project 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 Rhode Island Project's gross revenues and, in turn, on
the income generated by CDGC under the Management Agreement.
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 Rhode Island Project 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. Given the high level of uncertainty concerning the ability to secure a
binding compact or approval of non-compacted gaming, no financing commitments
for future capital needs have been obtained as of the date hereof.
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 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.
9
<PAGE> 12
<PAGE> 13
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.
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 U.S. Bankruptcy
Court in New Orleans, Louisiana 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 either of the Company's wholly-owned subsidiaries.
10
<PAGE> 14
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 provided 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"),
to be distributed pursuant to the terms of the Plan of Reorganization.
The Plan of Reorganization provided generally that creditors of the
Company received distributions as follows: (i) holders of Old Senior Secured
Notes received 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 received, at
the option of the Company: (X) such treatment as would 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 was 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 provided 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, the Plan of Reorganization provided for 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.
11
<PAGE> 15
Debt After Reorganization
New Senior Secured Notes. Pursuant to the Plan, 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. The Company holds $300,000 of the
New Senior Secured Notes in treasury. 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 Second
Amended and Restated Indenture effective as of December 4, 1998 ("Second Amended
Indenture") includes certain restrictive covenants. (See "Description of Second
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:
<TABLE>
<S> <C>
May 15, 2000 $ 4,620,000
May 15, 2001 18,480,000
</TABLE>
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 Second Amended Indenture.
The Second 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
Second Amended Indenture) may be released from the lien created by the Second
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, 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, limitations on dividends and
other restricted payments and investments, payment restrictions affecting
Subsidiaries, transactions with Affiliates (as defined in the Second Amended
Indenture), consolidations, mergers and sales of assets, incurrences of
additional Indebtedness (as defined in the Second Amended Indenture) and
Disqualified Capital Stock (as defined in the Second Amended Indenture), liens,
as well as on lines of business which the Company may engage in.
The Company and the Guarantors have covenanted to file under certain
circumstances, upon request from 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 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.
12
<PAGE> 16
Default Under First Amended Indenture
The Company's First Amended and Restated Indenture, dated as of March
27, 1997 (the "First Amended Indenture") contemplated that certain actions of
the Company require prior notice to (and in certain cases, approval from) a
Noteholders Advisory Committee ("Advisory Committee"), including the ability of
the Company to deliver to the Indenture Trustee a Definitive Budget (as defined
in the First Amended Indenture). However, the Advisory Committee never 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
First Amended Indenture required that the proposed members of the Advisory
Committee in the First Amended Indenture 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 First 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 First Amended Indenture). In light of good faith
negotiations between the Indenture Trustee, the holders of a majority in
principal amount of the New Senior Secured Notes and the Company to amend the
First Amended Indenture in such a manner as would facilitate curing any
alleged Events of Default, the Indenture Trustee had been directed by the
holders of a majority in principal amount of the New Senior Secured Notes to
forebear from taking any action, and in fact took no action, to accelerate the
New Senior Secured Notes, foreclose on any collateral or otherwise execute
any of its rights under the First Amended Indenture. As discussed herein, all
defaults existing under the First Amended Indenture were waived on December 4,
1998, the effective date of the Second Amended Indenture.
Court Approval of Modification of Plan and Second Amended Indenture
On October 23, 1998 the Company and the Indenture Trustee filed a
Joint Motion for an Order Approving Modifications to the Plan with the
Bankruptcy Court (the "Joint Motion").
On November 16, 1998 the Bankruptcy Court ordered the approval of the
proposed modifications to the Plan as set forth in the Joint Motion, including,
without limitation: (i) the Second Amended Indenture; (ii) the Second Amended
and Restated Certificate of Incorporation (the "Second Amended Certificate");
and (iii) the composition of the Company's Board of Directors to consist of the
following individuals: (a) Michael W. Barozzi (Common Director); (b) William S.
Papazian (Common Director); (c) Col. Clinton L. Pagano (Common Director); and
(d) Charles B. Brewer (Class A Director).
As detailed in the Joint Motion, the principal changes contained in the
Second Amended Indenture are:
(i) elimination of the Advisory Committee (as defined in the First
Amended Indenture);
(ii) modification of the provisions relating to Excess Cash (as
defined in the Second Amended Indenture);
(iii) changing the date of the sinking fund payment due 2000 from May
28, 2000 to May 15, 2000; and
(iv) changing the final maturity date from May 28, 2001 to May 15,
2001.
13
<PAGE> 17
As also detailed in the Joint Motion, the principal changes to the
Second Amended Certificate included the creation of a new class of common stock,
Class A Common Stock, and the right of Holders of Class A Common Stock to elect
up to four members of the Board, with weighted voting rights for the Class A
Director(s) if the holders of the Class A Common Stock elect fewer than four
directors. Except for such additional rights of holders of the Class A Common
Stock, the New Common Stock and Class A Common Stock share identical rights.
The modifications to the Plan did not affect the economic interests of
any creditor receiving distributions under the Plan, and only impacted the
non-economic rights and interests of the holders of the Old Secured Notes. As
detailed in the Joint Motion, the Plan was modified to provide that (i) holders
of the Old Secured Notes received Class A Common Stock in lieu of New Common
Stock on account of their Allowed Secured Claim; and (ii) holders of the Old
Secured Notes received Class A Common Stock in lieu of New Common Stock on
account of their Allowed Unsecured Claims. These modifications to the Plan did
not affect the aggregate number of shares of common stock outstanding. The
Class A Common Stock represents 80 percent of the Company's outstanding voting
securities and the New Common Stock represents 20 percent of the outstanding
voting securities. Only holders of the Class A Common Stock, however, have the
right to elect the Class A Directors.
The Plan was also modified to eliminate the right of the Noteholder
Steering Committee to designate members of the Board of Directors.
The Court also ordered that the Indenture Trustee fix December 7, 1998
as the record date for distribution of the New Secured Notes, Class A Common
Stock and other property to the holders of the Old Secured Notes. In compliance
with the Court's Order, the Indenture Trustee has made distributions to the
holders of the Old Secured Notes and to the general unsecured creditors.
For previously disclosed information regarding the Plan, reference is
made to the following reports of the Company filed under Section 13 of the
Securities Exchange Act of 1934, all of which are on file at the Securities
and Exchange Commission: Quarterly Reports on Form 10-Q for the quarterly
periods ended December 31, 1997, March 31, 1998, September 30, 1998, December
31, 1998 and March 31, 1999, Annual Reports on Form 10-K for the annual periods
ended June 30, 1997 and June 30, 1998 and Current Report on Form 8-K filed
December 18, 1998.
On December 4, 1998 the Second Amended Certificate was filed with, and
deemed effective by, the Secretary of State of New Jersey.
On December 11, 1998, the Second Amended Indenture was executed by the
parties thereto, with an effective date of December 4, 1998.
Also as of December 4, 1998, Holders entitled to receive a majority of
the New Secured Notes waived all defaults existing under the First Amended and
Restated Indenture.
As per the terms of the Second Amended Indenture, the Company made an
interest payment of $1,285,900 on November 12, 1997, and interest payments of
$1,386,000 on May 15, 1998, November 15, 1998 and May 15, 1999.
14
<PAGE> 18
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 no shares were issued. The Old Common Stock of the Company consisted of
75 million authorized shares of which approximately 19 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 Second Amended Certificate authorizes 5 million shares of New
Common Stock. On the Effective Date, 2,000,000 shares of New Common Stock were
issued to the Company as the disbursing agent under the Plan of Reorganization.
The New Common Stock has been distributed to various classes of creditors
pursuant to the terms of the Plan of Reorganization. In addition, the Company's
executive management has received a total of 200,000 shares pursuant to the Plan
of Reorganization.
15
<PAGE> 19
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, 1999, 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, 1999
are approximately $32,585,000, although no assurance can be given that the
Company will be able to utilize these NOLs. See "Risk Factors - Net Operating
Loss Carryforwards".
16
<PAGE> 20
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 basis 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, 1999 are approximately
$32,585,000, 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 Second Amended
Certificate, the Company imposed certain transferability restrictions upon its
5-percent shareholders for purposes of Tax Code ss. 382. These restrictions
generally provided 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 expired on March
19, 1999, the date that was two years after the Effective Date.
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,
1999 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 $32,585,000 as of
June 30, 1999 (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, 1999, 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
and future 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. Management is currently evaluating the
feasibility of refinancing or restructuring the payment terms of its New Senior
Secured Notes. There can be no assurance, however, that the Company will be able
to refinance or restructure the New Senior Secured Notes or that the terms of
any possible refinancing or restructuring will be favorable to the Company.
Expirations of Management Contracts. With the exception of the Pueblo
of Laguna contract, CGMI's other management contracts 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 Rhode Island Project
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. Given the
high level of uncertainty concerning the ability to secure a binding compact or
approval for non-compacted gaming, 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 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 or a significant portion 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
or, if applicable, Bureau of the Interior 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 justifies 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 Second 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 Second 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 Second 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 5 employees at fiscal year ended
June 30, 1999.
ITEM 2. PROPERTIES
CGMI leases 2,646 square feet of office space in Phoenix, Arizona
pursuant to a lease agreement which expires December 31, 2000.
ITEM 3. 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 material litigation pending against the Company on June
30, 1999. The Company is or may become a defendant in pending or threatened
legal proceedings in the ordinary course of business although it is not aware of
the existence of any such pending or threatened legal proceedings at this time.
1. Muckleshoot Litigation
On January 30, 1998 the Muckleshoot Tribal Council purported to
terminate the Company's management contract on grounds that the Company's
certification with the Washington State Gambling Commission ("WSGC") had lapsed.
Subsequently, the WSGC had notified the Muckleshoot Tribe that the Company
remained in good standing with the WSGC and would be immediately re-certified
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 and remains in full force and
effect.
25
<PAGE> 29
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.
Reorganization of the Company
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, 1999, 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
de-listed 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 re-listed on the OTC Electronic Bulletin Board or
that NASDAQ will approve an application by the Company for re-listing. As of the
date hereof, there is no established public trading market for the New Common
Stock.
As of June 30, 1999, there were 347 holders of record of the New Common
Stock.
The Company is currently authorized under its Certificate of
Incorporation to issue up to 5,000,000 shares of New Common Stock.
The following table sets forth the range of high and low bid prices for
the Common Stock, as reported by the NASDAQ Stock
26
<PAGE> 30
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.
<TABLE>
<CAPTION>
Common Stock
Calendar Quarter High Low
1995:
<S> <C> <C>
Third Quarter $0.69 $0.16
Fourth Quarter $0.38 $0.07
1996:
First Quarter $0.30 $0.10
Second Quarter $0.30 $0.13
Third Quarter $0.14 $0.06
Fourth Quarter $0.12 $0.02
1997:
First Quarter $0.08 $0.01
Second Quarter* $0.03 $0.125
</TABLE>
* -- On June 25, 1997, the New Common Stock was de-listed 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.
There is no established trading market for the Senior Secured Notes.
27
<PAGE> 31
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".
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT SHARE DATA
- ---------------------------------------------------------------------------------------------------------------------------
REORGANIZED |
COMPANY | PREDECESSOR COMPANY
----------------------------------------| ---------------------------------
|
Statement of Operations Year Year May 29, |
Data (1)(2) Ended Ended 1997 |
June June Through | July 1, 1996
30, 30, June 30, | Through
1999 1998 1997(A) | May 28, 1997 Years Ended June 30,
| -------------------
| 1996 1995
- --------------------------------------------------------------------------------------|------------------------------------
<S> <C> <C> <C> | <C> <C> <C>
Gross Revenues $7,264 $ 8,150 $ 753 | $ 7,447 $ 7,663 $ 10,637
Operating Expenses 6,116 12,881 1,921 | 7,238 14,441 111,908
Reorganization Items (Expense) -- -- -- | 50,805 (600) --
Other Income (Expense) 112 (2,087) (168) | (6,603) 3,660 (15,605)
(Loss)Income Before Extraordinary Items(3) 842 (7,154) (1,351) | 44,288 (4,039) (116,876)
Loss on Early Extinguishment of Debt -- -- -- | (1,998) -- --
Gain From Reorganization Items -- -- -- | 103,464 -- --
Net (Loss) Income 842 (7,154) (1,351) | 145,754 (4,039) (117,709)
- --------------------------------------------------------------------------------------|------------------------------------
Earnings Per Share:(B) |
Income (Loss) Before Extraordinary Item $0.43 ($3.82) ($0.72) | N/A N/A N/A
Income From Discontinued Operations -- -- -- | N/A N/A N/A
Gain From Reorganization Items -- -- -- | N/A N/A N/A
Net (Loss) Income $0.43 ($3.82) ($0.72) | N/A N/A N/A
Weighted Average Shares Outstanding(A)(B) 1,939,178 1,872,694 1,866,667 | 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): 1999 1998 1997 | 1996 1995
- -----------------------------------------------------------------------------|----------------------------
<S> <C> <C> <C> | <C> <C>
Working Capital (Deficit) (3) 5,942 5,991 6,431 | (118,020) (143,893)
Total Assets 17,229 16,721 25,114 | 60,048 82,977
Long-Term Debt (3) 18,240 23,100 23,100 | -- 20,293
Total Liabilities 24,192 24,826 26,065 | 160,308 179,199
Stockholder's Equity (Deficit) (6,963) (8,105) (951) | (100,260) (96,222)
Ratio of Earnings to Fixed Charges (4) (4) (4) | (4) (4)
- -----------------------------------------------------------------------------|----------------------------
</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,
1999.
28
<PAGE> 32
(2) Includes non-recurring income of $4,196,000 at June 30, 1995 received by the
Company in connection with discontinued operations.
(3) 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.
(4) 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, 1999.
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, 1999 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, 1999, the
Company had a net decrease in cash and cash equivalents of $58,000, of which
$2,495,000 was provided by Company operating activities, and $2,553,000 was used
in Company investing activities.
Operating Activities: Cash flows from operating activities for fiscal
year 1999 were provided by (i) Native American casino management fees of
approximately
29
<PAGE> 33
$7,264,000, and (ii) interest income of $487,000. Significant operating activity
balances required to reconcile the Company's GAAP accrual net income of $842,000
to net cash flows used in operating activities include (i) depreciation and
amortization of $2,238,000, (ii) Muckleshoot Settlement payments of $2,150,000
(see Footnote [6] 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 $5,000, (v) a decrease in prepaid expenses
and other assets of $17,000, (vi) the write-off of investment in Muckleshoot
management agreement of $815,000, (vii) an increase in related party payable of
$62,000, (viii) an increase of $70,000 for federal income taxes payable, and
(ix) an increase of $110,000 for state income taxes payable.
Significant operating activity cash outflows required to reconcile the
Company's GAAP, accrual net income to net cash flows used in operating
activities include (i) Muckleshoot settlement of $3,300,000 (see Footnote [6] to
the audited Consolidated Financial Statements), (ii) a decrease in accounts
payable and accrued expenses of $522,000, and (iii) a decrease in accrued
interest payable of $54,000. The decrease in accounts payable and accrued
expenses is primarily attributable to fewer accounts payable outstanding as of
June 30, 1999 due to the payment of legal fees associated with the resolution of
the Muckleshoot legal proceedings, and the payment of accounts payable balances
related to the Narragansett Indian Tribe's attempt to achieve an approved
compact, both of which created a larger accounts payable balance in fiscal 1998.
Investing Activities: For the year ended June 30, 1999, the Company
used $2,553,000 in net cash flows for investing activities. Cash flows from
investing activities were provided by (i) $2,252,000 in repayment of Native
American loans/advances, (ii) decreased by $3,436,000 for an increase in
restricted funds, and (iii) decreased by $1,369,000 for an increase in deferred
charges relating to the Dancing Eagle Casino project in fiscal 1999.
Financing Activities: The Company did not have any financing activities
for the fiscal year ended June 30, 1999.
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, 1999, 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, construct, operate
and manage a Class III casino to be located at the Casa Blanca exit on
Interstate 40 on the Pueblo's sovereign reservation lands approximately 45 miles
west of Albuquerque, New Mexico ("Dancing Eagle Casino Project"). The proposed
21,000 square foot casino will offer 10 Las Vegas-style table games, 300 slot
machines, a 72-seat full service restaurant, a gift shop and other amenities. As
amended, the management and development agreement provides that the term of such
agreement is five (5) years from the official date of opening of the casino. The
agreement further provides that CGMI will receive a management fee of 30% of
adjusted net revenues (as defined in such agreement) during the first three
years of the term, and 20% of adjusted net revenues in the fourth and fifth
years of the term. The agreement further provides that the management fees shall
at all times be capped at 34.3% of net revenues as determined in accordance with
generally accepted accounting principles. Construction of the Dancing Eagle
Casino Project is expected to commence by October 1999 and the facility is
anticipated to open in the first quarter of calendar year 2000.
The Company currently anticipates using a portion of its cash on-hand
to finance certain aspects of the new Dancing Eagle Casino Project. Company
funds utilized for the Laguna Project will be repaid by the Dancing Eagle Casino
Project over an anticipated three 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, and management
fees and principal and interest loan repayments from the proposed Dancing Eagle
Casino Project. Absent any new developments, these agreements, along with
debt-service payments on the Tribal Loans with Tonto Apache and cash and cash
equivalents at June 30, 1999 of $4,440,000 and restricted cash of $3,977,000,
will provide the Company with its only sources of cash for the approximately ten
months remaining on the Tonto Apache and Umatilla 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 Rhode Island Project and
Dancing Eagle Casino 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.
30
<PAGE> 34
In order to complete the funding of the construction or acquisition
costs of new projects, excluding the planned Dancing Eagle Casino anticipated to
open in the first calendar quarter of 2000, and to fund the construction costs
of the Rhode Island 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 including obtaining financing of the Dancing Eagle Casino, 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 Indian 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.
Description of Second Amended Indenture.
See Item 1. Business -- "Description of Second Amended Indenture".
Default Under First Amended Indenture
See Item 1. Business -- "Default under First Amended Indenture."
Court Approval of Modification of Plan and Second Amended Indenture
See Item 1. Business -- "Court Approval of Modification of Plan and
Second Amended Indenture."
31
<PAGE> 35
RESULTS OF OPERATIONS
Overview
The following discussion about the Company's results of operations
includes the Company and its subsidiaries, CGMI, and CDGC.
In September 1999 management of the Company streamlined and reorganized
and began implementation of a business strategy designed to achieve the
following goals: (i) increase revenues at the Company's managed casinos, (ii)
finance and develop the Dancing Eagle Casino project, (iii) build cash for use
in debt service and for future projects, (iv) further develop the Rhode Island
Project, (v) seek and obtain new project opportunities, (vi) decrease operating
expenses instituted by prior management and (viii) seek out ways to refinance or
restructure the Company's existing indebtedness. The progress of the Company's
new business strategy is reflected in the section "Fiscal 1999 compared to
Fiscal 1998" below.
On the Petition Date, the Company, apart from its subsidiaries, filed a
voluntary petition for relief and a Plan of Reorganization under Chapter 11 of
the Bankruptcy Code. 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.
As a consequence of the implementation of its business plan, including
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 Rhode Island 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 1999 as compared to fiscal 1998, and fiscal 1998 as compared to fiscal
1997 is presented on a consolidated basis only.
32
<PAGE> 36
FISCAL 1999 COMPARED TO FISCAL 1998
The following table sets forth certain key elements of the results of
operations for the combined periods discussed above:
<TABLE>
<CAPTION>
FISCAL FISCAL
1999 1998
----------- ------------
<S> <C> <C>
REVENUES:
Native American Casino Management Fees $ 7,264,000 $ 8,150,000
----------- ------------
COSTS & EXPENSES
Salaries & Related Costs 1,588,000 3,284,000
Native American Gaming Development Costs 566,000 2,317,000
Professional Fees 1,274,000 1,380,000
General & Administrative 450,000 1,447,000
Depreciation & Amortization 2,238,000 3,153,000
Write-down of Excess Reorganization Value -- 1,300,000
----------- ------------
TOTAL COSTS & EXPENSES 6,116,000 12,881,000
----------- ------------
INCOME (LOSS) FROM OPERATIONS 1,148,000 (4,731,000)
OTHER INCOME (EXPENSE)
Muckleshoot Settlement, Net 2,285,000 --
Interest Income 487,000 798,000
Other Income 40,000 --
Interest Expense (2,700,000) (2,885,000)
----------- ------------
TOTAL OTHER INCOME (EXPENSE) 112,000 (2,087,000)
----------- ------------
INCOME (LOSS) BEFORE INCOME TAX 1,260,000 (6,818,000)
----------- ------------
INCOME TAXES 418,000 336,000
----------- ------------
NET INCOME (LOSS) $ 842,000 $ (7,154,000)
=========== ============
</TABLE>
Income From Operations
Income from operations for the year ended June 30, 1999 was $1,148,000,
compared to a loss of $4,731,000 for the year ended June 30, 1998, an increase
of $5,879,000 or 124.3%. This increase in income from operations is due to (i) a
decrease in revenues of $886,000, and (ii) a decrease in operating expenses of
$6,765,000.
Revenues
Revenues for the year ended June 30, 1999 and 1998 are summarized as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR
ENDED ENDED
FACILITY 6/30/99 6/30/98 VARIANCE $ VARIANCE %
- -------- ---- ---- ---------- ----------
<S> <C> <C> <C> <C>
Muckleshoot Casino Management Fees -- $1,120,000 $(1,120,000) (100.0%)
Tonto Apache Management Fees 2,335,000 2,275,000 60,000 2.6%
Umatilla Management Fees 4,929,000 4,755,000 174,000 3.7%
---------- ---------- ----------- -------
Total Revenues $7,264,000 $8,150,000 $ (886,000) (10.9%)
---------- ---------- ----------- -------
</TABLE>
Total revenues for fiscal year 1999, consisting of management fees from
the Company's managed gaming facilities, was $7,264,000, a decrease of $886,000
or 10.9% over the year ended June 30, 1998. The decrease in management fees is
due primarily to the combination of two factors, (i) a decrease in revenues from
the Muckleshoot Casino of $1,120,000 due to the termination and settlement of
the Muckleshoot management agreement, as explained in Note [6] to the audited
consolidated financial statements contained herein, and (ii) increased revenues
from the Umatilla and Tonto Apache Casinos of $174,000 and $60,000 respectively,
which was a result of effective marketing and cost control procedures in the
managed casinos.
