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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ________________
Commission File No. 0-19128
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CAPITAL GAMING INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-3061189
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2701 East Camelback Road, 85016
Suite 484 (Zip Code)
Phoenix, Arizona
(Address of principal executive offices)
---------------------
Registrant's telephone number, including area code: (602) 667-0670
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
----------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [ X ] No [ ]
Applicable only to issuers involved in bankruptcy proceedings during
the preceding five years:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ X ] No [ ]
Indicate the number of shares outstanding for each of the issuer's classes of
common stock as of September 30, 1999: 1,999,745 (consisting of 1,600,000 shares
of Class A Common Stock and 399,745 shares of Common Stock)
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CAPITAL GAMING INTERNATIONAL, INC.
INDEX
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 1999 (Unaudited) and June 30, 1999 (Audited) 1
Consolidated Statements of Operations for the three months
ended September 30, 1999 and 1998 (Unaudited) 3
Consolidated Statements of Changes in Stockholders' Deficit for
the three months ended September 30, 1999 (Unaudited) 4
Consolidated Statements of Cash Flows for the three months
ended September 30, 1999 and 1998 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures about Market Risks 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Default Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Securityholders 22
Item 6. Exhibits and Reports on Form 8-K 23
Signature Page 24
</TABLE>
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PART I., Item 1.
CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
ASSETS
<TABLE>
<CAPTION>
September 30, 1999 June 30, 1999
------------------ -------------
[Unaudited]
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,771 $ 4,440
Restricted funds [Note 8] 5,565 3,977
Interest receivable 29 24
Native American management fees & expenses receivable 584 647
Current portion - Native American loans receivable 1,020 1,441
Muckleshoot settlement receivable [Note 9] 863 1,150
Prepaid expenses and other current assets 190 215
------- -------
TOTAL CURRENT ASSETS 13,022 11,894
------- -------
FURNITURE, FIXTURES AND EQUIPMENT 11 14
EXCESS REORGANIZATION VALUE, Net [Note 3] 3,296 3,790
OTHER ASSETS:
Investment in Native American management
agreements, net 105 162
Deferred charges [Note 10] 1,742 1,369
------- -------
TOTAL OTHER ASSETS 1,847 1,531
------- -------
TOTAL ASSETS $18,176 $17,229
======= =======
</TABLE>
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements
1
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CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
September 30, 1999 June 30, 1999
------------------ -------------
[Unaudited]
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of 12% senior secured notes
payable [Note 7] $ 4,560 $ 4,560
Accounts payable and accrued expenses 741 773
Accrued interest 976 292
Federal income taxes payable (2) 70
State income taxes payable 335 257
-------- --------
TOTAL CURRENT LIABILITIES 6,610 5,952
-------- --------
LONG TERM DEBT:
12% senior secured notes payable [Note 7] 18,240 18,240
-------- --------
TOTAL LIABILITIES 24,850 24,192
-------- --------
STOCKHOLDERS' DEFICIT:
Common stock, no par value, authorized 5,000,000 shares;
issued and outstanding 1,999,745 shares 400 400
Additional paid in capital [Note 7] 300 300
Accumulated deficit (since May 29, 1997, date of
reorganization) (7,374) (7,663)
-------- --------
TOTAL STOCKHOLDERS' DEFICIT (6,674) (6,963)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 18,176 $ 17,229
======== ========
</TABLE>
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements
2
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CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
[UNAUDITED]
(In Thousands except Share Data)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1999 September 30, 1998
------------------- ------------------
<S> <C> <C>
REVENUES:
Native American casino management fees $ 1,976 $ 1,974
----------- -----------
COSTS AND EXPENSES:
Salaries, wages and related costs 212 763
Native American gaming development costs 52 269
Professional fees 139 321
General and administrative 83 126
Depreciation and amortization 554 577
----------- -----------
TOTAL COSTS AND EXPENSES 1,040 2,056
----------- -----------
INCOME (LOSS) FROM OPERATIONS 936 (82)
----------- -----------
OTHER INCOME (EXPENSE):
Muckleshoot settlement, net [Note 9] -- 2,285
Interest income 118 135
Interest expense (684) (693)
Other income -- 40
----------- -----------
TOTAL OTHER INCOME (EXPENSE) (566) 1,767
----------- -----------
INCOME (LOSS) BEFORE INCOME TAX 370 1,685
PROVISION FOR INCOME TAX EXPENSE [Note 6] 81 81
----------- -----------
NET INCOME (LOSS) $ 289 $ 1,604
=========== ===========
NET INCOME (LOSS) PER SHARE $ .14 $ .83
=========== ===========
WEIGHTED AVERAGE COMMON AND EQUIVALENT
SHARES OUTSTANDING 1,999,745 1,933,333
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements
3
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CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
[UNAUDITED]
(In Thousands except Share Data)
<TABLE>
<CAPTION>
Common Stock Retained
------------------ Additional Earnings
Shares Amount Capital (Deficit)
--------- ------ ---------- ---------
<S> <C> <C> <C> <C>
BALANCE - JUNE 30, 1999 1,999,745 $400 $300 $(7,663)
Net income for the three months
ended September 30, 1999 -- -- -- 289
--------- ---- ---- -------
BALANCE - September 30, 1999 1,999,745 $400 $300 $(7,374)
========= ==== ==== =======
</TABLE>
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements
4
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CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 289 $ 1,604
------- -------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 554 577
Muckleshoot settlement, Gross [Note 9] -- (3,300)
Payments on Muckleshoot settlement [Note 9] 287 1,192
Write-off of investment in Muckleshoot
management agreement [Note 9] -- 815
Increase in interest receivable (5) 8
Decrease (increase) in Native American
management fees and expenses receivable 63 29
Decrease (increase) in prepaid expenses
and other current assets 25 (9)
(Decrease) increase in accounts payable
and accrued expenses (32) (264)
(Decrease) increase in accrued interest 684 694
(Decrease) increase in federal income taxes payable (72) --
Increase in state income taxes payable 78 81
------- -------
Total Adjustments 1,582 (177)
------- -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,871 1,427
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Repayments of Native American loans receivable 421 1,044
(Increase) decrease in restricted funds (1,588) (5)
(Increase) in deferred charges [Note 10] (373) (255)
Purchase of furniture, fixtures and equipment -- --
------- -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (1,540) 784
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 0 0
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 331 2,211
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIODS 4,440 4,498
------- -------
CASH AND CASH EQUIVALENTS - END OF PERIODS $ 4,771 $ 6,709
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid During the Periods for:
Interest $ 0 $ 0
Income Taxes $ 72 $ 0
</TABLE>
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements
5
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PART I., Item 1.
