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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended September 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
Commission file number 0-22242
CASINO RESOURCE CORPORATION
(Name of the small business issuer in its charter)
MINNESOTA 41-0950482
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
707 Bienville Boulevard
Ocean Springs, Mississippi 39564
(Address of principal executive offices)
Issuer's telephone number (228) 872-5558
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Name of each exchange on which registered: N/A
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock and Class A Warrants
Check whether the company (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the Company was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No .
Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in the definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The Company's revenues for the fiscal year ended September 30,1997 were
$15,700,264.
As of December 31, 1997, 10,043,364 shares of Common Stock were
outstanding, and the aggregate market value of such Common Stock (based upon
the last reported sale price on the NASDAQ National Market), excluding
outstanding shares beneficially owned by affiliates was approximately
$10,671,074.
Transitional Small Business Disclosure Format (Check one):
Yes ; No X
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PART I
ITEM 1. BUSINESS
GENERAL
The Company was organized in 1969. In 1987, the Company merged into an
inactive public corporation, and in 1993, it changed its name to Casino
Resource Corporation. Prior to 1987, the Company engaged in various business
activities unrelated to its current or proposed businesses. Between 1987 and
1991, the Company's primary business was owning and managing recreational
vehicle resorts, and providing related direct marketing services. The Company
sold its capital-intensive camp resort properties during 1988 through 1991 and
began offering its direct marketing services to the recreational real estate
industry, primarily focusing on timeshare and camp resort developments and,
eventually, to the casino industry. The Company sold its timeshare and camp
resort direct marketing business in May 1994, and directed its focus to the
hospitality and entertainment industry in both gaming and high-tourist areas,
and to the emerging gaming industry.
The Company entered the hospitality and entertainment industries by
acquiring or developing five businesses, one of which has been sold. In March
1994, the Company purchased a musical production company, which staged an
award-winning show at the Aladdin Hotel in Las Vegas, Nevada and closed on
November 15, 1997 with the closing of the Aladdin Hotel. Also in March 1994,
the Company purchased its "Country Tonite Theatre" in Branson, Missouri, which
was reopened for business in May 1994. In May 1994, the Company completed
construction of and opened its 154-room hotel, the "Grand Hinckley Inn," on 7.5
acres of leased land in northern Minnesota adjacent to the Grand Casino
Hinckley, an Indian gaming facility currently operated by Grand Casinos, Inc.
("Grand Casinos"). Also, in May 1994, the Company completed construction of
the 1,872-seat "Biloxi Star Theatre" adjacent to the Grand Casino Biloxi on the
Gulf Coast of Mississippi. This facility was subsequently sold to Grand
Casinos in September 1994. In March 1997, a third venue for the Country Tonite
Show opened in Pigeon Forge, Tennessee. The Country Tonite Theatre, LLC, a
joint venture between the Company and Burkhart Ventures, LLC, presents the
Country Tonite show in a 1,500-seat, state-of-the-art theatre in Pigeon Forge,
Tennessee. The Company is the operating manager and owns 60% of the joint
venture. In April 1997, the Branson Theatre added a second show "The Golden
Girls", in a joint venture with Greg Thompson Productions. The Company plans
to increase its hospitality and entertainment businesses as opportunities
arise.
The Company, through its 85% owned subsidiary, CRC of Tunisie, Inc.,
opened its casino and 500-seat theatre (Casino Caraibe) in a leased facility
in Sousse, Tunisia on October 18, 1997.
The Company had previously entered into a Technical Assistance and
Consulting Agreement with Harrah's Entertainment, Inc. ("Harrah's") which, upon
the receipt of a compact and regulatory approval, Harrah's is to develop and
manage one or more casinos to be funded by Harrah's for the Pokagon Band of
Potawatomi Indians in northern Indiana and southwestern Michigan. The Company
will, upon commencement of operations, receive 21.6% of Harrah's management
fee, but is not required to provide any development capital.
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EXISTING OPERATIONS
GRAND HINCKLEY INN (HINCKLEY, MN)
In May 1994, the Company opened its Grand Hinckley Inn on 7.5 acres of
leased land located adjacent to the Grand Casino Hinckley, a 46,000 square-foot
casino owned by the Mille Lacs Band of Ojibwe Indians (the "tribe") and
operated by Grand Casinos near Hinckley, Minnesota. The casino attracts
approximately four million patrons per year. The 154-room hotel is largely
occupied by casino patrons.
The hotel is located approximately 90 miles north of Minneapolis near the
intersection of Interstate 35 and State Highway 48. The intersection contains
approximately 250 hotel or motel rooms, plus a 281-room hotel completed in
December 1997 by the tribe, adjacent to the casino. The tribe is the lessor of
the Grand Hinckley Inn site.
The hotel is a luxury facility featuring 138 standard rooms and 16 suites.
Amenities include a swimming pool, a whirlpool and sauna, a video arcade, cable
television with video programming and games, and surface parking for 189
vehicles. The hotel features a spacious lobby and library, vaulted fireplace
sitting areas, a conference room, and guest laundry facilities. The hotel
provides complimentary continental breakfasts to all guests and free 24-hour
shuttle service to and from the casino seven days a week.
The hotel has achieved an average occupancy rate of approximately 83% for
the fiscal year ended September 30, 1997, and generally reaches full capacity
on weekends. For the fiscal year ended September 30, 1997, the hotel had an
average room rate of $57.28.
The Company has entered into several beneficial arrangements with Grand
Casinos and the tribe regarding the hotel. The Company leases the land on
which the hotel is situated from Grand Casinos at the rate of $1 per annum; the
casino arranges room reservations at the hotel for its preferred customers; and
each business highlights the other in its marketing efforts. In addition,
under a Marketing Enhancement Agreement, the Company receives a $20 fee per
night per occupied room from the "Enterprise," (a combination of Grand Casinos
and the Mille Lacs Band of Ojibwe). In return for the marketing enhancement
fee, the hotel has entered into a revenue sharing plan with the Enterprise
which requires that 50% of all room revenues above a defined cumulative
threshold be paid to the Enterprise up to the amount of the marketing
enhancement fees received by the hotel. The hotel exceeded the cumulative
threshold during the fiscal year ended September 30, 1996 and began making
payments to the Enterprise under the windfall profit sharing arrangement.
Payments due to the Enterprise under this "windfall profit sharing arrangement"
for fiscal 1997 totaled $659,000. Payments in the future will vary based on
revenues and increases, if any, in the hotel's annual operating cost threshold.
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The Company and the Tribal Commission of the Mille Lacs Band have
entered into an agreement regarding future ownership of the hotel. The
Tribal Commission has the unilateral right to purchase the hotel on the
anniversary dates of its initial occupancy (May 1994) in each of years 2001
through 2006 at a cost equivalent to the original development cost of the
hotel plus the depreciated cost of personal property and all inventories, less
$450,000. Conversely, in the event that the Tribal Commission allows the
construction of more than 500 hotel or equivalent rooms on property owned by
the Tribal Commission or Grand Casinos, the Company has the right to require
the Tribal Commission to purchase the hotel at the cost stated above. The
addition by the tribe of the 281-room Grand Casino Hotel adjacent to the
Hinckley casino does not result in the 500-room threshold being exceeded.
The Grand Casino Hotel, which opened December 1997, could have an adverse
impact on the operating income of the hotel.
The Company obtained mortgage financing in the amount of $3.3 million for
the development of the hotel in 1994. This debt is collateralized by the hotel,
as well as by certain stock pledged by Grand Casinos. The mortgage note
matures on April 1, 2004 and bears interest at an annual rate equal to the prime
rate plus 2%, up to a maximum of 11% (currently 10.50%). The note is payable
in monthly installments of principal and interest of $44,283. Approximately
$2.5 million in principal amount was outstanding at September 30, 1997. In
addition to the mortgage, the Company secured $900,000 of equipment financing
collateralized by the hotel's furniture, fixtures and equipment and guaranteed
by Grand Casinos. This debt was repaid in full in August 1996. A $1,289,000
line of credit extended by Grand Casinos to the Company for working capital
purposes secured by a second mortgage on the hotel was repaid in August, 1997.
In September 1997, all the common stock of Casino Building Corporation (which
is the record owner of the Grand Hinckley Inn), a wholly-owned subsidiary of
the Company, was pledged as collateral for a $800,000 note due October 18, 1998.
COUNTRY TONITE THEATRE (BRANSON, MO)
The Company purchased the former Ray Stevens Theatre, now the Country
Tonite Theatre (the "Theatre"), in Branson, Missouri in March 1994. In May
1994, the 2,000-seat theatre began running two shows daily, featuring dancers,
singers, comics and other variety acts. The show is produced by the Company's
Las Vegas-based subsidiary, Country Tonite Enterprises, Inc. ("CTE"). The
Theatre includes 38,000 square feet on two floors with an auditorium, a stage
area, control booths, dressing rooms, upstairs offices, a lounge, a gift shop
which offers a wide variety of souvenirs with the Country Tonite theme, and two
concession stands. In addition, the Theatre parking lot accommodates 600 cars
and 30 buses.
The Country Tonite show has been voted "Best Live Country Music Show in
America" by the Country Music Associations of America ("CMAA") for three
consecutive years through 1995. In November 1995, the show was voted "Show of
the Year" by the 1995 Branson Entertainment Awards. Theatre revenues increased
1.4% for fiscal 1997 over fiscal 1996. The Theatre has achieved 38% of capacity
during the fiscal year ended September 1997, with an average ticket price of
$15.43, which is competitive with the average ticket price at other theaters in
Branson.
Branson, Missouri is a popular resort destination for country music lovers
from across the nation. Branson is located at the intersection of U. S. Highway
76 and Interstate Highway 65, which connects Branson and Springfield, Missouri.
With a population of approximately 3,000, Branson is home to over 30 theaters
featuring music stars such as Andy Williams, Bobby Vinton and the Osmond
family. In addition to roughly 20,000 hotel rooms, Branson offers diverse
eating, shopping
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and recreational activities to its approximately 6 million annual visitors,
most of whom visit between the months of
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March and December. Typical visitors to Branson are senior citizens
participating in bus tours through Missouri. Families also comprise a large
part of Branson's visitors during the summer months and they are drawn to
Branson not only by the country music, but by the additional activities
offered in the summer months by the many lakes in the Branson area and the
Arkansas Ozarks, another popular tourist destination area only 50 miles from
Branson.
The Company purchased the Theatre for $2 million in cash and a promissory
note collateralized by the Theatre for $8 million in principal amount. The
note, with a principal balance of $7.4 million at September 30, 1997, bears
interest at the prime rate plus 1%, with a floor of 7% and a ceiling of 10%
(currently 9.5%), and matures on April 1, 1999. The note is payable in monthly
installments of principal and interest of $73,035, with a final payment due at
maturity of $7,077,978.
COUNTRY TONITE PRODUCTION SHOW (LAS VEGAS, NV)
CTE, the Company's musical production subsidiary based in Las Vegas,
Nevada, was acquired in March 1994. The production show involves a country
and western theme, and played at the Aladdin Hotel and Casino ("Alladin") in
Las Vegas from 1992 until November 15, 1997 when the Aladdin Hotel closed for
renovations. Company management is currently seeking a new long term Las
Vegas venue for the show. Failure to find a new venue for the Las Vegas Show
could have a negative impact on the Company's operating income. In addition
to the CMAA award, other awards received by the show include "Best Television
Program in Nevada", "Electronic Media Award 1994" and "Recording of the
Year". In 1997, the Show was awarded the "International Country Music Live
Show of the Year" and Jack Pilger was awarded International Producer of the
Year and inducted into the Country Music Organizations of America Hall of
Fame in 1997. Additional casts of the Country Tonite show perform at the
Country Tonite Theatre in Branson, Missouri and Pigeon Forge, Tennessee.
The Company added a third venue for the Country Tonite Show in Pigeon
Forge, Tennessee, which began in March 1997. The show appeared at Grand Casino
in Biloxi, Mississippi from late December 1996 to March 1997 and toured Japan
for twenty days in September 1997. The Company is exploring other venues for
its popular Country Tonite Show.
COUNTRY TONITE THEATRE - PIGEON FORGE
CRC of Tennessee, Inc. ("CRCT"), a wholly owned subsidiary of the Company
and Burkhart Ventures, LLC formed a joint venture, Country Tonite Theatre, LLC
to present the Country Tonite Show in a 1,500-seat state-of-the-art theatre
located in the heart of Pigeon Forge, Tennessee which began on March 21, 1997.
CRCT owns 60% of the joint venture and manages the theater. Under the terms of
the Operating Agreement, the partners contributed $500,000 of operating capital
and agree to provide up to $500,000 of advances as a credit line to the LLC,
of which $500,000 has been advanced through December 31, 1997.
There are currently nine comparable theaters operating in the Pigeon Forge
area. Pigeon Forge is considered an emerging area for theater based
entertainment.
Pigeon Forge, located at the base of the Smoky Mountains, draws over 12
million tourists annually in contrast to the Branson marketplace, which hosts
approximately 6 million visitors per year. Country Tonite Enterprises
produces and performs its Country Tonite Show in the Pigeon Forge theater.
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TUNISIA CASINO
The Company, through its 85% owned subsidiary, CRC of Tunisie, S.A. signed
a definitive agreement in July 1996 with the Samara Casino Company to lease and
operate a casino, video arcade and 500-seat theatre in Sousse, Tunisia. The
42,000 square foot casino and resort, which opened October 18, 1997, has over
10,000 square feet of gaming space with approximately 281 slot machines and 21
table games. Capital expenditures and preopening costs to open the Tunisia
Casino totaled approximately $4,500,000, of which approximately $4,000,000 has
been expended through September 30, 1997.
The entertainment complex/casino is a freestanding building, which is
located on a triangular piece of property in front of the Hotel Samara. The
site is located on the main street of Sousse in the heart of the tourist center
and directly off the beach. The site is approximately 1.5 acres in size. The
casino is the first of its kind in the City of Sousse. Two other casinos are
open in other Tunisian municipalities at distances of approximately fifty to
one hundred miles from Sousse.
CRC of Tunisia also operates a gourmet restaurant, gift shop and additional
food and bar service on the property for which the Company exchanged a 15%
ownership interest in CRC of Tunisie, S.A. effective in October 1997. The
casino is situated in front of the 425-room Hotel Samara, one of three hotels
that Samara controls in Sousse. The two other hotels have 125 and 275 rooms,
respectively.
The Republic of Tunisia is a small country in the northern most part of
North Africa and is bordered on the north and east by the Mediterranean, on the
southeast by Libya, and on the west by Algeria. It is approximately 62,608
square miles in size or relatively the same size as Illinois. Tunisia is a
destination resort known for its beaches. The city of Sousse borders the
Mediterranean. Casinos are a new attraction for the tourist trade in Tunisia.
The total number of annual tourists visiting Tunisia is estimated to be
4.5 million. The average length of stay for tourists is approximately 6 days.
There are approximately 20,000 hotel rooms to rent in the city of Sousse with
many more in the outlying areas. The tourist season is May 15 through October.
During this time the hotel rooms are historically, on average, 80% occupied.
The average occupancy rate year-round is 53%. The closest airport to Sousse is
approximately 30 minutes away. Tourists take a bus from the airport to Sousse.
DEVELOPMENT ACTIVITIES
POKAGON CONSULTING AGREEMENT
In January 1995, the Company and Monarch Casinos, Inc. ("Monarch")
executed a Memorandum of Understanding (which was modified in December 1995)
whereby the Company acquired Monarch's rights to potential Indian gaming
contracts in exchange for shares of the Company's Common Stock, certain
financial assistance and a consulting agreement, all as described below. The
Company assumed Monarch's rights with respect to the potential award of a
gaming management contract by the Pokagon Band of Potawatomi Indians, domiciled
in northern Indiana and southwestern Michigan.
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Also in January 1995, the Company executed a Memorandum of Understanding
with the Promus Companies Incorporated (now Harrah's Entertainment, Inc.),
whereby Harrah's would act on behalf of itself, and the Company in seeking the
Pokagon award. A Management and Development Agreement was awarded by the
Pokagon band to a subsidiary of Harrah's in September 1995, and final
agreements between Harrah's and the Pokagon band were entered into in November
and December 1995. The agreements call for Harrah's to provide or cause to be
provided one or more loans to finance the construction of one or more casinos
in the Pokagon band's service area of northern Indiana and southwestern
Michigan. The band will then be responsible for repaying the loans and paying
to Harrah's a management fee, as defined for each Pokagon casino.