33
<PAGE> 37
Costs and Expenses
Salaries and related costs decreased approximately $1.7 million, or
51.6% in fiscal 1999 as compared to fiscal 1998. This decrease is primarily
attributable to (i) a reduction in highly compensated employees, (ii) a
reduction in staff, and (iii) a reduction in taxes and benefit payments incurred
in conjunction with the aforementioned highly compensated employees and staff.
Native American Development costs decreased $1,751,000, or 75.6% from
$2,317,000 in fiscal 1998 to $566,000 in fiscal 1999. The decrease in Native
American development costs was due to decreased legal fees incurred in
conjunction with the Narragansett Indian Tribe's attempt to further their
position toward an approved gaming Compact.
Professional fees decreased $106,000, or 7.7% in fiscal 1999,
decreasing from approximately $1.38 million in fiscal 1998 to $1.27 million in
fiscal 1999. The overall decrease in legal expenses is primarily attributable to
the combination of four factors, (i) increased legal fees incurred in the
finalizing of the Second Amended Indenture, (ii) increased legal fees associated
with the Muckleshoot settlement which was finalized in July 1998, (iii)
professional fees incurred relating to the establishment of the Dancing Eagle
Casino Project, and (iv) decreased by management's continuing efforts to reduce
legal costs in all categories.
General and Administrative expenses decreased approximately $997,000,
from approximately $1,447,000 in fiscal 1998 to $450,000 in fiscal 1999. This
68.9% decrease is due to reduced expenses associated with the streamlining of
the Company's operations and new management's cost-effective philosophy.
Depreciation and amortization decreased approximately $915,000 in
fiscal 1999, a 29.0% decrease from the $3,153,000 balance in fiscal 1998. The
decrease in depreciation and amortization expense is primarily due to (i) the
write-off of the Muckleshoot deferred charges on July 20, 1998 (see Note [6] to
the Company's audited consolidated financial statements contained herein), and
(ii) the write-down of Excess Reorganization Costs in fiscal 1998 and the
subsequent recalculated amortization of the remaining balance which resulted in
lower amortization expenses in fiscal 1999.
On June 30, 1998, the Company recorded a non-cash impairment loss of $1.3
million related to the write-down of the Company's excess reorganization value
in accordance with Statement of Accounting Standards No. 121 "Accounting for the
Impairment 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 asset's 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 [8] to the
Company's audited consolidated financial statements contained herein).
34
<PAGE> 38
Other Income and Expense Items
The other income line item, Muckleshoot Settlement - Net for
$2,285,000, represents the net gain to the Company for fiscal year 1999,
associated with the Muckleshoot settlement (see note [6] to the Company's
audited consolidated financial statements contained herein). The balance
represents the net of the $3.3 million settlement, less a $200,000 receivable
balance due the company as of June 30, 1998, less the unamortized balance of the
deferred asset Investment in Muckleshoot Agreement, of approximately $815,000.
Interest Income declined 39.0% from $798,000 in fiscal 1998 to $487,000
in fiscal 1999. The decrease in interest income is the collective result of two
factors, (i) an increase in average idle interest-bearing cash, cash equivalents
and restricted funds outstanding during fiscal year 1999, which resulted in a
nominal increase in interest income, and (ii) lesser interest income from the
Native American loans due to the receipt of the final payment in September 1998
of the Umatilla Tribes Casino Loan and the normal monthly amortization of the
Tonto Apache Casino Loan, which resulted in lower interest income.
Other income of $40,000 recorded in fiscal 1999 represents the receipt
by the Company of a settlement payment on a gain contingency settled during the
year.
Interest expense decreased $185,000 or 6.4% from $2,885,000 reported in
fiscal 1998. The decrease is due to the reduction of accrued interest on the New
Senior Secured Notes released and surrendered to the Company and held in
Treasury. The only interest expense bearing instrument of the Company during
both fiscal years 1999 and 1998 was the new Senior Secured Notes whose principal
balance of $23.1 million and whose interest rate of 12.0% have both remained
unchanged.
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, 1999 of approximately $32,585,000 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.
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.
35
<PAGE> 39
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).
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
FACILITY 06/30/98 06/30/97 VARIANCE $ VARIANCE %
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
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>
36
<PAGE> 40
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 Rhode Island
Project Indian Tribe in Rhode Island in their furtherance of obtaining an
approved gaming Compact as described in footnote [7] of the Company's
consolidated financial statements contained herein. The nominal decrease in
expenditures is due to decreased legal expenditures associated with the Rhode
Island Project 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 consummation 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 write-down of the Company's excess reorganization
value in accordance with Statement of Accounting Standards No. 121 --
"Accounting for the Impairment 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 [8] 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:
<TABLE>
<S> <C>
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
===========
</TABLE>
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.
37
<PAGE> 41
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) CGMI 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:
<TABLE>
<S> <C>
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
============
</TABLE>
38
<PAGE> 42
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's portfolio of marketable securities includes numerous
issuers, varying types of securities and maturities. Due to the short-term
nature of the portfolio, the fair value of the Company's portfolio of
marketable securities would not be significantly impacted by either a 100 basis
point increase or decrease in interest rates. The Company does not hold or
issue derivative financial instruments.
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, 1999 following Part IV.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On August 16, 1999, the Company engaged Toback Certified Public
Accountants, a Phoenix-based certified public accounting firm, as its
accountants to replace Moore Stephens, P.C., a New Jersey certified public
accounting firm. The Company's Board of Directors approved the selection of
Toback Certified Public Accountants as the Company's new accountants. The
change in the Company's accountants was necessitated by the Company's
relocation of its New Jersey offices to Phoenix, Arizona and was not as a
result of any resignation, adverse opinion or disagreement with the Company's
former accountants.
39
<PAGE> 43
PART III
MANAGEMENT
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position Class
<S> <C> <C> <C>
Charles B. Brewer 51 Chairman Class A
Michael W. Barozzi 51 President and Chief Operating Officer and Director Common
Col. Clinton L. Pagano 71 Director Common
(Retired)
William S. Papazian 37 Executive Vice President and General Counsel,
Corporate Secretary and Director Common
</TABLE>
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 became
an outside director to the Company in January 1999. 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
40
<PAGE> 44
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.
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. For information regarding the procedures for the
election of directors contained in the Second Amended Indenture and Second
Amended Certificate, see Item 1. Business -- "Court Approval of Modification of
Plan and Second Amended Indenture."
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, 1999.
41
<PAGE> 45
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.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- -----------------------------------------------------------------------------------------------------------------------------------
SECURITIES
NAME AND FISCAL OTHER RESTRICTED UNDERLYING LONG ALL
PRINCIPAL YEAR ANNUAL STOCK OPTIONS/SARS TERM OTHER
POSITION ENDED SALARY BONUS COMPENSATION AWARDS(7) GRANTED(8)(9) PAYOUTS COMPENSATION
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Edward M. 06/30/99 345,833 0 0 0 0 0 5,319(13)
Tracy(1) 06/30/98 585,417 0 131,667(10/5) 0 0 0 323,707(13/16)
Chairman and 06/30/97 495,000 333,333 272,667(6) 0 0 0 216,250(10/12)
Chief
Executive
Officer
- ------------------------------------------------------------------------------------------------------------------------------------
Michael 06/30/99 291,667(17) 0 0(18) 100,000 0 0 10,320(13)
Barozzi(2) 06/30/98 200,000(2) 0 $91,667(10/15) 0 0 0 1,152(13)
President 06/30/97
and Chief
Operating
Officer
- ------------------------------------------------------------------------------------------------------------------------------------
William S. 06/30/99 291,667(17) 0 0(18) 100,000 0 0 8,825(13)
Papazian(3) 06/30/98 304,167 0 41,661(10/15) 0 0 0 169,481(11/13)
Executive 06/30/97 210,000 166,667 127,333(6) 0 0 0 16,667(10/13)
Vice
President,
General
Counsel,
Secretary
and
Director
- ------------------------------------------------------------------------------------------------------------------------------------
Clinton L. 06/30/99 87,500 0 0 0 0 0 10,877(14)
Pagano(4) 06/30/98 129,167 0 37,500(10/15) 0 0 0 12,540(14)
Executive 06/30/97 100,000 0 0 0 0 0 14,268(14)
Vice
President
and
Director
- ------------------------------------------------------------------------------------------------------------------------------------
Bradley A. 06/30/99 70,833 0 0 0 0 0 0
Denton(5) 06/30/98 32,513 0 0 0 0 0 0
Vice 06/30/97
President
and Chief
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. 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.
(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.
42
<PAGE> 46
(4) Mr. Pagano was appointed Executive Vice President of Compliance and a
member of the Board of Directors of the Company on October 17, 1993. Mr.
Pagano resigned as Executive Vice President of Compliance on January 1,
1999, but remains on the Board of Directors of the Company as an Outside
Director.
(5) Mr. Denton was appointed Vice President and Chief Financial Officer of the
Company on April 1, 1998. Mr. Denton resigned as Vice President and Chief
Financial Officer on November 13, 1998.
(6) Payments made by the Company to cover income taxes.
(7) The total value recorded by the Company for the initial installments of the
stock grants was $13,000. In January 1999 Mr. Barozzi and Mr. Papazian were
each awarded 100,000 shares of common stock, 66,667 shares of which to each
of Mr. Barozzi and Mr. Papazian respectively, were immediately vested. Mr.
Barozzi and Mr. Papazian each vested in the remaining 33,333 shares of
common stock, respectively, in May 1999.
(8) 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.
(9) All stock options of past and present management were cancelled in
connection with the Plan of Reorganization.
(10) Vacation paid in lieu of time off.
(11) 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.
(12) 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.
(13) Automobile lease and term group life insurance.
(14) Miscellaneous fringe benefits paid relating to automobile allowance and
medical insurance.
(15) Retroactive payroll per the terms of employment agreement.
(16) 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 1998.
(17) As reflected in the Summary Compensation Table for fiscal year ended
6/30/99, Mr. Barozzi and Mr. Papazian each took a $50,000 voluntary
reduction in base salary to $275,000 in September 1998.
(18) On January 8, 1999, the Company placed $125,000 in principal amount of
Senior Secured Notes ("Incentive Notes") in the name of employee to be held
in escrow and not vested as to principal until May 15, 2000. If employee
voluntarily resigns or is terminated for cause prior to May 15, 2000, the
Incentive Notes will not vest and will be deemed forfeited. All regular
interest payments (May 15 and November 15) on the Incentive Notes are
deemed earned by employee when paid.
43
<PAGE> 47
Option/SAR Grants in the Fiscal Year Ended June 30, 1999
In the fiscal year ended June 30, 1999, 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, 1999, and
June 30, 1999 Option/SAR Values
In the fiscal year ended June 30, 1999 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, 1999.
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
Chairman Charles B. Brewer is entitled to Director's fees as an outside
director at a rate of $75,000 per annum commencing September 1, 1998. Col.
Pagano receives Director's fees at the rate of $90,000 for the period January 1,
1999 through December 31, 1999 and $60,000 for the period January 1, 2000
through December 31, 2000. Director's are also reimbursed for their expenses in
connection with their attendance at each Board meeting or otherwise incurred in
performance of their duties as Directors.
Michael W. Barozzi 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 employment agreements with Michael W. Barozzi,
the Company's President and Chief Operating Officer, and William S. Papazian,
the Company's Executive Vice President and General Counsel, in December 1998,
which provide for, among other things, a rolling term of one (1) year. Mr.
Barozzi's and Mr. Papazian's annual salary are each currently $275,000. Mr.
Barozzi's and Mr. Papazian's employment agreements each have change in control
provisions which provide that upon a Change in Control (as defined in such
agreements), employee may terminate his employment for Good Reason which is
defined to mean any of the following: (i) assignment of duties materially
inconsistent with employee's position, (ii) dimunition in employee's position,
duties, responsibilities or status, (iii) change in title or reporting
responsibilities, (iv) any removal of employee or failure to reelect employee
to his position, (v) a reduction in employee's base salary or failure to
increase employee's base salary under certain circumstances, (vi) failure by
the Company to continue any benefit plan or fringe benefit or materially
adversely affect employee's participation in such benefit plan or fringe
benefit and failure of the Company to abide by material terms of the agreement.
Upon termination by employee for Good Reason, employee shall be entitled to (i)
base salary through the date of termination and (ii) severance pay equal to
employee's base salary in effect for one year, in 24 equal semi-monthly
payments on the 15th and last day of each month.
44
<PAGE> 48
Repricing of Stock Options
There have been no repricing of stock options in the fiscal year ended
June 30, 1999. 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, 1999.
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
As of June 30, 1999 the Company's Chairman, Charles B. Brewer, served
as the sole member of the Executive Compensation Committee. 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.
45
<PAGE> 49
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, 1999, management of the Company spent
significant time and energies implementing the Company's business strategy
including developing and financing the Company's Dancing Eagle Casino project in
New Mexico, maintaining existing Tribal contracts following a reorganization of
management, negotiating and implementing the Company's Second Amended Indenture,
and streamlining operations and costs significantly such that the Company has
experienced its first year of profitable operations. The Executive Compensation
Committee of the Board of Directors did not issue any reports in fiscal 1999.
Accordingly, compensation paid to executive officers of the Company was
determined pursuant to Employment Agreements entered into with management in
December 1998. These agreements reflected, among other things, voluntary
reductions in salary by management which occurred in September 1998, the
issuance of 200,000 shares of stock, collectively, to management and the
contingent issuance of $250,000 in New Senior Secured Notes, collectively, to
management. Other than the Stock Option Plan, the Company currently maintains no
formal executive compensation program. No options have been issued pursuant to
the Stock Option Plan.
46
<PAGE> 50
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 de-listed effective June 25, 1997 from the NASDAQ OTC
Bulletin Board due to a lack of market makers for the Company's common stock,
data for the fiscal years ended June 30, 1998 and June 30, 1999 are excluded
from the chart.)
<TABLE>
<CAPTION>
S&P 500 Peer Group
Company Index Composite
------- ------- ----------
<S> <C> <C> <C>
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
</TABLE>
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 June 30, 1999: (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 1,999,745 as of June 30, 1999 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 1,999,745 shares of New Common Stock.
47
<PAGE> 51
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of
Beneficial Owner Beneficial Ownership Percentage of Class
------------------- -------------------- --------------------
<S> <C> <C>
Charles B. Brewer(1) 0 0%
Michael W. Barozzi(1) 100,000(2) 5%
Col. Clinton L. Pagano(1) 0 0%
William S. Papazian(1) 100,001(2) 5%
Directors and Executive 200,001 10%
Officers As a Group
(4 persons)
Grace Brothers Ltd. 878,283(3) 43.9%
1560 Sherman Avenue Ste 900
Evanston, IL 60201
Continental Casualty Company 265,330(3) 13.3%
CNA Plaza
Chicago, IL 60685
Funsten Asset Management Company 249,165(3) 12.5%
as Investment Advisor
121 Outrigger Mall
Marina Del Rey, CA 90292
</TABLE>
- -------------
(1) Address of each beneficial owner named in this table, unless otherwise
indicated c/o Capital Gaming International, Inc., 2701 East Camelback
Road, Suite 484, Phoenix, Arizona 85016.
(2) New Common Stock
(3) Class A Common Stock. Held in Voting Trust with Charles B. Brewer as Voting
Trustee. Pursuant to the Voting Trust Agreement, Mr. Brewer retains sole
voting rights over these shares but is not the beneficial owner of these
shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There were no related party transactions in the fiscal year ended
June 30, 1999.
48
<PAGE> 52
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(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)
49
<PAGE> 53
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)
50
<PAGE> 54
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)
51
<PAGE> 55
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)
52
<PAGE> 56
10.123 Agreement of Purchase and Sale dated April 26, 1994, by and
among New Orleans 2000 Partnership, Crescent City Capital
Development Corp. and Grand Palais Riverboat, Inc. (11)
10.125 Loan and Security Agreement dated February 17, 1994, by and
between the Registrant and Republic Corporate Services, Inc.
(11)
10.126 $5,000,000 Note dated February 17, 1994 from Republic
corporate Services, Inc. to Registrant. (11)
10.127 Letter Agreement dated May 4, 1994, by and between the
Registrant and Republic Corporate Services, Inc. (11)
10.128 $19,000,000 Note from the Registrant to Republic Corporate
Services, Inc. (11)
10.130 First Amendment dated June 24, 1994, to the Cash Collateral
and Disbursement Agreement dated February 17, 1994, by and
among the Registrant, Crescent City Capital Development Corp.,
Capital Gaming International Casino Management Division, Inc.
(formerly British American Bingo, Inc.), First Trust National
Association and First National Bank of Commerce. (12)
10.131 Agreement to Purchase and Sell dated June 30, 1994, by and
between River City Joint Venture and The Alabama Great
Southern Railroad. (12)
10.132 Term Note by River City Joint Venture to New Orleans 2000
Partnership dated July 13, 1994. (13)
10.133 Assignment of Agreement and Sale dated July 13, 1994. (13)
10.134 Mortgage and Assignment of Leases and Rentals by River City
Joint Venture in favor of New Orleans 2000 Partnership dated
July 13, 1994. (13)
10.135 Amended and Restated partnership Agreement between Grand
Palais Riverboat, Inc. and Crescent City Capital Development
Corp. dated July 7, 1994. (13)
10.136 First Amendment dated June 1, 1994, to the Marketing Services
Agreement dated February 17, 1994, by and between the
Registrant and HFS Gaming Corp. (14)
10.137 Amendment effective as of October 1, 1994, to the Executive
Employment Agreement effective as of October 17, 1993, by and
between the Registrant and Clinton L. Pagano. (16)
10.139 Stock Option Agreement dated June 2, 1994, by and between
Registrant and William S. Papazian.
10.143 Stock Option Agreement dated August 24, 1994, by and between
Registrant and James F. Ahearn.
10.144 Letter Amendment to Warrant Agreements by and between
Registrant, Ladenberg, Thalmann & Company, Inc., and certain
affiliates, dated October 11, 1994 (without exhibits). (16)
10.145 Construction Agreement by and between Crescent City Capital
Development Corp., Grand Palais Riverboat, Inc., and Grimaldi
Construction, Inc., dated October 25, 1994 (without exhibits).
(17)
10.146 Stock Purchase Agreement by and between Registrant, Fidelity
Galileo Fund, L.P., and Fidelity Copernicus Fund, L.P., dated
as of March 30, 1995. (18)
10.147 Registration Rights Agreement by and between Registrant,
Fidelity Galileo Fund, L.P., and Fidelity Copernicus Fund,
L.P. dated as of March 30 1995. (18)
10.148 Riverboat Casino Operating Agreement by and between Crescent
City Capital Development Corp. and River Marine Services,
Inc., dated as of January 13, 1995. (18)
10.152 Promissory Note dated March 27, 1995, between Crescent City
Capital Development Corp. and First National Bank of Commerce.
(18)
10.153 Commercial Guaranty dated March 27, 1995, between Registrant
and First National Bank of Commerce. (18)
53
<PAGE> 57
10.154 Credit Agreement dated March 10, 1995, by and among River City
Joint Venture, Crescent City Capital Development Corp., Grand
Palais Riverboat, Inc., and First National Bank of Commerce.
(18)
10.155 Promissory Note dated March 10, 1995, between River City Joint
Venture and First National Bank of Commerce. (18)
10.156 Mortgage dated March 9, 1995, between River City Joint Venture
and First National Bank of Commerce, relating to certain
property owned by the River City Joint Venture (the "Orange
Street Parcels"). (18)
10.157 Mortgage dated March 9, 1995, between River City Joint Venture
and First National Bank of Commerce, relating to certain
Property owned by the River City Joint Venture (the "Cusimano
Parcels"). (18)
10.162 Employment Agreement dated May 30, 1995, by and between the
Registrant and Edward Tracy. (19)
10.163 Employment Agreement dated May 30, 1995, by and between the
Registrant and I.G. Davis, Jr. (19)
10.167 Buy-Out Agreement dated September 1, 1995, by and among
Registrant, Capital Gaming Management, Inc. and the Cow Creek
Band of Umpqua Tribe of Indians. (19)
10.168 Amendments to the January 13, 1994, Amended and Restated
Riverboat Construction Agreement by and between the
Registrant, Crescent City Capital Development Corp. and Bender
Shipyard, Inc. dated October 19, 1994, February 3, 1995, and
February 9, 1995. (19)
10.169 First Preferred Ship Mortgage by Crescent City Capital
Development Corporation in favor of First Trust National
Association dated March 23, 1995. (19)
10.170 Engagement Agreement between Registrant and Donaldson, Lufkin
& Jenrette dated June 20, 1995. (19)
10.171 Employment Agreement dated May 17, 1996, by and between
Registrant and William S. Papazian. (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.
10.177 Employment Agreement dated as of December 1, 1998 between
Registrant and Michael W. Barozzi
10.178 Letter Agreement dated January 8, 1999 between Registrant and
Michael W. Barozzi
10.179 Employment Agreement dated as of December 1, 1998 between
Registrant and William S. Papazian
10.180 Letter Agreement dated as of January 8, 1999 between
Registrant and William S. Papazian
54
<PAGE> 58
11.0 Schedule of Computation of Earnings Per Share #
12.0 Computation of Ratio of Earnings to Fixed Charges #
27. Financial Data Schedule #
# 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.
55
<PAGE> 59
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.
Current Report on Form 8-K filed with the Securities and Exchange
Commission on December 18, 1998.
Current Report on Form 8-K filed with the Securities and Exchange
Commission on August 23, 1999.
Current Report on Form 8-K/A filed with the Securities and Exchange
Commission on August 25, 1999.
56
<PAGE> 60
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: September 28, 1999 By: /s/ Michael W. Barozzi
-----------------------------------------
Michael W. Barozzi, President and Chief
Operating Officer
(Authorized Representative)
Dated: September 28, 1999 By: /s/ William S. Papazian
-----------------------------------------
William S. Papazian, Executive Vice
President and General Counsel and
Secretary
(Authorized Representative)
Dated: September 28, 1999 By: /s/ Robin K. McEntire
-----------------------------------------
Robin K. McEntire, Corporate Controller
(Principal Accounting Officer)
57
<PAGE> 61
CAPITAL GAMING INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
CONTENTS
Page
Independent auditor's report F-2
Independent auditor's report F-3
Financial statements:
Consolidated balance sheets F-4
Consolidated statements of operations F-5
Consolidated statements of changes in stockholders' deficit F-7
Consolidated statements of cash flows F-8
Consolidated notes to financial statements F-11
F-1
<PAGE> 62
Board of Directors and Stockholders
Capital Gaming International, Inc.
and Subsidiaries
Phoenix, Arizona
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying consolidated balance sheet of
Capital Gaming International, Inc. and Subsidiaries as of June 30, 1999 and the
related consolidated statements of operations, stockholders' deficit and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Capital Gaming International Inc. and Subsidiaries as of June 30, 1999, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
TOBACK CPAs, P.C.