CAPITAL GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
[1] ORGANIZATION
Capital Gaming International, Inc., 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.
CGMI developed and currently manages and operates two Native American
casinos located in separate jurisdictions as follows:
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, 319 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 commenced on October 4, 1999 and the facility is anticipated to
open in the first quarter of calendar year 2000.
[2] BASIS OF PRESENTATION
The Consolidated Balance Sheet and Changes in Stockholders' Deficit as
of September 30, 1999, the Consolidated Statements of Operations for the
three-month periods ended September 30, 1999 and 1998, and the Consolidated
Statement of Cash Flows for the three-month periods ended September 30, 1999 and
1998 are unaudited. The June 30, 1999 Balance Sheet data was derived from
audited consolidated financial statements. These consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, such statements
include all adjustments (consisting only of normal recurring items) which are
considered necessary for a fair presentation of the financial position of the
Company at September 30, 1999, and the results of its operations and cash flows
for the three-month periods ended September 30, 1999 and 1998. The results of
operations for interim periods are not necessarily indicative of a full year of
operations. It is suggested that these financial statements be read in
conjunction with the consolidated financial statements and notes included in the
Capital Gaming International, Inc. Form 10-K, as amended, for the fiscal year
ended June 30, 1999 as filed with the Securities and Exchange Commission.
The Consolidated Financial Statements include the accounts of the
Company and all of its wholly-owned subsidiaries. Inter-company transactions and
balances have been eliminated in consolidation.
Certain reclassifications have been made to the prior period financial
statements to conform to classifications used in the current period.
6
<PAGE> 9
[3] REORGANIZATION UNDER CHAPTER 11
Reorganization
On December 23, 1996 (the "Petition Date"), the Company, apart from its
subsidiaries, filed a voluntary petition for relief under Chapter 11 of the
United States Bankruptcy Code (the "Bankruptcy Code") in the United States
Bankruptcy Court for the District of Camden, New Jersey (the "Bankruptcy
Court"). The petition did not involve the Company's wholly-owned subsidiaries.
On the Petition Date, the Company filed a pre-negotiated plan of reorganization,
together with all subsequent amendments and modifications, (the "Plan") and an
accompanying disclosure statement, together with all subsequent amendments and
modifications, (the "Disclosure Statement"). The Disclosure Statement was
approved by the Bankruptcy Court on February 6, 1997.
On March 19, 1997 the Bankruptcy Court conducted a hearing regarding
the confirmation of the Plan and entered an order confirming the Plan. As
contemplated by the Plan, on May 28, 1997 (the "Effective Date"), the Company
emerged from Chapter 11. The Plan was further modified by the Bankruptcy Court
on November 16, 1998 upon the Joint Motion of the Company and U.S. Bank Trust
National Association as Indenture Trustee ("Indenture Trustee") with respect to
the Company's Second Amended and Restated Indenture effective as of December 4,
1998 ("Second Amended Indenture").
Plan of Reorganization
The Plan provided generally that creditors of the Company were to
receive 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 Class A Common Stock, and (B) on account of their
unsecured Deficiency Claims (as defined in the Plan) totaling $80,688,850, the
same treatment as is afforded to holders of General Unsecured Claims except that
they shall receive Class A Common Stock in lieu of New Common Stock (see
subparagraph (iii) below); (ii) holders of Secured Claims (as defined in the
Plan) that are not Claims (as defined in the Plan) 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), the
Indenture Trustee could receive no more than 375,000 shares of New Common Stock
and $550,000 in New Senior Secured Notes on account of its allowed Class 4
Claim, and any shares the Amended Indenture Trustee would otherwise receive on
account of its Class 4 Claim in excess of $550,000 in New Senior Secured Notes
is required to be distributed pro rata to all other holders of Allowed Class 4
Claims. See "Business - Debt After Reorganization" for a description of the New
Senior Secured Notes and "Business - Capital Structure" for a description of the
Company's current capital structure.