Under the Technical Assistance and Consulting Agreement with Harrah's, the
Company will receive 21.6% of Harrah's management fee as consulting fees over
the five-year term of Harrah's management contract (and any extensions thereof)
with the Pokagon band. The Company has, in turn, agreed to pay to two
consultants to the Company who assisted in the acquisition of rights from
Monarch (including Kevin M. Kean, a principal stockholder of the Company), an
aggregate of 10% of its consulting fee income less the Company's related direct
operating costs, subject to certain limits in the case of Mr. Kean. (Similar
fees may also be payable to Mr. Kean out of revenues if any, received by the
Company from other Indian businesses, including gaming.) Mr. Kean has
pledged his interest in the Pokagon project as part of a settlement of his
$1,232,000 note receivable due the Company.
The Company will have no obligation to provide Harrah's or the Pokagon
band with any funding. However, to the extent not recouped by Harrah's from
the Pokagon band, the Company will reimburse Harrah's for the Company's share
(21.6%) of specified development and licensing costs incurred by Harrah's.
The Management and Development Agreement and related agreements between
Harrah's and the Pokagon band cannot take effect until approved by the
National Indian Gaming Commission ("NIGC"). The Company's obligation to
reimburse Harrah's will be payable in equal installments over 24 months
without interest, and will be subject to reduction for payments due the
Company from Harrah's. Under the Technical Assistance and Consulting
Agreement, Harrah's has agreed to pay to the Company a one-time fee of
$250,000 (recorded in fiscal 1995 and collected in fiscal 1996) in connection
with the signing of the Management and Development Agreement with the Pokagon
Band, and a one-time fee of $600,000 as consideration for the relinquishment
of any rights or claims to any other business venture of Harrah's and its
affiliates, which is payable over five years, commencing with the opening of
the first Pokagon casino. In turn, the Company has agreed to pay to
Harrah's, $5,000 per month for a period of 40 months for the administration
of the Pokagon contract, commencing with the opening of the first Pokagon
casino.
In consideration for the rights acquired from Monarch, the Company issued
to Monarch 100,000 shares of the Company's common stock in May 1995, and has
agreed to issue to Monarch an additional 400,000 shares of common stock upon
the ground breaking for the first Pokagon casino and 1,500,000 shares of common
stock upon commencement of operations of the first Pokagon casino.
Additionally, the Company agreed to assume up to $179,000 of Monarch's accounts
payable, to make certain cash advances to Monarch or its principals and to
reimburse Monarch's executives for travel and business development costs
related to certain gaming opportunities. The Company has also executed a
Consulting Agreement with Monarch, which was subsequently assigned by Monarch
to Willard E. Smith, requiring the Company to (i) pay monthly fees commencing
(retroactively) in January 1995 at
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various rates of from $3,000 to $14,250 per month; (ii) loan an aggregate of
$250,000 (all of which has been advanced), which may be forgiven in part or in
whole upon the occurrence of certain events; (iii) reimburse travel expenses,
and (iv) lease to Mr. Smith the Company's Ocean Springs, Mississippi residence
at a below-market lease rate. Payment of monthly consulting fees to Willard
Smith under the Consulting Agreement were terminated in September, 1997.
MARKETING AND COMPETITION
The entertainment and hospitality businesses of the Company rely on the
attraction of the Grand Casino Hinckley, in the case of the Grand Hinckley Inn;
the national reputation of Las Vegas, Nevada, in the case of the Company's
stage show at the Aladdin Hotel in Las Vegas (which closed in November 1997);
and the tourist attractions of Branson, Missouri and Pigeon Forge, Tennessee in
the case of the Country Tonite Theatres. The gaming business of the Company
relies on the tourist industry of Tunisia.
HINCKLEY, MINNESOTA MARKET
The Grand Hinckley Inn is located near the intersection of Interstate
Highway 35 and Minnesota State Highway 48, adjacent to Hinckley, Minnesota.
Hinckley is within ninety miles of Hayward, Wisconsin, and the Minnesota cities
of Minneapolis/St. Paul, Duluth, St. Cloud and Brainerd. Interstate Highway 35
links Minneapolis/St. Paul and Duluth, which are Minnesota's two largest
population centers, and the Highway 48 intersection is a traditional rest stop
for travelers. The intersection contains approximately 250 hotel or motel
rooms plus a number of restaurants and retail outlets. In addition, Grand
Casinos owns or has developed approximately 400 acres of land adjacent to Grand
Casino Hinckley. The Grand Hinckley Inn depends substantially on patronage by
visitors to the neighboring Grand Casino Hinckley, as well as on enhancement
payments by Grand Casinos.
Although the Grand Hinckley Inn has maintained occupancy levels of
approximately 82% since opening in May 1994, there is no assurance that the
adjacent casino will continue to attract its historically high levels of
patronage. The Enterprise constructed a 281-room hotel adjacent to the Grand
Casino, which opened in December 1997. This hotel competes directly with the
Grand Hinckley Inn and could adversely impact both the occupancy and room
rates. A decrease in casino business or an additional increase in the number
of guest rooms could also adversely impact present occupancy and room rate
levels. The hotel's success has, to a large part, been attributable to
co-marketing activities conducted by both the Company and Grand Casinos, as
operator of the adjacent casino. Under terms of a Marketing Enhancement
Agreement, as amended, the hotel has benefited from referral reservations
from the casino; from the purchase by the casino of rooms to satisfy its
obligations under frequent-player programs; joint advertising themes and
programs; and the marketing enhancement fee paid by the casino for each daily
occupied room. The Company is presently in negotiations with GCI regarding the
effect of the tribe's newly-opened 281-room hotel on the referral reservation
procedure provided in the Marketing Enhancement Agreement. The Company has
advised GCI that it may initiate litigation to enforce its rights with
respect to the referral reservation procedure provided in the Marketing
Enhancement Agreement. Should any of these factors change in a material
manner, the Company's success at the hotel could be adversely impacted.
BRANSON, MISSOURI MARKET
Branson, Missouri is a nationally known destination for country music
lovers. Approximately 6 million tourists visit Branson, Missouri each year,
lured by its attractive geography and climate, as well as by its substantial
number of family-oriented musical and show theaters. The area contains
approximately 33 theaters providing a wide range of family entertainment for
all ages.
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The Company attracts "walk up" patrons (approximately 85% of total
sales), both through local media advertising and "word-of-mouth", and markets
to pre-arranged bus tours (approximately 15% of total sales). The number of
competing theaters and number of shows could attract ticket buyers away from
the Company's theatre. Also, other area tourist attractions could limit the
growth or even decrease ticket sales. In addition, other geographic areas
are currently actively seeking to increase their tourist bases, which could,
at some point, negatively impact the number of annual visitors to Branson.
The Country Tonite Show playing at the Company's theatre, while having won
major awards could be duplicated by a competing theatre with possible adverse
consequences to the Company.
LAS VEGAS, NEVADA MARKET
The Company's Country Tonite stage show played at the Aladdin Hotel, a
casino with 1,100 hotel rooms located on the Las Vegas "Strip" through November
15, 1997 after which the Aladdin closed for renovations. The Company's
management is attempting to locate a permanent venue for the Country Tonite
Show in Las Vegas. Failure to locate a new venue could have a material adverse
effect on the Company's consolidated operating income. In the event that the
Company obtains a new permanent venue, there is no guarantee that the show will
operate under the same financial terms and conditions or any assurance that
patronage will continue at the previous level. Numerous individual and group
acts and production casts operate in Las Vegas, competing for tourist
expenditures.
PIGEON FORGE, TENNESSEE MARKET
The Company's Country Tonite Show added a venue in Pigeon Forge,
Tennessee, through a 60% owned joint venture, Country Tonite Theatre LLC, in
March 1997. This is a new market for the Company's award winning Country
Tonite Show. Similar to the first year of the Branson show, the LLC
sustained operating losses in its first year. There is no assurance that the
LLC will ever become profitable. Currently, nine family oriented musical and
show theaters are operating in the Pigeon Forge area. It is likely that
additional theaters will open in the future. Although the Pigeon Forge area
draws approximately 12 million tourists annually, there are no assurances
that the Pigeon Forge show will ultimately duplicate the success of the
Branson show. The theatre competes for the tourist dollar against other
theatre venues and other forms of family entertainment in the Pigeon Forge
area.
The Pigeon Forge area competes with other tourist areas in the United
States for tourist dollars. A shift in the market could negatively impact the
number of annual visitors to Pigeon Forge.
SOUSSE, TUNISIA MARKET
The Company, through its 85% owned subsidiary, Casino Resource
Corporation Tunisia, S.A., opened a casino and theater in Sousse, Tunisia on
October 18, 1997. The total number of tourists visiting Tunisia annually is
estimated to be 4.5 million. The average length of stay for tourists is
approximately six days. There are approximately 20,000 hotel rooms to rent
in the City of Sousse, with many more in the outlying areas. The tourist
season is May 15 through October. During this time the hotel rooms are
historically, on average, 80% occupied. The average occupancy rate
year-round is 53%. The closest airport to Sousse is approximately 30
minutes away. Tourists take a bus from the airport to Sousse. The casino is
the first of its kind for the city of Sousse. No comparable casinos are
currently open in Tunisia; however, at least two other casinos are under
development in other Tunisian municipalities at distances of approximately 50
to 100 miles from Sousse.
POKAGON TRIBAL AREA MARKET
The Pokagon Indian tribe does not have a designated reservation but has
been assigned certain service areas in northern Indiana and southwestern
Michigan within which one or more casinos may be constructed subject to the
approval of various regulatory authorities. In May 1996, the Pokagon Band
announced the selection of a site in the New Buffalo township for its proposed
Michigan service area. Although the Governor of Michigan signed a compact with
the Pokagon Tribe in September 1995, the Michigan legislature failed to approve
the compact in May 1996. The compact is expected to be resubmitted for
possible legislative approval in 1998. Until the compact is
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approved, no timetable for development is determinable. The Company expects
eventual approval of the compact as Michigan already has Class III gaming
with seven other tribes. Although 13 million people reside within 150 miles
of the service areas, the planned casino(s) could encounter significant
competition from existing riverboat casinos now operating in Illinois and
Indiana. Likewise, there is a possibility that other native American
land-based casinos could be developed, and which could provide substantial
competition to the Pokagon casino(s). In either event, while the Company
will have only a minimal capital investment and related risk in the Pokagon
venture, significant competition could severely reduce the Company's
anticipated future management fee income.
EMPLOYEES
At September 30, 1997, the Company had 18 employees at its headquarters
in Ocean Springs, Mississippi; 57 employees at the Grand Hinckley Inn; 105
employees at the Country Tonite Theatre in Branson, Missouri (reduced to
approximately 6 during the offseason); 33 employees at the Country Tonite
production show in Las Vegas (which closed November 15, 1997, which resulted
in a reduction to approximately five employees as of December 31, 1997); 94
employees at the Country Tonite Theatre in Pigeon Forge (reduced to
approximately 6 during the offseason) and 300 employees at Casino Caraibe in
Tunisia (under development at September 30, 1997). The Company has entered
into employment agreements with various employees with expiration dates
through July 1999. The total cost of the agreements is approximately
$970,000. None of the Company's employees are represented by a union, and
management considers its labor relations to be good.
REGULATION AND LICENSING OF GAMING ACTIVITY
The ownership and operation of casinos in the U.S., Tunisia and other
gaming jurisdictions is highly regulated. The Company obtained its operating
and gaming license in Tunisia and opened the casino on October 18, 1997.
In the U.S., the Company will have the right to receive fees based on the
casino management fees by Harrah to the Pokagon band. The Company will be
required to apply for and obtain gaming license applications with the National
Gaming Indian Commission ("NIGC") in connection with Pokagon. To date
preliminary background information has been submitted to the NIGC.
INDIAN GAMING REGULATION
INDIAN GAMING REGULATORY ACT AND TRIBAL/STATE COMPACTS. Gaming on Indian
lands within the United States is authorized by the Indian Gaming Regulatory
Act (the "IGRA"), a federal statute enacted in 1988. The IGRA provides for
three classes of gaming. Class I gaming consist of non-commercial social games
played solely for prizes of minimal value or traditional forms of Indian
gaming, and is subject to the exclusive jurisdiction of the applicable Indian
tribe. Class II gaming includes bingo, pulltabs and non-banking card games that
are already permitted in a state, and is subject to the concurrent jurisdiction
of and the applicable Indian tribe. Class III gaming is a residual category
composed of all forms of gaming that are not Class I or Class II gaming,
including casino style gaming.
The IGRA provides that before tribes can engage in Class III gaming in a
particular state, the tribe must negotiate a "tribal/state compact" with that
state to regulate such gaming. Under the IGRA, the scope of Class III gaming
in which tribes can engage in a particular state depends on the state's "public
policy" towards such gaming. The courts have developed a shorthand test to
determine a state's public policy, which is expressly incorporated in the IGRA.
If a state permits Class III gaming by any person, organization or entity in
the state, whether or not such gaming is
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subject to restrictive regulations, then the state's "public policy" toward
such gaming is deemed permissive and the state must negotiate a compact with
an Indian tribe in good faith at the request of the tribe. If it does not,
the tribe would have the right to file a "bad faith lawsuit" and ultimately,
if the court found that the state had refused to negotiate in good faith and
a compact still could not be negotiated, the Secretary of the Interior could
authorize procedures to conduct Class III gaming in that state without a
state-negotiated compact.
The terms of the tribal/state compacts negotiated pursuant to the IGRA
vary from state to state, and may vary from tribe to tribe within a state. At
least 23 states (Arizona, California, Colorado, Connecticut, Idaho, Iowa,
Kansas, Louisiana, Michigan, Minnesota, Mississippi, Montana, Nebraska, Nevada,
New Mexico, New York, North Carolina, North Dakota, Oklahoma, Oregon, South
Dakota, Washington and Wisconsin) have signed tribal/state compacts with Indian
tribes that permit certain types of Class III gaming on Indian land. (A
compact was reached by the Pokagon Band with the Governor of Michigan, but such
compact did not receive the necessary ratification of the State's legislature.)
Changes in state gaming laws may limit the types of gaming that are eligible
for tribal/state compacts. 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, including Alabama,
California, Florida, Kansas, Louisiana, Michigan, Minnesota, Mississippi, New
York, North Carolina, Rhode Island, Texas, Washington and Wisconsin. The
Eleventh Circuit Court of Appeals and several federal courts have held that the
Eleventh Amendment to the United States Constitution immunizes states from suit
by Indian tribes in federal court without the state's consent. Therefore, in
these jurisdictions, Indian tribes may not have a forum to compel a state to
negotiate a tribal/state compact. Several other Circuit Courts have, however,
held otherwise.
In addition, because portions of the IGRA have been the subject of
controversy between the Indian tribes and governors in a number of states, the
Senate Committee of Native American Affairs proposed amendments to the IGRA in
1994. Those amendments, however, were rejected by tribal leaders and others.
In response, the Senate Committee proposed new amendments to the IGRA in March
1995. In addition, several bills to amend the IGRA have been introduced in the
House. It is unknown whether or when these proposed amendments will be
proposed or enacted and, if enacted, their effects on such activities. Even
where tribes and states have negotiated a compact, any changes in the IGRA may
have a material effect on how gaming on tribal lands will be conducted.
MANAGEMENT CONTRACTS. The NIGC has adopted regulations pursuant to the
IGRA that govern the submission requirements for and content of management
contracts with Indian tribes. A management contract has no legal effect until
it is approved by the Chairman of 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 that
upon 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. Further, the
fee received by the manager of a gaming facility may not exceed 30% of the net
revenues, except that a fee in excess of 30% and up to of 40% of net revenues
may be approved if the NIGC Chairman is satisfied that the capital investment
and income projections for the gaming facility require the additional fee. The
NIGC has the power to require contract modifications under certain
circumstances or to void a contract if the Management Company fails to comply
with
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applicable laws and regulations.
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In addition to ensuring that a management contract contains certain
terms, the Chairman of the NIGC may disapprove a management contract if it is
determined that the management contractor's prior activities, criminal
record, if any, or reputation, habits and associations pose a threat to the
public interest or create a danger of illegal practices, or that such
contractor has interfered with or unduly influenced the tribal governmental
decision-making process. The NIGC also requires that certain information
pertaining to persons and entities with a financial interest in, or having
management responsibility for, a management contract be disclosed for
purposes of a suitability review. This is expected to include the Company by
virtue of its percentage-consulting fee. The NIGC regulations provide that
each of the 10 persons who have the greatest direct or indirect financial
interest in the management contract must be found suitable in order for the
management contract to be approved by the NIGC. The NIGC regulations provide
that any entity with a financial interest in a contract must be found
suitable, as must the directors and 10 largest shareholders (or owners of 5%
or more of issued and outstanding stock) of such entities in the case of a
corporate entity, or the 10 largest holders of interest in the case of a
trust or partnership. The Chairman of the NIGC may reduce the scope of
information to be provided by institutional investors. Specifically, 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 and be found suitable to be affiliated with a gaming
operation in order for the management contract to be approved by the NIGC.