Phoenix, Arizona
September 27, 1999
F-2
<PAGE> 63
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 sheet of
Capital Gaming International, Inc. and its subsidiaries as of June 30, 1998,
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, and the period July 1, 1996 to May 28,
1997. The 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 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, and the period July 1, 1996 to May 28, 1997, in conformity with generally
accepted accounting principles.
As more fully described in Note 2 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 pre-reorganization
consolidated financial statements.
MOORE STEPHENS, P.C.
Certified Public Accountants
Cranford, New Jersey
August 7, 1998
F-3
<PAGE> 64
CAPITAL GAMING INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 1998
(ROUNDED TO NEAREST 000'S)
ASSETS
<TABLE>
<CAPTION>
1999 1998
------------ ------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 4,440,000 $ 4,498,000
Restricted funds (Note 4) 3,977,000 --
Interest receivable 24,000 29,000
Native American management fees and expenses
receivable (Note 20) 647,000 709,000
Current portion of Native American loans receivable
(Notes 10 and 20) 1,441,000 2,249,000
Muckleshoot settlement receivable (Note 6) 1,150,000 --
Prepaid expenses and other current assets 215,000 232,000
------------ ------------
Total current assets 11,894,000 7,717,000
------------ ------------
Furniture, fixtures and equipment (Note 11) 14,000 23,000
Excess reorganization value, net (Notes 2 and 8) 3,790,000 5,767,000
Other assets:
Restricted funds (Note 4) -- 541,000
Native American loans receivable (Note 10) -- 1,444,000
Investment in Native American management agreements,
net (Note 12) 162,000 1,229,000
Deferred charges (Note 14) 1,369,000 --
------------ ------------
Total other assets 1,531,000 3,214,000
------------ ------------
$ 17,229,000 $ 16,721,000
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of 12% senior secured notes payable (Note 15) $ 4,560,000 $ --
Accounts payable and accrued expenses 711,000 1,233,000
Accrued interest 292,000 346,000
Federal income taxes payable 70,000 --
State income taxes payable 257,000 147,000
Due to related party (Note 18) 62,000 --
------------ ------------
Total current liabilities 5,952,000 1,726,000
Long-term debt:
12% senior secured notes payable less current portion (Note 15) 18,240,000 23,100,000
------------ ------------
Total liabilities 24,192,000 24,826,000
------------ ------------
Commitments (Note 18)
Stockholders' deficit:
Common stock, no par value, authorized 5,000,000
shares; issued and outstanding 1,999,745 shares and
1,933,333 shares at June 30, 1999 and 1998, respectively
(Notes 2 and 16) 400,000 400,000
Additional paid-in capital (Note 15) 300,000 --
Accumulated deficit (since May 29, 1997, date of
reorganization) (7,663,000) (8,505,000)
------------ ------------
Total stockholders' deficit (6,963,000) (8,105,000)
------------ ------------
$ 17,229,000 $ 16,721,000
============ ============
</TABLE>
The Accompanying Notes are an
Integral Part of these Financial Statements
F-4
<PAGE> 65
CAPITAL GAMING INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(ROUNDED TO NEAREST 000'S EXCEPT FOR NUMBER OF SHARES AND PER SHARE DATA)
<TABLE>
<CAPTION>
| Predecessor
Reorganized Company | Company
----------------------------------------------------- | -------------
May 29, 1997 | July 1, 1996
Year ended Year ended through | through
June 30, 1999 June 30, 1998 June 30, 1997 | May 28, 1997
------------- ------------- ------------- | -------------
<S> <C> <C> <C> | <C>
Revenues: |
Native American casino management |
fees (Note 5) $ 7,264,000 $ 8,150,000 $ 753,000 | $ 7,447,000
|
Costs and expenses: |
Salaries and related costs 1,588,000 3,284,000 188,000 | 1,818,000
Native American gaming development |
costs 566,000 2,317,000 532,000 | 1,910,000
Professional fees 1,274,000 1,380,000 469,000 | 1,387,000
General and administrative 450,000 1,447,000 470,000 | 1,388,000
Depreciation and amortization 2,238,000 3,153,000 262,000 | 735,000
Write-down of excess reorganization |
value (Note 8) -- 1,300,000 -- | --
------------ ------------ ------------ | ------------
Total costs and expenses 6,116,000 12,881,000 1,921,000 | 7,238,000
------------ ------------ ------------ | ------------
|
Income (loss) from operations 1,148,000 (4,731,000) (1,168,000) | 209,000
------------ ------------ ------------ | ------------
|
Reorganization items: |
Reorganization adjustments (Note 2) -- -- -- | 52,268,000
Reorganization fees paid to management |
(Note 2) -- -- -- | (1,463,000)
------------ ------------ ------------ | ------------
Total reorganization items -- -- -- | 50,805,000
------------ ------------ ------------ | ------------
|
Other income (expense): |
Muckleshoot settlement, net (Note 6) 2,285,000 -- -- | --
Interest income 487,000 798,000 83,000 | 875,000
Gain on disposal of riverboat gaming |
assets (Note 1) -- -- -- | 364,000
Other income 40,000 -- -- | --
Interest expense (2,700,000) (2,885,000) (251,000) | (7,842,000)
------------ ------------ ------------ | ------------
112,000 (2,087,000) (168,000) | (6,603,000)
------------ ------------ ------------ | ------------
|
Income (loss) before income taxes 1,260,000 (6,818,000) (1,336,000) | 44,411,000
|
Income taxes (Note 9) 418,000 336,000 15,000 | 123,000
------------ ------------ ------------ | ------------
|
Income (loss) before extraordinary items 842,000 (7,154,000) (1,351,000) | 44,288,000
</TABLE>
The Accompanying Notes are an
Integral Part of these Financial Statements
F-5
<PAGE> 66
CAPITAL GAMING INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(ROUNDED TO NEAREST 000'S EXCEPT FOR NUMBER OF SHARES AND PER SHARE DATA)
<TABLE>
<CAPTION>
| Predecessor
Reorganized Company | Company
----------------------------------------------------- | --------------
May 29, 1997 | July 1, 1996
Year ended Year ended through | through
June 30, 1999 June 30, 1998 June 30, 1997 | May 28, 1997
------------- ------------- ------------- | ------------
<S> <C> <C> <C> | <C>
Extraordinary item - loss on early |
extinguishment of debt (Note 23) -- -- -- | (1,998,000)
Extraordinary item - gain from reorganization |
items (Note 23) -- -- -- | 103,464,000
--------- ----------- ------------- | ------------
|
Net income (loss) $ 842,000 $(7,154,000) $ (1,351,000) | $145,754,000
========= =========== ============= | ============
|
Basic income (loss) per share (a) $ .43 $ (3.82) $ (0.72) | $ N/A
========= =========== ============= | ============
|
Weighted average common and |
equivalent shares outstanding 1,939,178 1,872,694 1,866,667 | 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 (period 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 Financial Statements
F-6
<PAGE> 67
CAPITAL GAMING INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(ROUNDED TO NEAREST 000'S EXCEPT FOR NUMBER OF SHARES)
<TABLE>
<CAPTION>
Common stock Additional
------------------------- paid-in Accumulated
Shares Amount capital deficit
------ ------ ------- -------
<S> <C> <C> <C> <C>
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) (Note 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) (Note 2) 1,800,000 387,000 -- --
Stock grants to officers and directors
(Note 2) 66,667 13,000 -- --
Net loss from May 29, 1997 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
(Note 2) 66,666 -- -- --
Net loss -- -- -- (7,154,000)
------------- ------------- ------------- -------------
Balance, June 30, 1998 1,933,333 400,000 -- (8,505,000)
Treasury bonds (Note 15) -- -- 300,000 --
Stock grants to officers and directors
(Note 2) 66,412 -- -- --
Net income -- -- -- 842,000
------------- ------------- ------------- -------------
Balance, June 30, 1999 1,999,745 $ 400,000 $ 300,000 $ (7,663,000)
============= ============= ============= =============
</TABLE>
The Accompanying Notes are an
Integral Part of these Financial Statements
F-7
<PAGE> 68
CAPITAL GAMING INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(ROUNDED TO NEAREST 000'S)
<TABLE>
<CAPTION>
| Predecessor
Reorganized Company | Company
--------------------------------------------------------- | --------------
May 29, 1997 | July 1, 1996
Year ended Year ended through | through
June 30, 1999 June 30, 1998 June 30, 1997 | May 28, 1997
------------- ------------- ------------- | ------------
<S> <C> <C> <C> | <C>
Cash flows from operating activities: |
Net income (loss) $ 842,000 $ (7,154,000) $ (1,351,000) | $ 145,754,000
Adjustments to reconcile net income |
(loss) to net cash provided by |
(used in) operating activities: |
Depreciation and amortization 2,238,000 3,153,000 262,000 | 735,000
Muckleshoot settlement, gross (3,300,000) -- -- | --
Payments on Muckleshoot settlement 2,150,000 -- -- | --
Write-off of investment in Muckleshoot |
management agreement 815,000 -- -- | --
Increase in related party payable 62,000 -- -- | --
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 costs -- -- -- | 552,000
Amortization of original issue discount -- -- -- | 261,000
Abandonment of capital asset -- -- 75,000 | --
Write-down of excess reorganization |
value -- 1,300,000 -- | --
Gain on sale of riverboat gaming |
operations -- -- -- | (364,000)
Decrease in interest receivable 5,000 43,000 6,000 | 539,000
Decrease (increase) in Native American |
management fees and expenses |
receivable 62,000 62,000 42,000 | (146,000)
Decrease (increase) in prepaid expenses |
and other current assets 17,000 185,000 200,000 | (512,000)
Decrease in notes receivable, other -- 100,000 -- | --
Decrease (increase) in officer loans -- 250,000 -- | (250,000)
(Decrease) increase in accounts payable |
and accrued expenses (522,000) (1,481,000) 858,000 | 821,000
(Decrease) increase in accrued interest (54,000) 95,000 251,000 | 6,979,000
Increase in federal income taxes payable 70,000 -- -- | --
Increase in state income taxes |
payable 110,000 147,000 -- | --
------------- ------------- ------------- | -------------
1,653,000 3,428,000 1,694,000 | (146,255,000)
------------- ------------- ------------- | -------------
Net cash provided by (used in) |
operating activities 2,495,000 (3,726,000) 343,000 | (501,000)
------------- ------------- ------------- | -------------
</TABLE>
The Accompanying Notes are an
Integral Part of these Financial Statements
F-8
<PAGE> 69
CAPITAL GAMING INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(ROUNDED TO NEAREST 000'S)
<TABLE>
<CAPTION>
| Predecessor
Reorganized Company | Company
---------------------------------------------------- | -------------
May 29, 1997 | July 1, 1996
Year ended Year ended through | through
June 30, 1999 June 30, 1998 June 30, 1997 | May 28, 1997
------------- ------------- ------------- | ------------
<S> <C> <C> <C> | <C>
Cash flows from investing activities: |
Repayments of Native American loans |
receivable 2,252,000 3,939,000 332,000 | 3,363,000
(Increase) decrease in restricted funds (3,436,000) 385,000 (2,000) | (11,000)
Increase in deferred charges (1,369,000) -- -- | --
Net transfers to restricted cash -- -- -- | (413,000)
Purchase of furniture, fixtures and |
equipment -- (23,000) -- | --
----------- ----------- ----------- | -----------
Net cash (used in) provided by |
investing activities (2,553,000) 4,301,000 330,000 | 2,939,000
----------- ----------- ----------- | -----------
|
Cash flows from financing activities: |
Reduction in equipment notice -- -- -- | (1,290,000)
----------- ----------- ----------- | -----------
|
Net (decrease) increase in cash and cash |
equivalents (58,000) 575,000 673,000 | 1,148,000
|
Cash and cash equivalents at beginning |
of year 4,498,000 3,923,000 3,250,000 | 2,102,000
----------- ----------- ----------- | -----------
|
Cash and cash equivalents at end of year $ 4,440,000 $ 4,498,000 $ 3,923,000 | $ 3,250,000
=========== =========== =========== | ===========
|
Supplemental disclosures of cash flows information: |
|
Interest paid 2,754,000 2,672,000 50,000 | 2,510,000
State income taxes paid 238,000 2,000 -- | 423,000
</TABLE>
The Accompanying Notes are an
Integral Part of these Financial Statements
F-9
<PAGE> 70
CAPITAL GAMING INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
Supplementary Schedule of Noncash Operating and Financing Activities:
On July 29, 1996, the Indenture Trustee for the Company's Senior
Secured Noteholders distributed an aggregate of $49,986,000 in cash and
Purchaser's Notes to the Senior Secured Noteholders on account of principal and
accrued interest ("Noteholder Distribution"). The Noteholder Distribution
included $28,000,000 in Purchaser's Notes, as well as cash from the sale of
Crescent City Capital Development Corp. (CCCD) and Casino Magic Corp. (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.
During the year ended June 30, 1999, the potential right to receive
$300,000 in Senior Secured Notes held by a former officer was released and
surrendered to the Company as part of his resignation, thereby creating Treasury
Bonds. These Treasury Bonds are owned by the Company and resulted in a decrease
in Senior Secured Notes and an increase in additional paid-in capital.
The Accompanying Notes are an
Integral Part of these Financial Statements
F-10
<PAGE> 71
CAPITAL GAMING INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company:
Nature of business:
Capital Gaming International, Inc. and Subsidiaries (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 Rhode Island Casino project is conducted
through Capital Development Gaming Corp. ("CDGC"), a wholly-owned subsidiary of
the Company.
The Company's CGMI subsidiary currently manages and operates two Native
American gaming facilities, which CGMI has developed or expanded into Class III
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 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 (see
Note 14).
The Company's CDGC subsidiary has a management and development contract
with the Narragansett Indian Tribe for the development of a Class III gaming
facility in Charlestown, Rhode Island or elsewhere in the State of Rhode Island
as may be permitted by law (see Note 7).
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 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 using 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 were 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, 1995, CCCD filed a Plan of Reorganization (the "January
Plan") under Chapter 11 which was confirmed on January 12, 1996.
F-11
<PAGE> 72
1. The Company, continued:
Disposal of Riverboat Gaming Operation, continued:
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, including receipt of all state regulatory approvals. 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 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 $56,600,000, 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.
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 interest 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> 73
2. Reorganization under Chapter 11:
Reorganization:
On December 23, 1996 (the "Petition Date"), Capital Gaming
International, Inc. and Subsidiaries, 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. and Subsidiaries' operations. Under the Plan, the old common stock
interests in Capital Gaming International, Inc. and Subsidiaries were canceled
and the Company, as reorganized, issued new common stock (the "New Common
Stock").
F-13
<PAGE> 74
2. Reorganization under Chapter 11, continued:
Plan of Reorganization, continued:
The Plan provided generally that creditors of the Company will receive
distributions as follows: (i) holders of Old Secured Notes received in the
aggregate (A) an 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) an 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 New Secured Notes the Indenture
Trustee would otherwise receive an 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, and the 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.
F-14
<PAGE> 75
2. Reorganization under Chapter 11, continued:
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 overstatements of claims.
Liabilities subject to compromise consisted of the following,
immediately preceding the Effective Date:
<TABLE>
<S> <C>
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
============
</TABLE>
Modification of Plan and Second Amended Indenture:
The Company's First Amended and Restated Indenture, dated as of March
27, 1997 (the "First Amended Indenture") contemplated 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 First Amended
Indenture). However, the Advisory Committee never 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 First Amended Indenture
require that the proposed members of the Advisory Committee be licensed by the
appropriate various state gaming regulators.
F-15
<PAGE> 76
2. Reorganization under Chapter 11, continued:
Modification of Plan and Second Amended Indenture, continued:
On August 7, 1998, the Company was notified by counsel of the
occurrence of possible events of default ("Events of Default") under the First
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 First Amended Indenture). In light of good faith negotiations between the
Indenture Trustee, the holders of a majority in principal amount of the New
Senior Secured Notes and the Company agreed to amend the First Amended and
Restated Indenture in such a manner as would facilitate curing any alleged
events of default.
The Indenture Trustee had been directed by the Holders of a majority in
principal amount of the New Senior Secured Notes to forebear from taking any
action, and in fact took no action, to accelerate the New Senior Secured Notes,
foreclose on any collateral or otherwise execute any of its rights under the
First Amended Indenture. As discussed herein, all defaults existing under The
First Amended Indenture were waived on December 4, 1998, the effective date of
the Second Amended Indenture.
On October 23, 1998 the Company and the Indenture Trustee filed a Joint
Motion for an order approving modifications to the Plan with the bankruptcy
court (the "Joint Motion").
On November 16, 1998 the bankruptcy court ordered the approval of the
proposed modifications to the Plan as set forth in the Joint Motion, including,
without limitation: (i) the Second Amended Indenture; (ii) the Second Amended
and Restated Certificate of Incorporation (the "Second Amended Certificate");
and (iii) the composition of the Company's Board of Directors to consist of the
following individuals: (a) Michael W. Barozzi (Common Director); (b) William S.
Papazian (Common Director); (c) Col. Clinton L. Pagano (Common Director); and
(d) Charles B. Brewer (Class A Director).
As detailed in the Joint Motion, the principal changes to the Second
Amended Indenture are:
(i) elimination of the Advisory Committee (as defined in the Second
Amended Indenture);
(ii) modification of the provisions relating to excess cash (as defined
in the Second Amended Indenture);
(iii) changing the date of the sinking fund payment due 2000 from May
28, 2000 to May 15, 2000; and
(iv) changing the final maturity date from May 28, 2001 to May 15,
2001.
F-16
<PAGE> 77
2. Reorganization under Chapter 11, continued:
Modification of Plan and Second Amended Indenture, continued:
As also detailed in the Joint Motion, the principal changes to the
Second Amended Certificate include the creation of a new class of common stock,
Class A Common Stock, and the right of holders of Class A Common Stock to elect
up to four members of the Board, with weighted voting rights for the Class A
Director(s) if the holders of the Class A Common Stock elect fewer than four
directors. Except for such additional rights of holders of the Class A Common
Stock, the New Common Stock and Class A Common Stock share identical rights.
As detailed in the Joint Motion, the Plan is modified to provide that
(i) holders of the Old Secured Notes will receive Class A Common Stock in lieu
of New Common Stock on account of their allowed unsecured claims. These
modifications to the Plan will not affect the aggregate number of shares of
common stock outstanding; the class A Common Stock will represent 80 percent of
the Company's outstanding voting securities and the New Common Stock will
represent 20 percent of the outstanding voting securities. Only holders of the
Class A Common stock, however, will have the right to elect the Class A
Directors.
The Plan is also modified to eliminate the right of the Noteholder
Steering Committee to designate members of the Board of Directors.
The Court also ordered that the Indenture Trustee fix December 7, 1998
as the record date for distribution of the New Secured Notes, Class A Common
Stock and other property to the Holders of the Old Secured Notes. In compliance
with the Court's order, the Indenture Trustee has made distributions to the
Holders of the Old Secured Notes and to the general unsecured creditors.
On December 4, 1998 the Second Amended Certificate was filed with, and
deemed effective by, the Secretary of State of New Jersey.
On December 11, 1998, the Second Amended Indenture was executed by the
parties thereto, with an effective date of December 4, 1998.
Also as of December 4, 1998, holders entitled to receive a majority of
the New Secured Notes waived all defaults existing under the First Amended and
Restated Indenture on December 4, 1998.
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. 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 operations, included assumptions related to the
completion of the Rhode Island Project project and the attraction of new
management agreements. Due to the uncertainty surrounding the Rhode Island
Project 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
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, totaled approximately $9,339,000, and
is being amortized over a period of four years (see Note 8).
F-17
<PAGE> 78
2. Reorganization under Chapter 11, continued:
Fresh Start Reporting, continued:
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 values
have been reflected in the June 30, 1999, 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:
<TABLE>
<S> <C>
Legal/Professional Fees $ (1,716,000)
Interest Income 30,000
Write-Off of Goodwill (405,000)
Excess Reorganizational Value 9,265,000
Adjustment to Capital Stock 37,217,000
Adjustment to Paid-in Capital 7,877,000
------------
Total $ 52,268,000
</TABLE>
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 operations in New
Orleans, (ii) $550,000 in New Senior Secured Notes, and (iii) $13,000 in New
Common Stock grants.
F-18
<PAGE> 79
2. Reorganization under Chapter 11, continued:
The effect of the Plan of Reorganization on the Balance Sheet as of May
28, 1997, is as follows:
<TABLE>
<CAPTION>
Preorganized Exchange of Reorganized
Balance Sheet Debt Discharge Stock Fresh Start Balance Sheet
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 3,250,000 $ -- $ -- $ -- $ 3,250,000
Restricted funds in escrow 924,000 -- 924,000
Interest receivable 78,000 -- -- -- 78,000
Native American Management
fees and expenses
receivable 813,000 -- -- -- 813,000
Current portion-Native American
& other loans receivable 3,931,000 -- -- -- 3,931,000
Notes receivable from officers' 250,000 -- -- -- 250,000
Prepaid expenses and other
current assets 638,000 -- -- -- 638,000
Property and equipment 93,000 -- -- -- 93,000
Excess reorganization value -- -- -- 9,339,000 9,339,000
Other assets -- -- -- --
Native American loans
receivable 4,032,000 -- -- -- 4,032,000
Investments in Native
American Management
Agreements 2,002,000 -- -- -- 2,002,000
Notes receivable, other 80,000 -- -- -- 80,000
Deferred financing costs 4,311,000 -- -- (4,311,000) --
Goodwill 405,000 -- -- (405,000) --
Deposits and other assets -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Total assets $ 20,807,000 $ -- $ -- $ 4,623,000 $ 25,430,000
============= ============= ============= ============= =============
Liabilities and Shareholders' Equity
(Deficit)
Current liabilities:
Accounts payable and accrued
expenses $ 1,930,000 $ -- $ -- $ -- $ 1,930,000
Accrued interest on secured notes -- -- -- -- --
12.0% senior secured notes
payable -- 23,100,000 -- -- 23,100,000
Liabilities subject to compromise 132,389,000 (132,389,000) -- -- --
Common stock 37,617,000 -- (37,617,000) 400,000 400,000
Additional paid-in capital 7,877,000 -- (7,877,000) -- --
Retained earnings (deficit) (159,006,000) (550,000) 45,494,000 4,223,000 --
-- 132,389,000 -- -- --
-- (22,550,000) -- -- --
------------- ------------- ------------- ------------- -------------
Total liabilities & equity $ 20,807,000 $ -- $ -- $ 4,623,000 $ 25,430,000
============= ============= ============= ============= =============
</TABLE>
F-19
<PAGE> 80
3. Summary of significant accounting policies:
Principles of consolidation:
The accompanying consolidated financial statements of the Reorganized
Company (periods beginning May 29, 1997) and the Predecessor Company (period
prior to May 29, 1997) include the accounts of Capital Gaming International,
Inc. and Subsidiaries and its wholly-owned subsidiaries Capital Gaming
Management Inc. (CGMI) and Capital Development Gaming Corp. (CDGC). Intercompany
balances and transactions have been eliminated.