Holders of the Old Common Stock received their pro rata share of 50,000
shares of New Common Stock. Existing warrants, options and other rights to
acquire Old Common Stock (collectively, the "Old Options") were cancelled and
holders of such Old Options received no distributions of property on account
thereof.
The Plan provided for the discharge of all claims against the Company
and/or the release of the Company, its officers and employees, its wholly-owned
subsidiaries and their respective present and former directors, the Indenture
Trustee and the Noteholders Steering Committee of all liabilities in any way
related to the Company. In addition, a critical element of the Plan was the
release by the Indenture Trustee and each of the Noteholders of all of their
claims against subsidiaries of the Company arising out of guaranties and
pledges, except for the treatment of their Claims provided for under the Plan of
Reorganization.
Fresh-Start Reporting
In accordance with AICPA Statement of Position 90-7 "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"),
the Company was required to adopt fresh-start reporting on the Effective Date.
7
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In adopting fresh-start reporting, the Company, with the assistance of
its financial advisors, estimated the fair value of the Company without regard
to liabilities (the "Reorganization Value") at $23,500,000. The excess of the
Reorganization Value over the fair market value of the net assets of the
Company, totaling approximately $9,339,000 was recorded as Excess Reorganization
Value on the Effective Date. The estimate of Reorganization Value was based on
cash flow projections, under varying scenarios and assumptions, for the
post-reorganization operations of the Company. The significant assumptions
underlying the estimate were: (i) various scenarios regarding the acquisition of
new management contracts and the completion of the Rhode Island Project; (ii)
term of post-reorganization operations from three to eight years; (iii) a
discount rate of 12%; and (iv) no consideration for federal income taxes due to
the Company's expected utilization of its Net Operating Loss Carryforwards. As
the assumptions underlying the estimate of Reorganization Value relate to events
and circumstances that have not yet taken place, such estimates and assumptions
are inherently subject to significant economic and competitive uncertainties and
contingencies beyond the control of the Company, including, but not limited to,
those with respect to the future courses of the Company's business activity.
Accordingly, there will usually be differences between projections and actual
results because events and circumstances frequently do not occur as expected,
and those differences may be material.
The effect of the adjustments required in adopting fresh-start
reporting are reflected in the Balance Sheet data as of June 30, 1997. As a
result of the adoption of fresh-start reporting, the Consolidated Financial
Statements for the Reorganized Company are not comparable to those of the
Predecessor Company prepared prior to the Effective Date.
[4] SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of the Company are set forth in the
Company's form 10-K, as amended, for the fiscal year ended June 30, 1999 as
filed with the Securities and Exchange Commission.
[5] RHODE ISLAND DEVELOPMENT PROJECT
Narragansett Contract - Native American Casino (Rhode Island)
Through its wholly-owned subsidiary, Capital Development Gaming Corp.
("CDGC"), the Company entered into a seven-year management and development
contract with the Narragansett Indian Tribe (the "Narragansett Contract") for
the development of a Class II and Class III gaming facility in Rhode Island. The
Narragansett Contract provides for the Company to receive a management fee of
30% of Net Distributable Profits (as defined therein) of the gaming facility for
the first five years, commencing on the opening of the facility and 20% for the
remaining two years. As part of the Narragansett Contract, the Company is
required to advance certain funds for the development of the Rhode Island
Project and the construction of the gaming facility which will be repaid over a
seven-year period commencing with opening of the facility. The Narragansett
Contract was submitted to the NIGC for approval in June 1995.
In August 1996, the NIGC submitted comments on the Narragansett
Contract. As a result of the Decision (as defined below) invalidating the
Compact (as defined below), the NIGC informed the Company and the Narragansett
Tribe that the NIGC would only consider a contract relating solely to Class II
gaming. In light of this, the Company bifurcated the Narragansett Contract (the
"Management Agreement") and submitted it on June 21, 1996 for review and
approval by the NIGC of only the portions relating to Class II gaming. The
Company reclassified the Class III contract as a development contract until such
time as a Tribal/State Compact for Class III gaming was signed. However, as a
result of the Chafee Rider (as defined below), on December 16, 1996, the NIGC
declined further review of the Management Agreement.
In declining to review the Management Agreement, the Chairman of the
NIGC asserted that as a result of the application of the Chafee Rider, the
Narragansett Tribe lost its rights to conduct both Class II and Class III gaming
under the Indian Gaming Regulatory Act ("IGRA"). An appeal of the NIGC's action
was filed on December 20, 1996, and on June 17, 1997, the NIGC issued a final
decision upholding the Chairman's actions.
In light of the Decision (as defined below) to invalidate the Compact
and the application of the Chafee Rider (as defined below), no assurance can be
given if, or when, NIGC approval of the Management Agreement will be obtained or
if the Narragansett Tribe will be able to establish a commercial gaming
enterprise (Class II or Class III) under IGRA. Additionally, it is possible, as
a condition of obtaining such approval, that the NIGC will require material
modifications to the Narragansett Contract.