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
contract, as determined by the NIGC. The Company must pay all fees associated
with background investigations by the NIGC. The NIGC is responsible for
conducting the requisite background investigation on the foregoing
individuals and entities in the case of Class II gaming operations; the
applicable state gaming agency and tribe are responsible for conducting the
background investigation with respect to Class III gaming operations and then
providing its findings to the NIGC. Generally, the applicable tribal/state
compact will delineate responsibilities and issues relating to background
checks for Class III operations.
The NIGC regulations require that background information as described
above must be submitted for approval within 10 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 the management contract must be
disapproved if the NIGC determines that: (a) any person with a direct or
indirect financial interest in, or having management responsibility for, a
management contract (i) has been convicted of a felony or any misdemeanor
gaming offense; (ii) if the person's prior activities make them unsuitable to
be connected with gaming; (iii) is an elected member of the governing body of a
tribe that is party to the management contract; or (iv) has knowingly provided
materially false statements to the NIGC or a tribe or has refused to respond to
questions from the NIGC; (b) the management contractor has attempted to unduly
interfere with or influence tribal decisions relating to the gaming operation
or has deliberately or substantially failed to follow the management contract
and applicable tribal ordinances; or (c) a trustee would not approve the
management contract.
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In addition to requirements governing management contracts and
submissions, the regulations require each tribe to enact an ordinance
authorizing and setting out standards for the conduct of gaming on its lands,
which must be approved by the NIGC. The ordinance must mandate the tribe to
conduct background investigations and issue licenses to key employees and
primary management officials employed by the gaming enterprise, submit annual
independent audits to the NIGC, and pay a variable user fee to the NIGC. The
NIGC also has extensive access, investigatory, monitoring, compliance and
enforcement powers to ensure that the management contractor, the tribe and
the gaming enterprise comply with its regulations.
The NIGC has only recently been provided the regulatory authority to
approve management contracts. It is not yet clear how this authority interacts
with the statutory rights of approval of the Bureau of Indian Affairs (the
"BIA") for contracts between Indian tribes and non-Indians. Pursuant to BIA
regulations, contracts between non-Indians and Indian tribes, which do not
adhere to certain statutory requirements, are void. At present, it is unclear
as to whether and how the BIA intends to assert jurisdiction to approve
collateral agreements related to management contracts (such as promissory
notes) or whether the NIGC will have approval authority over such collateral
agreements. Pursuant to current procedures, all such documents are to be
submitted to the NIGC, which will then determine whether review and approval
resides with the NIGC or the BIA.
TUNISIA GAMING REGULATIONS
The Company's first gaming venture carries on its operations outside the
United States ("U.S."), in Sousse, Tunisia, and is subject to Tunisian laws and
regulations affecting the ownership and operation of the casino. Operations
outside the U.S. are subject to inherent risks, including without limitation,
fluctuations in the value of the U.S. dollar relative to foreign currencies,
tariffs, quotas, taxes and other market barriers, political and economic
instability, currency restrictions, difficulty in staffing and managing
international operations, language barriers, difficulty in obtaining work
permits for employees, limitations on technology transfers, potential adverse
tax consequences, and difficulties in operating in a different cultural and
legal system. There can be no assurance that any of the aforementioned or any
unforeseen factors will not adversely impact the Company's Tunisian operations.
ITEM 2. PROPERTIES
The Company's owned or leased properties include principally the Grand
Hinckley Inn in Hinckley, Minnesota; the casino and theatre complex in Sousse,
Tunisia; the Company Tonite Theatres in Branson, Missouri and Pigeon Forge,
Tennessee; the Company executives offices in Ocean Springs, Mississippi and a
residential property in Ocean Springs, Mississippi. The Grand Hinckley Inn is
a 154-room, upscale hotel owned by the Company adjacent to the Grand Casino
Hinckley near Hinckley, Minnesota. It is situated on 7.5 acres of real estate
leased at a cost of $1 per annum for the ten year initial term of the lease.
The 2,000-seat Country Tonite Theatre in Branson, Missouri is owned by the
Company, including underlying real estate of 10.7 acres. The 1,500-seat County
Tonite Theatre in Pigeon Forge, Tennessee is leased by the LLC of which the
Company is the majority partner by virtue of its 60% investment. The Company
leases, pursuant to a five-year lease, executive office space in Ocean Springs,
Mississippi at a rate of $73,500 per annum.
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The Company owns a residence in Ocean Springs, Mississippi which is rented to
a principal of Monarch at a below-market rate. The Company leases a 42,000
square foot casino resort in Tunisia pursuant to a three-year lease (with
two, three-year renewal options) providing for base rent of 600,000 dinars,
which is approximately $486,000 at the current exchange rate, plus value
added taxes (with a 10% yearly escalation plus a scaled percentage rental
based on gross gaming revenues of the casino). In addition, the Company pays
rent on the Theatre at the rate of two dinars per paying customer.
Finally, the Company owns several small lots and real estate parcels in
Wisconsin, which it is attempting to sell. Proceeds, if any, from the sale are
not expected to be material.
Under a Marketing Enhancement Agreement, entered into with the tribal
Commission if the Mille Lacs Band of Ojibwe Indians (owners of the grand
Casino Hinckley) and Grand Casinos, the Company receives a $20 fee per night
per occupied room. The Company recognized approximately $944,000 and
$982,000 from the marketing subsidy in 1997 and 1996, respectively. In
return for the marketing enhancement fee, the hotel has entered into a
revenue-sharing plan with the casino, which requires that 50% of all room
revenues above a defined cumulative threshold (up to the amount of marketing
subsidy paid to the hotel) be paid to the Enterprise. The cumulative threshold
was exceeded in fiscal 1995. Payments due under the revenue-sharing plan
totaled $645,000 and $786,000 in 1997 and 1996, respectively. Payments to
Grand under this windfall profit sharing agreement for fiscal 1998 will vary
based on revenues and the change, if any, in the operating cost threshold.
The Company and the Tribal Commission of the Mille Lacs Band have entered
into an agreement regarding future ownership of the hotel. The tribal
Commission has the unilateral right to purchase the hotel on the anniversary
date of its initial occupancy (May 1994) in each of years 2001 through 2006
at a cost equivalent to the original development cost of the hotel plus the
depreciated cost of personal property and all inventories, less $450,000.
Conversely, in the event that the Tribal Commission allows the construction
of more than 500 hotel or equivalent rooms on property owned by the Tribal
Commission of Grand, the Company has the right to require the Tribal
Commission to purchase the hotel at the cost stated above. Although a
281-room hotel was opened in December 1997 adjacent to the Casino, total
rooms on property owned by the Tribal Commission or Grand will still fall
below the 500 equivalent room threshold.
The Company has guaranteed rent payments, totaling $360,000 per year for
up to five years, of its 60% owned joint venture, Country Tonite Theatre,
L.L.C., commencing March 1, 1997.
ITEM 3. LEGAL PROCEEDINGS
In 1995, a suit was brought against the Company in Federal District
Court of New Jersey, which venue was later transferred to the Federal
District Court for Southern Mississippi. Plaintiff (Gelb Productions, Inc., a
New Jersey corporation) asserts it had a contract with the Company to provide
eight professional boxing events at the Company's former Biloxi Star Theater.
The complaint was thereafter amended by plaintiff to reflect additional
allegations that defendant tortuously harmed plaintiff's business reputation
and maliciously interfered with existing and prospective economic
relationships. Settlement was reached with Gelb in December 1997 for
$100,000 plus attorney's fees and expenses which will be decided by the
Mississippi Court under the Lodestar method.
The Company commenced an arbitration action in November 1994 with the
Arbitration Association in Minneapolis, Minnesota, against Cunningham
Hamilton Quiter, P.A. (CHQ), the architect it retained in connection with the
construction of the Biloxi theater. On December 30, 1994, the architectural
firm commenced a suit in a Mississippi state court seeking a foreclosure on a
mechanics' lien it had filed on the Biloxi theater project in the amount of
approximately $321,000, which sum the Company escrowed. On December 26,
1996, the Arbitration Association announced the Company was entitled to an
award of approximately $142,000, which sum was a portion of previously
escrowed $321,000. The decision resulted in a gain to the Company of
approximately $122,000 in fiscal 1997.
James Barnes and Prudence Barnes, two former officers of a subsidiary of
the Company, have brought suit in the State District Court, Clark County,
Nevada, against the Company in connection with their employment termination
in June 1995. No specific amount of damages has been claimed; however, the
plaintiffs have informally indicated that they would entertain a settlement
offer of between $250,000 and $350,000. The Company intends to vigorously
defend itself in this matter.
In March 1996, PDC, a Minnesota limited liability company, and two of
its officers filed suit against the Company, Harrah's Entertainment and
Monarch Casinos, in the Fourth Judicial District Court of Minnesota, and in
Michigan, which venue was later dropped, alleging defamation, violation of
the Lanham Act, violation of the Michigan Consumer Protection Act, tortuous
interference with its business relations and prospective economic
advantage, as well as false light invasion of privacy in connection with the
Pokagon Indian Gaming Award. Under the Lanham Act, the plaintiffs are
claiming a right to treble damages. The plaintiff seeks compensatory damages
and has not claimed a specific amount of damages, but claims such damages
exceed $50,000. The plaintiff also seeks recovery of their attorneys' fees.
The Company's general liability carrier has taken up the defense of the
Company. The Company intends to vigorously defend itself in this matter.
On November 13, 1995, Casino Resorts, Inc., a Minnesota corporation,
commenced an action in the State District Court for the Fourth Judicial
District of Minnesota against Monarch and the Company alleging breach of
contract against Monarch and tortuous interference with a contractual
business relationship against the Company. The plaintiff seeks compensatory
damages and has not claimed a specific amount of damages, but claims such
damages exceed $50,000. The plaintiff also seeks reimbursement of costs and
expenses. The matter came before the Fourth Judicial District Court of
Minnesota, on December 9, 1996, for hearing on motions by the Company and
Monarch for summary judgment. On January 22, 1997, the Company's motion for
summary judgment on plaintiff's claim of tortuous interference was granted
and plaintiff's claim against the Company was dismissed. Additionally,
Monarch's motion of summary judgment on plaintiff's claim for breach of
contract was granted and plaintiff's claim against it was dismissed. Casino
Resorts, Inc. filed an appeal with the Minnesota Court of Appeals on May 7,
1997, claiming that there are factual issues, which must be resolved by a
jury. In December 1997, the Minnesota Court of Appeals affirmed the decision
of the lower court dismissing the plaintiff's claims of tortuous interference
against the Company.
The Company has received notice that the action of Cunningham, Hamilton,
Quiter, P.A. (CHQ) against John J. Pilger (CEO of the Company) in Jackson
County Circuit Court, Mississippi originally set in abeyance pending
completion of arbitration proceeding, is now reconstituted. Cunningham
alleges that the Company owes CHQ approximately $40,000 for services rendered
in 1994. The Company denies these charges and plans to vigorously defend
itself in this matter.
On December 31, 1997, the Company's former chairman defaulted on repaying the
$1,232,000 (principal) of notes receivable due the Company. The Company
filed suit against the individual on January 2, 1998. The Company holds
150,000 shares of the Company's stock as collateral. On January 15, 1998,
the Company signed an agreement with the individual. Under the agreement,
220,000 additional shares of the Company's stock will be canceled along with
the 150,000 shares held at the market price of $1.19 per share. Additionally,
the Company and the individual entered into a new note agreement. The new note
of $1,196,885, including approximately $143,000 of previously reserved interest,
bears interest at 7%, payable on maturity on January 15, 2001. The note is
collateralized by the individual's 5% interest in the Company's Pokagon
management fee. Solely at the Company's discretion, at any time prior to
maturity, the Company can take the collateral as payment in full for the note.
Since the individual's ability to pay the note is not known, the Company has
provided an impairment reserve for $791,900 which represents the remaining
principal balance after stock cancellations. Generally accepted accounting
principles do not permit the recording of contingent assets until realized and
as the individual's ability to pay the note is not known, the Company has
provided an impairment reserve for the $791,900 which represents the remaining
principal balance after stock cancellations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year ended September 30, 1997.
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PART II
ITEM 5. MARKET PRICE FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's common stock (symbol "CSNR") and its Class A warrants
(symbol "CSNRW") are traded on the NASDAQ National Market. The following table
sets forth, for the fiscal periods indicated, high and low sales prices of the
common stock and Class A warrants as reported by NASDAQ:
Common Stock Warrants
-------------- -------------
High Low High Low
---- --- ---- ---
FISCAL YEAR ENDED SEPTEMBER 30, 1996
First Quarter $4.81 $2.38 $.98 $.31
Second Quarter $3.38 $1.75 $.50 $.20
Third Quarter $3.94 $1.63 $.81 $.31
Fourth Quarter $2.75 $1.50 $.56 $.25
FISCAL YEAR ENDED SEPTEMBER 30, 1997
First Quarter $2.23 $1.31 $.28 $.13
Second Quarter $2.45 $1.38 $.25 $.13
Third Quarter $1.97 $1.25 $.22 $.09
Fourth Quarter $2.19 $1.19 $.44 $.06
Each warrant entitles the holder to purchase one share of the Company's
common stock at a price of $6.75, subject to adjustment. The warrants expire
September 15, 1998, and are subject to redemption by the Company for $.05 per
warrant if the closing price of the common stock exceeds $8.50 per share for 20
consecutive trading days, subject to adjustment.
HOLDERS
On December 31, 1997 there were approximately 225 record holders of the
common stock, and 80 record holders of the warrants. In addition, the Company
estimates there are an additional 2,700 shareholders and 400 warrant holders
who own shares or warrants, respectively, in nominee or street name, at that
date.
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SALE OF UNREGISTERED SECURITIES
On September 9, 1997, the Company sold $800,000 principal amount of 13%
convertible subordinated debentures. The common stock into which the
debentures are convertible has been registered for resale.
DIVIDENDS
No dividends have been declared or paid during the reporting period.
OTHER
In December 1995 the Company issued 1,268,444 shares of Common Stock
pursuant to a warrant exercise agreement entered into in conjunction with a
release of claims agreement. The Company recorded all proceeds as a capital
transaction for financial reporting purposes.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following financial data presented below has been derived from the
Company's Consolidated Financial Statements for the fiscal years ended
September 30, 1997 and 1996.
Year Ended September 30
---------- ------------
1997 1996
---- ----
(in thousands)
INCOME FROM OPERATIONS
Entertainment revenues $11,734 $ 8,938
Hospitality revenues 3,966 3,968
Operating expense - entertainment 9,246 6,200
Operating expense - hospitality 2,636 2,620
General and administrative expense 2,056 2,245
Loss on gaming projects, net 438 742
Interest expense 1,219 1,828
Other income (expense) including minority
interest in 1997 (96) 202
------ -------
NET INCOME (LOSS) $ 9 $ (527)
------ -------
------ -------
Following is management's discussion and analysis of significant factors
which have affected the Company's financial position and operating results
during the periods reflected in the accompanying consolidated financial
statements.
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FISCAL 1997 COMPARED TO FISCAL 1996
CONSOLIDATED
The Company's revenues from operations were $15,700,264, an increase of
$2,794,315, or 21.7%, from the $12,905,949 recorded in fiscal 1996.
Substantially all of the increase was provided by the entertainment segment.
ENTERTAINMENT
COUNTRY TONITE THEATRE LLC
The Country Tonite Show in Pigeon Forge opened on March 21, 1997.
Revenues from the opening date through September 30, 1997 totaled $2,196,054.
Operating expenses (including project, general and administrative costs and
depreciation) totaled $3,059,144 (including $1,175,333 eliminated in
consolidation) resulting in an operating loss of $863,090 before the minority
interest share of the loss ($341,206). The Company expected an operating loss
in the first year of operation as the show builds market presence.
COUNTRY TONITE PRODUCTION SHOW
Country Tonite Production show revenues totaled $3,870,884 in fiscal 1997,
(including $1,175,333 eliminated in consolidation), an increase of $1,678,524
from fiscal 1996 revenues of $2,192,360. The increase was due principally to
the addition of the Pigeon Forge show contract and the Country Tonite Show
appearing in Biloxi, Mississippi from late December 1997 through early March
1997 and a twenty day Japan tour. Operating income increased $489,828 to
$936,099 (including $1,175,333 eliminated in consolidation) in fiscal 1997 from
$446,271 in fiscal l996. Operating expenses (including project, general and
administrative costs and depreciation) increased from $1,746,090 in fiscal 1996
to $2,934,785 in fiscal 1997, principally as a result of the aforementioned new
venues.