Cash and cash equivalents:
Cash and cash equivalents include 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 8).
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 change 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 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-20
<PAGE> 81
3. Summary of significant accounting policies, continued:
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
years ended June 30, 1999 and 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 as they are not comparable
to subsequent periods, due to the reorganization and implementation of fresh
start reporting.
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.
4. Restricted funds:
Restricted funds are held by the Indenture Trustee as cash collateral
(as defined in the Second Amended Indenture) for payment of the New Senior
Secured Notes. Of the $3,977,000 held by the Indenture Trustee as cash
collateral as of June 30, 1999, $3,413,000 is available to be disbursed to or
on behalf of the Company, upon the fulfillment of certain requirements contained
in the Second Amended Indenture for specific purposes which include (i) to
redeem the New Senior Secured Notes or to make any sinking fund payment required
by the Second Amended Indenture, (ii) to pay interest due or accrued on the New
Senior Secured Notes, (iii) up to $300,000, in any calendar year, to pay any
additional developmental expenses (as defined in the Second Amended Indenture),
(iv) to pay any deferred budgeted expense (as defined in the Second Amended
Indenture) for which the Company did not reserve funds in connection with its
most recent quarterly calculation of excess cash (as defined in the Second
Amended Indenture), (v) to make expenditures with respect to a qualified new
project (as defined in the Second Amended Indenture) or (vi) for any use to
which holders of a majority of the outstanding Senior Secured Notes has
consented. The Company anticipates that some or all of the restricted funds held
by the Indenture Trustee may be applied to interest and/or principal payments
due on the new Senior Secured Notes and to fund new projects of the Company.
5. 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, blackjack, poker, off-track
betting (OTB), and high stakes bingo. The first phase of this development opened
on November 5, 1994. During the years ended June 30, 1999 and 1998, the periods
May 29, 1997 to June 30, 1997 and July 1, 1996 to May 28, 1997 the facility
produced approximately $4,930,000, and $4,754,000, $337,000, and $3,529,000,
respectively, in management fees for the Company.
F-21
<PAGE> 82
5. Native American gaming operations, continued:
Facility openings and summarized financial information, continued:
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, poker, and high stakes bingo. The Company,
as manager of the casino, collected approximately $2,335,000, and $2,276,000,
$232,000 and $1,823,000, in management fees for the years ended June 30, 1999
and 1998, the periods May 29, 1997 to June 30, 1997 and July 1, 1996 to May 28,
1997, 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, for the year ended June 30, 1998, the periods
May 29, 1997 to June 30, 1997 and July 1, 1996 to May 28, 1997, respectively.
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
Note 6).
6. Muckleshoot settlement:
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") 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 month 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 paid in advance of their due date and are
expected to be fully repaid by June 30, 2000.
F-22
<PAGE> 83
6. Muckleshoot settlement, continued:
The Company recorded other income of $3.3 million, less the $200,000
receivable balance from the Muckleshoot Casino, due as of June 30, 1998, and
wrote-off the unamortized balance of the deferred asset, investment in
Muckleshoot Agreement as of July 20, 1998, of approximately $815,000 for an
other income net gain to the Company of approximately $2,285,000 for the year
ended June 30, 1999. Additionally, on the settlement date the Company recorded a
receivable balance of $2.3 million. The total receivable due the Company on the
Muckleshoot settlement as of June 30, 1999 is $1,150,000.
7. 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 has advanced 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 Management Agreement.
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.
F-23
<PAGE> 84
Department of the Interior Issues Regulations for Class III Gaming Compacts
In April, 1999, the Secretary issued regulations prescribing procedures
to permit Class III gaming when a State interposes its immunity from suit by an
Indian Tribe in which the Tribe accuses the State of failing to negotiate in
good faith. The rule announces the Secretary's determination that the Secretary
may promulgate Class III gaming procedures under certain specified procedures;
it also sets forth the process and standards pursuant to which any procedures
would be adopted. These regulations took effect on May 12, 1999. The rules,
however, have not yet been acted upon in light of litigation pending in the
Florida Federal Court. The States of Florida and Alabama filed a complaint in
April, 1999, challenging the rules on various grounds. The Seminole Tribe of
Florida, the Miccosukee Tribe and the Poarch Band of Creek Indians have
intervened in the litigation. These Tribes, along with the Secretary, have filed
motions to dismiss. As of September 28, 1999, the Florida Federal Court had not
yet ruled on the pending motions. There can be no assurance as to when the
regulations will actually become effective, since no such action will occur
until the foregoing litigation is resolved. At this juncture, it is unknown when
and how the Court will rule on the pending motions and how that ruling will
impact the regulations. It also is unknown how such ruling and its impact (if
any) on the regulations will apply to the Narragansett Tribe in light of the
Chafee Rider. However, as a result of the Chafee Rider, there can also be no
assurance that the Secretary will have the authority under any regulations 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 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.
F-24
<PAGE> 85
Other Matters
In connection with the Narragansett Tribe's efforts to seek statewide
voter approval of a gaming facility to be located in Providence, Rhode Island in
the November 1998 general election, the Company had retained Donaldson, Lufkin
and Jenrette Securities Corporation ("DLJ") to act as its exclusive financial
advisor with respect to the review and analysis of financial and structural
alternatives available to the Company. As part of such engagement, the Company
agreed to issue warrants to DLJ to purchase five (5%) percent of the Company's
issued and outstanding common stock on a fully diluted basis, to be exercisable
only if the Narragansett Tribe succeeded in winning voter approval for a
Narragansett gaming facility. In light of the fact that a voter referendum did
not occur in November 1998, and the uncertainty surrounding any future voter
referendum including the West Warwick effort, the Company has not issued and
does not intent to issue such warrants.
The Company has continued funding the on-going development costs of the
Rhode Island Project, which at June 30, 1999, 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, 1999,
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 Rhode Island Project 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 Rhode Island Project's gross revenues and, in turn, on
the income generated by CDGC under the Management Agreement.
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 Rhode Island Project 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. Given the high level of uncertainty concerning the ability to secure a
binding compact or approval of non-compacted gaming, no financing committments
for future capital needs have been obtained as of the date hereof.
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 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.
F-25
<PAGE> 86
Ongoing Project Development - West Warwick, Rhode Island
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 in a general election. As a
result of the Chafee Rider, the Narragansett Tribe had focused its efforts on
seeking voter approval of a gaming facility to be located in Providence, Rhode
Island and subsequently focused such efforts on seeking voter approval of a
gaming facility to be located near Interstate 95 in West Warwick, 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 state legislature will approve
placement of the referendum question on the November 2000 ballot or any other
general election ballot, or 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 the state legislature will approve placement of the referendum
question on the November 2000 ballot or any other general election ballot, or
that any such referendum would be successful or, if successful, what the
ultimate scope of permitted gaming would be.
In January 1999 a grassroots group calling itself West Warwick 2000 was
formed in the town of West Warwick, Rhode Island. West Warwick 2000 sought out
the Narragansett Tribe and invited the Tribe to propose a potential casino to be
located in the town of West Warwick. Following public hearings on the issue, the
West Warwick Town Council voted 5 to 0 to hold a non-binding town referendum on
June 8, 1999. On June 8, 1999 the non-binding town referendum was held and
approximately 67% of those voting approved the idea of a Narragansett Casino
being sited in the town of West Warwick. Following the non-binding referendum,
the Town Council of the town of West Warwick sent a resolution to the Rhode
Island General Assembly requesting that the question of a Narragansett Casino in
West Warwick be placed on the ballot in the State's next general election being
held in November 2000. It is expected that the Rhode Island General Assembly
will take up this issue in the Legislative Session beginning in January 2000. If
the Town Council Resolution is ratified by the Rhode Island General Assembly, it
is then subject to gubernatorial veto which can be overriden with a vote of 60%
of each of the state senate and state house of representatives.
As a result of the set-backs caused by the invalidation of the Compact
and the application of the Chafee Rider, and other factors, there can be no
assurance that any legislative, judicial or administrative efforts will be
successful.
Bureau of Indian Affairs Approval
On September 3, 1998 the Secretary of the Interior and the Deputy
Commissioner of the Bureau of Indian Affairs approved the Management Agreement
between the Narragansett Tribe and CDGC pursuant to 25 CFR Section 81. While
this approval does not impact the Narragansett Tribe's right to offer gaming
pursuant to IGRA, the approval is significant because it protects the
Narragansett Tribe and CDGC from any assertion that the Management Contract is
null and void under the provisions of 25 U.S.C. Section 81 due to lack of
approval.
8. Excess reorganization value:
Accumulated amortization and amortization expense of excess
reorganization value was approximately $4,602,000 and $1,977,000 as of and for
the year ended June 30, 1999 and $2,625,000, and $2,432,000 as of and for the
year ended June 30, 1998.
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 had 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 was 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."
F-26
<PAGE> 87
9. Income taxes:
Components of income tax expense:
<TABLE>
<CAPTION>
| Predecessor
Reorganized Company | Company
------------------------------------------------ | ------------------
May 29, 1997 | July 1, 1996
|
Year ended Year ended through | through
|
June 30, 1999 June 30, 1998 June 30, 1997 | May 28, 1997
------------------------------ ---------------- | -----------------
<S> <C> <C> <C> | <C>
Current: |
Federal $ 70,000 $ - $ - | $ -
|
State 348,000 336,000 15,000 | 123,000
--------------- --------------- --------------- | -----------------
|
|
Current expense $ 418,000 $ 336,000 $ 15,000 | $ 123,000
============== ================ =============== | ================
</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>
| Predecessor
Reorganized Company | Company
--------------------------------------------------- | -----------------
May 29, 1997 | July 1, 1996
Year ended Year ended through | through
June 30, 1999 June 30, 1998 June 30, 1997 | May 28, 1997
<S> <C> <C> <C> | <C>
Federal income tax benefit |
(expense) at the statutory rate $ (428,000) $ 2,318,000 $ 454,000 | $(15,100,000)
|
Amortization of excess |
reorganization value (672,000) (827,000) - | -
|
Federal alternative minimum tax (70,000) - - | -
|
State tax benefit (expense) |
net of Federal tax benefit (expense) (348,000) (336,000) (15,000) | (123,000)
|
(Non) recognition of NOL |
carryforward 1,100,000 (1,491,000) (454,000) | 15,100,000
------------ --------------- ---------- ------------
|
Current expense $ (418,000) $ (336,000) $ (15,000) | $ (123,000)
============ =============== ========== ============
</TABLE>
F-27
<PAGE> 88
Net Operating Loss Carryforwards ("NOLs"):
The net operating losses (NOLs) generated in prior years totaled
approximately $107,000,000. The NOLs have been reduced by approximately
$75,500,000 as a result of the cancellation of indebtedness that was affected by
the Company's reorganization. The NOLs remaining have been reduced by the
current years income of approximately $3,000,000. There can be no assurance that
the Company will be able to utilize these NOLs due to the complex nature of the
applicable tax code and the difference that may exist between management's
interpretation of the code and that of the Internal Revenue Service (IRS). As a
result of this risk associated with the NOLs, management has established a 100%
valuation allowance to offset the associated deferred tax asset.
As of June 30, 1999, the Company has a net operating loss carryforward
expiring as follows:
<TABLE>
<CAPTION>
<S> <C>
June 30, 2009 $ 3,778,000
June 30, 2010 14,230,000
June 30, 2011 10,152,000
June 30, 2012 1,255,000
June 30, 2013 3,170,000
----------------
Total $ 32,585,000
=================
</TABLE>
F-28
<PAGE> 89
9. Income taxes, continued:
Net Operating Loss Carryforwards ("NOLs"), continued:
The Income tax effects of temporary differences that give rise to
significant portions of deferred income tax assets as of June 30, 1999 and 1998
are as follows:
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Deferred Income Tax Assets:
Federal net operating losses $ 11,079,000 $ 11,973,000
State net operating losses 7,474,000 6,949,000
--------------- ---------------
Total deferred income tax assets 18,553,000 18,922,000
Valuation allowance (18,553,000) (18,922,000)
--------------- ---------------
Net deferred income tax assets $ - $ -
=============== ===============
</TABLE>
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.
10. 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. As of June 30,
1999, there was one loan outstanding for approximately $1,441,000, due March
2000. The full balance is to be realized within one year and as such is
classified as a current asset. This note bears interest at prime lending rate
+1% (8.75% at June 30, 1999).
Loan Repayment and Contract Buy-out - Pursuant to the terms of the
Class III management contract between the Muckleshoot Tribe and the Company's
Native American gaming subsidiary - Capital Gaming Management, Inc. (CGMI) - the
Tribe has repaid 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.
F-29
<PAGE> 90
11. Property and equipment:
Property and equipment consist of the following as of June 30, 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Office furniture, fixtures and equipment $ 131,000 $ 131,000
Less accumulated depreciation (117,000) (108,000)
--------------- ---------------
$ 14,000 $ 23,000
=============== ===============
</TABLE>
Depreciation expense for the years ended June 30, 1999 and 1998, the
periods May 29, 1997 to June 30, 1997 and July 1, 1996 to May 28, 1997 is
$9,000, and $13,000, $3,000, and $34,000, respectively, and is included in
depreciation and amortization expense.
12. Investment in Native American Management Agreements:
The balance of $162,000 and $1,229,000, as of June 30, 1999 and 1998 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 life of these management contracts is approximately one year.
Amortization for the years ended June 30, 1999 and 1998, periods May 29, 1997 to
June 30, 1997 and July 1, 1996 to May 28, 1997, was approximately $249,000, and
$708,000, and $59,000, and $687,000, respectively. Accumulated amortization as
of June 30, 1999 and 1998 was approximately $992,000 and $2,119,000,
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, 1999, management expects the
assets to be fully recoverable.
13. 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.
14. Pueblo of Laguna deferred charges:
In June 1998, the Company entered into a Management and Development
Agreement with Pueblo of Laguna tribe to develop and manage a class III gaming
facility (Dancing Eagle Casino Project). The Agreement was amended and restated
in March and September 1999. The National Indian Gaming Commission (NIGC)
approved the Third Amended and Restated agreement in September 1999.
All initial expenditures incurred by the Company for the establishment
and development of the Dancing Eagle Casino Project, as defined in the
Management and Development Agreement, other than those costs which generally
would be classified as Company administrative costs, have been capitalized as a
deferred asset. Additionally, as of October 1, 1998, all Company administrative
expenditures relating to the Dancing Eagle Casino have also been capitalized as
a deferred asset. Upon the commencement of gaming operations at the Dancing
Eagle Casino Project, the total sum of the general and administrative,
non-Laguna loan balances, which will remain a deferred asset will be amortized
over the five year period of the Pueblo of Laguna Management and Development
Agreement.
F-30
<PAGE> 91
Pursuant to the Third Amended and Restated Management and Development
Agreement between CGMI and the Pueblo of Laguna dated September 7, 1999, CGMI
will Loan approximately $1,700,000 to the Laguna Development Corporation, a
wholly-owned tribal corporation ("LDC") to partially fund pre-opening and
construction expenses of the Pueblo of Laguna Casino Project (the "CGMI Loans").
Additionally, the parties have agreed that a construction loan of $7,200,000
will be privately placed by a third party in favor of LDC ("Third Party Loan").
The CGMI Loans will be subordinate to the third party loan.
In addition, the management agreement will entitle the Company to 30%
of the net revenues of the gaming operations for the first three years and 20%
of net revenues of the gaming operations for the remaining two years of the
contract. Operations are expected to commence in the first calendar quarter of
year 2000.
15. Debt after reorganization:
Senior Secured Notes:
Pursuant to the Reorganization, the Holders of the Old Senior Secured
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. Certain members of management received a total
of $550,000 of those Senior Secured Notes. These members are not vested in the
Senior Secured Notes until May 2000. During the year ended June 30, 1999, an
officer of the Company resigned and forfeited his rights to receive $300,000 of
these Senior Secured Notes. The Company now holds these $300,000 of the New
Senior Secured notes in treasury. 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 all of the
covenants as of June 30, 1999. 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:
<TABLE>
<CAPTION>
<S> <C>
May 15, 2000 $ 4,620,000
May 15, 2001 18,480,000
Thereafter -
---------------
Total $ 23,100,000
===============
</TABLE>
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.
Per the terms of the Amended Indenture, the Company made interest
payments of $1,386,000 on May 15, 1998, November 15, 1998 and May 15, 1999.
F-31
<PAGE> 92
16. 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 5,000,000 shares of no par value common
stock. Upon the Effective Date, 1,800,000 shares of common stock were authorized
for issuance on a pro rata basis to the Company's various classes of creditors.
In addition, the Company's executive management became entitled to receive a
total of 66,667 shares of common stock on the Effective Date. Also on the
Effective Date, 133,333 shares were reserved to be issued to executive
management pursuant to the Plan. The remaining shares were issued in May 1998
and May 1999, respectively. Also see Note 2, Modification of Plan and Second
Amended Indenture.
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, or material
limitation 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.
17. 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. 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, 1999 there were no options granted under the Plan.
F-32
<PAGE> 93
18. Commitments and contingencies:
Employment agreements:
The Company has employment agreements with the Company's President and
Executive Vice President which require annual compensation of $275,000 and have
rolling terms of one (1) year. The Company also has an agreement with an outside
director of the Company which requires an outside director's fee of $90,000 for
the calendar year ended December 31, 1999 and $60,000 for the calendar year
ended December 31, 2000. In addition, the Company has an informal agreement with
a second outside director of the Company which requires an outside director's
fee of $75,000 for the 12 month period ended August 31, 1999. As of June 30,
1999, the Company owed approximately $62,000 to this second outside director.
Registration of securities:
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.
Property lease:
The Company leases 2,646 square feet of office space in Phoenix,
Arizona under an operating lease which expires on December 31, 2000. The
Company's commitment under this non-cancelable lease will require annual
lease payments of approximately $50,000 and $25,000, for the fiscal years ending
June 30, 2000 and June 30, 2001, respectively. Rent expense for the year ended
June 30, 1999 and 1998, the period May 29, 1997 to June 30, 1997, July 1, 1996
to May 28, 1997, was approximately $116,000, and $92,000, $8,000, and $74,000,
respectively.
Purchase Commitment:
The Company entered into a purchase commitment to purchase the building
for the Dancing Eagle Casino operations for approximately $630,000. The Company
will lease the building to Laguna Development Corporation for a period of five
years beginning with the commencement of casino operations. See note 14.
19. 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. The expenses of the Plan to the Company for the years ended June 30,
1999 and 1998, the periods May 29, 1997 to June 30, 1997 and July 1, 1996 to May
28, 1997 was approximately $61,000, and $71,000, $22,000, and $51,000,
respectively.
F-33
<PAGE> 94
20. 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 $100,000 as of
June 30, 1999, that is subject to credit risk beyond FDIC insured limits. The
Company had approximately $8,300,000 at June 30, 1999, in U.S. government
obligations, repurchase agreements, cash management funds and Euro investments
which are not insured.
The Company has recorded as of June 30, 1999, $647,000, in management
fees due from Native American Tribes under management contracts as well as
$1,441,000, 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, 1999, these receivables are due from two tribes, the
Tonto Apache Tribe and the Umatilla Tribe. 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
revenues. Management has no dispute with any Native American Tribe that would
place doubt on the full collectability of any of the receivables. The Company
attempts to take 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:
<TABLE>
<CAPTION>
Fiscal Year Ended June 30
-------------------------
1999 1998
------ ------
<S> <C> <C>
Muckleshoot Tribe - 14%
Tonto Apache 32% 28%
Umatilla 68% 58%
</TABLE>
The loss of one of these Tribes could have a material adverse effect on the
Company's financial condition.
F-34
<PAGE> 95
21. Risks and uncertainties:
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.
22. Fair value of financial instruments:
Effective June 30, 1996, the Company adopted Statement of Financial
Accounting Standards No. 107, Disclosure About Fair Value of Financial
Instruments which requires disclosing fair value to the extent practicable for
financial instruments which are recognized or unrecognized in the balance sheet.
The fair value of the financial instruments disclosed herein is not necessarily
representative of the amount that could be realized or settled, nor does the
fair value amount consider the tax consequences of realization or settlement.
In assessing the fair value of 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, and 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.
F-35
<PAGE> 96
23. 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:
<TABLE>
<CAPTION>
<S> <C>
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
=============
</TABLE>
There is no income tax effect on the extraordinary items due to the
cancellation of indebtedness as more fully described in Note 9.
F-36
<PAGE> 97
24. 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.
25. New authoritative pronouncements:
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. Initial 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.
F-37
<PAGE> 98
Index to Exhibits
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)
<PAGE> 99
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)
<PAGE> 100
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)
<PAGE> 101
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)
<PAGE> 102
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)
<PAGE> 103
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)
<PAGE> 104
10.130 First Amendment dated June 24, 1994, to the Cash Collateral
and Disbursement Agreement dated February 17, 1994, by and
among the Registrant, Crescent City Capital Development Corp.,
Capital Gaming International Casino Management Division, Inc.
(formerly British American Bingo, Inc.), First Trust National
Association and First National Bank of Commerce. (12)
10.131 Agreement to Purchase and Sell dated June 30, 1994, by and
between River City Joint Venture and The Alabama Great
Southern Railroad. (12)
10.132 Term Note by River City Joint Venture to New Orleans 2000
Partnership dated July 13, 1994. (13)
10.133 Assignment of Agreement and Sale dated July 13, 1994. (13)
10.134 Mortgage and Assignment of Leases and Rentals by River City
Joint Venture in favor of New Orleans 2000 Partnership dated
July 13, 1994. (13)
10.135 Amended and Restated partnership Agreement between Grand
Palais Riverboat, Inc. and Crescent City Capital Development
Corp. dated July 7, 1994. (13)
10.136 First Amendment dated June 1, 1994, to the Marketing Services
Agreement dated February 17, 1994, by and between the
Registrant and HFS Gaming Corp. (14)
10.137 Amendment effective as of October 1, 1994, to the Executive
Employment Agreement effective as of October 17, 1993, by and
between the Registrant and Clinton L. Pagano. (16)
10.139 Stock Option Agreement dated June 2, 1994, by and between
Registrant and William S. Papazian.