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
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Purported Termination of Narragansett Contract
The Narragansett Tribe has informed the Company that its contract is
terminated and that it seeks to contract with a specified third-party to develop
the Rhode Island Project. In connection with its purported termination, the
Tribe has acknowledged its legal obligation to repay, in accordance with the
terms of the Management Contract, the development loan made to the Tribe by the
Company. The Company disputes the Tribe's purported termination and is
evaluating its alternatives in this matter.
Tribal/State Compact
In August 1994, a Tribal/State Compact (the "Compact") was entered into
between the Narragansett Tribe and Governor Bruce Sundlan of Rhode Island. In
November of 1994, a lawsuit was filed by Rhode Island Attorney General Pine (the
"Pine Case") seeking to void the Compact on the grounds that the Governor of
Rhode Island lacked the authority to bind the State of Rhode Island absent State
Legislative approval. In 1995, Rhode Island's new Governor, Governor Almond,
joined with Attorney General in the Pine Case.
In February 1996, the United States District Court for the District of
Rhode Island decided that the Compact was void for lack of State Legislative
approval (the "Decision"). The State of Rhode Island has subsequently refused to
negotiate with the Narragansett Tribe. In light of this Decision, and similar
decisions in other states, the Secretary of the Interior (the "Secretary")
requested comments from the public as to whether the Secretary has the authority
to adopt Secretarial procedures to permit gaming under IGRA for the Tribes in
states (such as Rhode Island) that refuse to negotiate Tribal/State Compacts in
good faith. On January 22, 1998, a Proposed Rule on Class III Gaming Procedures
("Proposed Rule") was promulgated by the Department of the Interior.
Department of the Interior Proposed Rule on Class III Gaming Procedures
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 was passed
without hearings or debate, with no consultation with the Narragansett Tribe and
over the objections of ranking members of the Senate Indian Affairs Committee.
In February 1997, as a result of the NIGC's decision to decline further
review of the Management Agreement and the application of the Chafee Rider, the
Narragansett Tribe initiated litigation in the United States District Court for
the District of Columbia (the "District Court") naming the NIGC and its Chairman
as defendants. In this action, the Narragansett Tribe sought a declaration of
the District Court that, among other things, would declare the Chafee Rider
unconstitutional under the equal protection component of the Fifth Amendment to
the U.S. Constitution, along with an injunction requiring the NIGC to review the
Management Agreement. Both the Narragansett Tribe and the NIGC filed
cross-motions for summary judgement in the matter. In August 1997, the District
Court granted the NIGC's motion for summary judgement. An appeal was filed by
the Narragansett Tribe in the United States Court of Appeals for the District of
Columbia. On October 27, 1998 the Court of Appeals affirmed the District Court's
decision.
9
<PAGE> 12
In May 1997, a Congressional Review of the Chafee Rider was initiated
with a hearing before the Committee on Resources of the U.S. House of
Representatives (the "Committee"). The hearing included testimony from the
Department of the Interior, the Narragansett Tribe and the National Council of
American Indians, all of whom testified in support of the repeal of the Chafee
Rider, as well as from several political leaders from the State of Rhode Island
in support of the Chafee Rider. In June 1997, legislation that would amend and
effectively repeal the Chafee Rider ("H.R. 1983") was introduced in the House of
Representatives by Rep. Patrick J. Kennedy (D-RI), a member of the Committee,
and co-sponsored by Rep. Don Young (R-AK), the Chairman of the Committee and
Rep. Dale E. Kildee (D-MI), a member of the Committee and Co-Chairman of the
Congressional Native American Caucus. H.R. 1983, known as "The Narragansett
Justice Act," has subsequently cleared the Committee. No assurances can be given
as to the ultimate outcome of H.R. 1983.
Ongoing Project Development
Unless the Chafee Rider is overturned, the Narragansett Tribe is
precluded from establishing a Class II or Class III gaming facility under IGRA.
Under Rhode Island State Law, therefore, the Narragansett Tribe's only recourse
to establish a gaming facility, absent a repeal of the Chafee Rider, is to
submit the issue to a statewide and local referendum 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.
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, and other factors, the Company has not issued such warrants.
Other Matters
The Company continued funding of the on-going development costs of the
Narragansett development project until the Tribe's purported termination, which
at September 30, 1999, totaled approximately $11.5 million consisting primarily
of legal costs, environmental engineering and assessment costs, design costs and
other administrative costs. At September 30, 1999, approximately $9.9 million in
development costs (of the $11.5 million expended) were recoverable by the
Company if and when a gaming facility was established by the Narragansett Tribe.
The Tribe's purported termination of the Management Contract makes recovery of
this amount uncertain. These funds were expended cumulatively over the period
from Spring 1993 to present, and none of these expenditures have been
capitalized.
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[6] INCOME TAXES
Net Operating Loss Carryforwards ("NOLs")
The following description of the Company's NOLs is based on the
Company's analysis of the application of the relevant sections of the United
States Tax Code (the "Tax Code"). There can be no assurance that the Internal
Revenue Service ("IRS") or the courts will agree with the Company's analysis.
There are substantial risks associated with the Company's utilization of the
NOLs.
For purposes of this discussion, unless otherwise defined or modified,
the term "Gross NOLs" means the total NOLs reported to the Internal Revenue
Service on the federal income tax returns of the particular taxpayer, before the
application of any reductions and related adjustments described in the following
paragraphs under the heading "Net Operating Loss Carryforwards". Based on its
federal income tax returns for the years through June 30, 1996, the Company and
its subsidiaries reported cumulative Gross NOLs of approximately $107,000,000.