COUNTRY TONITE THEATRE
Revenues increased $97,012, or 1.4%, from the fiscal 1996 total of
$6,745,937 to $6,842,949 in fiscal 1997. Paid attendance for the Country
Tonite show totaled 38% of capacity in 1997 compared to 40% of capacity in
fiscal 1996. Average ticket prices totaled $15.43 in fiscal 1997 compared to
$15.57 in fiscal 1996, resulting in a slight decline in revenues from Country
Tonite Show which was offset by revenues for the Golden Girls show (a joint
venture with Greg Thompson Productions). Through cost containment efforts by
Company management, operating expenses (including project, general and
administrative costs and depreciation) fell $26,417 or 0.6%, to $4,427,053 in
fiscal 1997 from $4,453,470 in fiscal 1996 despite the addition of the Golden
Girls show and its related expenses. Operating income increased $123,429 or
5.4% to $2,415,896 in fiscal 1997 from $2,292,467 in fiscal 1996.
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HOSPITALITY
GRAND HINCKLEY INN
In fiscal 1997, the Grand Hinckley Inn continued its historical high
occupancy rates, achieving an average occupancy of 83% and average daily rate
of $57.28 compared to an average occupancy rate of 86% and an average daily
rate of $54.85 in fiscal 1996. The fall in occupancy from 1996 to 1997 was
offset by higher average rates. Revenues for fiscal 1997 decreased $1,942 to
$3,965,710 in fiscal 1996 from $3,967,652 in fiscal 1996. Operating income
decreased $18,056 or 1.3%, from $1,347,604 in fiscal 1996 to $1,329,548 in
fiscal 1997 as operating expenses (including project, general and
administrative costs and depreciation) increased, to $2,636,162 in fiscal
1997 from $2,620,048 in fiscal 1996. The increase in operating expenses and
the resulting decrease in operating income were principally the result higher
operating expenses in several categories, principally salaries, maintenance,
property taxes, and advertising expenditures offset by lower windfall profit
sharing expenses. Profit sharing with the Enterprise totaled $786,000 in
fiscal 1996 compared to $645,000 in fiscal 1997.
The addition of a 281-room hotel, adjacent to the Grand Casino,
completed in December 1997 by the tribe could have an adverse effect in the
operating income of the Company.
GENERAL AND ADMINISTRATIVE
The Company's general and administrative expenses aggregated $2,055,698 in
fiscal 1997 compared to $2,245,372 for fiscal 1996, a decrease of $189,674
principally as a result of additional costs related to the start up and
administration of the Pigeon Forge theatre and Tunisian casino being more than
offset by lower legal and professional expenses.
GAMING
Loss on gaming projects of $438,321 for fiscal 1997 consists principally
of the loss on sale of the Company's interest in the Palace Casino acquired on
January 31, 1997 and subsequently sold on February 5, 1997. A combination of
events including cash commitments to other projects under development and the
fact that the Company could not manage the facility until its corporate
officers and board members were found suitable, a process which could have
taken several additional months, contributed to the Company's decision to sell
its interest in the Palace Casino.
Loss on gaming projects of $742,218 for fiscal 1996 consists principally
of the loss on abandonment of the initial attempt to acquire the Palace Casino
in January 1996.
INTEREST EXPENSE
Interest expense totaled $1,218,947 for fiscal 1997 compared to $1,828,052
for fiscal 1996. The decrease from 1996 was due principally to a reduction in
the charge for the discount upon conversion of subordinated debentures from
$550,000 in 1996 to $49,000 in 1997.
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OTHER
Interest income increased $61,924 to $197,943 in 1997 from $136,019.
Other income and expenses in 1997 includes a $794,000 allowance for
collection of a $1,232,000 note receivable from a stockholder, as well as the
minority interest in the loss of the consolidated joint venture of $341,206
and a gain from an arbitration settlement of approximately $122,000.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased $1,550,745 to $3,097,167 at
September 30, 1997 from $1,546,422 at September 30, 1996. In addition to
funds provided by operations, the Company's principal source of funds in
fiscal 1997 consisted of proceeds from the sale of its equity interest in the
Palace Casino of $1,000,000, a placement of convertible subordinated
debentures of $800,000 ($707,000 net proceeds), equipment financing of
$516,000 and two private debt placements totaling $1,800,000. The Company's
principal use of funds in fiscal 1997 consisted of capital expenditures of
$2,261,789, preopening costs for the casino and theatres of $1,625,437, and
payments on long-term debt and notes of $1,140,399. On December 12, 1997
the Company redeemed $400,000 principal amount ($497,000 cash) of 13%
convertible debentures.
Expenditures to complete the Casino Caraibe project subsequent to
September 30, 1997 totaled approximately $500,000. The Company anticipates
operating losses from its Tunisian casino for at least the first two fiscal
quarters of fiscal 1998.
The failure to find a replacement venue for the Company's Country Tonite
Show in Las Vegas could have a negative effect on operating income of the
Company.
The Company has a note payable in the principal amount of $800,000 with
a variable interest rate at the higher of 20% per annum or 5% per annum of
the gross gaming win of the Tunisian Casino, as defined in the note. This
note matures on October 18, 1998. The Company has a note payable dated
August 29, 1997 in the principal amount of $1,000,000 with a variable
interest rate of 10% of operating income of the Tunisian Casino, as defined.
This note matures in twenty five years.
The opening by the tribe of a 281-room hotel adjacent to the casino could
have a negative effect on operating income of the Company.
The Company did not receive any cash proceeds from settlement of the
$1,232,000 note receivable due the Company from its former chairman (Kevin
Kean).
On January 5, 1998 the Company's Board of Directors authorized a stock
buyback program providing for purchase by the Company of up to 400,000 shares
of its common stock.
At September 30, 1997, the Company has $100,000 available under a line of
credit with a bank, which expires in February 1998.
Subject to the foregoing, the Company expects that available cash and cash
from future operations will be sufficient to meet the capital expenditures,
debt service and working capital requirements of its existing businesses for
the next fiscal year.
CAPITAL EXPENDITURES
Capital expenditures by the company were $2,261,789 for the year ended
September 30, 1997 compared to $278,722 for the 1996 fiscal year. Capital
expenditures for 1997 consisted principally of purchases and expenditures for
the Casino Caraibe development. The Company presently has no significant
future capital expenditure commitments.
21
<PAGE>
FUTURE OPERATIONS
The Company is currently evaluating new venues for its Country Tonite
production in such high-tourist areas as Myrtle Beach, South Carolina;
Laughlin, Nevada and Biloxi, Mississippi.
Potential new hospitality opportunities continue to be explored as well.
The Grand Hinckley Inn has been profitable since inception and management
is presently exploring potential new hospitality endeavors.
The Country Tonite production, playing at the Aladdin Hotel and Casino in
Las Vegas, was contracted through November 15, 1997. The Company is searching
for a new long-term replacement venue in Las Vegas.
In September 1995, the Company concluded negotiations with Harrah's
Entertainment, Inc. ("Harrah's") whereby the Company will act as a consultant
in the development and management of one or more casinos to be funded by
Harrah's for the Pokagon Band of Potawatomi Indians in northern Indiana and in
southwestern Michigan. The Company will, upon commencement of operations,
receive 21.6% of Harrah's management fee, without being required to provide any
of the capital necessary for development.
On October 18, 1997, the Company opened a casino and 500-seat theatre in
Sousse, Tunisia.
The Company continues to pursue other opportunities to own and manage
additional non-gaming and gaming facilities either singularly or in conjunction
with other gaming industry participants.
SEASONALITY
The Company expects its hotel operations will be affected by seasonal
factors, including holidays, weather and travel conditions. The theatre
operations in Branson, Missouri and Pigeon Forge, Tennessee will also be
affected by seasonal factors and in addition will be closed annually from
mid-December through mid-March, a period when theaters normally close in
Branson.
The Casino and Theatre in Tunisia will also be affected by seasonal
factors as the primary tourist season in Tunisia ranges from May through
October each year.
IMPACT OF INFLATION
Management of the Company does not believe that inflation has had any
significant adverse impact on the Company's financial condition or results of
operations for the periods presented. However, an increase in the rate of
inflation could adversely affect the Company's future operations and expansion
plans.
22
<PAGE>
FOREIGN CURRENCY TRANSACTIONS
The Company's transactions with respect to its casino venture in Tunisia
will be in dinars. As such, there are all the risks pertaining to fluctuations
in foreign exchange rates and potential restrictions or costs associated with
the transfer of funds to the United States.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share". The new standard simplifies the method for
computing earnings per share and requires the presentation of two new amounts,
basic and diluted earnings per share. The Company will be required to adopt
SFAS No. 128, in the quarter ending December 31, 1997. Earlier adoption is not
allowed. If SFAS No. 128 was adopted, the basic earnings per share would be
$0.00 and ($0.06) at September 30, 1997 and 1996, respectively.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income". The new Standard discusses how to
report and display comprehensive income and its components. The standard is
effective for years beginning after December 15, 1997. When the Company adopts
this statement, it is not expected to have a material impact on the Company's
financial statements.
In June 1997 the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." This
standard requires enterprises to report certain information about operating
segments, their products and services, geographic areas, and major customers.
This standard is effective for years beginning after December 15, 1997. When
the Company adopts this statement, it is not expected to have a material impact
on the Company's financial statements.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
All statements contained herein that are not historical facts are based on
current expectations. These statements are forward looking in nature and
involve a number of risks and uncertainties. Actual results may differ
materially. Among the factors that could cause actual results to differ
materially are the following: the availability of sufficient capital to finance
the Company's business plan on terms satisfactory to the Company; competitive
factors, such as the introduction of new hotels or renovation of existing
hotels in the same markets (such as the new hotel recently constructed adjacent
to the casino in Hinckley, Minnesota); failure to find a replacement venue for
the Country Tonite Las Vegas Show; changes in travel patterns which could
affect demand for the Company's hotel, theatres or casinos; changes in
development and operating costs, including labor, construction, land,
equipment, and capital costs; general business and economic conditions;
political unrest in Tunisia or the region; and other risk factors described
from time to time in the Company's reports filed with the Securities and
Exchange Commission. The Company wishes to caution readers not to place undue
reliance on any such forward looking statements, which statements are made
pursuant to the Private Securities Litigation Reform Act of 1995, and as such,
speak only as to the date made.
23
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Index to Financial Statements appears at page F-1 hereof, the Report
of Registrant's Independent Accountants appears at page F-2 hereof, and the
Consolidated Financial Statements and Notes to Consolidated Financial
Statements of the Registrant appear beginning at page F-3 hereof.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
24
<PAGE>
PART III
ITEM 9. DIRECTOR'S AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Set forth below is information as of September 30, 1997 regarding the
directors and executive officers of the Company, including information as to
their principal occupations for the last five years, certain other
directorships held by them, and their ages as of the date hereof.
JOHN J. PILGER, age 51, has been the Chief Executive Officer and a
director of the Company since 1984, and served as President from 1984 to 1993.
Mr. Pilger was previously Chairman of the Board until July 1994 and resumed
such role in April 1995. Mr. Pilger oversees all Company activities including
operations, acquisitions, development and construction. Prior to 1984, Mr.
Pilger operated a sole proprietorship, which owned and managed apartment
buildings in the Chicago, Illinois area.
WILLIAM S. LUND, age 56, has been a director of the Company since January
1994. Since 1985, he has been Chairman and Chief Executive Officer of Lund
Enterprises, a diversified company with interests in real estate development,
investment, manufacturing, retail auto dealerships and consulting. Since 1985,
Mr. Lund has been the managing associate of WSL Associates, a management and
financial consulting firm specializing in real estate and recreation-resort
projects. Mr. Lund is also the Chairman of the Board of Toyota of San Luis
Obispo, San Luis Nissan-BMW, and Lund-Frangic Motors, Inc. (since 1985),
American Family Concepts (since 1994) and Advocacy Arts Foundation.
JOHN W. STEINER, age 55, has been a director of the Company since January
1994. Since 1990, he has served as Chairman of the Board of the Ace Worldwide
Group of Companies, a leading provider of moving, trucking, warehousing and
overall logistics services. Mr. Steiner also serves on the Board of Directors
and Executive Committee of Atlas World Group, Inc. Mr. Steiner is President of
the Associate Board of the Milwaukee County Zoological Society, a Board member
of the Metropolitan Milwaukee Association of Commerce and the Better Business
Bureau of Wisconsin.
DR. TIMOTHY MURPHY, age 37, was elected to serve as a director on March
17, 1997. Dr. Murphy resides on the Mississippi coast and is a Chiropractic
doctor maintaining his own practice. Dr. Murphy serves as a trustee on the
Board of Parker College, as well as its finance chairman. Additionally, Dr.
Murphy is a member of the American Chiropractic Association; serves on the
Council of Diagnostic Imaging and Council on Sports Injury. Dr. Murphy
serves as team Chiropractor to Mercy Cross High School, D'Iberville High
School and Mississippi Sea Wolves Professional Hockey Team.
DENNIS EVANS, age 51, was elected to serve as a director on March
17, 1997. Mr. Evans brings 30 years of sales and marketing business experience
to the Board. Mr. Evans is an entrepreneur who has acted as President of
several large sales and marketing firms, as well as consultant to several mid-
western development companies. Mr. Evans has acted as a marketing consultant
to the Country Tonite Theatres in Branson and Pigeon Forge and to the Company's
casino development in Tunisia.
25
<PAGE>
NOREEN POLLMAN, age 49, has served as Secretary to the Company since March
1995 and as a director since March 1995 and from 1987 to 1993. Since 1984, Ms.
Pollman has been Vice President of Operations for each of the Company's
operating businesses with responsibility for the development and implementation
of operating budgets. Ms. Pollman owns two wineries with retail and wholesale
operations and has recently acquired a Brew Pub which opened in April 1997.
ROBERT J. ALLEN, age 38, was named Vice President of Entertainment of
the Company on August 1, 1994. He has served as a director of the Company
since March 1995 and from 1987 to 1993. Mr. Allen served as Executive Vice
President and Chief Marketing Officer of the Company's former Recreational
Property Management, Inc. subsidiary from 1986 to 1987. He also previously
served as Vice President of Telecommunications.
MAURICE P. GAUDET, age 45, was named Chief Financial Officer on January 30,
1996. He has served as Controller since April of 1995. Prior thereto, he was
Chief Financial Officer of a privately owned quick lube chain since March 1991.
He was also Controller of a savings and loan and a freight-forwarding firm, and
spent nine years with an international CPA firm. Mr. Gaudet is a certified
public accountant.
Officers serve at the discretion of the Board of Directors.
ITEM 10. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the annual and long-
term compensation earned by John J. Pilger, Noreen Pollman, and Robert J.
Allen, the Named Executive Officers (as defined) for services rendered in all
capacities to the Company for the fiscal years ended September 30, 1997, 1996
and 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Other Restricted Securities
Annual Stock Underlying All Other
Fiscal Salary Bonus Comp. Awards Options Compensation
Name and Principal Position (1) Year ($) ($) ($) ($) (#) ($)
- ------------------------------- ------ ------ ----- ------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
John J. Pilger . . . . . . . . . . . . . 1997 255,763(5) (0) (0)(6) (0) 195,000 (0)
Chief Executive Officer 1996 203,435(3) (0) (0)(6) (0) 20,000 (0)
1995 178,426(4) (0) (0)(6) (0) 20,000 59,482(10)
Noreen Pollman . . . . . . . . . . . . . 1997 128,583 20,000 (0) (0) 90,000 (0)
Executive Vice President, 1996 129,005(7) (0) (0) (0) 20,000 (0)
Operations 1995 109,546 (0) (0) (0) 0 (0)
Robert J. Allen . . . . . . . . . . . . 1997 116,583 (0) (0) (0) 90,000 (0)
26
<PAGE>
Executive Vice President, 1996 116,507 (8) (0) (0) (0) 20,000 (0)
Entertainment 1995 (0)(9) (0) (0) (0) 0 (0)
_________________________
</TABLE>
27
<PAGE>
2) Under Securities and Exchange Commission rules, the "Named Executive
Officers" include (i) each person who served as Chief Executive Officer
during fiscal 1997, (ii) each person who (a) served as an executive officer
at September 30, 1997, (b) was among the four most highly paid executive
officers of the Company, not including the Chief Executive Officer, during
fiscal 1997 and (c) earned total annual salary and bonus compensation in
fiscal 1997 in excess of $100,000 and (iii) up to two persons who would be
included under clause (ii) above had they served as an executive officer at
September 30, 1997.
3) Includes $17,308 in unused vacation time and $16,636 in wages earned prior
to fiscal 1996 not paid until fiscal 1996.