10.143 Stock Option Agreement dated August 24, 1994, by and between
Registrant and James F. Ahearn.
10.144 Letter Amendment to Warrant Agreements by and between
Registrant, Ladenberg, Thalmann & Company, Inc., and certain
affiliates, dated October 11, 1994 (without exhibits). (16)
10.145 Construction Agreement by and between Crescent City Capital
Development Corp., Grand Palais Riverboat, Inc., and Grimaldi
Construction, Inc., dated October 25, 1994 (without exhibits).
(17)
<PAGE> 105
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)
<PAGE> 106
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.
10.177 Employment Agreement dated as of December 1, 1998 between
Registrant and Michael W. Barozzi
10.178 Letter Agreement dated January 8, 1999 between Registrant and
Michael W. Barozzi
10.179 Employment Agreement dated as of December 1, 1998 between
Registrant and William S. Papazian
10.180 Letter Agreement dated as of January 8, 1999 between
Registrant and William S. Papazian
<PAGE> 107
11.0 Schedule of Computation of Earnings Per Share #
12.0 Computation of Ratio of Earnings to Fixed Charges #
27. Financial Data Schedule #
# 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.
<PAGE> 108
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.
Current Report on Form 8-K filed with the Securities and Exchange
Commission on December 18, 1998.
Current Report on Form 8-K filed with the Securities and Exchange
Commission on August 23, 1999.
Current Report on Form 8-K/A filed with the Securities and Exchange
Commission on August 25, 1999.
<PAGE> 1
EXHIBIT 10.177
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (this "Agreement"), dated as of December 1, 1998,
between Capital Gaming International, Inc. a New Jersey corporation (the
"Company"), and Michael W. Barozzi, an individual residing at 8223 Turtle Creek
Circle, Las Vegas, Nevada 89113 (the "Employee").
WHEREAS, the Employee is presently employed by the Company pursuant to that
certain Employment Agreement dated June 1, 1997, and any amendments thereto,
between the Company and the Employee (the "Prior Agreement"); and
WHEREAS, the Company and the Employee desire to terminate the Prior Agreement
and substitute this Agreement in its place: and
WHEREAS, as consideration, in part, for the Company entering into this
Agreement, the Employee has agreed to release and cause the release of the
Company and its affiliates from any and all obligations arising under the Prior
Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual covenants and
agreements herein contained, and intending to be legally bound hereby, the
Company and the Employee hereby agree that the Prior Agreement shall be, and it
hereby is, terminated and this Agreement is entered into effective as of
December 1, 1998 to read in its entirety as follows:
1. Release of the Prior Agreement. Employee, on behalf of himself and his
heirs, assigns, legal representatives, and agents, hereby fully and forever
releases, discharges, disclaims and renounces any and all claims, demands,
actions, causes of action and/or suits in law or equity now or hereafter
existing, whether known or unknown, relating to or arising from the Prior
Agreement, against the Company and its directors, officers, shareholders,
agents, employees, successors, assigns and legal representatives. Employee
hereby represents and warrants that he has not assigned or otherwise transferred
any claim, demand, action or cause of action released hereby. Employee
acknowledges that he has had the benefit of counsel of its own choice and has
been afforded an opportunity to review this Agreement with chosen counsel.
2. Employment. The Company agrees to continue the Employee in its employ,
and the Employee agrees to remain in the employ of the Company, for the period
set forth in Paragraph 3, in the position and with the duties and
responsibilities set forth in Paragraph 4, and upon the other terms and
conditions herein provided.
3. Term. The term of this Agreement (the "Employment Term" shall be
one-year, commencing on the date hereof, and shall be automatically renewed on
each day following the date hereof so that on any given day the unexpired
portion of the Employment Term shall be one
1
<PAGE> 2
year. The Employment Term shall continue to be renewed each day unless and until
written notice is given by either party to the other party, at which time the
employment term shall expire one year from the date such written notice is
received by the other party. Notwithstanding the foregoing, the Employee's
employment hereunder may be terminated earlier in accordance with the provisions
of Paragraph 6.
4. Position and Duties.
(a) During the Employment Term, the Employee shall serve as President and
Chief Operating Officer of the Company, reporting directly to the Chairman and
Board of Directors of the Company. In such capacity, the Employee shall perform
the duties of President and Chief Operating Officer, as set forth in the
Company's Bylaws, as they may be amended from time to time, and shall have such
other duties, functions, responsibilities, and authority commensurate with such
office as are from time to time delegated to the Employee by the Chairman or the
Board of Directors of the Company, provided that such duties, functions,
responsibilities, and authority are reasonable and customary for a person
serving as President and Chief Operating Officer of an enterprise comparable to
the Company.
(b) During the Employment Term, the Employee shall devote his full time,
skill, and attention and his best efforts during normal business hours to the
business and affairs of the Company and its subsidiaries and affiliates to the
extent necessary to discharge faithfully and efficiently the duties and
responsibilities delegated and assigned to the Employee herein or pursuant
hereto, except for usual, ordinary, and customary periods of vacation and
absence due to illness or other disability. It is understood that the Employee's
employment during the Employment Term shall be on an exclusive basis, except
that the Employee may, subject to the provisions of Paragraphs 9, 10 and 11
hereof, undertake, or continue to conduct, other business, civic or charitable
activities during the Employment 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 of Directors.
5. Compensation and Related Matters.
(a) Base Salary. During the Employment Term, the Company shall pay to the
Employee for his services hereunder a base salary ("Base Salary") at the rate of
not less than $275,000 per year, payable in installments in accordance with the
general payroll practices of the Company in effect at the time such payment is
made with respect to other senior executives of the Company, but in no event
less frequently than monthly, or as otherwise mutually agreed upon. The
Employee's Base Salary shall be subject to such increases (but not decreases) as
may be determined from time to time by the Board of Directors of the Company in
its sole discretion.
(b) Bonuses. In addition to Base Salary, the Employee shall be entitled to
receive during the Employment Term such bonuses or other discretionary
compensation payments, if
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any, as the Chairman of the Board of the Board of Directors of the Company may
determine to award him from time to time. Any such bonuses or other
discretionary compensation payments shall be payable to the Employee in the
manner specified by the Chairman of the Board of the Board of Directors at the
time any such bonus or other payment is awarded.
(c) Employee Benefits. During the Employment Term, the Employee shall be
entitled to participate in all employee benefit plans, programs, and
arrangements (including, without limitation, any pension, profit sharing,
savings, retirement, incentive compensation, bonus, stock option, stock
purchase, life insurance, medical, dental, accident, and disability plans,
programs, and arrangements) provided by the Company from time to time to its
senior executives generally, subject to and on a basis consistent with the
terms, conditions, and overall administration (including eligibility and vesting
requirements) of such plans, programs, and arrangements; provided, however, that
nothing contained in this Agreement shall require the Company at any time to
institute any, or any particular, employee benefit plan, program, or
arrangement. In the event of a conflict between the terms of any such plan,
program or arrangement and the terms of this Agreement, the terms of such plan,
program, or arrangement shall be controlling. Any disputes with respect to any
such plan, program, or arrangement shall be resolved in the manner specified in
such plan, program, or arrangement, if the same contains a provision governing
resolution of disputes. The Company reserves the right to modify, amend, or
terminate any such plan, program, or arrangement at any time in such manner as
it shall determine.
(d) Withholding. All compensation shall be subject to normal required tax
withholdings.
(e) Expenses for Professional Memberships. During the Employment Term, the
Employee shall be entitled to receive prompt reimbursement for all reasonable
expenses incurred by 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.
(f) Other Expenses. During the Employment Term, the Employee shall be
entitled to receive prompt reimbursement for all reasonable expenses incurred by
the Employee in performing his duties and responsibilities hereunder, in
accordance with the policies, practices, and procedures of the Company from time
to time in effect.
(g) Fringe Benefits. During the Employment Term, the Employee shall be
entitled to the fringe benefits customarily provided by the Company to its other
senior executives, in accordance with the policies, practices, and procedures of
the Company from time to time in effect.
(h) Vacations. During the Employment Term, the Employee shall be entitled
to reasonable periods of vacation, not to exceed four (4) weeks in each year,
with pay, and
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reasonable periods of sick leave with pay, commensurate with the Employee's
position. The Employee shall also be entitled to all paid holidays given by the
Company to its senior executives. The Employee agrees to utilize his vacation at
such time or times as are (i) consistent with the proper performance of his
duties and responsibilities hereunder and (ii) mutually convenient for the
Company and the Employee.
6. Termination of Employment.
(a) Death. The Employee's employment hereunder shall terminate
automatically upon his death.
(b) Complete Disability. The Company shall have the right to terminate
Employee's employment under this Agreement prior to the expiration of the
Employment Term upon the Complete Disability of the Employee as hereinafter
defined. The term "Complete Disability" as used in this Subparagraph shall mean
(i) the total inability of Employee, despite any reasonable accommodation
required by law, due to bodily injury or disease or any other physical or mental
incapacity, to perform the services provided for hereunder for a period of 120
days in the aggregate, within a period of 180 consecutive days during the term
of this Agreement, in addition to any statutorily required leave of absence, and
(ii) where such inability will, in the opinion of a qualified physician, be
permanent and continuous during the remainder of Employee's life. If the Company
determines in good faith that the Complete Disability of the Employee has
occurred during the Employment Term, the Company may notify the Employee of the
Company's intention to terminate the Employee's employment hereunder for such
Complete Disability. In such event, the Employee's employment hereunder shall
terminate effective on the 30th day following the date such Notice of
Termination (as defined below) is given to the Employee (the "Disability
Effective Date").
(c) Termination by Company. The Company may terminate the Employee's
employment hereunder for Cause (as defined below) or without Cause.
(i) For purposes of this Agreement, "Cause" shall mean any of the
following:
(A) conduct by the Employee that, in the good faith opinion of
the Board of Directors of the Company, is materially detrimental to
the Company or reflects unfavorably on the Company or the Employee to
such an extent that the Company's best interests reasonably require
the Employee's discharge;
(B) conduct by the Employee that constitutes fraud, dishonesty,
or a criminal act with respect to the Company;
(C) embezzlement of funds or misappropriation of other property
by the Employee from the Company;
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(D) conviction of the Employee of a felony or of any other crime
involving fraud, dishonesty, or moral turpitude;
(E) the willful and continued failure by the Employee to
substantially perform his duties hereunder (other than any such
failure resulting from illness of or injury to the Employee or the
Employee's physical or mental incapacity which do not rise to the
level of a "Complete Disability"), after demand for substantial
performance is delivered by the Company that specifically identifies
the manner in which the Company believes the Employee has not
substantially performed his duties and Employee fails to perform his
duties within thirty (30) days after receiving such demand;
(F) 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 other business of a subsidiary of the
Company within thirty (30) days (or if the Company in good faith
determines that such 30 day period is not feasible, within 120 days)
after the applicable deadline for obtaining or retaining such permit,
license or approval; or
(G) any other material breach by the Employee of any of the
provisions of this Agreement.
(ii) Any such termination shall be effective upon the Company's giving
a Notice of Termination (as defined below).
(d) Termination by Employee. The Employee may terminate his employment
hereunder at any time during the Employment Term for any reason.
(e) Termination by Employee for Good Reason. The Employee may terminate his
employment hereunder for Good Reason (as defined below) at any time during the
Employment Term following a Change in Control (as defined below).
(i) For purposes of this Agreement, "Good Reason" shall mean any of
the following (without the Employee's express written consent):
(A) (1) the assignment to the Employee by the Company of any
significant duties materially inconsistent with the Employee's
positions, duties, responsibilities, or status with the Company as in
effect immediately prior to a Change in Control (as defined below),
(2) any action by the Company following a Change in Control that
results in a substantial diminution in such positions, duties,
responsibilities, or status, (3) any change in the Employee's
reporting responsibilities, titles, or offices with the Company as in
effect immediately prior
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to a Change in Control, or (4) any removal of the Employee from or any
failure to reelect the Employee to any of such positions, except, in
any such case, (a) in connection with the termination of the
Employee's employment hereunder by the Company for Disability or Cause
or by the Employee other than for good reason, or (b) for an isolated,
insubstantial, and inadvertent action not taken in bad faith and which
is remedied by the Company promptly after receipt of notice thereof
given by the Employee;
(B) (1) a reduction by the Company of the Employee's Base Salary
as in effect on the date hereof or as increased from time to time
during the Employment Term or (2) a failure by the Company to increase
(within 12 months of the Employee's last increase in Base Salary) the
Employee's Base Salary after a Change in Control in an amount which at
least equals, on a percentage basis, the average percentage increase
in base salary for all senior executives of the Company effected in
the preceding twelve (12) months;
(C) (1) any failure by the Company to continue in effect any
benefit plan, program, or arrangement (including, without limitation,
the Company's life, business travel, disability, medical, dental and
hospitalization insurance plans) in which the Employee is
participating at the time of a Change in Control, or a plan, program,
or arrangement providing the Employee with substantially equivalent
benefits thereunder (collectively, "Benefit Plans"), (2) any action by
the Company that materially and adversely affects the Employee's
participation in or materially reduces the Employee's benefits under
any such Benefit Plan, or (3) any action by the Company that deprives
the Employee of any material fringe benefit enjoyed by the Employee at
the time of a Change in Control;
(D) any material failure by the Company to comply with any
material provision of this Agreement, other than an isolated,
insubstantial, and inadvertent failure not occurring in bad faith and
which is remedied by the Company promptly after receipt of
notice-thereof given by the Employee.
(E) any failure by the Company to obtain the assumption of this
Agreement by any successor or assign of the Company; or
(F) any purported termination of the Employee's employment
hereunder otherwise than as expressly permitted by this Agreement, and
for purposes of this Agreement, no such purported termination shall be
effective.
(ii) For purposes of this Agreement, a "Change in Control" shall mean:
(A) the acquisition by any individual, entity, or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange
Act of 1934,
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as amended (the "Exchange Act")) (a "Person") of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act)
of 20% or more of either (1) the then outstanding shares of common
stock of the Company (the "Outstanding Company Common Stock") or (2)
the combined voting power of the then outstanding voting securities of
the Company entitled to vote generally in the election of directors
(the "Outstanding Company Voting Securities"); provided, however, that
the following acquisitions shall not constitute a Change in Control:
(1) any acquisition directly from the Company (excluding an
acquisition by virtue of the exercise of a conversion privilege), (2)
any acquisition by the Company, (3) any acquisition by any employee
benefit plan (or related trust) sponsored or maintained by the Company
or any corporation controlled by the Company, or (4) any acquisition
by any corporation pursuant to a reorganization, merger, or
consolidation, if, following such reorganization, merger, or
consolidation, the conditions described in clauses (1), (2) and (3) of
subparagraph (C) of this Paragraph 6 (e)(ii) are satisfied; or
(B) individuals who, as of the date of this Agreement, constitute
the Board of Directors of the Company (the "Incumbent Board") cease
for any reason to constitute at least a majority of the Board of
Directors of the Company; provided, however, that any individual
becoming a director subsequent to the date hereof whose election, or
nomination for election by the Company's shareholders, was approved by
a vote of a majority of the directors then comprising the Incumbent
Board shall be considered as though such individual were a member of
the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a result of
either an actual or threatened election contest (as such terms are
used in Rule 14a-11 of Regulation 14A promulgated under the Exchange
Act) or other actual or threatened solicitation of proxies or consents
by or on behalf of a Person other than the Board of Directors of the
Company; or
(C) approval by the shareholders of the Company of a
reorganization, merger, or consolidation, in each case, unless,
following such reorganization, merger, or consolidation, (1) more than
60% of, respectively, the then outstanding shares of common stock of
the corporation resulting from such reorganization, merger, or
consolidation and the combined voting power of the then outstanding
voting securities of such corporation entitled to vote generally in
the election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities immediately prior to such reorganization, merger, or
consolidation in substantially the same proportions as their
ownership, immediately prior to such reorganization, merger, or
consolidation, of the Outstanding Company Common Stock and Outstanding
Company Voting Securities, as the case may be, (2) no
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<PAGE> 8
Person (excluding the Company, any employee benefit plan (or related
trust) of the Company or such corporation resulting from such
reorganization, merger, or consolidation, and any Person beneficially
owning, immediately prior to such reorganization, merger, or
consolidation, directly or indirectly, 20% or more of the Outstanding
Company Common Stock or Outstanding Company Voting Securities, as the
case may be) beneficially owns, directly or indirectly, 20% or more
of, respectively, the then outstanding shares of common stock of the
corporation resulting from such reorganization, merger, or
consolidation or the combined voting power of the then outstanding
voting securities of such corporation entitled to vote generally in
the election of directors, and (3) a majority of the members of the
board of directors of the corporation resulting from such
reorganization, merger, or consolidation were members of the Incumbent
Board at the time of the execution of the initial agreement providing
for such reorganization, merger, or consolidation; or
(D) approval by the shareholders of the Company of (1) a complete
liquidation or dissolution of the Company or (2) the sale or other
disposition of all or substantially all the assets of the Company,
other than to a corporation, with respect to which following such sale
or other disposition, (a) more than 60% of, respectively, the then
outstanding shares of common stock of such corporation and the
combined voting power of the then outstanding voting securities of
such corporation entitled to vote generally in the election of
directors is then beneficially owned, directly or indirectly, by all
or substantially all the individuals and entities who were the
beneficial owners, respectively, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities immediately prior to
such sale or other disposition in substantially the same proportion as
their ownership, immediately prior to such sale or other disposition,
of the Outstanding Company Common Stock and Outstanding Company Voting
Securities, as the case may be, (b) no Person (excluding the Company,
any employee benefit plan (or related trust) of the Company or such
corporation, and any Person beneficially owning, immediately prior
to such sale or other disposition, directly or indirectly, 20% or more
of the Outstanding Company Common Stock or Outstanding Company Voting
Securities, as the case may be) beneficially owns, directly or
indirectly, 20% or more of, respectively, the then outstanding shares
of common stock of such corporation or the combined voting power of
the then outstanding voting securities of such corporation entitled to
vote generally in the election of directors, and (c) a majority of the
members of the board of directors of such corporation were members of
the Incumbent Board at the time of the execution of the initial
agreement or action of the Board of Directors of the Company providing
for such sale or other disposition of assets of the Company.
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(f) Notice of Termination. Any termination of the Employee's employment
hereunder by the Company or by the Employee (other than a termination pursuant
to Paragraph 6(a)) shall be communicated by a Notice of Termination (as defined
below) to the other party hereto. For purposes of this Agreement, a "Notice of
Termination" shall mean a written notice which (i) indicates the specific
termination provision in this Agreement relied upon, (ii) in the case of a
termination for Disability, Cause or Good Reason, sets forth in reasonable
detail the facts and circumstances claimed to provide a basis for termination of
the Employee's employment under the provision so indicated, and (iii) specifies
the Date of Termination (as defined in Paragraph 6(g) below). The failure by the
Company or the Employee to set forth in the Notice of Termination any fact or
circumstance which contributes to a showing of Disability, Cause or Good Reason
shall not waive any right of the Company or the Employee hereunder or preclude
the Company or the Employee from asserting such fact or circumstance in
enforcing the Company's or the Employee's rights hereunder.
(g) Date of Termination. For purposes of this Agreement, "Date of
Termination" shall mean the effective date of termination of the Employee's
employment hereunder, which date shall be (i) if the Employee's employment is
terminated by his death, the date of his death, (ii) if the Employee's
employment is terminated because of his Disability, the Disability Effective
Date, (iii) if the Employee's employment is terminated by the Company for Cause
or by the Employee for Good Reason, the date provided for in the Notice of
Termination, which date shall in no event be earlier than the date such notice
is given.
(h) Resignation. In the event of termination of the Employee's employment
hereunder (for any reason other than the death of the Employee), the Employee
agrees that if at such time he is a director or officer of the Company or any of
its subsidiaries, he will promptly deliver to the Company his written
resignation from all such positions, such resignation to be effective as of the
Date of Termination.
7. Obligations of Company Upon Termination of Employment.
(a) Death. If the Employee's employment hereunder is terminated by
reason of the Employee's death, the Company shall pay to the Employee's estate,
in a lump sum in cash within thirty (30) days after the Date of Termination, the
Employee's Base Salary through the Date of Termination at the rate in effect
hereunder at the time of the Employee's death, to the extent not theretofore
paid.
(b) Complete Disability. If the Employee's employment hereunder is
terminated by reason of the Employee's Complete Disability, the Company shall
pay to the Employee, in a lump sum in cash within thirty (30) days after the
Date of Termination, the Employee's Base Salary through the Date of Termination
at the rate in effect hereunder as of the date of the Notice of Termination, to
the extent not theretofore paid.
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(c) Termination for Cause. If the Employee's employment hereunder is
terminated for Cause, the Company shall pay to the Employee, in a lump sum in
cash within 30 days after the Date of Termination, the Employee's Base Salary
through the Date of Termination at the rate in effect hereunder as of the date
of the Notice of Termination, to the extent not theretofore paid, and,
thereafter, the Company shall have no further obligations to the Employee under
this Agreement, except as provided in Paragraph 14(c).
(d) Termination by Employee Other Than for Good Reason. If the Employee's
employment hereunder is terminated by the Employee other than for Good Reason,
the Company shall pay to the Employee, in a lump sum in cash within thirty (30)
days after the Date of Termination, the Employee's Base Salary through the Date
of Termination, to the extent not theretofore paid.