Under Section 172(b) of the Internal Revenue Code of 1986, as amended (the "Tax
Code") and, in effect for those years, unused NOLs expire after fifteen taxable
years from the taxable year of a loss. Because these losses were generated in
1994, 1995 and 1996, they should expire in 2009, 2010 and 2011 respectively.
For purposes of this discussion, the term "Net NOLs" means the amount
of NOLs of the particular taxpayer for federal income tax purposes adjusted to
reflect reductions and related adjustments required under Tax Code ss. 108 and
Tax Code ss. 382(1)(5), assuming that Tax Code ss. 382(1)(5) applies, but
subject to Internal Revenue Service audits, subsequent changes in the ownership
of the Company and effects under Tax Code ss. 382, and the application of Tax
Code Sections 269 and 384. See "Net Operating Loss Carryforwards - Application
of Tax Code ss. 382 Under the Chapter 11 Reorganization". After taking into
account the reorganization of the Company pursuant to the Plan 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.
Under the Plan of Reorganization, unsecured indebtedness of the Company
with an aggregate face amount of approximately $110,000,000 was cancelled.
Generally, Tax Code ss. 108 provides that a debtor whose indebtedness is
cancelled must include the amount of cancelled indebtedness in gross income to
the extent the indebtedness cancelled 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 cancelled is not required to be
included in gross income. Instead, any such excess amounts so excluded from
gross income reduce prescribed tax attributes of the debtor, including NOLs and
the bases of the assets of the debtor, in a specified order of priority
beginning with NOLs. Management of the Company believes that approximately
$75,500,000 of its Gross NOLs of approximately $107,000,000 as of June 30, 1996
must be reduced to take into account cancellation of indebtedness of the Company
pursuant to the Plan.
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.
If the Company is subject to the Section 382 Limitation as a result of
the consummation of the Plan, its annual Section 382 Limitation would be equal
to the product of the applicable long-term tax-exempt rate (5.64%) times the
fair market value of the equity of the Company immediately before the ownership
change. Thus, for example, if the value of the equity of the Company as of the
Effective Date of the Plan 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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<PAGE> 14
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 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 Class A 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
cancelled 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 ss. 382(1)(5) the reduction to
NOLs under Tax Code ss. 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 ss. 269 and 384, which are described below in this
section.
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, 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.
Provision for Income Tax Expense
The Provision for Income Tax Expense of $81,000 for the three-month
period ended September 30, 1999 relates solely to state income taxes. No
provision was made for federal income taxes due to the expected utilization of
the Net Operating Loss Carryforwards. As such, no relationship exists between
income tax expense and Consolidated Income (Loss) Before Income Tax for the
Company.
[7] NEW SENIOR SECURED NOTES
Debt After Reorganization
New Senior Secured Notes. Pursuant to the Plan, 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.
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<PAGE> 15
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. See "Default under the First Amended Indenture."
The Company and the Guarantors also have agreed to use their best
efforts to cause such registration statement to be declared effective by the
Securities and Exchange Commission (the "SEC") within 180 days following such
notice.
Default Under 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.
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<PAGE> 16
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.
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, June 30, 1998 and June 30, 1999 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. The Company will
make its scheduled interest payment of $1,386,000 on November 15, 1999.
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<PAGE> 17
[8] 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 $5,565,000 held by the Indenture Trustee as cash
collateral as of September 30, 1999, $4,995,000 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.
[9] MUCKLESHOOT SETTLEMENT
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.
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.
[10] PUEBLO OF LAGUNA DEFERRED CHARGES
On July 24, 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.
Pursuant to the Third Amended and Restated Management and Development
Agreement between CGMI and the Pueblo of Laguna dated September 7, 1999, CGMI
loaned 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, a construction loan of $7,200,000 was privately placed by a third
party in favor of LDC ("Third Party Loan"). The CGMI Loans are subordinate to
the third party loan.
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<PAGE> 18
In addition, the management agreement entitles the Company to 30% of
adjusted net revenues of the gaming operations (as defined in such agreement)
for the first three years and 20% of adjusted net revenues of the gaming
operations for the remaining two years of the contract. 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
principals. Construction of the Dancing Eagle Casino Project commenced on
October 4, 1999. Operations are expected to commence in the first calendar
quarter of year 2000.
[11] 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.
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PART I., Item 2.
CAPITAL GAMING INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the unaudited Consolidated Financial Statements as of September 30, 1999
and June 30, 1999 (audited) and for the three-months ended September 30, 1999
and 1998 contained herein and the Company's audited Consolidated Financial
Statements and the related notes thereto appearing in the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1999 filed with the
Securities and Exchange Commission.