4) Includes $10,368 in unused vacation time.
5) Includes $12,942 in unused vacation time.
6) During fiscal 1997, 1996 and 1995, Mr. Pilger received personal benefits,
the aggregate amounts of which did not exceed the lesser of $50,000 or 10%
of the total of the annual salary and bonus reported for Mr. Pilger in such
years.
7) Includes $5,499 of wages earned in 1995 paid in 1996.
8) Includes $5,001 of wages earned in 1995 paid in 1996.
9) Compensation level did not meet disclosure requirements.
10) Reflects a bonus paid to compensate for extraordinary services performed
for the period from March 1994 through March 1995 and with respect to
certain liabilities incurred in connection with the trading of company
stock.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of September 30, 1997, certain
information with respect to each shareholder known to the Company to be the
beneficial owner of more than 5% of its Common Stock, each director, each Named
Executive Officer, and all directors and officers of the Company as a group.
Unless otherwise indicated, each person named in the table has sole voting and
investment power as to the Common Stock shown.
Number of Shares Percentage of
Name and Address of Beneficial Owner Beneficially Owned (1) Outstanding Shares
- ------------------------------------ ---------------------- ------------------
John J. Pilger ..................... 1,717,990(2) 16.24%
Noreen Pollman ..................... 95,000(3) 0.90%
William S. Lund .................... 60,000(4) 0.57%
John W. Steiner ................... 66,000(4) 0.62%
Dr. Timothy Murphy ................ - 0.00%
Dennis Evans ....................... 24,100(5) 0.32%
Robert J. Allen ................... 95,000(6) 0.90%
Maurice P. Gaudet .................. 11,000(7) 0.10%
Kevin M. Kean ...................... 1,400,944(8) 13.24%
All Directors and Executive Officers
as a group (8 Persons) 2,069,090 19.55%
_________________________
1) Shares not outstanding but deemed beneficially owned by virtue of the
right of a person or
28
<PAGE>
member of a group to acquire them within 60 days upon exercise of options or
warrants are treated as outstanding only when determining the amount and
percent owned by such person or group.
2) Includes 105,000 shares deemed beneficially owned pursuant to options,
which are immediately exercisable. In addition, Mr. Pilger holds proxies to
vote 1,330,944 shares owned by Kevin M. Kean and 175,000 shares owned by
Richard A. Howarth, Jr., a former officer of the Company. See Note 7 below.
With such shares, Mr. Pilger has the right to vote a total of 2,502,212
outstanding shares or 24.91% of the shares outstanding.
3) Includes 89,000 shares deemed beneficially owned pursuant to options,
which are immediately exercisable.
4) Includes 60,000 shares deemed beneficially owned pursuant to options,
which are immediately exercisable.
5) Includes 10,000 shares deemed beneficially owned pursuant to options,
which are immediately exercisable.
6) Includes 89,000 shares deemed beneficially owned pursuant to options,
which are immediately exercisable.
7) Includes 10,000 shares deemed beneficially owned pursuant to an option,
which is immediately exercisable.
8) Includes 14,100 shares owned by Mr. Kean's father and 70,000 shares of
Common Stock deemed beneficially owned pursuant to an option which is
immediately exercisable. Mr. Kean has granted an irrevocable proxy with
respect to 1,330,944 shares of the Company's common stock to John J. Pilger.
Mr. Kean's address is 2644 E. Lakeshore Drive, Baton Rouge, Louisiana 70808.
OPTION GRANTS AND EXERCISES
The following table sets forth information with respect to stock options
granted to the Named Executive Officers during fiscal 1996. No stock
appreciation rights were granted by the Company in fiscal 1997.
OPTION GRANTS IN FISCAL 1997
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS GRANTED EXERCISE
UNDERLYING TO EMPLOYEES PRICE EXPIRATION
NAME OPTIONS GRANTED (#) IN FISCAL 1997 ($/SHARE) DATE
- ------------------------------------------------ -------------------- --------------------- ----------- -----------
<S> <C> <C> <C> <C>
John J. Pilger.................................. 195,000(1) 38% 1.48 4/3/2007-09
Noreen Pollman.................................. 90,000(1) 18% 1.34 4/3/2007-09
Robert J. Allen................................. 90,000(1) 18% 1.34 4/3/2007-09
</TABLE>
- ------------------------
(1) The Executives' options were granted under the Company's 1997 Long-Term
Incentive and Stock Option Plan. The grants were made on April 3, 1997. The
options vest one third immediately and one third on April 3, 1998 and 1999,
respectively.
The following Table sets forth with respect to the Named Executive Officers
Information concerning the exercise of stock options during fiscal 1997 and
unexercised options held as of the end of fiscal 1997. The Company has never
granted stock appreciation rights.
AGGREGATED OPTION EXERCISES
AND FISCAL 1997 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY
ACQUIRED ON VALUE OPTIONS AT 9/30/97 (#) OPTIONS AT 9/30/97 ($)
EXERCISE REALIZED ----------------------------- -----------------------------
NAME (#) ($) UNEXERCISABLE EXERCISABLE UNEXERCISABLE EXERCISABLE
- ------------------------------------ ----------- ----------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
John J. Pilger...................... -0- -0- 130,000 105,000 35,100 17,600
Noreen Pollman...................... -0- -0- 60,000 89,000 24,600 12,300
Robert J. Allen..................... -0- -0- 60,000 89,000 24,600 12,300
</TABLE>
EMPLOYMENT AGREEMENTS
The Company entered into a three-year employment agreement with John J.
Pilger on May 20, 1996, providing for an annual salary of $225,000, subject to
annual cost of living adjustments. The agreement also provides for use of an
automobile and payment of insurance premiums the value of which does not exceed
10% of his annual salary. The agreement also provides for bonuses if certain
financial performance guidelines are met.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
COMPANY LOANS
Through September 30, 1997, the Company has made loans to John J. Pilger
totaling $507,461 in principal and interest. Such obligations accrue interest
at rates between 7% and 9.5% per year and mature on October 1, 1999 with monthly
payments of $4,500 beginning on April 1, 1998. The loans include $150,000
advanced for the purchase by Mr. Pilger of a Mississippi residence and $357,461
in other advances. No principal payments were made in fiscal year 1997.
Through September 30, 1997, the Company has made a loan to Noreen Pollman
totaling $100,000, which has an outstanding balance of $82,378 including
interest. This note accrues interest at the prime rate (currently 8.50%) and
matures on April 17, 1998.
Through September 30, 1997, the Company has advanced $10,677 including
interest to Robert J. Allen. This note, which bears a 9.25% interest rate, is
due on demand.
On December 31, 1997, the Company's former chairman (Kevin Kean)
defaulted on repaying $1,232,000 of notes receivable due the Company. The
Company filed suit against this individual on January 2, 1998. On January 15,
1998, the Company signed an agreement with this individual. Under the
agreement, 220,000 shares of the Company's common stock will be cancelled
along with the 150,000 shares currently pledged to the Company, at the market
price of $1.19 per share. The Company and this individual entered into a new
note agreement. The new note, of $1,196,884.88, bears interest at 7% per
annum and matures on January 15, 2001. The note is collateralized by the
individual's 5% interest in the Company's Pokagon management fee. Soley at
the Company's discretion, at any time prior to maturity, the Company can take
the collateral as payment in full for the note. The individual has also
granted the Chairman of the Company an irrevocable proxy for 1,330,944 shares
of the Company's common stock.
29
<PAGE>
FORMER OFFICE AND TELEPHONE LEASES
The Company previously leased furnished corporate offices in Elkhorn,
Wisconsin, from a partnership owned by Messrs. Pilger and Howarth pursuant to
a five-year lease commencing June 1, 1992. The lease was terminated early on
June 30, 1995 and the Company continued to pay monthly rental charges at a
reduced rate of $3,000 plus property taxes (prorated through May 31, 1997),
to R. Howarth net of a security deposit, through the expiration of the lease
on May 31, 1997.
An aggregate of $8,704 and $11,262 was paid by the Company pursuant to
the leases for each of fiscal 1997 and 1996, respectively.
MISSISSIPPI RESIDENCE
In April 1994, the Company purchased a residential property in Ocean
Springs from Mr. Pilger, paying him $137,000 in cash. This residence has been
leased at a below market rate since June 1995 to a principal of Monarch
Casinos, Inc. The Company has entered into negotiations with such individual
for the purchase of the residence.
PREFERRED STOCK CONVERSION
By resolution dated December 24, 1992, the Company agreed to purchase all
of the 300,000 then outstanding shares of its 8% Cumulative Preferred Stock
from Mr. Pilger. In consideration for the Preferred Stock, the Company issued
909,091 shares of Common Stock using a conversion value for the Common Stock of
$1.32 per share. (The last five trades of the Common Stock recorded on the OTC
Bulletin Board prior to December 24, 1992 averaged $1.50 per share). In
connection with the conversion, the Company assumed from Mr. Pilger certain
opportunities to develop casino-related entertainment and hotel facilities.
Mr. Pilger also waived rights to an aggregate of $240,000 in accrued dividends.
Prior to the time of conversion, the Company was not in either the hospitality
or the entertainment business. No registration rights were granted with
respect to the Common Stock issued in this transaction.
A total of 150,000 of such shares of Common Stock were personally owned by
Mr. Howarth, who in connection with the conversion, transferred them to Mr.
Pilger in consideration for Mr. Pilger's assignment of the development
opportunities, and also to effect a repositioning of the stock ownership
interests between Messrs. Pilger and Howarth, reflecting a new allocation of
responsibilities between them. In consideration therefore, Mr. Pilger agreed
to pay Mr. Howarth $1.50 per share, payable at such time as Mr. Pilger sells
such stock to an unrelated third party. The agreement was amended, effective
November 30, 1994, to provide for the transfer by Mr. Pilger to Howarth of
175,000 shares of Common Stock and the release of Mr. Pilger from the
obligation to pay to Mr. Howarth the $1.50 per share after Mr. Pilger sells
and/or transfers 18% of his Common Stock of the Company. In other words, if
Mr. Pilger sells 100 shares Mr. Howarth is paid (18% x 100) or $1.50 on 18
shares. In addition, pursuant to such agreement, Mr. Howarth granted Mr.
Pilger an irrevocable proxy to vote such 175,000 shares until such Common Stock
is sold or transferred to an unrelated third party by Mr. Howarth.
All of the share and share price numbers referred to above have been
adjusted to reflect a June 1993 one-for-two reverse split of the Company's then
outstanding capital stock.
30
<PAGE>
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 302A.521 of the Minnesota Statues, the Company is required
to indemnify its directors, officers, employees, and agents against liability
under certain circumstances, including liability under the Securities Act of
1933, as amended.
As permitted under the Minnesota Statues, the Restated Articles of
Incorporation of the Company provide that directors shall have no personal
liability to the Company or to its shareholders for monetary damages arising
from breach of the Directors' duty of loyalty to the Company or with respect to
certain enumerated matters, excluding payment of illegal dividends, acts not in
good faith, and acts resulting in an improper personal benefit to the director.
RELATIONSHIP WITH CONSULTANTS
The Company has agreed to pay to two consultants to the Company, who
assisted in the acquisition of certain development rights (including Kevin M.
Kean, a principal shareholder of the Company), an aggregate of 10% of any
consulting fee income (less related direct operating costs), received by the
Company from its agreements relating to the Pokagon Indians, subject to certain
limits in the case of Mr. Kean. Similar fees may also be payable to Mr. Kean
out of revenues, if any, received by the Company from other Indian businesses,
including gaming. Mr. Kean has partially collaterallized his $1,196,885 note
to the Company with his right to 5% of the said consulting fee income.
OTHER
On October 16, 1997, John J. Pilger received a $150,000 payment from the
Company, for services to be rendered (including exposure to potential
personal liability with respect to Tunisian gaming activities) for fiscal
1998.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
The Exhibits to this Report are listed on page E-1 hereof:
(b) Reports on Form 8-K for the quarter ended September 30, 1997:
(i) Report dated September 12, 1997 regarding completion of three
financing transactions.
SIGNATURES
31
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below on January 19, 1998 by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE AND TITLE
s/ John J. Pilger
--------------------------------------------
John J. Pilger, Chief Executive Officer,
President and Chairman of the Board of
Directors
s/ Maurice P. Gaudet
--------------------------------------------
Maurice Gaudet, Chief Financial Officer and
Chief Accounting Officer
s/ Noreen Pollman
--------------------------------------------
Noreen Pollman, Vice President of Operations
and Director
s/ Robert J. Allen
--------------------------------------------
Robert J. Allen, Vice President of
Entertainment and Director
s/ Dr. Timothy Murphy
--------------------------------------------
Dr. Timothy Murphy, Director
s/ Dennis Evans
--------------------------------------------
Dennis Evans, Director
s/ William Lund
--------------------------------------------
William Lund,
Director
32
<PAGE>
CASINO RESOURCE CORPORATION AND SUBSIDIARIES
CONTENTS
- ------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT F-2
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets F-3 - F-4
Statements of Operations F-5
Statements of Stockholders' Equity F-6
Statements of Cash Flows F-7 - F-8
Notes to Consolidated Financial Statements F-9 - F-34
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Casino Resource Corporation
and Subsidiaries
Ocean Springs, Mississippi
We have audited the accompanying consolidated balance sheets of Casino Resource
Corporation and Subsidiaries as of September 30, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended. These 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 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 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 Casino
Resource Corporation and Subsidiaries at September 30, 1997 and 1996, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
Chicago, Illinois
December 11, 1997, except for Note 19
which is dated January 15, 1998
F-2
<PAGE>
CASINO RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
SEPTEMBER 30, 1997 1996
- ------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,097,167 $ 1,546,422
Restricted cash - 338,602
Accounts receivable - trade and other 531,015 307,204
Inventory 297,905 87,916
Prepaid expenses (Note 2) 1,123,605 295,447
- ------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 5,049,692 2,575,591
- ------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, less accumulated
depreciation and amortization (Note 4) 16,230,883 15,082,906
- ------------------------------------------------------------------------------
NONCURRENT ASSETS
Cost in excess of fair value of assets
acquired, less accumulated amortization
of $172,894 in 1997 and $124,645 in 1996 550,848 599,097
Deferred development costs (Note 5) 1,229,959 2,201,211
Notes and advances receivable - related
parties, net of allowance for
uncollectibles of $189,121 in 1997 and
$0 in 1996 (Note 3) 753,988 556,895
Note receivable, Palace Casino 221,073 -
Preopening costs, less accumulated
amortization of $211,842 in 1997 and
$17,117 in 1996 1,500,925 54,678
Other assets - net (Note 6) 907,693 714,166
- ------------------------------------------------------------------------------
TOTAL NONCURRENT ASSETS 5,164,486 4,126,047
- ------------------------------------------------------------------------------
$ 26,445,061 $ 21,784,544
- ------------------------------------------------------------------------------
F-3
<PAGE>
CASINO RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
SEPTEMBER 30, 1997 1996
- ------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,125,534 $ 1,173,449
Note payable - Grand Casinos, Inc.