(e) Termination by Company Other Than for Cause or Termination by
Employee for Good Reason. If the Employee's employment hereunder (A) is
terminated by the Company other than (1) for Cause, (2) for Disability, or (3)
pursuant to the provisions of Paragraph 3 or (B) is terminated by the Employee
for Good Reason, then, in either case, the Company shall pay to the Employee, in
a lump sum in cash within thirty (30) days after the Date of Termination (except
for the amounts provided for in clause (ii) below, which shall be payable in
installments as therein provided), the aggregate of the following amounts:
(i) the Employee's Base Salary through the Date of Termination, at the
rate in effect hereunder at the time the Notice of Termination is given, to
the extent not theretofore paid; and
(ii) in lieu of any further Base Salary payments to the Employee for
periods subsequent to the Date of Termination, as severance pay, an amount
equal to the Employee's annual Base Salary at the rate in effect hereunder
at the time the Notice of Termination is given, for one year commencing on
the Date of Termination (the "Severance Package"), such payment to be made
in substantially equal semi-monthly installments on the fifteenth and last
days of each month commencing with the month in which the Date of
Termination occurs and continuing for twenty-four consecutive semi-monthly
payment dates (including the first such date as aforesaid); provided,
however, that such severance payment shall be reduced by the present value
(determined as provided in Section 280G(d)(4) of the Internal Revenue Code
of 1986, as amended) of any other amount of severance relating to salary or
bonus continuation to be received by the Employee upon termination of his
employment under any severance plan, program, or arrangement of the
Company;
(f) Sole Remedy. The right to receive the payments and other benefits
provided for under this Paragraph 7 shall be the Employee's sole and exclusive
remedy for the termination of his employment hereunder and shall be in lieu of
any claim that he might otherwise have against the Company arising from such
termination.
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8. Compliance With Other Agreements.
(a) The Company represents and warrants to the Employee that the execution,
delivery, and performance by the Company of this agreement have been duly
authorized by all necessary corporate action of the Company and do not and will
not conflict with or result in a violation of any provision of, or constitute a
default under, any contract, agreement, instrument, or obligation to which the
Company is a party or by which it is bound.
(b) The Employee represents and warrants to the Company that the execution,
delivery, and performance by the Employee of this Agreement do not and will not
conflict with or result in a violation of any provision of, or constitute a
default under, any contract, agreement instrument, or obligation to which the
Employee is a party or by which he is bound. In addition, the Employee
represents to the Company that he has read and is familiar with the Company's
statement of corporate policies and procedures, and the Employee agrees to
abide by and carry out during the Employment Term all such policies and
procedures that are applicable to his employment by the Company, as they may be
modified or amended from time to time.
9. Noncompetition and Related Matters.
(a) The Employee acknowledges that during the Employment Term the Company
has agreed to provide to him, and he shall receive from the Company, special
training and knowledge. The Employee acknowledges that included in the special
knowledge received is the confidential information identified in Paragraph 10.
The Employee acknowledges that this confidential information is valuable to the
Company and, therefore, its protection and maintenance constitutes a legitimate
interest to be protected by the Company by the enforcement of this covenant not
to compete. Therefore, the Employee agrees that, during the Employment Term and
for a period commencing upon the termination of the Employee's employment
hereunder and ending eighteen months after such termination, unless otherwise
extended pursuant to the terms of this Paragraph 9, the Employee will not,
directly or indirectly, either as an employee, employer, consultant, agent,
principal, partner, shareholder, corporate officer, director, or in any other
individual or representative capacity, engage or participate in any business or
activity that is engaged in a business relationship of any nature whatsoever
with the Mazatzal Casino, the Wildhorse Gaming Resort, the Pueblo of Laguana
Casino, or any gaming facility hereafter developed and/or managed by the Company
or its subsidiaries for the Rhode Island Project Indian Tribe or any other
tribal or non-tribal owner during the Employment Term (collectively, the
"Capital Customers"). The Employee represents to the Company that the
enforcement of the restriction contained in this Paragraph 9(a) would not be
unduly burdensome to the Employee and that in order to induce the Company to
employ the Employee the Employee further represents and acknowledges that the
Employee is willing and able to compete in other geographical areas not
prohibited by this Paragraph 9(a).
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(b) The Employee agrees that a breach or violation of this covenant not to
compete by the Employee shall entitle the Company, as a matter of right, to an
injunction issued by any court of competent jurisdiction, restraining any
further or continued breach or violation of this covenant. Such right to an
injunction shall be cumulative and in addition to, and not in lieu of, any other
remedies to which the Company may show itself justly entitled. Further, during
any period in which the Employee is in breach of this covenant not to compete,
the time period of this covenant shall be extended for an amount of time that
the Employee is in breach hereof.
(c) In addition to the restrictions set forth in Paragraph 9(a), the
Employee shall not, for a period commencing upon the termination of the
Employee's employment hereunder and ending eighteen months after such
termination, unless otherwise extended pursuant to the terms of this Paragraph
9, either directly or indirectly, (i) make known to any person or entity the
names and addresses of any of the Capital Customers of the Company or contacts
of the Company within the industry or any other information pertaining to such
customers or contacts, (ii) call on, solicit, or take away, or attempt to call
on, solicit, or take away, any of the Capital Customers of the Company on whom
the Employee called or with whom the Employee became acquainted during the
Employee's association with the Company, whether for the Employee or for any
other person or entity, or (iii) recruit or hire or attempt to recruit or hire,
directly or by assisting others, any other employee of the Company or any of its
affiliates.
(d) The representations and covenants contained in this Paragraph 9 on the
part of the Employee will be construed as ancillary to and independent of any
other provision of this Agreement, and the existence of any claim or cause of
action of the Employee against the Company or any officer, director, or
shareholder of the Company, whether predicated on this Agreement or otherwise,
shall not constitute a defense to the enforcement by the Company of the
covenants of the Employee contained in this Paragraph 9. In addition, the
provisions of this Paragraph 9 shall continue to be binding upon the Employee in
accordance with their terms, notwithstanding the termination of the Employee's
employment hereunder for any reason.
(e) If the Employee violates any covenant contained in this Paragraph 9 and
the Company brings legal action for injunctive or other relief, the Company
shall not, as a result of the time involved in obtaining the relief, be deprived
of the benefit of the full period of any such covenant. Accordingly, the
covenants of the Employee contained in this Paragraph 9 shall be deemed to have
durations as specified above, which periods shall commence upon the later of (i)
the termination of the Employee's employment hereunder and (ii) the date of
entry by a court of competent jurisdiction of a final judgment enforcing the
covenants of the Employee in this Paragraph 9.
(f) The parties to this Agreement agree that the limitations contained in
this Paragraph 9 with respect to time, geographical area, and scope of activity
are reasonable. However, if any court shall determine that the time,
geographical area, or scope of activity of any restriction contained in this
Paragraph 9 is unenforceable, it is the intention of the parties that
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such restrictive covenant set forth herein shall not thereby be terminated but
shall be deemed amended to the extent required to render it valid and
enforceable.
(g) Nothing contained in this Paragraph 9 shall be construed to prohibit
the Employee from investing in stock or other securities listed on a national
securities exchange or actively traded in the over-the-counter market of any
corporation or other entity engaged in a business or activity competitive with
the business of the Company or any of its subsidiaries, provided that the
Employee and the members of his immediate family shall not, directly or
indirectly, hold more than a total of one percent (1%) of all such shares of
stock or other securities issued and outstanding, and provided further that the
Employee shall not perform any services on behalf of, or in the operation of the
affairs of, such corporation or other entity.
(h) The restrictions contained in Paragraph 9(a) shall not apply with
respect to any period or periods following the Employment Term if the Employee's
employment hereunder is terminated by the Company upon a Complete Disability of
the Employee.
10. Confidentiality. The Employee recognizes and acknowledges that the
Company's trade secrets and other confidential or proprietary information, as
they may exist from time to time, are valuable, special, and unique assets of
the Company's business, access to and knowledge of which are essential to the
performance of the Employee's duties hereunder. The Employee confirms that all
such trade secrets and other information constitute the exclusive property of
the Company. During the Employment Term and for a period of two years following
the termination of the Employment Term/thereafter without limitation of time,
the Employee shall hold in strict confidence and shall not, directly or
indirectly, disclose or reveal to any person, or use for his own personal
benefit or for the benefit of anyone else, any trade secrets, confidential
dealings, or other confidential or proprietary information of any kind, nature,
or description (whether or not acquired, learned, obtained, or developed by the
Employee alone or in conjunction with others) belonging to or concerning the
Company or any of its subsidiaries, or any of their customers or clients or
others with whom they now or hereafter have a business relationship, except (i)
with the prior written consent of the Company duly authorized by its Board of
Directors, (ii) in the course of the proper performance of the Employee's duties
hereunder, (iii) for information (x) that becomes generally available to the
public other than as a result of unauthorized disclosure by the Employee or his
affiliates or (y) that becomes available to the Employee subsequent to the
termination of his employment hereunder and on a nonconfidential basis from a
source other than the Company or its subsidiaries who is not bound by a duty of
confidentiality, or other contractual, legal, or fiduciary obligation, to the
Company or such customers, clients, or others having a business relationship, or
(iv) as required by applicable law or legal process. The provisions of this
Paragraph 10 shall continue in effect notwithstanding termination of the
Employee's employment hereunder for any reason.
11. Business Records. Given the secretive and competitive environment in
which the Company does business and the fiduciary relationship that the Employee
will have with the Company hereunder, the Employee agrees to promptly deliver to
the Company, upon termination
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of his employment hereunder, or at any other time when the Company so requests,
all memoranda, notes, records, drawings, manuals, and other documents (and all
copies thereof and therefrom) in any way relating to the business or affairs of
the Company or any of its subsidiaries or any of their clients, whether made or
compiled by the Employee or furnished to him by the Company or any of its
employees, customers, clients, consultants, or agents, which the Employee may
then possess or have under his control. The Employee confirms that all such
memoranda, notes, records, drawings, manuals, and other documents (and all
copies thereof and therefrom) constitute the exclusive property of the Company.
The obligation of confidentiality set forth in Paragraph 10 shall continue
notwithstanding the Employee's delivery of any such documents to the Company.
Notwithstanding the foregoing provisions of this Paragraph 11 or any other
provision of this Agreement, the Employee shall be entitled to retain any
written materials received by the Employee in the capacity as a shareholder of
the Company or the Company's affiliates. The provisions of this Paragraph 11
shall continue in effect notwithstanding termination of the Employee's
employment hereunder for any reason.
12. Indemnify.
(a) Subject only to the exclusions set forth in Paragraph 12(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, or any
applicable state law, 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 occurred 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, 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 12 (including, without limitation, payments in indemnity for such
taxes).
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<PAGE> 15
(b) Notwithstanding the foregoing, no indemnity pursuant to this Paragraph
12 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 which may be purchased and maintained by
the Company.
(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 (A) were in breach of his duty of loyalty to the Company or
its shareholders, (B) were not in good faith or involved a knowing
violation of law or (C) 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
15
<PAGE> 16
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 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) 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.
13. Mitigation. In the event of and following the termination of the
Employee's employment hereunder, the Employee shall be required to endeavor to
mitigate in accordance with applicable law his damages and the payments provided
for under this Agreement by seeking employment elsewhere or becoming
self-employed, but shall not be required to accept (i) a position for which he
is not suited or that would derogate from his standing in the position he held
with the Company or (ii) a position in a location, other than that of his
principal residence or its environs, that is not convenient for him or (iii) a
position that would constitute a violation by him of the provisions of Paragraph
9. To the extent that the Employee shall receive compensation, benefits, and
service credit for benefits from other employment secured pursuant to the
provisions of the immediately preceding sentence, the payments to be made and
the benefits and service credit for benefits to be provided by the Company
hereunder shall be correspondingly reduced. Such reduction shall, in the event
of any question or disagreement, be determined jointly by the firm of certified
public accountants regularly employed by the Company and a firm of certified
public accountants selected by the Employee, in each case upon the advice of
actuaries to the extent the certified public accountants consider necessary,
and, in the event such accountants are unable to agree on a resolution of the
matter, such reduction shall be determined by an independent firm of certified
public accountants selected jointly by both firms of accountants. The fees and
expenses of the Company's accountants shall be borne by the Company, the fees
and expenses of the Employee's accountants shall be borne by the Employee, and
the fees and expenses of any actuaries or third firm of accountants shall be
borne equally by the Company and the Employee.
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<PAGE> 17
14. Miscellaneous.
(a) Set Off. The Employee hereby grants to the Company the right to set off
against, and authorizes the Company to deduct from, any payments to the
Employee, or to his heirs, legal representatives, or successors, provided for in
this Agreement, any amounts which may be due and owing by the Employee to the
Company, whether arising hereunder or otherwise.
(b) Jurisdiction and Venue. In respect of any action or proceeding arising
out of or relating to this Agreement, each of the parties hereto consents to the
jurisdiction and venue of any federal or state court located within Maricopa
County, Arizona, waives personal service of any and all process upon it or him,
consents that all such service of process may be made by first class registered
or certified mail, postage prepaid, return receipt requested, directed to it or
him at the address specified in Subparagraph (d) of this Paragraph 14, agrees
that service so made shall be deemed to be completed upon actual receipt
thereof, and waives any objection to jurisdiction or venue of, and waives any
motion to transfer venue from, any of the aforesaid courts.
(c) Survival. Neither the expiration or the termination of the term of the
Employee's employment hereunder shall impair the rights or obligations of either
party hereto which shall have accrued hereunder prior to such expiration or
termination. The provisions of Paragraphs 9, 10, 11 and 12, and the rights and
obligations of the parties thereunder, shall survive the expiration or
termination of the term of the Employee's employment hereunder.
(d) Notices. All notices and other communications required or permitted to
be given hereunder by either party hereto shall be in writing and shall be given
by hand delivery or by first class registered or certified United States mail,
postage prepaid, return receipt requested, to the party for which intended at
the following addresses (or at such other addresses as shall be specified by the
parties by like notice):
If to the Company, at:
2701 E. Camelback Road, Suite 484
Phoenix, Arizona 85016
Attention: William S. Papazian, Executive Vice President
and General Counsel
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with a copy to:
Charles Brewer, Chairman
Southmark Corporation
2711 LBJ Freeway, Suite 950
Dallas, Texas 75234
If to the Employee, at:
8223 Turtle Creek Circle
Las Vegas, Nevada 89113
with a copy to:
All such notices and other communications shall be effective only upon receipt
by the addressee.
(e) Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto concerning the subject matter hereof and supersedes
all prior agreements and understandings, both written and oral, including the
Prior Agreement, between the parties with respect to such subject matter.
(f) Binding Effect; Assignment; No Third Party Benefit. This Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective heirs, legal representatives, successors, and assigns; provided,
however, that the duties and responsibilities of the Employee hereunder may not
be assumed by, or delegated to, any other person. Nothing in this Agreement,
express or implied, is intended to or shall confer upon any person other than
the parties hereto, and their respective heirs, legal representatives,
successors, and permitted assigns, any rights, benefits, or remedies of any
nature whatsoever under or by reason of this Agreement.
(g) Amendment. This Agreement may not be modified or amended in any respect
except by an instrument in writing signed by the party against whom such
modification or amendment is sought to be enforced.
(h) Waiver. Any term or condition of this Agreement may be waived at any
time by the party hereto which is entitled to have the benefit thereof, but such
waiver shall only be effective if evidenced by a writing signed by such party,
and a waiver on one occasion shall not be deemed to be a waiver of the same or
any other type of breach
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<PAGE> 19
on a future occasion. No failure or delay by a party hereto in exercising any
right or power hereunder shall operate as a waiver thereof nor shall any single
or partial exercise thereof preclude any other or further exercise thereof or
the exercise of any other right or power.
(i) Authority. No person, other than pursuant to a resolution of the Board
of Directors of the Company or a committee thereof, shall have authority on
behalf of the Company to agree to modify, amend, or waive any provision of this
Agreement or anything in reference thereto.
(j) Severability. If any provision of this Agreement is held to be
unenforceable, (a) this Agreement shall be considered divisible, (b) such
provision shall be deemed inoperative to the extent it is deemed unenforceable,
and (c) in all other respects this Agreement shall remain in full force and
effect; provided, however, that if any such provision may be made enforceable by
limitation thereof, then such provision shall be deemed to be so limited and
shall be enforceable to the maximum extent permitted by applicable law.
(k) Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Arizona, without regard to
the principles of conflicts of laws thereof.
(1) Descriptive Headings. The descriptive headings herein are inserted for
convenience of reference only, do not constitute a part of this Agreement, and
shall not affect in any manner the meaning or interpretation of this Agreement.
(m) References. All references in this Agreement to Paragraphs,
subparagraphs, and other subdivisions refer to the Paragraphs, subparagraphs,
and other subdivisions of this Agreement unless expressly provided otherwise.
The words "this Agreement", "herein", "hereof," "hereby," "hereunder," and words
of similar import refer to this Agreement as a whole and not to any particular
subdivision unless expressly so limited. Whenever the words "include",
"includes," and "including" are used in this Agreement, such words shall be
deemed to be followed by the words "without limitation." Words in the singular
form shall be construed to include the plural and vice versa, unless the context
otherwise requires. Wherever any terms of the masculine gender are used in
reference to the Employee in this Agreement, such terms shall be deemed changed
to the corresponding terms of the feminine gender if the Employee is a female.
(n) Counterparts. This Agreement may be executed by the parties hereto in
any number of counterparts, each of which shall be deemed an original, but all
of which shall constitute one and the same agreement.
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<PAGE> 20
(o) Drafter. The parties further acknowledge that they have, through their
respective counsel, participated in the preparation of this Agreement, and it is
understood that no provision of this Agreement shall be construed against any of
the parties or their attorneys in the preparation and execution of this
Agreement.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on
its behalf by its duly authorized officer, and the Employee has executed this
Agreement, as of the date first set forth above.
CAPITAL GAMING INTERNATIONAL, INC.
By: /s/ Charles B. Brewer
-----------------------------------------
Name: Charles B. Brewer
Title: Chairman
EMPLOYEE
/s/ Michael W. Barozzi
--------------------------------------------
Michael W. Barozzi
20
<PAGE> 1
Exhibit 10.178
January 8, 1999
Michael W. Barozzi, President and Chief Operating Officer
8223 Turtle Creek Circle
Las Vegas, NV 89113
RE: Employment Agreement ("Employment Agreement"), dated as of December 1, 1998,
between Capital Gaming International, Inc. (the "Company"), and Michael W.
Barozzi ("Employee")
Dear Mr. Barozzi:
This letter agreement ("Letter Agreement") is made and effective as of
January 1, 1999 and memorializes the supplementary agreements reached between
the Company and Employee with respect to the Employment Agreement. All terms not
otherwise defined herein shall have the meaning ascribed to such terms in the
Employment Agreement.
1. Location of Services to be Performed.
The Company acknowledges that Employee currently resides and works in
Las Vegas, NV. The Company agrees that Employee shall not be required as
a condition of his continued employment to relocate from the Las Vegas,
NV area or to regularly report to an office of the Company on a daily
basis which is located outside such area as a condition to continued
employment.
2. Senior Secured Notes.
Section 6.4 of the Company's First Amended and Modified Plan of
Reorganization provides that key officers would receive a confirmation
payment which included New Secured Notes. The Company and Employee
hereby mutually agree that the Company shall forthwith cause U.S. Bank
Trust National Association as Indenture Trustee to issue $125,000 in New
Secured Notes in the name of Employee as an incentive for continued
employment with the Company ("Employee Notes"), to be held in escrow and
distributed as follows:
<PAGE> 2
Michael Barozzi
Page 2.
a. The Employee Notes will be forwarded to Charles B. Brewer, c/o Southmark
Corporation, 2711 LBJ Freeway, Suite 950, Dallas, TX 75234 who will hold
them in escrow and shall act as Escrow Agent ("Escrow Agent") pursuant
to this Letter Agreement. The Escrow Agent shall not be liable for any
action taken or omitted by him in good faith and believed by him to be
authorized hereby or within the rights or powers conferred upon him
hereunder, or in accordance with advice of counsel of his choosing, and
shall not be liable for any mistake of fact or error of judgment.
b. Employee shall not be entitled to physical distribution of the Employee
Notes or be vested as to principal until May 15, 2000 at which time the
Escrow Agent shall deliver the Employee Notes to Employee, or as
directed by Employee in writing, together with any payments of principal
which the Company has paid with respect to such Employee Notes. Any such
payments of principal (if any) shall be maintained in a segregated,
interest bearing account. If Employee is terminated prior to May 15,
2000 for Cause, or if Employee has voluntarily left the employ of the
Company prior to May 15, 2000 other than for Good Reason (each a
"Triggering Event"), the Employee will be deemed to have forfeited his
rights to receive the Employee Notes and any principal or future
interest payments. Upon two (2) weeks written notice to Employee after a
Triggering Event, Escrow Agent shall deliver the Employee Notes and all
other cash in escrow to the Company.
c. Any and all past and future interest payments on the Employee Notes will
be deemed earned by Employee as such interest payments are made
generally by the Company (November 15 and May 15 of each year commencing
November 15, 1997) and the Company will instruct U.S. Bank Trust
National Association as Indenture Trustee to forthwith make such
distribution of interest directly to Employee with respect to the
November 15, 1997, May 15, 1998 and November 15, 1998 interest payments.
d. In exchange for the agreements contained herein, Employee hereby
releases and forever discharges the Company for any claim to a
distribution of New Secured Notes pursuant to Section 6.4 of the First
Amended and Modified Plan of Reorganization.
3. New Common Stock.
Section 6.4 of the Company's First Amended and Modified Plan of
Reorganization provides that the Company shall distribute to key officers a
total of 10.0% (or 200,000) shares) of the issued and outstanding New Common
Stock of the Company (the "Key Officer Distribution") to vest as follows:
3.34% of the issued and outstanding shares of New Common Stock on the
effective date (May 29, 1997), and 3.33% of the then issued and outstanding
shares of New Common Stock on each of the first and second year
anniversaries of the effective date. The Company hereby agrees that
<PAGE> 3
Michael Barozzi
Page 3.
Employee, shall be entitled to receive 50% of the Key Officer Distribution
such that Employee shall receive forthwith 66,667 shares of the issued and
outstanding shares of New Common Stock (representing the May 29, 1997 and
May 29, 1998 vested shares), with the remaining 33,333 shares of the issued
and outstanding shares of New Common Stock to be distributed to Employee on
May 29, 1999.
4. This Letter Agreement may not be modified or amended in any respect except
by an instrument in writing signed by the party against whom such
modification or amendment is sought to be enforced.
Sincerely,
/s/ Charles B. Brewer
------------------------------
Charles B. Brewer
Chairman
ACCEPTED AND AGREED
/s/ Michael W. Barozzi
- -----------------------------
Michael W. Barozzi
Escrow Agent
/s/ Charles B. Brewer
- -----------------------------
Charles B. Brewer
<PAGE> 1
Exhibit 10.179
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (this "Agreement"), dated as of December 1, 1998,
between Capital Gaming International, Inc., a New Jersey corporation (the
"Company"), and William S. Papazian, an individual residing at 4901 East Calle
del Medio, Phoenix, Arizona 85018 (the "Employee").