Notice Regarding Forward-Looking Statements
To the extent the information contained in this management discussion
and analysis of unaudited consolidated financial condition as of September 30,
1999 and June 30, 1999 (audited) and results of operations for the three-months
ended September 30, 1999 and 1998 are viewed as forward-looking statements, the
reader is cautioned that various risks and uncertainties exist that could cause
the actual future results to differ materially from those inferred by the
forward-looking statements. Words such as "expects", "anticipates", "intends",
"potential", "believes" and similar expressions are intended to identify
forward-looking statements. A discussion of the risk factors regarding the
implementation of the Company's business strategy is set forth in the Company's
Annual Report on Form 10-K filed with the Securities and Exchange Commission, in
the section entitled "Risk Factors." Failure to successfully implement this
strategy would raise substantial doubt about the Company's ability to fulfill
its principal obligations under its New Senior Secured Notes. The reader is
further cautioned that risks and uncertainties exist that have not been
mentioned herein due to their unforeseeable nature, but which, nevertheless, may
impact the Company's future operations.
Liquidity and Capital Resources
Sources and Uses of Cash
For the three months ended September 30, 1999, the Company had a net
increase in cash and cash equivalents of $331,000, of which $1,871,000 was
provided by Company operating activities, and $1,540,000 was used by Company
investing activities .
Operating Activities: Cash flows from operating activities for the
three months ended September 30, 1999 were provided by (i) Native American
casino management fees of approximately $2,038,000, and (ii) interest income of
approximately $118,000. Significant operating activity balances required to
reconcile the Company's GAAP accrual net income of $289,000 for the three months
ended September 30, 1999 to net cash flows used by operating activities include
(i) depreciation and amortization of $554,000, (ii) payments received on the
Muckleshoot Settlement Agreement of $287,000, (iii) a decrease in interest
receivable of $5,000 (iv) a decrease in Native American management fees and
expenses receivable of $63,000, (v) a decrease in prepaid and other current
assets of $25,000 (vi) a decrease in accounts payable and accrued expenses of
$32,000, (vii) an increase in accrued interest payable of $684,000, (viii) a
decrease in federal income taxes payable of $72,000, and (ix) an increase of
$78,000 for state income taxes payable.
Investing Activities: Cash flows from investing activities for the
three month period ended September 30, 1999 were provided by $421,000 in
repayment of Native American loans/advances, and used by (i) an increase in
restricted funds of $1,588,000, and (ii) an increase in deferred Pueblo of
Laguna charges of $373,000.
Financing Activities: The Company did not have any financing activities
for the three month period ended September 30, 1999.
The Company's source of cash for the next twelve months is expected to
be derived from the receipt of management fees, the receipt of debt service
payments on the Native American loans receivable, and installment payments
received from the Muckleshoot settlement. The Company received its final debt
service payment in September 1998 on the Umatilla Tribes Casino loan, and the
Company is scheduled to be paid-in-full on the Tonto Apache Casino loan in April
2000. In the event conditions arise, for whatever reasons, that cause a
reduction or elimination of existing cash reserves and sources of cash, the
Company may not be able to continue operations or service its debt.
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, 319 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
17
<PAGE> 20
generally accepted accounting principles. On October 4, 1999, the Company funded
approximately $1,436,000 pursuant to the Construction and Pre-opening Cost Loan
Agreement for the construction of the Dancing Eagle Casino Project. The facility
is anticipated to open in the first quarter of calendar year 2000.
In December 1998 the Pueblo of Laguna announced plans to develop a
larger, second casino within the next 18 to 36 months to be located on
Interstate 40 on the Tribe's sovereign reservation lands approximately 7 miles
west of Albuquerque, New Mexico. There can be no assurances as to what effect
this increased competition will have on the projected revenues, profits and
management fees derived from the Company's proposed Dancing Eagle Casino
Project, or the ability of the LDC to repay any loans.
Debt
At September 30, 1999 the New Senior Secured Notes consist of the face
value $23,100,000 of the New Senior Secured Notes issued pursuant to the Plan.
The Company holds $300,000 of the New Senior Secured Notes in treasury.
Capital Requirements
The Company will continue to operate, through CGMI, the Tonto Apache
and Umatilla casinos pursuant to the related management agreements, and the
Dancing Eagle Casino Project pursuant to the related management agreement.
Absent any new developments, these agreements, along with debt-service payments
on the Tribal Loans with the Tonto Apache Tribe, installment payments on the
Muckleshoot Settlement, principal and interest payments on the tribal loan
relative to the Dancing Eagle Casino Project, monthly lease payments relative to
the Dancing Eagle Casino Project, and cash and cash equivalents on hand at
September 30, 1999 of $4,771,000 and restricted funds of approximately
$5,565,000 will provide the Company with its only sources of cash for the
approximately six months remaining on the Company's two existing operating
management contracts, and the anticipated five years on the Dancing Eagle Casino
Project. The Company believes that these sources of cash coupled with a new and
reduced expense budget will exceed the ongoing cash requirements for all
operating expenses and general business development costs 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.
In order to complete the funding of the construction or acquisition
costs of new projects, it is anticipated that the Company will require
significant additional capital or project financing. The Company believes that
should any new projects become available it 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 funding the development of Class III gaming facilities
including the Dancing Eagle Casino Project, 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, given
the high level of uncertainty concerning the prospects of new development
projects, 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. No financing commitments have been obtained as of the date of this
filing, nor can the timing of any new capital requirements be reasonably
estimated at this time.
The Company believes it will require new sources of cash beyond its
existing operations and current expansion plans in order to fund the final
payment of principal of $18,480,000 on its New Senior Secured Notes due May 15,
2001.