(Note 15) - 589,410
Subordinated convertible debentures
(Note 8) 321,735 -
Current maturities of long-term debt
(Note 9) 852,978 547,755
Accrued expenses and other liabilities
(Note 7) 1,220,155 947,017
- ------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 3,520,402 3,257,631
- ------------------------------------------------------------------------------
LONG-TERM LIABILITIES
Long-term debt, less current maturities
(Note 9) 12,837,774 9,952,366
Subordinated convertible debentures,
long-term (Note 8) 321,735 350,000
Deferred rent (Note 10) 178,620 -
- ------------------------------------------------------------------------------
TOTAL LONG-TERM LIABILITIES 13,338,129 10,302,366
- ------------------------------------------------------------------------------
TOTAL LIABILITIES 16,858,531 13,559,997
- ------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 18 and 19)
STOCKHOLDERS' EQUITY (Notes 12, 13 and 14)
Preferred stock, 8% cumulative; $.01 par
value; authorized 5,000,000 shares;
none issued - -
Common stock, $.01 par value; authorized
30,000,000 shares; 9,673,364 and
9,761,803 shares issued and outstanding
in 1997 and 1996, respectively 96,734 97,618
Additional paid-in capital 22,793,110 22,671,175
Notes receivable - common stock - (1,232,000)
Deficit (13,303,314) (13,312,246)
- ------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 9,586,530 8,224,547
- ------------------------------------------------------------------------------
$ 26,445,061 $ 21,784,544
- ------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
CASINO RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 1997 1996
- ------------------------------------------------------------------------------
REVENUE
Entertainment $ 11,734,554 $ 8,938,297
Hospitality 3,965,710 3,967,652
- ------------------------------------------------------------------------------
Total revenue 15,700,264 12,905,949
- ------------------------------------------------------------------------------
COSTS AND EXPENSES
Operating costs - entertainment 9,245,649 6,199,560
Operating costs - hospitality 2,636,162 2,620,048
General and administrative 2,055,698 2,245,372
Other income (156,196) (65,893)
Interest expense - net of interest
income of $197,943 and $136,019
in 1997 and 1996, respectively 1,021,004 1,692,033
Loss on abandonment of gaming
projects - net (Note 5) 438,321 742,218
Allowance for impaired receivable
(Note 19) 791,900 -
- ------------------------------------------------------------------------------
Total costs and expenses 16,032,538 13,433,338
- ------------------------------------------------------------------------------
Loss before minority interest (332,274) (527,389)
MINORITY INTEREST IN NET LOSS OF A
CONSOLIDATED SUBSIDIARY 341,206 -
- ------------------------------------------------------------------------------
NET INCOME (LOSS) $ 8,932 $ (527,389)
- ------------------------------------------------------------------------------
NET INCOME (LOSS) PER COMMON SHARE $ 0.00 $ (0.05)
- ------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 10,015,873 8,980,105
- ------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
CASINO RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADDITIONAL NOTES
COMMON STOCK PAID-IN RECEIVABLE -
SHARES AMOUNT CAPITAL COMMON STOCK DEFICIT TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, September 30, 1995 7,746,007 $ 77,460 $ 18,741,575 $ - $ (12,784,857) $ 6,034,178
Issuance of common stock -
conversion of debenture 839,852 8,399 1,768,390 - - 1,776,789
Issuance of common stock - acquisition 17,500 175 35,919 - - 36,094
Issuance of common stock -
settlement of litigation 15,000 150 31,725 - - 31,875
Issuance of common stock -
exercise of warrants 1,143,444 11,434 2,138,566 (1,232,000) - 918,000
Cancellation of previously issued warrants - - (45,000) - - (45,000)
Net loss - - - - (527,389) (527,389)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, September 30, 1996 9,761,803 97,618 22,671,175 (1,232,000) (13,312,246) 8,224,547
Issuance of common stock -
conversion of debentures
and payment of accrued interest 281,561 2,816 352,299 - - 355,115
Cancellation of common stock and receivable
impairment reserve (Note 19) (370,000) (3,700) (436,400) 1,232,000 - 791,900
Debt discount relating to 13%
convertible debentures - - 206,036 - - 206,036
Net income - - - - 8,932 8,932
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, September 30, 1997 9,673,364 $ 96,734 $ 22,793,110 $ - $ (13,303,314) $ 9,586,530
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
CASINO RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 1997 1996
- ------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 8,932 $ (527,389)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities
Depreciation 1,091,391 1,056,756
Amortization 346,762 146,293
Minority interest in net loss of a
consolidated subsidiary (341,206) -
Abandonment cost - gaming ventures 438,321 742,218
Discount upon conversion of convertible
debentures 243,226 550,000
Reserve for impaired receivable 791,900 -
Expenses paid through issuance of
common stock - 57,297
Loss on sale/abandonment of property
and equipment 22,421 -
Accretion of note receivable interest (14,461) -
Changes in assets and liabilities
Accounts receivable - trade and other (162,605) 218,681
Inventory (209,989) (14,501)
Prepaid expenses (348,128) 36,642
Other assets 12,805 17,966
Accounts payable - trade (47,915) (484,429)
Accrued expenses and other liabilities 278,253 317,133
Deferred rent 178,620 -
- ------------------------------------------------------------------------------
Net cash provided by continuing operating
activities 2,288,327 2,116,667
Change in provision for contingencies - (71,353)
- ------------------------------------------------------------------------------
Net cash provided by operating activities 2,288,327 2,045,314
- ------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of Palace Casino 829,381 -
Decrease (increase) in restricted cash 338,602 (11,341)
Increase in deferred development costs (202,722) (2,039,165)
Refund of deferred development costs 405,655 -
Purchase of property and equipment (2,261,789) (278,722)
Increase in due from related parties (197,093) (26,207)
Increase in preopening costs and other (1,625,437) (272,584)
Payment of organization costs (30,250) -
Proceeds from minority interest in
a consolidated subsidiary 280,000 -
- ------------------------------------------------------------------------------
Net cash used in investing activities (2,463,653) (2,628,019)
- ------------------------------------------------------------------------------
F-7
<PAGE>
CASINO RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 1997 1996
- ------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock and
other equity transactions $ - $ 801,555
Payments on line-of-credit borrowings (589,410) (700,000)
Proceeds from long-term debt 2,959,470 1,673,941
Payments on long-term debt (550,989) (689,322)
Payment of loan costs (93,000) -
- ------------------------------------------------------------------------------
Net cash provided by financing activities 1,726,071 1,086,174
- ------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,550,745 503,469
CASH AND CASH EQUIVALENTS, at beginning of
year 1,546,422 1,042,953
- ------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, at end of year $ 3,097,167 $ 1,546,422
- ------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year for
Interest $ 1,149,830 $ 1,296,763
Income taxes 23,340 68,603
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Issuance of common stock as payment
for deferred development costs $ - $ 36,084
Conversion of subordinated convertible
debentures and payment of accrued interest 355,115 1,300,000
Note received from sale of interest in
the Palace Casino 206,612 -
Debenture issued in connection with the
Company's interest in the Palace Casino 1,388,430 -
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-8
<PAGE>
CASINO RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
1. SUMMARY OF
SIGNIFICANT ACCOUNTING
POLICIES
BUSINESS Casino Resource Corporation and Subsidiaries (the
"Company") is primarily engaged in the hospitality and
entertainment business. The Company owns and
operates a hotel in Hinckley, Minnesota (the Grand
Hinckley Inn), a production theater in Branson,
Missouri (the Country Tonite Theater) and a
production company in Las Vegas, Nevada (Country
Tonite Enterprises) and manages a 60%-owned joint
venture, Country Tonite Theater, LLC, which leases
and operates a theater in Pigeon Forge, Tennessee
and has entered into an agreement to lease and
operate a casino and theater in Tunisia, which opened
on October 18, 1997 through its 85% owned subsidiary
(CRC of Tunisie, S.A.).
The Company has entered into agreements to
participate with Harrah's Entertainment, Inc. in
a major Indian gaming award in Indiana and Michigan.
BASIS OF The accompanying consolidated financial statements
PRESENTATION include the accounts of Casino Resource Corporation
and its majority and wholly owned subsidiaries. All
significant intercompany balances and transactions
have been eliminated.
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 revenues and
expenses during the reporting period. Actual
results could differ from those estimates.
CASH AND CASH For purposes of the consolidated statements of cash
EQUIVALENTS flows, cash equivalents consist of short-term
investments having an original maturity of three
months or less. Carrying amounts approximate fair
value because of the short-term maturity of the
investments.
F-9
<PAGE>
CASINO RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
RESTRICTED CASH The Company had restricted cash being held by a
Mississippi state court in conjunction with
litigation involving the construction and subsequent
sale of the Biloxi Star Theater. The case was
settled and the funds were disbursed in January 1997.
CONCENTRATIONS OF Financial instruments that potentially subject the
CREDIT RISK Company to significant concentrations of credit risk
consist principally of cash instruments and accounts
receivable. The Company maintains cash and cash
equivalents with various financial institutions.
The Company provides credit in the normal course of
business. The Company performs ongoing credit
evaluations of its customers and maintains
allowances for potential credit losses, if necessary.
ADVERTISING Advertising expenditures are generally charged to
operations in the year incurred and totaled $626,930
in 1997 and $289,906 in 1996.
INVENTORY Inventory, consisting principally of merchandise and
concessions, is stated at the lower of cost
(first-in, first-out) or market.
PROPERTY AND Property and equipment are stated at cost. For
EQUIPMENT financial reporting purposes, depreciation and
amortization are computed over the estimated useful
lives of the assets (or the lease term, if shorter)
by the straight-line method over the following lives:
Land improvements 20 - 25 years
Buildings 35 - 40 years
Leasehold improvements 10 - 15 years
Office equipment 5 - 6 years
Transportation equipment 5 - 7 years
Other 5 years
COST IN EXCESS OF Cost in excess of fair value of assets acquired is
FAIR VALUE OF ASSETS amortized using the straight-line method over
ACQUIRED fifteen years.
F-10
<PAGE>
CASINO RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
DEFERRED DEVELOPMENT Deferred development costs consist of external costs
COSTS incurred in the evaluation of potential ventures.
The costs are expensed if a determination is made to
abandon the project.
PREOPENING COSTS Preopening costs consist primarily of costs incurred
to establish operations at the Country Tonite Theater,
LLC and the casino in Tunisia. The preopening costs
of the casino will be amortized over a one-year
period beginning in October 1997.
DEFERRED CHARGES Deferred charges consist of loan and convertible
debt origination fees and organization expense. The
deferred charges are amortized on the straight-line
method over the estimated useful lives ranging from
one to five years.
LONG-LIVED ASSETS The Company assesses the realizability of its
long-lived assets in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 121,
"Accounting for Impairments of Long-Lived Assets and
for Long-Lived Assets to be Disposed of." The
Company adopted SFAS No. 121 beginning October 1,
1996.
TAXES ON INCOME Deferred income taxes, when appropriate, are
provided on the difference in earnings determined
for tax and financial reporting purposes.
NET INCOME (LOSS) Net income (loss) per share data is computed using the
PER COMMON AND weighted average number of common shares and common
COMMON EQUIVALENT stock equivalents outstanding during each year.
SHARE Common equivalent shares from stock options and
warrants have not been included in the computation
for 1996 because their effect would be anti-dilutive.
RECENT ACCOUNTING In February 1997, the Financial Accounting Standards
PRONOUNCEMENTS Board issued SFAS No. 128, "Earnings Per Share". The
new standard simplifies the method for computing
earnings per share and requires the presentation of
two new amounts, basic and diluted earnings per
share. The Company will be required to adopt SFAS
No. 128, in the quarter ending December 31, 1997.
Earlier adoption is not allowed. If SFAS No. 128
was adopted, the basic earnings per share would be
$0.00 and ($0.06) at September 30, 1997 and 1996,
respectively.
F-11
<PAGE>
CASINO RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
In June 1997, the Financial Accounting Standards
Board issued SFAS No. 130, "Reporting Comprehensive
Income". The new standard discusses how to report
and display comprehensive income and its components.
The standard is effective for years beginning after
December 15, 1997. When the Company adopts this
statement, it is not expected to have a material
impact on the Company's financial statements.
In June 1997, the Financial Accounting Standards
Board issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information."
This standard requires enterprises to report certain
information about operating segments, their products
and services, geographic areas and major customers.
This standard is effective for years beginning after
December 15, 1997. When the Company adopts this
statement, it is not expected to have a material
impact on the Company's financial statements.
RECLASSIFICATIONS Certain reclassifications have been made to the
previously reported 1996 financial statements to
conform with the 1997 presentation.
2. PREPAID EXPENSES Prepaid expenses consist of the following:
SEPTEMBER 30, 1997 1996
-------------------------------------------------------
Rent $ 560,030 $ -
Consulting fees 206,848 -
Insurance 181,355 124,571
Marketing 89,700 90,000
Miscellaneous 85,672 80,876
-------------------------------------------------------
$ 1,123,605 $ 295,447
-------------------------------------------------------
F-12
<PAGE>
CASINO RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Included in consulting fees is $200,000 advanced
under a consulting agreement to the managing member
of the entity that lent the Company $1,000,000 in
September 1997.
3. RELATED PARTIES Notes and advances receivable include notes and
related interest due from officers and stockholders
totaling $753,988 and $556,895 at September 30, 1997
and 1996, respectively, at interest rates ranging
from 6% to 11%. The notes mature through October 1,
1999. Interest income from these notes was $130,307
and $88,448 in 1997 and 1996, respectively.
4. PROPERTY AND Property and equipment consist of the following:
EQUIPMENT
SEPTEMBER 30, 1997 1996
------------------------------------------------------
Land and improvements $ 2,226,724 $ 2,226,724
Buildings 11,328,379 11,327,492
Leasehold improvements 1,092,905 404,364
Furniture, fixtures and
equipment 5,253,145 3,711,359
------------------------------------------------------
19,901,153 17,669,939
Less accumulated depreciation
and amortization (3,670,270) (2,587,033)
------------------------------------------------------
Net property and equipment $ 16,230,883 $ 15,082,906
------------------------------------------------------
F-13
<PAGE>
CASINO RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
5. DEFERRED Deferred development costs consist of the following:
DEVELOPMENT COSTS
SEPTEMBER 30, 1997 1996
-------------------------------------------------------
Pokagon Indian Gaming
Project (a) $ 1,229,959 $ 1,052,378
Tunisia Casino Project (b) - 682,435
Palace Casino Project (c) - 466,398
-------------------------------------------------------
$ 1,229,959 $ 2,201,211
-------------------------------------------------------
(a) Monarch Casinos, Inc. sold its rights to the
Pokagon Indian gaming contract to the Company
in fiscal 1995 for consideration consisting of
the Company's assumption of certain trade
payables of the seller; the Company's
obligation to reimburse certain of the seller's
principals for travel and other new business
development costs; the Company's obligation to
loan the seller limited amounts of funding; the
execution of an agreement with the seller for
the payment of future new business development
fees; and the issuance of 100,000 of the
Company's common shares plus the contingent
issuance of an additional 1.9 million common
shares (to be earned as the Pokagon gaming
contract achieves certain governmental approval
levels and upon commencement of operations of
the initial casino).
Also, included in this amount is a $250,000
advance to an officer of Monarch Casinos, Inc.
This advance was made in accordance with the
contract described above. This advance accrues
interest at 7% and is due on demand after June
6, 1995, or will be canceled upon the second
anniversary date of the opening of the first
Pokagon casino.
F-14
<PAGE>
CASINO RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
The Company in turn entered into an agreement
with Harrah's Entertainment, Inc. ("Harrah's")
whereby the Company's rights to the Pokagon
gaming contract were assigned to Harrah's in
return for a share of Harrah's future
management fee from operations of planned
Pokagon tribal casinos. Harrah's is primarily
responsible to fund all costs attributable to
development and operation of the casinos,
receiving in return a management fee, as
defined. The Company, while not primarily
responsible to fund any such development or
operational costs might, in certain
circumstances, be required to provide
reimbursements to Harrah's. The Company will
receive 21.6% of Harrah's fees earned. The
Company has agreed to pay a percentage of the
fees it earns from Indian gaming contracts to
certain consultants.
All external costs and the fair value of the
Company's common shares issued have been
capitalized and will be expensed over five
years commencing with the receipt of initial
management fees from the Pokagon gaming venture.
In addition to the agreement above, Harrah's
agreed to reimburse the Company for all the
costs associated with the venture related to
the Eastern Band of Cherokee Indians in
exchange for the Company renouncing any rights
or claims to any other business ventures of
Harrah's and its affiliates. The amount to be
reimbursed is $600,000 which is recorded as an
other asset. Harrah's will pay the Company
$120,000 per year commencing on the opening of
the first Pokagon casino and each year after
for four years. These payments will be reduced
by $5,000 each month for a period of 40 months to
cover Harrah's costs for administering the
contract. Harrah's is in the process of
obtaining the necessary regulatory approvals
for the project.
(b) In 1996, the Company incurred $682,435 for
costs related to the Tunisian casino. As of
September 30, 1997, these costs have been
reclassified to prepaid expenses, leasehold
improvements, deferred charges and preopening
costs.
F-15
<PAGE>
CASINO RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
The casino opened on October 18, 1997.
(c) As of September 30, 1996, the costs consist
principally of the Company's initial investment
of $400,000 and $46,094 for consulting fees and
land rights. During 1997, the Company acquired its
interest in the Palace Casino and subsequently
sold it on February 5, 1997. In connection with
the sale, the Company incurred a loss of
$438,321 on the transaction.
In 1995, the Company initially attempted to
purchase certain assets of the Palace Casino.
In February 1996, the Company did not
consummate the planned purchase and expensed
costs totaling approximately $727,000.