WHEREAS, the Employee is presently employed by the Company pursuant to that
certain Amended and Restated Employment Agreement dated May 17, 1996, as amended
by Amendment No. 1 thereto dated May 28, 1997, and any subsequent amendments
thereto, between the Company and the Employee (the "Prior Agreement"); and
WHEREAS, the Company and the Employee desire to terminate the Prior
Agreement and substitute this Agreement in its place; and
WHEREAS, as consideration, in part, for the Company entering into this
Agreement, the Employee has agreed to release and cause the release of the
Company and its affiliates from any and all obligations arising under the Prior
Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby, the
Company and the Employee hereby agree that the Prior Agreement shall be, and it
hereby is, terminated and this Agreement is entered into effective as of
December 1, 1998 to read in its entirety as follows:
1. Release of the Prior Agreement. Employee, on behalf of himself and his
heirs, assigns, legal representatives, and agents, hereby fully and forever
releases, discharges, disclaims and renounces any and all claims, demands,
actions, causes of action and/or suits in law or equity now or hereafter
existing, whether known or unknown, relating to or arising from the Prior
Agreement, against the Company and its directors, officers, shareholders,
agents, employees, successors, assigns and legal representatives. Employee
hereby represents and warrants that he has not assigned or otherwise transferred
any claim, demand, action or cause of action released hereby. Employee
acknowledges that he has had the benefit of counsel of its own choice and has
been afforded an opportunity to review this Agreement with chosen counsel.
2. Employment. The Company agrees to continue the Employee in its employ,
and the Employee agrees to remain in the employ of the Company, for the period
set forth in Paragraph 3, in the position and with the duties and
responsibilities set forth in Paragraph 4, and upon the other terms and
conditions herein provided.
3. Term. The term of this Agreement (the "Employment Term") shall be
one-year, commencing on the date hereof, and shall be automatically renewed on
each day following the
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<PAGE> 2
date hereof so that on any given day the unexpired portion of the Employment
Term shall be one year. The Employment Term shall continue to be renewed each
day unless and until written notice is given by either party to the other party,
at which time the Employment Term shall expire one year from the date such
written notice is received by the other party. Notwithstanding the foregoing,
the Employee's employment hereunder may be terminated earlier in accordance with
the provisions of Paragraph 6.
4. Position and Duties.
(a) During the Employment Term, the Employee shall serve as Executive Vice
President and General Counsel of the Company, reporting directly to the Chief
Operating Officer and Board of Directors of the Company. In such capacity, the
Employee shall perform the duties of Executive Vice President and General
Counsel, as set forth in the Company's Bylaws, as they may be amended from time
to time, and shall have such other duties, functions, responsibilities, and
authority commensurate with such office as are from time to time delegated to
the Employee by the Chief Operating Officer or the Board of Directors of the
Company, provided that such duties, functions, responsibilities, and authority
are reasonable and customary for a person serving as Executive Vice President
and General Counsel of an enterprise comparable to the Company.
(b) During the Employment Term, the Employee shall devote his full time,
skill, and attention and his best efforts during normal business hours to the
business and affairs of the Company and its subsidiaries and affiliates to the
extent necessary to discharge faithfully and efficiently the duties and
responsibilities delegated and assigned to the Employee herein or pursuant
hereto, except for usual, ordinary, and customary periods of vacation and
absence due to illness or other disability. It is understood that the Employee's
employment during the Employment Term shall be on an exclusive basis, except
that the Employee may, subject to the provisions of Paragraphs 9, 10 and 11
hereof, undertake, or continue to conduct, other business, civic or charitable
activities during the Employment 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 of Directors.
5. Compensation and Related Matters.
(a) Base Salary. During the Employment Term, the Company shall pay to the
Employee for his services hereunder a base salary ("Base Salary") at the rate of
not less than $275,000 per year, payable in installments in accordance with the
general payroll practices of the Company in effect at the time such payment is
made with respect to other senior executives of the Company, but in no event
less frequently than monthly, or as otherwise mutually agreed upon. The
Employee's Base Salary shall be subject to such increases (but not decreases) as
may be determined from time to time by the Board of Directors of the Company in
its sole discretion.
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<PAGE> 3
(b) Bonuses. In addition to Base Salary, the Employee shall be entitled to
receive during the Employment Term such bonuses or other discretionary
compensation payments, if any, as the Chairman of the Board of the Board of
Directors of the Company may determine to award him from time to time. Any such
bonuses or other discretionary compensation payments shall be payable to the
Employee in the manner specified by the Chairman of the Board of the Board of
Directors at the time any such bonus or other payment is awarded.
(c) Employee Benefits. During the Employment Term, the Employee shall be
entitled to participate in all employee benefit plans, programs, and
arrangements (including, without limitation, any pension, profit sharing,
savings, retirement, incentive compensation, bonus, stock option, stock
purchase, life insurance, medical, dental, accident, and disability plans,
programs, and arrangements) provided by the Company from time to time to its
senior executives generally, subject to and on a basis consistent with the
terms, conditions, and overall administration (including eligibility and vesting
requirements) of such plans, programs, and arrangements; provided, however, that
nothing contained in this Agreement shall require the Company at any time to
institute any, or any particular, employee benefit plan, program, or
arrangement. In the event of a conflict between the terms of any such plan,
program, or arrangement and the terms of this Agreement, the terms of such plan,
program, or arrangement shall be controlling. Any disputes with respect to any
such plan, program, or arrangement shall be resolved in the manner specified in
such plan, program, or arrangement, if the same contains a provision governing
resolution of disputes. The Company reserves the right to modify, amend, or
terminate any such plan, program, or arrangement at any time in such manner as
it shall determine.
(d) Withholding. All compensation shall be subject to normal required tax
withholdings.
(e) Expenses for Professional Memberships. During the Employment Term, the
Employee shall be entitled to receive prompt reimbursement for all reasonable
expenses incurred by 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.
(f) Other Expenses. During the Employment Term, the Employee shall be
entitled to receive prompt reimbursement for all reasonable expenses incurred by
the Employee in performing his duties and responsibilities hereunder, in
accordance with the policies, practices, and procedures of the Company from time
to time in effect.
(g) Fringe Benefits. During the Employment Term, the Employee shall be
entitled to the fringe benefits customarily provided by the Company to its other
senior executives, in accordance with the policies, practices, and procedures
of the Company from time to time in effect.
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<PAGE> 4
(h) Vacations. During the Employment Term, the Employee shall be entitled to
reasonable periods of vacation, not to exceed four (4) weeks in each year, with
pay, and reasonable periods of sick leave with pay, commensurate with the
Employee's position. The Employee shall also be entitled to all paid holidays
given by the Company to its senior executives. The Employee agrees to utilize
his vacation at such time or times as are (i) consistent with the proper
performance of his duties and responsibilities hereunder and (ii) mutually
convenient for the Company and the Employee.
6. Termination of Employment.
(a) Death. The Employee's employment hereunder shall terminate automatically
upon his death.
(b) Complete Disability. The Company shall have the right to terminate
Employee's employment under this Agreement prior to the expiration of the
Employment Term upon the Complete Disability of the Employee as hereinafter
defined. The term "Complete Disability" as used in this Subparagraph shall mean
(i) the total inability of Employee, despite any reasonable accommodation
required by law, due to bodily injury or disease or any other physical or mental
incapacity, to perform the services provided for hereunder for a period of 120
days in the aggregate, within a period of 180 consecutive days during the term
of this Agreement, in addition to any statutorily required leave of absence, and
(ii) where such inability will, in the opinion of a qualified physician, be
permanent and continuous during the remainder of Employee's life. If the Company
determines in good faith that the Complete Disability of the Employee has
occurred during the Employment Term, the Company may notify the Employee of the
Company's intention to terminate the Employee's employment hereunder for such
Complete Disability. In such event, the Employee's employment hereunder shall
terminate effective on the 30th day following the date such Notice of
Termination (as defined below) is given to the Employee (the "Disability
Effective Date").
(c) Termination by Company. The Company may terminate the Employee's
employment hereunder for Cause (as defined below) or without Cause.
(i) For purposes of this Agreement, "Cause" shall mean any of the
following:
(A) conduct by the Employee that, in the good faith opinion of the
Board of Directors of the Company, is materially detrimental to the
Company or reflects unfavorably on the Company or the Employee to such
an extent that the Company's best interests reasonably require the
Employee's discharge;
(B) conduct by the Employee that constitutes fraud, dishonesty, or a
criminal act with respect to the Company;
4
<PAGE> 5
(C) embezzlement of funds or misappropriation of other property
by the Employee from the Company;
(D) conviction of the Employee of a felony or of any other crime
involving fraud, dishonesty, or moral turpitude;
(E) the willful and continued failure by the Employee to
substantially perform his duties hereunder (other than any such
failure resulting from illness of or injury to the Employee or the
Employee's physical or mental incapacity which do not rise to the
level of a "Complete Disability"), after demand for substantial
performance is delivered by the Company that specifically identifies
the manner in which the Company believes the Employee has not
substantially performed his duties and Employee fails to perform his
duties within thirty (30) days after receiving such demand;
(F) 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 other business of a subsidiary of the
Company within thirty (30) days (or if the Company in good faith
determines that such 30 day period is not feasible, within 120 days)
after the applicable deadline for obtaining or retaining such
permit, license or approval; or
(G) any other material breach by the Employee of any of the
provisions of this Agreement.
(ii) Any such termination shall be effective upon the Company's
giving a Notice of Termination (as defined below).
(d) Termination by Employee. The Employee may terminate his employment
hereunder at any time during the Employment Term for any reason.
(e) Termination by Employee for Good Reason. The Employee may terminate his
employment hereunder for Good Reason (as defined below) at any time during the
Employment Term following a Change in Control (as defined below).
(i) For purposes of this Agreement, "Good Reason" shall mean any of
the following (without the Employee's express written consent):
(A) (1) the assignment to the Employee by the Company of any
significant duties materially inconsistent with the Employee's
positions, duties, responsibilities, or status with the Company as
in effect immediately prior to a Change in Control (as defined
below), (2) any action by the Company following a
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<PAGE> 6
Change in Control that results in a substantial diminution in such positions,
duties, responsibilities, or status, (3) any change in the Employee's reporting
responsibilities, titles, or offices with the Company as in effect immediately
prior to a Change in Control, or (4) any removal of the Employee from or any
failure to reelect the Employee to any of such positions, except, in any such
case, (a) in connection with the termination of the Employee's employment
hereunder by the Company for Disability or Cause or by the Employee other than
for Good Reason, or (b) for an isolated, insubstantial, and inadvertent action
not taken in bad faith and which is remedied by the Company promptly after
receipt of notice thereof given by the Employee;
(B) (1) a reduction by the Company of the Employee's Base Salary as in
effect on the date hereof or as increased from time to time during the
Employment Term or (2) a failure by the Company to increase (within 12 months of
the Employee's last increase in Base Salary) the Employee's Base Salary after a
Change in Control in an amount which at least equals, on a percentage basis, the
average percentage increase in base salary for all senior executives of the
Company effected in the preceding twelve (12) months;
(C) (1) any failure by the Company to continue in effect any benefit
plan, program, or arrangement (including, without limitation, the Company's
life, business travel, disability, medical, dental and hospitalization insurance
plans) in which the Employee is participating at the time of a Change in
Control, or a plan, program, or arrangement providing the Employee with
substantially equivalent benefits thereunder (collectively, "Benefit Plans"),
(2) any action by the Company that materially and adversely affects the
Employee's participation in or materially reduces the Employee's benefits under
any such Benefit Plan, or (3) any action by the Company that deprives the
Employee of any material fringe benefit enjoyed by the Employee at the time of a
Change in Control;
(D) any material failure by the Company to comply with any material
provision of this Agreement, other than an isolated, insubstantial, and
inadvertent failure not occurring in bad faith and which is remedied by the
Company promptly after receipt of notice thereof given by the Employee.
(E) any failure by the Company to obtain the assumption of this
Agreement by any successor or assign of the Company; or
(F) any purported termination of the Employee's employment hereunder
otherwise than as expressly permitted by this Agreement, and for purposes of
this Agreement, no such purported termination shall be effective.
(ii) For purposes of this Agreement, a "Change in Control" shall mean:
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<PAGE> 7
(A) the acquisition by any individual, entity, or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either (1) the then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (2) the combined voting power of the then
outstanding voting securities of the Company entitled to vote generally in the
election of directors (the "Outstanding Company Voting Securities"); provided,
however, that the following acquisitions shall not constitute a Change in
Control: (1) any acquisition directly from the Company (excluding an acquisition
by virtue of the exercise of a conversion privilege), (2) any acquisition by the
Company, (3) any acquisition by any employee benefit plan (or related trust)
sponsored or maintained by the Company or any corporation controlled by the
Company, or (4) any acquisition by any corporation pursuant to a reorganization,
merger, or consolidation, if, following such reorganization, merger, or
consolidation, the conditions described in clauses (1), (2) and (3) of
subparagraph (C) of this Paragraph 6 (e)(ii) are satisfied; or
(B) individuals who, as of the date of this Agreement, constitute the Board
of Directors of the Company (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board of Directors of the Company;
provided, however, that any individual becoming a director subsequent to the
date hereof whose election, or nomination for election by the Company's
shareholders, was approved by a vote of a majority of the directors then
comprising the Incumbent Board shall be considered as though such individual
were a member of the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a result of either an
actual or threatened election contest (as such terms are used in Rule 14a-11
of Regulation 14A promulgated under the Exchange Act) or other actual or
threatened solicitation of proxies or consents by or on behalf of a Person other
than the Board of Directors of the Company; or
(C) approval by the shareholders of the Company of a reorganization, merger,
or consolidation, in each case, unless, following such reorganization, merger,
or consolidation, (1) more than 60% of, respectively, the then outstanding
shares of common stock of the corporation resulting from such reorganization,
merger, or consolidation and the combined voting power of the then outstanding
voting securities of such corporation entitled to vote generally in the election
of directors is then beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company Common Stock and Outstanding
Company Voting Securities immediately prior to such reorganization, merger, or
consolidation in substantially the same proportions as their ownership,
immediately prior to such
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<PAGE> 8
reorganization, merger, or consolidation, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities, as the case may be, (2) no
Person (excluding the Company, any employee benefit plan (or related trust) of
the Company or such corporation resulting from such reorganization, merger, or
consolidation, and any Person beneficially owning, immediately prior to such
reorganization, merger, or consolidation, directly or indirectly, 20% or more of
the Outstanding Company Common Stock or Outstanding Company Voting Securities,
as the case may be) beneficially owns, directly or indirectly, 20% or more of,
respectively, the then outstanding shares of common stock of the corporation
resulting from such reorganization, merger, or consolidation or the combined
voting power of the then outstanding voting securities of such corporation
entitled to vote generally in the election of directors, and (3) a majority of
the members of the board of directors of the corporation resulting from such
reorganization, merger, or consolidation were members of the Incumbent Board at
the time of the execution of the initial agreement providing for such
reorganization, merger, or consolidation; or
(D) approval by the shareholders of the Company of (1) a complete
liquidation or dissolution of the Company or (2) the sale or other disposition
of all or substantially all the assets of the Company, other than to a
corporation, with respect to which following such sale or other disposition, (a)
more than 60% of, respectively, the then outstanding shares of common stock of
such corporation and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election of
directors is then beneficially owned, directly or indirectly, by all or
substantially all the individuals and entities who were the beneficial owners,
respectively, of the Outstanding Company Common Stock and Outstanding Company
Voting Securities immediately prior to such sale or other disposition in
substantially the same proportion as their ownership, immediately prior to such
sale or other disposition, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, as the case may be, (b) no Person
(excluding the Company, any employee benefit plan (or related trust) of the
Company or such corporation, and any Person beneficially owning, immediately
prior to such sale or other disposition, directly or indirectly, 20% or more of
the Outstanding Company Common Stock or Outstanding Company Voting Securities,
as the case may be) beneficially owns, directly or indirectly, 20% or more of,
respectively, the then outstanding shares of common stock of such corporation or
the combined voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors, and (c) a
majority of the members of the board of directors of such corporation were
members of the Incumbent Board at the time of the execution of the initial
agreement or action of the Board of Directors of the Company providing for such
sale or other disposition of assets of the Company.
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<PAGE> 9
(f) Notice of Termination. Any termination of the Employee's employment
hereunder by the Company or by the Employee (other than a termination pursuant
to Paragraph 6(a)) shall be communicated by a Notice of Termination (as defined
below) to the other party hereto. For purposes of this Agreement, a "Notice of
Termination" shall mean a written notice which (i) indicates the specific
termination provision in this Agreement relied upon, (ii) in the case of a
termination for Disability, Cause or Good Reason, sets forth in reasonable
detail the facts and circumstances claimed to provide a basis for termination of
the Employee's employment under the provision so indicated, and (iii) specifies
the Date of Termination (as defined in Paragraph 6(g) below). The failure by the
Company or the Employee to set forth in the Notice of Termination any fact or
circumstance which contributes to a showing of Disability, Cause or Good Reason
shall not waive any right of the Company or the Employee hereunder or preclude
the Company or the Employee from asserting such fact or circumstance in
enforcing the Company's or the Employee's rights hereunder.
(g) Date of Termination. For purposes of this Agreement, "Date of
Termination" shall mean the effective date of termination of the Employee's
employment hereunder, which date shall be (i) if the Employee's employment is
terminated by his death, the date of his death, (ii) if the Employee's
employment is terminated because of his Disability, the Disability Effective
Date, (iii) if the Employee's employment is terminated by the Company for Cause
or by the Employee for Good Reason, the date provided for in the Notice of
Termination, which date shall in no event be earlier than the date such notice
is given.
(h) Resignation. In the event of termination of the Employee's employment
hereunder (for any reason other than the death of the Employee), the Employee
agrees that if at such time he is a director or officer of the Company or any of
its subsidiaries, he will promptly deliver to the Company his written
resignation from all such positions, such resignation to be effective as of the
Date of Termination.
7. Obligations of Company Upon Termination of Employment.
(a) Death. If the Employee's employment hereunder is terminated by reason of
the Employee's death, the Company shall pay to the Employee's estate, in a lump
sum in cash within thirty (30) days after the Date of Termination, the
Employee's Base Salary through the Date of Termination at the rate in effect
hereunder at the time of the Employee's death, to the extent not theretofore
paid.
(b) Complete Disability. If the Employee's employment hereunder is
terminated by reason of the Employee's Complete Disability, the Company shall
pay to the Employee, in a lump sum in cash within thirty (30) days after the
Date of Termination, the Employee's Base Salary through the Date of Termination
at the rate in effect hereunder as of the date of the Notice of Termination, to
the extent not theretofore paid.
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<PAGE> 10
(c) Termination for Cause. If the Employee's employment hereunder is
terminated for Cause, the Company shall pay to the Employee, in a lump sum in
cash within 30 days after the Date of Termination, the Employee's Base Salary
through the Date of Termination at the rate in effect hereunder as of the date
of the Notice of Termination, to the extent not theretofore paid, and,
thereafter, the Company shall have no further obligations to the Employee under
this Agreement, except as provided in Paragraph 14(c).
(d) Termination by Employee Other Than for Good Reason. If the Employee's
employment hereunder is terminated by the Employee other than for Good Reason,
the Company shall pay to the Employee, in a lump sum in cash within thirty (30)
days after the Date of Termination, the Employee's Base Salary through the Date
of Termination, to the extent not theretofore paid.
(e) Termination by Company Other Than for Cause or Termination by Employee
for Good Reason. If the Employee's employment hereunder (A) is terminated by the
Company other than (1) for Cause, (2) for Disability, or (3) pursuant to the
provisions of Paragraph 3 or (B) is terminated by the Employee for Good Reason,
then, in either case, the Company shall pay to the Employee, in a lump sum in
cash within thirty (30) days after the Date of Termination (except for the
amounts provided for in clause (ii) below, which shall be payable in
installments as therein provided), the aggregate of the following amounts:
(i) the Employee's Base Salary through the Date of Termination, at the
rate in effect hereunder at the time the Notice of Termination is given, to
the extent not theretofore paid; and
(ii) in lieu of any further Base Salary payments to the Employee for
periods subsequent to the Date of Termination, as severance pay, an amount
equal to the Employee's annual Base Salary at the rate in effect hereunder
at the time the Notice of Termination is given, for one year commencing on
the Date of Termination (the "Severance Package"), such payment to be made
in substantially equal semi-monthly installments on the fifteenth and last
days of each month commencing with the month in which the Date of
Termination occurs and continuing for twenty-four consecutive semi-monthly
payment dates (including the first such date as aforesaid); provided,
however, that such severance payment shall be reduced by the present value
(determined as provided in Section 280G(d)(4) of the Internal Revenue Code
of 1986, as amended) of any other amount of severance relating to salary or
bonus continuation to be received by the Employee upon termination of his
employment under any severance plan, program, or arrangement of the Company;
(f) Sole Remedy. The right to receive the payments and other benefits
provided for under this Paragraph 7 shall be the Employee's sole and exclusive
remedy for the termination of his employment hereunder and shall be in lieu of
any claim that he might otherwise have against the Company arising from such
termination.
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<PAGE> 11
8. Compliance With Other Agreements.
(a) The Company represents and warrants to the Employee that the execution,
delivery, and performance by the Company of this Agreement have been duly
authorized by all necessary corporate action of the Company and do not and will
not conflict with or result in a violation of any provision of, or constitute a
default under, any contract, agreement, instrument, or obligation to which the
Company is a party or by which it is bound.
(b) The Employee represents and warrants to the Company that the execution,
delivery, and performance by the Employee of this Agreement do not and will not
conflict with or result in a violation of any provision of, or constitute a
default under, any contract, agreement, instrument, or obligation to which the
Employee is a party or by which he is bound. In addition, the Employee
represents to the Company that he has read and is familiar with the Company's
statement of corporate policies and procedures, and the Employee agrees to
abide by and carry out during the Employment Term all such policies and
procedures that are applicable to his employment by the Company, as they may be
modified or amended from time to time.
9. Noncompetition and Related Matters.
(a) The Employee acknowledges that during the Employment Term the Company
has agreed to provide to him, and he shall receive from the Company, special
training and knowledge. The Employee acknowledges that included in the special
knowledge received is the confidential information identified in Paragraph 10.