Restricted Funds
Restricted funds consist of approximately $5,565,000 and $3,977,000
(including accrued interest) as of September 30, 1999 and June 30, 1999,
respectively, and 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 $5,565,000 held by the Indenture Trustee as Cash Collateral, as of
September 30, 1999, $4,995,000 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.
18
<PAGE> 21
Year 2000 Computer Software Compliance
The Company relies on computer hardware, software and related
technology in the course of its operations, and such technology is utilized by
the Company and its managed casinos for their delivery of products and services.
The Company has preliminarily reviewed its computer systems as well as those of
its managed casino operations for compliance with the potential hazards of the
year 2000 computer conversion. Based on this preliminary review, it appears the
Company and its managed casino operations will be in compliance with year 2000
protocols prior to the end of the millennium, and that modifications, software
or computer hardware upgrades, or any other procedures required to comply with
year 2000 protocols, will primarily be handled by the software and computer
system vendors and/or manufacturers, and that expected costs to the Company are
currently expected to be immaterial.
Default Under First Amended Indenture
See Note [7] "Default Under First Amended Indenture".
19
<PAGE> 22
Results of Operations
Overview
The following discussion about the Company's results of operations
includes the Company and its subsidiaries, CGMI, and CDGC.
Three-month Period Ended September 30, 1999 as Compared to the Three-month
Period Ended September 30, 1998
Income From Operations
Income from operations for the three-month period ended September 30,
1999 totaled approximately $936,000 as compared to a loss of $82,000 for the
three-month period ended September 30, 1998, representing an increase in income
from operations of $1,018,000. This increase in income is due to (i) an increase
in revenues of $2,000, and (ii) a decrease in operating expenses of $1,016,000.
Revenues
The following table outlines the Company's revenues for the three months
ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
3 Months 3 Months
Ended Ended
9/30/99 9/30/98 Inc. (Dec.) % Change
-------- -------- ----------- --------
<S> <C> <C> <C> <C>
Umatilla $1,290 $1,257 $ 33 2.6%
Tonto Apache 686 717 (31) -4.3%
------ ------ ---- -----
$1,976 $1,974 $ 2 0.1%
====== ====== ==== =====
</TABLE>
Revenues increased $2,000, or 0.1% from $1,974,000 to $1,976,000 for the
three-month period ended September 30, 1999 as compared to the three-month
period ended September 30, 1998. The increased revenue from the Umatilla Casino
of $33,000 resulted from additional slot machines being added to the casino
floor. The decreased revenue from the Tonto Apache Casinos of $31,000 was due to
decreased traffic flow in the area from prolonged fire hazard conditions and
camping restrictions.
Costs and Expenses
Salaries and wages decreased to $212,000 from $763,000, a $551,000 or
72.2% decrease in the first quarter of fiscal 2000 as compared to the first
quarter of fiscal 1999. This decrease in salaries, wages and related expenses is
primarily attributable to management's efforts to increase efficiency,
streamline operations and reduce costs including (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.
Company development costs declined $217,000 or 80.7% from $269,000 for
the three months ended September 30, 1999 as compared to the three months ended
September 30, 1998. This decline is due primarily to reduced development costs
being incurred in conjunction with the Narragansett Indian Tribe's attempt to
further their position toward an approved Compact.
Professional fees decreased to $139,000 from $321,000, a 56.7% or
$182,000 decrease in the first quarter of fiscal 2000 as compared to the first
quarter of fiscal 1999. This decline is primarily due to management's continuing
efforts to reduce legal costs in all categories.
General and administrative expenses declined $43,000 or 34.1% to $83,000
for the three months ended September 30, 1999. This decline is attributable to
the continued streamlining of the Company's operations and general expense
reductions in the first quarter of fiscal 2000.
The decline in depreciation and amortization of $23,000 or 4.0% to
$554,000 is primarily attributable to the write-off of the amortization of
Muckleshoot Casino deferred charges in the first quarter of fiscal 1999.
Other Income and Expenses
The other income line, 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 [9] to the Company's consolidated financial
statements contained herein).
Interest income declined $17,000 or 12.6% from $135,000 for the three
months ended September 30, 1999. This decline is the collective result of two
factors, (i) an increase in average idle interest-bearing cash, cash equivalents
and restricted funds outstanding in the first quarter of fiscal 2000 which
increased interest income, and (ii) lesser interest income from the Native
American loans due the Company in the first quarter of fiscal 2000 as compared
to the first quarter of fiscal 1999 due to the receipt of the final payment in
September 1998 of the Umatilla Tribes Casino Loan, and the normal scheduled
monthly amortization of the Tonto Apache Casino Loan, which lowered interest
income.
20
<PAGE> 23
Interest expense decreased $9,000 or 1.3% from $693,000 for the first
quarter of fiscal 2000 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 2000 and 1999 was the new Senior Secured Notes whose principal
balance of $23.1 million and whose interest rate of 12.0% have both remained
unchanged.
The provision for income taxes for the three-month periods ended
September 30, 1999 and 1998 represents an estimate for state income tax expense
for Company earnings from CGMI in the state jurisdictions in which it operates.
No provision is made for Federal income taxes due to the expected utilization of
the net operating loss carryforwards of the Company (see Note [6] to the
Company's consolidated financial statements contained herein). As such, no
relationship exists between income tax expense and consolidated income before
income taxes for the Company.