6. OTHER ASSETS Other assets consist of the following:
SEPTEMBER 30, 1997 1996
-------------------------------------------------------
Due from Harrah's (Note 5) $ 600,000 $ 600,000
Organization costs,
less amortization of
$44,216 and $29,000 161,109 31,000
Loan origination costs,
less amortization of
$61,164 and $44,387 85,982 9,759
Deposits and miscellaneous 60,602 73,407
-------------------------------------------------------
$ 907,693 $ 714,166
-------------------------------------------------------
F-16
<PAGE>
CASINO RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
7. ACCRUED EXPENSES Accrued expenses and other liabilities consist of
AND OTHER the following:
LIABILITIES
SEPTEMBER 30, 1997 1996
-------------------------------------------------------
Payroll and payroll taxes $ 297,455 $ 204,888
Interest 159,102 95,136
Real estate taxes 119,838 128,714
Sales tax 89,098 44,612
Other 554,662 473,667
-------------------------------------------------------
$ 1,220,155 $ 947,017
-------------------------------------------------------
8. SUBORDINATED In September 1997, the Company completed a placement
CONVERTIBLE of $800,000, 13% subordinated convertible debentures
DEBENTURES (with net proceeds of $707,000). The debentures
have a one-year maturity with conversion into shares
of common stock on or before the anniversary date at
a price equal to 83% market value based on the then
current trading prices. At the issuance date, the
Company recorded a debt discount of $206,036 with a
corresponding credit to additional paid-in capital.
The discount is being amortized over 90 days, which
represents the required holding period of the
debentures. On December 12, 1997, $400,000
principal amount of debentures including interest
was redeemed in cash.
F-17
<PAGE>
CASINO RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
In February 1996, the Company completed a
private placement of $1,650,000, 8% subordinated
convertible debentures (with net proceeds of
$1,493,000). The debentures had a one-year maturity
with conversion into shares of common stock on or
prior to the anniversary date at a price equal to 75%
of market value based on the then current trading
prices. At the issuance date, the Company recorded a
debt discount of $550,000 with a corresponding credit
to additional paid-in capital. The discount was
amortized over 90 days, which represented the required
holding period of the debentures. During 1997 and
1996, $350,000 and $1,300,000 of the principal amount
of the debentures were converted into 281,561 and
839,852 common shares, respectively.
9. LONG-TERM DEBT Long-term debt consists of the following:
SEPTEMBER 30, 1997 1996
-------------------------------------------------------
Mortgage payable, interest
at prime plus 1% (9.5% at
September 30, 1997) (7%
floor and 10% ceiling),
collateralized by real
estate, payable in
monthly installments of
$73,035 including
interest through March
1999, with a final
payment of $7,077,978 due
in April 1999. $ 7,419,195 $ 7,600,142
Mortgage payable, interest
at prime plus 2% (10.5%
at September 30, 1997)
(11% ceiling), guaranteed
by Grand Casinos, Inc.,
collateralized by real
estate, payable in
monthly installments of
$44,283 including
interest through April
2004. 2,518,023 2,771,952
F-18
<PAGE>
CASINO RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
SEPTEMBER 30, 1997 1996
-----------------------------------------------------
Note payable, interest at
the greater of 20% per
annum or 5% of the gross
gaming win of the casino
in Tunisia for its first
year of operations,
collateralized by the
stock of the Company's
subsidiary that owns the
Grand Hinckley Inn,
payable on October 18,
1998. $ 800,000 $ -
Note payable, interest at
prime plus 3%,
collateralized by gaming
equipment, payable in
monthly installments of
$30,800 including interest
through December 1998. 431,714 -
Note payable, interest at
9.5%, collateralized by
real estate, payable in
monthly installments of
$1,139 through May 1999
with a final payment of
$88,497 due in May 1999. 96,200 100,200
Debenture, interest at 6%,
$1,500,000 principal amount,
discounted to an effective
interest rate of 10%.
Principal and accrued
interest are due on
January 31, 1999, payable in
cash or at the Company's
discretion, in common
stock. 1,425,620 -
Note payable with interest
at 10% of operating income,
as defined, of the
subsidiary that operates
the Tunisian casino, due
August 2022. The note is
convertible solely at the
lender's discretion into
the Company's subsidiary's
common stock, subject to
regulatory approvals. 1,000,000 -
F-19
<PAGE>
CASINO RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
SEPTEMBER 30, 1997 1996
-----------------------------------------------------
Other - 27,827
-----------------------------------------------------
13,690,752 10,500,121
Less current maturities (852,978) (547,755)
-----------------------------------------------------
Total long-term debt $ 12,837,774 $ 9,952,366
-----------------------------------------------------
Maturities of long-term debt are as follows:
YEAR ENDING SEPTEMBER 30,
-----------------------------------------------------
1998 $ 852,978
1999 9,911,106
2000 345,406
2001 383,471
2002 425,731
Thereafter 1,772,060
-----------------------------------------------------
$13,690,752
-----------------------------------------------------
At September 30, 1997, the Company has $100,000
available under a line of credit with a bank, which
expires in February 1998. The amount outstanding at
September 30, 1997 was $0.
10. LEASE COMMITMENTS The Company leases various equipment and facilities
under operating leases from related and unrelated
parties. These leases require that the Company pay
maintenance, utilities, insurance and taxes.
Total rent expense under operating leases was
$667,943 and $106,272 for the years ended September
30, 1997 and 1996, respectively. Related party rent
expense was $4,959 and $45,905 in 1997 and 1996,
respectively.
F-20
<PAGE>
CASINO RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Minimum annual rental commitments of noncancelable
operating leases covering facilities and equipment
at September 30, 1997 are approximately:
YEAR ENDING SEPTEMBER 30,
---------------------------------------
1998 $ 1,248,477
1999 1,520,207
2000 1,714,459
2001 1,133,021
2002 369,216
---------------------------------------
$ 5,985,380
---------------------------------------
The Company's lease agreement in Tennessee is with
the 40% joint venture partner of Country Tonite
Theater, LLC and requires scheduled rent increases
over the lease term. Generally accepted accounting
principles require total minimum rental payments to
be recognized as rent expense on a straight-line
basis over the lease term. The excess of such
charges over amounts to be paid under the lease
agreement is carried as a noncurrent liability in
the accompanying consolidated balance sheets.
The annual rent for the Tunisian casino is 600,000
dinars, which is approximately $486,000 at the
current exchange rate, with a 10% increase yearly.
The rent is payable in semi-annual installments.
In addition, the agreement requires the Company to
pay a variable percentage of the casino's gross
income, as defined, as additional rent. Generally
accepted accounting principles will require the
minimum rental payments to be recognized as rent
expense on a straight-line basis over the lease
term, when the lease commences in October 1997.
F-21
<PAGE>
CASINO RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
11. TAXES ON The composition of taxes on income is as follows:
INCOME
1997 1996
-----------------------------------------------------
Current
Federal $ 360,000 $ -
Utilization of net operating
loss carryforward (360,000) -
-----------------------------------------------------
Total taxes on income $ - $ -
-----------------------------------------------------
The Company and its subsidiaries file a consolidated
federal income tax return.
Deferred income taxes consist of the following:
SEPTEMBER 30, 1997 1996
-----------------------------------------------------
Total deferred tax assets,
relating principally to
net operating loss
carryforwards $ 4,200,000 $ 4,560,000
----------- -----------
Deferred tax liabilities - -
-----------------------------------------------------
4,200,000 4,560,000
Less valuation allowance (4,200,000) (4,560,000)
Total net deferred tax
assets $ - $ -
-----------------------------------------------------
Due to the uncertainty of realizing the deferred tax
asset in the future, the Company has recorded a
valuation allowance equaling the deferred tax asset.
At September 30, 1997, the Company has federal net
operating loss carryforwards available to offset
future taxable income of approximately $10,000,000,
which expire in various years through 2010.
F-22
<PAGE>
CASINO RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
12. CAPITAL STOCK In November 1995, the Company's former Chairman of the
Board exercised warrants to acquire 1,143,444 shares
of common stock. For financial reporting purposes,
the Company recorded proceeds of $2,150,000 or $1.88
per share, consisting of a payment of $650,000 cash
and execution of promissory notes due January 31, 1996
($500,000) and December 31, 1996 ($1.0 million). The
notes were extended at their initial due dates and
were scheduled to mature December 31, 1997. See
Note 19.
During 1996, 15,000 shares of stock were issued in
settlement of litigation with a former officer of
the Company.
In 1996, 17,500 shares of common stock were issued
in connection with the acquisition of leasehold
rights for the proposed Palace Casino acquisition.
Through September 30, 1997 and 1996, 281,561 and
839,582 shares were issued upon conversion of
subordinated convertible debentures. (See Note 8.)
13. WARRANTS As part of the public offering in September and
October 1993, the Company issued Class A Warrants
(the IPO Warrants) expiring, after a one-year
extension, on September 15, 1998, for the purchase
of 2,760,000 common shares at $6.75 per share. None
of these warrants have been exercised to date.
In April 1994, the Company issued warrants to Grand
Casino's, Inc. ("Grand") for the purchase of 250,000
common shares at $4.50 per share, as partial
consideration for Grand's guarantee of company debt.
During 1995, these warrants were transferred by Grand
to an investor and to the Company's former Chairman
of the Board in exchange for services provided to
Grand. In September 1995, 125,000 shares were issued
to the investor pursuant to a partial exercise of these
warrants for $531,250. The Company escrowed $50,000
of such funds and paid to the investor his interest
and transaction costs equal to such escrow. The
remaining 125,000 warrants were exercised in
November 1995 at $1.88 per share.
F-23
<PAGE>
CASINO RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
The managing underwriter of the public offering
received an option to acquire 240,000 shares at $8.25
per share and 240,000 warrants at $6.75 per share,
expiring on September 18, 1998. This option has
not been exercised to date.
In connection with the 13% convertible debenture,
the Company issued 25,000 warrants. The warrants
are exercisable through September 2000 at an
exercise price of 120% of the September 1997 closing
price as defined by the agreement. The value
assigned to these warrants increased deferred costs
and is being amortized over one year. The warrants
have not been exercised to date.
14. OPTIONS AND Certain financial consultants to the Company
AWARDS received options in December 1992 and in January
1993 to acquire 87,500 shares of common stock as
consideration for services rendered. These options
are fully vested and are exercisable at $2.375 per
share (17,500 shares) and at $.75 per share (70,000
shares). None of these options have been exercised
to date.
A former company executive was granted options in
September 1995, as part of an employment
termination arrangement, to acquire 50,000 shares
of common stock at $2.50 each (as to 25,000 shares)
and $6.80 each (as to 25,000 shares). The
aggregate options expire in September 2003 and none
of the options have been exercised to date.
During 1997, certain individuals received 30,500
options as a condition of employment and a
consultant received 20,000 options.
The Company has two stock incentive plans, both of
which are active. In July 1993, the Company adopted
a stock option plan (the "1993 Plan") which was
amended in 1995, and in April 1997, the Company's
stockholders approved a separate stock option plan
(the "1997 Plan"). Both plans provide for the
issuance of incentive stock options at a purchase
price approximating the fair market value of the
Company's common shares at the date of the grant (or
110% of such fair market value in the case of
substantial stockholders) vesting over ten years.
The 1993 and 1997
F-24
<PAGE>
CASINO RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Plans also authorize the Company to grant
nonqualified options, stock appreciation rights,
restricted stock and deferred stock awards. A total
of 1,000,000 shares of the Company's common stock
has been reserved pursuant to the 1993 and 1997
Plans. As of September 30, 1997, there were 431,400
options with respect to shares of common stock
outstanding under the 1993 Plan and there were
options with respect to 68,600 shares available for
grant under such plan; there were 455,400 options
with respect to shares of common stock outstanding
under the 1997 Plan and there were options with
respect to 44,600 shares available for grant under
such plan.
The following table summarizes the options granted,
exercised and outstanding under the plans.
<TABLE>
<CAPTION>
Weighted
Exercise Average
Price Exercise
Shares Per Share Price
-------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding, October 1, 1995 281,000 $ 1.70 - 4.14 $ 2.31
Granted 154,000 1.94 - 3.13 2.28
Exercised - - -
Canceled and expired (53,600) 2.13 - 4.14 3.53
-------------------------------------------------------------------
Outstanding, September 30,
1996 381,400 1.60 - 3.75 2.15
Granted 512,000 1.34 - 1.56 1.43
Exercised - - -
Canceled and expired (6,600) 1.56 - 3.13 1.94
-------------------------------------------------------------------
Outstanding, September 30,
1997 886,800 $ 1.34 - 3.75 $ 1.71
-------------------------------------------------------------------
-------------------------------------------------------------------
Options exercisable at
September 30, 1997 528,133 $ 1.34 - 3.75 $ 1.84
-------------------------------------------------------------------
Options available for future
grant 113,200
-------------------------------------------------------------------
-------------------------------------------------------------------
</TABLE>
The Company applies APB No. 25, "Accounting for Stock
Issued to Employees", and related interpretations, in
accounting for options. Under APB Opinion 25,
because the exercise price of the options equals the
market price of the underlying stock on the
measurement date, no compensation expense is
recognized.
F-25
<PAGE>
CASINO RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
The weighted-average, grant-date fair value of
stock options granted to employees during the year,
and the weighted-average significant assumptions
used to determine those fair values, using a
modified Black-Sholes option pricing model, and the
pro forma effect on earnings of the fair value
accounting for stock options under Statement of
Financial Accounting Standards No. 123, are as
follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------------------------------
<S> <C> <C>
Weighted average fair value per options
granted $ 1.16 $ 1.52
Significant assumptions (weighted-average)
Risk-free interest rate at grant date 6.76% 6.02%
Expected stock price volatility 0.85 0.85
Expected dividend payout - -
Expected option life (years) (a) 9.51 5.00
Net income (loss)
As reported $ 8,932 $(527,389)
Pro forma (586,858) (761,749)
Net income (loss) per share
As reported $ 0.00 $ (0.05)
Pro forma (0.06) (0.08)
</TABLE>
(a) The expected option life considers historical
option exercise patterns and future changes to
those exercise patterns anticipated at the date
of grant.
F-26
<PAGE>
CASINO RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
The following table summarizes information about stock
options outstanding at September 30, 1997 under the
plans:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------ ------------------------
Weighted-
Average Weighted- Number Weighted-
Range of Number Remaining Average Exercisable Average
Exercise Outstanding Contractual Exercise at Exercise
Prices at 9/30/97 Life Price 9/30/97 Price
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.34-1.99 703,000 9.0 Years $1.53 363,333 $1.64
2.00-2.99 127,000 6.8 Years 2.03 127,000 2.03
3.00-3.75 56,800 4.4 Years 3.19 37,800 3.22
-----------------------------------------------------------------------------
886,800 8.4 Years $1.71 528,133 $1.84
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
</TABLE>
15. TRANSACTIONS WITH On September 23, 1994, the Company entered into a
GRAND CASINOS, INC. term loan agreement with Grand Casinos, Inc. Advances
under this agreement bear interest at 10% per annum.
The loan was paid in full in August 1997.
For the years ended September 30, 1997 and 1996, 6%
and 8% of total revenues and 24% and 25% of
hospitality revenues were received through Grand's
marketing department, respectively.
16. BUSINESS SEGMENTS The Company operates principally in three industry
segments: (1) Entertainment Industry includes Country
Tonite Enterprises, a production company, the Branson
Theater and the Pigeon Forge Theater; (2)
Hospitality Industry includes the Hinckley Hotel and
(3) Gaming Industry includes interest in the Company's
Pokagon gaming contract, and its interest in the
Palace Casino and the Tunisian Casino.
F-27
<PAGE>
CASINO RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Specified financial information by business segment
is included in the following summary:
YEAR ENDED SEPTEMBER 30, 1997 1996
------------------------------------------------------
Net sales
Entertainment $ 11,734,554 $ 8,938,297
Hospitality 3,965,710 3,967,652
Gaming - -
------------------------------------------------------
Consolidated $ 15,700,264 $ 12,905,949
------------------------------------------------------
------------------------------------------------------
Operating income (loss)
Entertainment $ 2,488,905 $ 2,738,737
Hospitality 1,329,548 1,347,604
Gaming - -
Corporate (2,055,698) (2,245,372)
------------------------------------------------------
Consolidated $ 1,762,755 $ 1,840,969
------------------------------------------------------
------------------------------------------------------
Identifiable assets
Entertainment $ 11,231,445 $ 11,085,112
Hospitality 5,535,500 5,894,115
Gaming 5,394,644 2,201,211
Corporate 4,283,472 2,604,106
------------------------------------------------------
Consolidated $ 26,445,061 $ 21,784,544
------------------------------------------------------
------------------------------------------------------
F-28
<PAGE>
CASINO RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 1997 1996
------------------------------------------------------
Capital expenditures
Entertainment $ 124,513 $ 240,328
Hospitality 30,923 11,602
Gaming 2,050,941 -
Corporate 55,412 26,792
------------------------------------------------------
Consolidated $ 2,261,789 $ 278,722
------------------------------------------------------
------------------------------------------------------
Depreciation and amortization
Entertainment $ 990,996 $ 705,386
Hospitality 397,034 399,317
Gaming - -
Corporate 50,123 98,346
------------------------------------------------------
Consolidated $ 1,438,153 $ 1,203,049
------------------------------------------------------
------------------------------------------------------
Identifiable assets outside the United States
totalled $4,164,685 and $0 at September 30, 1997 and
1996, respectively. As the Casino opened on October
18, 1997, there were no operations for 1997 and 1996.