The Employee acknowledges that this confidential information is valuable to the
Company and, therefore, its protection and maintenance constitutes a legitimate
interest to be protected by the Company by the enforcement of this covenant not
to compete. Therefore, the Employee agrees that, during the Employment Term and
for a period commencing upon the termination of the Employee's employment
hereunder and ending eighteen months after such termination, unless otherwise
extended pursuant to the terms of this Paragraph 9, the Employee will not,
directly or indirectly, either as an employee, employer, consultant, agent,
principal, partner, shareholder, corporate officer, director, or in any other
individual or representative capacity, engage or participate in any business or
activity that is engaged in a business relationship of any nature whatsoever
with the Mazatzal Casino, the Wildhorse Gaming Resort, the Pueblo of Laguana
Casino, or any gaming facility hereafter developed and/or managed by the Company
or its subsidiaries for the Rhode Island Project Indian Tribe or any other
tribal or non-tribal owner during the Employment Term (collectively, the
"Capital Customers"). The Employee represents to the Company that the
enforcement of the restriction contained in this Paragraph 9(a) would not be
unduly burdensome to the Employee and that in order to induce the Company to
employ the Employee the Employee further represents and acknowledges that the
Employee is willing and able to compete in other geographical areas not
prohibited by this Paragraph 9(a).
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<PAGE> 12
(b) The Employee agrees that a breach or violation of this covenant not to
compete by the Employee shall entitle the Company, as a matter of right, to an
injunction issued by any court of competent jurisdiction, restraining any
further or continued breach or violation of this covenant. Such right to an
injunction shall be cumulative and in addition to, and not in lieu of, any other
remedies to which the Company may show itself justly entitled. Further, during
any period in which the Employee is in breach of this covenant not to compete,
the time period of this covenant shall be extended for an amount of time that
the Employee is in breach hereof.
(c) In addition to the restrictions set forth in Paragraph 9(a), the
Employee shall not, for a period commencing upon the termination of the
Employee's employment hereunder and ending eighteen months after such
termination, unless otherwise extended pursuant to the terms of this Paragraph
9, either directly or indirectly, (i) make known to any person or entity the
names and addresses of any of the Capital Customers of the Company or contacts
of the Company within the industry or any other information pertaining to such
customers or contacts, (ii) call on, solicit, or take away, or attempt to
call on, solicit, or take away, any of the Capital Customers of the Company on
whom the Employee called or with whom the Employee became acquainted during the
Employee's association with the Company, whether for the Employee or for any
other person or entity, or (iii) recruit or hire or attempt to recruit or hire,
directly or by assisting others, any other employee of the Company or any of its
affiliates.
(d) The representations and covenants contained in this Paragraph 9 on the
part of the Employee will be construed as ancillary to and independent of any
other provision of this Agreement, and the existence of any claim or cause of
action of the Employee against the Company or any officer, director, or
shareholder of the Company, whether predicated on this Agreement or otherwise,
shall not constitute a defense to the enforcement by the Company of the
covenants of the Employee contained in this Paragraph 9. In addition, the
provisions of this Paragraph 9 shall continue to be binding upon the Employee in
accordance with their terms, notwithstanding the termination of the Employee's
employment hereunder for any reason.
(e) If the Employee violates any covenant contained in this Paragraph 9 and
the Company brings legal action for injunctive or other relief, the Company
shall not, as a result of the time involved in obtaining the relief, be deprived
of the benefit of the full period of any such covenant. Accordingly, the
covenants of the Employee contained in this Paragraph 9 shall be deemed to have
durations as specified above, which periods shall commence upon the later of (i)
the termination of the Employee's employment hereunder and (ii) the date of
entry by a court of competent jurisdiction of a final judgment enforcing the
covenants of the Employee in this Paragraph 9.
(f) The parties to this Agreement agree that the limitations contained in
this Paragraph 9 with respect to time, geographical area, and scope of activity
are reasonable. However, if any court shall determine that the time,
geographical area, or scope of activity of any restriction contained in this
Paragraph 9 is unenforceable, it is the intention of the parties that
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<PAGE> 13
of his employment hereunder, or at any other time when the Company so requests,
all memoranda, notes, records, drawings, manuals, and other documents (and all
copies thereof and therefrom) in any way relating to the business or affairs of
the Company or any of its subsidiaries or any of their clients, whether made or
compiled by the Employee or furnished to him by the Company or any of its
employees, customers, clients, consultants, or agents, which the Employee may
then possess or have under his control. The Employee confirms that all such
memoranda, notes, records, drawings, manuals, and other documents (and all
copies thereof and therefrom) constitute the exclusive property of the Company.
The obligation of confidentiality set forth in Paragraph 10 shall continue
notwithstanding the Employee's delivery of any such documents to the Company.
Notwithstanding the foregoing provisions of this Paragraph 11 or any other
provision of this Agreement, the Employee shall be entitled to retain any
written materials received by the Employee in the capacity as a shareholder of
the Company or the Company's affiliates. The provisions of this Paragraph 11
shall continue in effect notwithstanding termination of the Employee's
employment hereunder for any reason.
12. Indemnity.
(a) Subject only to the exclusions set forth in Paragraph 12(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, or any
applicable state law, 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 occurred 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, 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 12 (including, without limitation, payments in
indemnity for such taxes).
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<PAGE> 14
such restrictive covenant set forth herein shall not thereby be terminated but
shall be deemed amended to the extent required to render it valid and
enforceable.
(g) Nothing contained in this Paragraph 9 shall be construed to prohibit the
Employee from investing in stock or other securities listed on a national
securities exchange or actively traded in the over-the-counter market of any
corporation or other entity engaged in a business or activity competitive with
the business of the Company or any of its subsidiaries, provided that the
Employee and the members of his immediate family shall not, directly or
indirectly, hold more than a total of one percent (1%) of all such shares of
stock or other securities issued and outstanding, and provided further that the
Employee shall not perform any services on behalf of, or in the operation of the
affairs of, such corporation or other entity.
(h) The restrictions contained in Paragraph 9(a) shall not apply with
respect to any period or periods following the Employment Term if the Employee's
employment hereunder is terminated by the Company upon a Complete Disability of
the Employee.
10. Confidentiality. The Employee recognizes and acknowledges that the
Company's trade secrets and other confidential or proprietary information, as
they may exist from time to time, are valuable, special, and unique assets of
the Company's business, access to and knowledge of which are essential to the
performance of the Employee's duties hereunder. The Employee confirms that all
such trade secrets and other information constitute the exclusive property of
the Company. During the Employment Term and for a period of two years following
the termination of the Employment Term/thereafter without limitation of time,
the Employee shall hold in strict confidence and shall not, directly or
indirectly, disclose or reveal to any person, or use for his own personal
benefit or for the benefit of anyone else, any trade secrets, confidential
dealings, or other confidential or proprietary information of any kind, nature,
or description (whether or not acquired, learned, obtained, or developed by the
Employee alone or in conjunction with others) belonging to or concerning the
Company or any of its subsidiaries, or any of their customers or clients or
others with whom they now or hereafter have a business relationship, except (i)
with the prior written consent of the Company duly authorized by its Board of
Directors, (ii) in the course of the proper performance of the Employee's duties
hereunder, (iii) for information (x) that becomes generally available to the
public other than as a result of unauthorized disclosure by the Employee or his
affiliates or (y) that becomes available to the Employee subsequent to the
termination of his employment hereunder and on a nonconfidential basis from a
source other than the Company or its subsidiaries who is not bound by a duty of
confidentiality, or other contractual, legal, or fiduciary obligation, to the
Company or such customers, clients, or others having a business relationship, or
(iv) as required by applicable law or legal process. The provisions of this
Paragraph 10 shall continue in effect notwithstanding termination of the
Employee's employment hereunder for any reason.
11. Business Records. Given the secretive and competitive environment in
which the Company does business and the fiduciary relationship that the Employee
will have with the Company hereunder, the Employee agrees to promptly deliver to
the Company, upon termination
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<PAGE> 15
(b) Notwithstanding the foregoing, no indemnity pursuant to this Paragraph
12 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 which may be purchased and maintained by
the Company.
(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 (A) were in breach of his duty of loyalty to the Company or its
shareholders, (B) were not in good faith or involved a knowing violation of
law or (C) 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
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<PAGE> 16
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 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) 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.
13. Mitigation. In the event of and following the termination of the
Employee's employment hereunder, the Employee shall be required to endeavor to
mitigate in accordance with applicable law his damages and the payments provided
for under this Agreement by seeking employment elsewhere or becoming
self-employed, but shall not be required to accept (i) a position for which he
is not suited or that would derogate from his standing in the position he held
with the Company or (ii) a position in a location, other than that of his
principal residence or its environs, that is not convenient for him or (iii) a
position that would constitute a violation by him of the provisions of Paragraph
9. To the extent that the Employee shall receive compensation, benefits, and
service credit for benefits from other employment secured pursuant to the
provisions of the immediately preceding sentence, the payments to be made and
the benefits and service credit for benefits to be provided by the Company
hereunder shall be correspondingly reduced. Such reduction shall, in the event
of any question or disagreement, be determined jointly by the firm of certified
public accountants regularly employed by the Company and a firm of certified
public accountants selected by the Employee, in each case upon the advice of
actuaries to the extent the certified public accountants consider necessary,
and, in the event such accountants are unable to agree on a resolution of the
matter, such reduction shall be determined by an independent firm of certified
public accountants selected jointly by both firms of accountants. The fees and
expenses of the Company's accountants shall be borne by the Company, the fees
and expenses of the Employee's accountants shall be borne by the Employee, and
the fees and expenses of any actuaries or third firm of accountants shall be
borne equally by the Company and the Employee.
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14. Miscellaneous.
(a) Set Off. The Employee hereby grants to the Company the right to set
off against, and authorizes the Company to deduct from, any payments to the
Employee, or to his heirs, legal representatives, or successors, provided
for in this Agreement, any amounts which may be due and owing by the
Employee to the Company, whether arising hereunder or otherwise.
(b) Jurisdiction and Venue. In respect of any action or proceeding
arising out of or relating to this Agreement, each of the parties hereto
consents to the jurisdiction and venue of any federal or state court located
within Maricopa County, Arizona, waives personal service of any and all
process upon it or him, consents that all such service of process may be
made by first class registered or certified mail, postage prepaid, return
receipt requested, directed to it or him at the address specified in
Subparagraph (d) of this Paragraph 14, agrees that service so made shall be
deemed to be completed upon actual receipt thereof, and waives any objection
to jurisdiction or venue of, and waives any motion to transfer venue from,
any of the aforesaid courts.
(c) Survival. Neither the expiration or the termination of the term of
the Employee's employment hereunder shall impair the rights or obligations
of either party hereto which shall have accrued hereunder prior to such
expiration or termination. The provisions of Paragraphs 9, 10, 11 and 12,
and the rights and obligations of the parties thereunder, shall survive the
expiration or termination of the term of the Employee's employment
hereunder.
(d) Notices. All notices and other communications required or permitted
to be given hereunder by either party hereto shall be in writing and shall
be given by hand delivery or by first class registered or certified United
States mail, postage prepaid, return receipt requested, to the party for
which intended at the following addresses (or at such other addresses as
shall be specified by the parties by like notice):
If to the Company, at:
2701 E. Camelback Road, Suite 484
Phoenix, Arizona 85016
Attention: William S. Papazian, Executive Vice President
and General Counsel
17
<PAGE> 18
with a copy to:
Charles B. Brewer, Chairman
Southmark Corporation
2711 LBJ Freeway, Suite 950
Dallas, Texas 75234
If to the Employee, at:
4901 East Calle del Medio
Phoenix, Arizona 85018
with a copy to:
All such notices and other communications shall be effective only upon receipt
by the addressee.
(e) Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto concerning the subject matter hereof and
supersedes all prior agreements and understandings, both written and oral,
including the Prior Agreement, between the parties with respect to such
subject matter.
(f) Binding Effect; Assignment, No Third Party Benefit. This Agreement
shall be binding upon and inure to the benefit of the parties hereto and
their respective heirs, legal representatives, successors, and assigns;
provided, however, that the duties and responsibilities of the Employee
hereunder may not be assumed by, or delegated to, any other person. Nothing
in this Agreement, express or implied, is intended to or shall confer upon
any person other than the parties hereto, and their respective heirs, legal
representatives, successors, and permitted assigns, any rights, benefits, or
remedies of any nature whatsoever under or by reason of this Agreement.
(g) Amendment. This Agreement may not be modified or amended in any
respect except by an instrument in writing signed by the party against whom
such modification or amendment is sought to be enforced.
(h) Waiver. Any term or condition of this Agreement may be waived at any
time by the party hereto which is entitled to have the benefit thereof, but
such waiver shall only be effective if evidenced by a writing signed by such
party, and a waiver on one occasion shall not be deemed to be a waiver of
the same or any other type of breach
18
<PAGE> 19
on a future occasion. No failure or delay by a party hereto in exercising
any right or power hereunder shall operate as a waiver thereof nor shall any
single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right or power.
(i) Authority. No person, other than pursuant to a resolution of the
Board of Directors of the Company or a committee thereof, shall have
authority on behalf of the Company to agree to modify, amend, or waive any
provision of this Agreement or anything in reference thereto.
(j) Severability. If any provision of this Agreement is held to be
unenforceable, (a) this Agreement shall be considered divisible, (b) such
provision shall be deemed inoperative to the extent it is deemed
unenforceable, and (c) in all other respects this Agreement shall remain in
full force and effect; provided, however, that if any such provision may be
made enforceable by limitation thereof, then such provision shall be deemed
to be so limited and shall be enforceable to the maximum extent permitted by
applicable law.
(k) Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Arizona, without regard
to the principles of conflicts of laws thereof.
(l) Descriptive Headings. The descriptive headings herein are inserted
for convenience of reference only, do not constitute a part of this
Agreement, and shall not affect in any manner the meaning or interpretation
of this Agreement.
(m) References. All references in this Agreement to Paragraphs,
subparagraphs, and other subdivisions refer to the Paragraphs,
subparagraphs, and other subdivisions of this Agreement unless expressly
provided otherwise. The words "this Agreement," "herein," ("hereof,"
"hereby," "hereunder," and words of similar import refer to this Agreement
as a whole and not to any particular subdivision unless expressly so
limited. Whenever the words "include," "includes," and "including" are used
in this Agreement, such words shall be deemed to be followed by the words
"without limitation." Words in the singular form shall be construed to
include the plural and vice versa, unless the context otherwise requires.
Wherever any terms of the masculine gender are used in reference to the
Employee in this Agreement, such terms shall be deemed changed to the
corresponding terms of the feminine gender if the Employee is a female.
(n) Counterparts. This Agreement may be executed by the parties hereto
in any number of counterparts, each of which shall be deemed an original,
but all of which shall constitute one and the same agreement.
19
<PAGE> 20
(o) Drafter. The parties further acknowledge that they have, through
their respective counsel, participated in the preparation of this Agreement,
and it is understood that no provision of this Agreement shall be construed
against any of the parties or their attorneys in the preparation and
execution of this Agreement.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on
its behalf by its duly authorized officer, and the Employee has executed this
Agreement, as of the date first set forth above.
CAPITAL GAMING INTERNATIONAL, INC.
By: /s/ Charles B. Brewer
-----------------------------------
Name
Title: Chairman
EMPLOYEE
/s/ William S. Parazian
---------------------------------------
William S. Papazian
20
<PAGE> 1
Exhibit 10.180
January 8, 1999
William S. Papazian, Executive Vice President and General Counsel
Capital Gaming International, Inc.
2701 E. Camelback Road, Suite 484
Phoenix, AZ 85016
RE: Employment Agreement ("Employment Agreement"), dated as of December 1,
1998, between Capital Gaming International, Inc. (the "Company"), and
William S. Papazian ("Employee")
Dear Mr. Papazian:
This letter agreement ("Letter Agreement") is made and effective as of
January 1, 1999 and memorializes the supplementary agreements reached between
the Company and Employee with respect to the Employment Agreement. All terms not
otherwise defined herein shall have the meaning ascribed to such terms in the
Employment Agreement.
1. Location of Services Performed.
The Company acknowledges that Employee currently resides and works in
Phoenix, AZ. The Company agrees that Employee shall not be required as a
condition of his continued employment to relocate from the
Phoenix/Scottsdale, AZ area or to regularly report to an office of the
Company on a daily basis which is located outside such area as a
condition to continued employment.
2. Senior Secured Notes.
Section 6.4 of the Company's First Amended and Modified Plan of
Reorganization provides that key officers would receive a confirmation
payment which included New Secured Notes. The Company and Employee
hereby mutually agree that the Company shall forthwith cause U.S. Bank
Trust National Association as Indenture Trustee to issue $125,000 in New
Secured Notes in the name of Employee as an incentive for continued
employment with the Company ("Employee Notes") to be held in escrow and
distributed as follows:
<PAGE> 2
William S. Papazian
Page 2.
a. The Employee Notes will be forwarded to Charles B. Brewer, c/o
Southmark Corporation, 2711 LBJ Freeway, Suite 950, Dallas, TX 75234
who will hold them in escrow and shall act as Escrow Agent ("Escrow
Agent") pursuant to this Letter Agreement. The Escrow Agent shall
not be liable for any action taken or omitted by him in good faith
and believed by him to be authorized hereby or within the rights or
powers conferred upon him hereunder, or in accordance with advice of
counsel of his choosing, and shall not be liable for any mistake of
factor error of judgment.
b. Employee shall not be entitled to physical distribution of the
Employee Notes or be vested as to principal until May 15, 2000 at
which time the Escrow Agent shall deliver the Employee Notes to
Employee, or as directed by Employee in writing, together with any
payments of principal which the Company has paid with respect to
such Employee Notes. Any such payments of principal (if any) shall
be maintained in a segregated, interest bearing account. If Employee
is terminated prior to May 15, 2000 for Cause, or if Employee has
voluntarily left the employ of the Company prior to May 15, 2000
other than for Good Reason (each a "Triggering Event"), the Employee
will be deemed to have forfeited his rights to receive the Employee
Notes and any principal or future interest payments. Upon two (2)
weeks written notice to Employee after a Triggering Event, Escrow
Agent shall deliver the Employee Notes and all other cash in escrow
to the Company.
c. Any and all past and future interest payments on the Employee Notes
will be deemed earned by Employee as such interest payments are made
generally by the Company (November 15 and May 15 of each year
commencing November 15,1997) and the Company will instruct U.S. Bank
Trust National Association as Indenture Trustee to forthwith make
such distribution of interest directly to Employee with respect to
the November 15,1997, May 15, 1998 and November 15, 1998 interest
payments.
d In exchange for the agreements contained herein, Employee hereby
releases and forever discharges the Company for any claim to a
distribution of New Secured Notes pursuant to Section 6.4 of the
First Amended and Modified Plan of Reorganization.
3. New Common Stock.
Section 6.4 of the Company's First Amended and Modified Plan of
Reorganization provides that the Company shall distribute to key
officers a total of 10.0% (or 200,000 shares) of the issued and
outstanding New Common Stock of the Company (the "Key Officer
Distribution") to vest as follows: 3.34% of the issued and outstanding
shares of New Common Stock on the effective date (May 29, 1997), and
3.33% of the then issued and outstanding shares of New Common Stock on
each of the first and second year anniversaries of the effective date.
The Company hereby agrees that
<PAGE> 3
William S. Papazian
Page 3.
Employee shall be entitled to receive 50% of the Key Officer
Distribution such that Employee shall receive forthwith 66,667 shares of
the issued and outstanding shares of New Common Stock (representing the
May 29, 1997 and May 29, 1998 vested shares), with the remaining 33,333
shares of the issued and outstanding shares of New Common Stock to be
distributed to Employee on May 29,1999.
4. This Letter Agreement may not be modified or amended in any respect
except by an instrument in writing signed by the party against whom such
modification or amendment is sought to be enforced.
Sincerely,
/s/ Charles B. Brewer
--------------------------------
Charles B. Brewer
Chairman
ACCEPTED AND AGREED
/s/ William S. Parazian
- -------------------------------
William S. Papazian
Escrow Agent
/s/ Charles B. Brewer
- -------------------------------
Charles B. Brewer
<PAGE> 1
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 YEAR ENDED THROUGH THROUGH | YEAR ENDED JUNE 30,
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1997 MAY 28, 1997| 1996 1995
------------- ------------- ------------- ------------| ---- ----
<S> <C> <C> <C> <C> <C> <C>
Consolidated Pre-Tax [Loss] |
Income From Operations $ 842,000 $ (7,154,000) $ (1,351,000) $ 44,411,000 | $ (3,718,000) $ (116,876,000)
Fixed Charges 2,700,000 2,885,000 251,000 8,394,000 | 21,846,000 20,388,000
------------- ------------ ------------ ------------- | ------------ ----------------
Earnings For Computation $ 3,542,000 $(4,269,000) $(1,100,000) $ 52,805,000 |$ 18,128,000 $ (96,488,000)
============= ============ ============ ============= | ============ ================
|
Interest Expense $ 2,700,000 $ 2,885,000 $ 251,000 $ 7,842,000 | $ 19,062,000 $ 18,225,000
Capitalized Interest -- -- -- -- | -- 1,474,000
Deferred Financing Cost -- -- -- 552,000 | 2,784,000 2,115,000
Interest Portion |
Of Rent Expense -- -- -- -- | -- 48,000
------------- ------------ ------------ ------------- | ------------ ----------------
Fixed Charges $ 2,700,000 $ 2,885,000 $ 251,000 $ 8,394,000 | $ 21,846,000 $ 21,862,000
============= ============ ============ ============ | ============ ================
|
Ratio of Earnings to Fixed |
Charges 1.31 -- -- 6.29 | -- --
============= ============ ============ ============ | ============ ================
|
Deficiency of Earnings $ -- $ 7,154,000 $ 1,351,000 $ -- | $ 3,718,000 $ 118,350,000
============= ============ ============ ============ | ============ ================
</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-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 4,440,000
<SECURITIES> 0
<RECEIVABLES> 3,262,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,894,000
<PP&E> 131,000
<DEPRECIATION> 117,000
<TOTAL-ASSETS> 17,229,000
<CURRENT-LIABILITIES> 5,952,000
<BONDS> 23,100,000
0
0
<COMMON> 400,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 17,229,000
<SALES> 0
<TOTAL-REVENUES> 7,264,000
<CGS> 0
<TOTAL-COSTS> 6,116,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,700,000
<INCOME-PRETAX> 1,260,000
<INCOME-TAX> 418,000
<INCOME-CONTINUING> 842,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 842,000
<EPS-BASIC> 0.43
<EPS-DILUTED> 0.43
</TABLE>