PART I., Item 3.
Quantitative and Qualitative Disclosures about Market Risks
Not applicable.
21
<PAGE> 24
PART II., Item 1.
CAPITAL GAMING INTERNATIONAL, INC.
LEGAL PROCEEDINGS
Pursuant to the Plan of Reorganization, all legal proceedings against
the Company prior to the Effective Date were settled. As a result there was no
material litigation pending against the Company on September 30, 1999. The
Company is or may become a defendant in pending or threatened legal proceedings
in the ordinary course of business although is not aware of the existence of any
material pending or threatened legal proceedings at this time except as
disclosed herein.
1. Muckleshoot Litigation
Previously reported in Company's Annual Report filed on Form 10-K for
the fiscal year ended June 30, 1999 filed with the Securities and Exchange
Commission. See Note [9] to the unaudited financial statements contained herein.
2. Narragansett Agreement
The Narragansett Tribe has informed the Company that its contract is
terminated and that it seeks to contract with a specified third-party to develop
the Rhode Island Project. In connection with its purported termination, the
Tribe has acknowledged its legal obligation to repay, in accordance with the
terms of the management contract, the development loan made to the Tribe by the
Company. The Company disputes the Tribe's purported termination and is
evaluating its alternatives in this matter. See Note [7].
Reorganization of the Company
See Note [2] to the unaudited Consolidated Financial Statements
contained herein and the Company's Annual Report filed on form 10-K for the
fiscal year ended June 30, 1999, filed with the Securities and Exchange
Commission.
Part II., Item 2.
Changes in Securities and Use of Proceeds
Except as disclosed in note [7] to the unaudited financial statements
contained herein (Court Approval of Modification of Plan and Second Amended
Indenture), there have been no changes in securities or the capital structure of
the Company for the three months ended September 30, 1999. As disclosed in note
[7] to the unaudited financial statements contained herein, effective December
4, 1998, holders of the Old Secured Notes became entitled to receive 1,600,000
shares of Class A Common Stock on account of their Allowed Secured Claims and
Allowed Unsecured Claims in connection with Bankruptcy Court approval of
Modifications to the Plan. These securities have been issued pursuant to an
exemption from the Securities Act of 1933 pursuant to Section 3(7) and, in the
alternative, any other section thereof that may apply. See note [3] to the
unaudited financial statements contained herein and the Reorganization section
in the Company's Annual Report filed on form 10-K for the fiscal year ended June
30, 1999, filed with the Securities and Exchange Commission.
PART II., Item 3.
Default Under First Amended Indenture
See Note [7] - "Default Under First Amended Indenture".
As per the terms of the Second Amended Indenture, the Company made an
interest payment of $1,285,900 on November 12, 1997, an interest payment of
$1,386,000 on May 15, 1998, an interest payment of $1,386,000 on November 15,
1998, and an interest payment of $1,386,000 on May 14, 1999. The Company will
make its scheduled interest payment of $1,386,000 on November 15, 1999.
Part II., Item 4.
Submission of Matters to a Vote of Securityholders
There were no matters required to be brought to a vote of the
securityholders during the three months ended September 30, 1999.
22
<PAGE> 25
PART II., Item 6.
CAPITAL GAMING INTERNATIONAL, INC.
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number
- -------
<S> <C>
# Filed herewith
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
The following Form 8-K, as amended, was filed by registrant during the
quarter ended September 30, 1999:
Form 8-K filed August 20, 1999 reporting under Item 4 that on August
16, 1999 Registrant dismissed Moore Stephens, P.C. as its principal
independent accountant, and that on August 16, 1999 Registrant engaged
Toback CPAs as its new principal accountant. Amendment No. 1 to such
Form 8-K, which attached certain required correspondence from Moore
Stephens, P.C., was filed on August 25, 1999.
23
<PAGE> 26
Signature Page
CAPITAL GAMING INTERNATIONAL, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
Dated: November 15, 1999 By: /s/ Michael W. Barozzi
---------------------------------------------
Michael W. Barozzi, President and Chief
Operating Officer
(Authorized Representative)
Dated: November 15, 1999 By: /s/ William S. Papazian
------------------------------------------
William S. Papazian, Executive Vice President
and General Counsel and Secretary
(Authorized Representative)
Dated: November 15, 1999 By: /s/ Robin K. McEntire
------------------------------------------
Robin K. McEntire, Controller
(Principal Accounting Officer)
24
<PAGE> 27
EXHIBIT INDEX
<TABLE>
Exhibit
No. Description
- ------- ----------------------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 4,771,000
<SECURITIES> 0
<RECEIVABLES> 2,496,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 13,022,000
<PP&E> 131,000
<DEPRECIATION> 120,000
<TOTAL-ASSETS> 18,176,000
<CURRENT-LIABILITIES> 6,610,000
<BONDS> 23,100,000
0
0
<COMMON> 400,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 18,176,000
<SALES> 0
<TOTAL-REVENUES> 1,976,000
<CGS> 0
<TOTAL-COSTS> 1,040,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 684,000
<INCOME-PRETAX> 370,000
<INCOME-TAX> 81,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 289,000
<EPS-BASIC> 0.14
<EPS-DILUTED> 0.14
</TABLE>