17. DEFINED Effective July 1, 1997, the Company adopted a
CONTRIBUTION PLAN defined contribution 401(k) plan (the "Plan") covering
substantially all of its U.S. employees. Eligible
employees may contribute up to 15% of compensation, as
defined in the Plan. The Company has an optional
matching program (approved annually by the Board of
Directors) where the Company matches a percentage of
the employee's contribution (currently 50% of the
first 6% of contribution). Company-matched
contributions that will be made in common stock of the
Company, vest in full after seven years of an
employee's credited service to the Company. The
Company also has an option to make additional profit
sharing plan contributions (none in fiscal 1997).
Defined contribution expense totaled $14,462 in the
year ended September 30, 1997.
18. COMMITMENTS AND (a) Under a Marketing Enhancement Agreement,
CONTINGENCIES entered into with the Tribal Commission of
the Mille Lacs Band of Ojibwe Indians (owners
of the Grand Casino Hinckley) and Grand, the
F-29
<PAGE>
CASINO RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Company receives a $20 fee per night per
occupied room. The Company recognized
approximately $944,000 and $982,000 from the
marketing subsidy in 1997 and 1996,
respectively. In return for the marketing
enhancement fee, the hotel has entered into a
revenue-sharing plan with the casino which
requires that 50% of all room revenues above a
defined cumulative threshold (up to the amount
of marketing subsidy paid to the hotel) be
paid to the casino. The cumulative threshold
was exceeded in fiscal 1995. Payments due
under the revenue-sharing plan totaled
$645,000 and $786,000 in 1997 and 1996,
respectively. Payments to Grand under this
windfall profit-sharing agreement for fiscal
1998 will vary based on revenues and the
change, if any, in the operating cost
threshold. The Company and the Tribal
Commission of the Mille Lacs Band have entered
into an agreement regarding future ownership
of the hotel. The Tribal Commission has the
unilateral right to purchase the hotel on the
anniversary date of its initial occupancy (May
1994) in each of years 2001 through 2006 at a
cost equivalent to the original development
cost of the hotel plus the depreciated cost of
personal property and all inventories, less
$450,000. Conversely, in the event that the
Tribal Commission allows the construction of
more than 500 hotel or equivalent rooms on
property owned by the Tribal Commission or
Grand, the Company has the right to require
the Tribal Commission to purchase the hotel at
the cost stated above.
(b) The Company has entered into employment
agreements with various employees with
expiration dates through July 1999. The total
cost of the agreements is approximately
$970,000.
F-30
<PAGE>
CASINO RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(c) In 1995, a suit was brought against the
Company in Federal District Court of New
Jersey, which venue was later transferred to
the Federal District Court for Southern
Mississippi. Plaintiff (Gelb Productions,
Inc., a New Jersey corporation) asserts it had
a contract with the Company to provide eight
professional boxing events at the Company's
former Biloxi Star Theater. The complaint was
thereafter amended by plaintiff to reflect
additional allegations that defendant
tortuously harmed plaintiff's business
reputation and maliciously interfered with
existing and prospective economic
relationships. Settlement was reached with
Gelb in December 1997 for $100,000, plus
attorney fees and expenses which will be
decided by the Mississippi court under the
Lodestar method.
As of September 30, 1997, the Company provided
a provision of $150,000 for the settlement and
costs related to the suit.
(d) The Company commenced an arbitration action
in November 1994 with the Arbitration
Association in Minneapolis, Minnesota, against
Cunningham, Hamilton, Quiter, P.A. ("CHQ"), the
architect it retained in connection with the
construction of the Biloxi theater. On
December 30, 1994, the architectural firm
commenced a suit in a Mississippi state court
seeking a foreclosure on a mechanics' lien it
had filed on the Biloxi theater project in the
amount of approximately $321,000, which sum
the Company escrowed. On December 26, 1996,
the Arbitration Association announced the
Company was entitled to an award of
approximately $142,000, which sum was a
portion of previously escrowed $321,000. The
decision resulted in a gain to the Company of
approximately $122,000 in fiscal 1997.
F-31
<PAGE>
CASINO RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(e) James Barnes and Prudence Barnes, two former
officers of a subsidiary of the Company, have
brought suit in the State District Court,
Clark County, Nevada, against the Company in
connection with their employment termination
in June 1995. No specific amount of damages
has been claimed; however, the plaintiffs have
informally indicated that they would entertain
a settlement offer of between $250,000 and
$350,000. The Company intends to vigorously
defend itself in this matter.
(f) In March 1996, PDC, a Minnesota limited
liability company, and two of its officers
filed suit against the Company and Harrah's
Entertainment and Monarch Casinos, in the
Fourth Judicial District Court of Minnesota,
and in Michigan, which venue was later
dropped, alleging defamation, violation of the
Lanham Act, violation of the Michigan Consumer
Protection Act, tortuous interference with
its business relations and prospective
economic advantage, as well as false light
invasion of privacy in connection with the
Pokagon Indian Gaming Award. Under the Lanham
Act, the plaintiffs are claiming a right to
treble damages. The plaintiff seeks
compensatory damages and has not claimed a
specific amount of damages, but claims such
damages exceed $50,000. The plaintiff also
seeks recovery of their attorneys' fees. The
Company's general liability carrier has taken
up the defense of the Company. The Company
intends to vigorously defend itself in this
matter.
(g) On November 13, 1995, Casino Resorts, Inc., a
Minnesota corporation, commenced an action in
the State District Court for the Fourth
Judicial District of Minnesota against Monarch
and the Company alleging breach of contract
against Monarch and tortuous interference with
a contractual business relationship against
the Company. The plaintiff seeks compensatory
damages and has not claimed a specific amount
of damages, but claims such damages exceed
$50,000. The plaintiff also seeks
reimbursement of costs and expenses. The
matter came before the Fourth Judicial
District Court of Minnesota, on December 9,
1996, for hearing on motions by the Company
F-32
<PAGE>
CASINO RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
and Monarch for summary judgement. On January
22, 1997, the Company's motion for summary
judgement on plaintiff's claim of tortuous
interference was granted and plaintiff's claim
against the Company was dismissed.
Additionally, Monarch's motion of summary
judgement on plaintiff's claim for breach of
contract was granted and plaintiff's claim
against it was dismissed. Casino Resorts,
Inc. filed an appeal with the Minnesota Court
of Appeals on May 7, 1997, claiming that there
are factual issues, which must be resolved by
a jury. In December 1997, the Minnesota Court
of Appeals affirmed the decision of the lower
court dismissing the plaintiff's claims of
tortuous interference against the Company.
(h) The Company has received notice that the
action of Cunningham, Hamilton, Quiter, P.A.
against John J. Pilger (CEO of the Company)
in Jackson County Circuit Court, Mississippi
originally set in abeyance pending completion
of arbitration proceeding, is now reconstituted.
Cunningham alleges that the Company owes CHO
approximately $40,000 for services rendered in
1994. The Company denies these charges and plans
to vigorously defend itself in this matter.
F-33
<PAGE>
CASINO RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
19. SUBSEQUENT EVENT On December 31, 1997, the Company's former chairman
defaulted on repaying the $1,232,000 (principal) of
notes receivable due the Company. The Company filed
suit against the individual on January 2, 1998. The
Company holds 150,000 shares of the Company's stock
as collateral. On January 15, 1998, the Company
signed an agreement with the individual. Under the
agreement, 220,000 additional shares of the
Company's stock will be canceled along with the
150,000 shares held at the market price of $1.19 per
share. Additionally, the Company and the individual
entered into a new note agreement. The new note of
$1,196,885, including approximately $143,000 of
previously reserved interest, bears interest at 7%,
payable on maturity on January 15, 2001. The note
is collateralized by the individual's 5% interest in
the Company's Pokagon management fee. Solely at the
Company's discretion, at any time prior to maturity,
the Company can take the collateral as payment in
full for the note. Since the individual's ability
to pay the note is not known, the Company has
provided an impairment reserve for $791,900 which
represents the remaining principal balance after
stock cancellations. Generally accepted accounting
principles do not permit the recording of contingent
assets until realized and as the individual's
ability to pay the note is not known, the Company
has provided an impairment reserve for the $791,900
which represents the remaining principal balance
after stock cancellations.
F-34
<PAGE>
Sequentially
Exhibit No. Description of Exhibit Numbered Pages
- -------------------------------------------------------------------------------
2.1 Palace Casino Asset Acquisition Agreement (6)
3.1 Restated Articles of Incorporation of the Company, as amended (2)
3.2 Bylaws of the Company, as amended (3)
4.1 $300,000 Convertible Debenture (7)
4.2 $500,000 Convertible Debenture (7)
4.3 Form of Registration Rights Agreement (7)
4.4 Form of Debenture Subscription Agreement (7)
4.5 Common Stock Purchase Warrant (The Gifford Fund, Ltd.) (7)
4.6 Common Stock Purchase Warrant (G.P.S. Fund, Ltd.) (7)
4.7 Common Stock Purchase Warrant (Joseph B. LaRocco) (7)
4.8 Common Stock Purchase Warrant (International Holding Company, Ltd.) (7)
4.9 $1,500,000 Debenture (8)
4.10 Amendment to Convertible Debentures (8)
10.1 Employment Agreement dated May 20,1996 between the Company and John J.
Pilger (6)
10.2 Ground Lease dated as of August 11,1993, as amended by the Amendment to
Ground Lease dated as of April 5, 1995, between Casino Building Corporation
and Grand Casinos, Inc. relating to the site for the Grand Hinckley Inn (5)
10.3 Hotel Development Agreement dated July 23,1993, between the Company and
Grand Casinos, Inc. relating to the development of the Grand Hinckley
Inn (1)
10.4 Marketing Enhancement and Purchase/Put Option Agreement dated as of August
11, 1993, between the Company, the Corporate Commission and Grand Casinos,
Inc. relating to the Grand Hinckley Inn (1)
10.5 Form of Warrant Agreement between the Company and Norwest Bank Minnesota,
N. A., as Warrant Agent, dated September 15, 1993 (1)
10.6 Promissory Note dated as of September 15,1993, made by John J. Pilger in
favor of the Company (3)
10.7 Contract to Produce Show dated December 28, 1995, between JMJ, Inc., d/b/a
Aladdin Hotel & Casino and Country Tonite Enterprises, Inc. relating to the
Las Vegas production show (2)
<PAGE>
10.8 Agreement for Purchase and Sale of Theatre dated March11, 1994, among the
Company, CRC of Branson, Inc. and Ahab of the Ozarks, Inc. relating to the
acquisition of the Country Tonite Theatre (2)
10.9 Construction and Term Loan Agreement dated as of April 1,1994, as amended
by the Amendment to Construction and Term Loan Agreement dated as of May
1,1994, between Casino Building Corporation and Miller & Schroeder
Investments Corporation relating to the construction and financing of the
Grand Hinckley Inn (5)
10.10 Promissory Note dated April 5, 1994, made by Casino Building
Corporation in favor of Miller & Schroeder Investments Corporation in the
amount of $3,300,000 (5)
10.11 Mortgage, Security Agreement and Financing Statement dated as of
April 1, 1994, between Casino Building Corporation and Miller & Schroeder
Investments Corporation (5)
10.12 Guaranty Agreement dated April 1, 1994, by the Company in favor of
Miller & Schroeder Investments Corporation (5)
10.13 Assignment of Rents and Leases dated as of April 1,1994, as amended
by the Amendment to of Rents and Leases dated as of May 1,1994, between
Casino Building Corporation and Miller & Schroeder Investments
Corporation (5)
10.14 Subordination Agreement dated as of April 1,1994, among the Company,
Casino Building Corporation and Miller & Schroeder Investments
Corporation (5)
10.15 Loan Purchase Agreement dated April 1, 1994, among the Company,
Casino Building Corporation and Miller & Schroeder Investments
Corporation (5)
10.16 Assignment dated as of April 1,1994, between Casino Building
Corporation and Miller & Schroeder Investments Corporation relating to the
assignment of the Marketing Enhancement and Purchase/Put Option
Agreement (5)
10.17 Common Stock Purchase Warrant dated April 5, 1994, granted to Grand
Casino, Inc. by the Company with respect to 98,130 shares (5)
10.18 Common Stock Purchase Warrant dated April 19, 1994, granted to Grand
Casino Inc. by the Company with respect to 151,870 shares (5)
10.19 Promissory Note dated March 29, 1994, made by Casino Building
Corporation for $939,739.50 in favor of PDS Financial Corporation relating
to the financing of furniture, fixtures and equipment for the Grand
Hinckley Hotel (5)
10.20 Security Agreement dated March 29, 1994, between Casino Building
Corporation and PDS Financial Corporation (5)
10.21 Guaranty dated March 29, 1994, made by the Company in favor of PDS
Financial Corporation (5)
10.22 Debt Subordination Agreement date March 29,1994, among Casino
Building Corporation, the Company and PDS Financial Corporation (5)
10.23 Assignment dated March 29, 1994, among Casino Building Corporation,
the Company and PDS Financial Corporation (5)
<PAGE>
10.24 Biloxi Star Theater Asset Purchase Agreement dated August 18, 1994,
among Grand Casinos, Inc., Grand Casinos of Mississippi, Inc.-Biloxi,
the Company and Casino Building Corporation of Mississippi, Inc. (2)
10.25 Assignment and Assumption of Ground Sublease and Related Documents
dated September 30, 1994, between Casino Building Corporation of
Mississippi, Inc. and Grand Casinos Biloxi Theater, Inc. (2)
10.26 Bill of Sale date September 30,1994, between Casino Building
Corporation of Mississippi, Inc. and Grand Casinos Biloxi Theater,
Inc. (2)
10.27 Assignment of Warranties, Permits, Licenses, Contracts, Service
Agreements and other Intangible Rights dated September 30, 1994, between
Casino Building Corporation of Mississippi, Inc, and Grand Casinos Biloxi
Theater, Inc. (2)
10.28 Indemnification Agreement dated September 30, 1994, among the
Company, Casino Building Corporation of Mississippi, Inc., Grand Casinos,
Inc., Grand Casinos, of Mississippi, Inc.-Biloxi, and Grand Casinos Biloxi
Theater, Inc. (2)
10.29 Non-Compete Agreement dated September 30, 1994, among the Company,
Casino Building Corporation of Mississippi, Inc., Grand Casinos, Inc.,
Grand Casinos Biloxi Theater, Inc. and John J. Pilger (2)
10.30 Termination Agreement dated as of September 30, 1994, among the
Company, Casino Building Corporation of Mississippi, Inc., Grand Casinos,
Inc., Grand Casinos of Mississippi, Inc.-Biloxi (2)
10.31 Registration Rights Agreement dated as of September 30, 1994, between
the Company and Grand Casinos, Inc. (2)
10.32 Term Loan Agreement dated as of August 18, 1994, between Casino
Building Corporation and Grand Casinos, Inc. relating to the line of
credit (2)
10.33 Term Note dated as of September 23, 1994, between Casino Building
Corporation and Grand Casinos, Inc. (2)
10.34 Mortgage, Security Agreement, Fixture Financing Statement and
Assignment of Leases and Rents, dated as of September 23, 1994, made by
Casino Building Corporation to Grand Casinos, Inc., securing $1,750,000
Term Note (2)
10.35 Continuing Guaranty (Unlimited) made by the Company in favor of Grand
Casinos, Inc. dated as of September 23, 1994, relating to the $1,750,000
Term Note (2)
10.36 Third Party Pledge Agreement dated as of September 23, 1994, made by
the Company in favor of Grand Casinos, Inc. and relating to the Term
Loan (2)
10.37 Warrant to Purchase Common Stock dated as of September 27, 1994,
granted to Grand Casinos, Inc. (2)
10.38 Rights of First Refusal Agreement dated as of September 23,1994,
between the Company and Grand Casinos, Inc., with respect to the sale of
the Grand Hinckley Inn. (2)
<PAGE>
10.39 Stock Purchase Agreement, dated as of December 18, 1992, between Mr.
Pilger and Mr. Howarth(1) as amended by First Amendment dated June 2,
1993(5), Second Amendment dated July 2,1993(5), and Third Amendment dated
November 30, 1994 (4)
10.40 Settlement Agreement dated as of September, 1994, between the
Company and Gerald North (2)
10.41 Settlement Agreement dated December 8, 1994 between the Company and
Resource Financial Services (2)
10.42 Agreement dated as of October 15, 1993, between the Company and Kevin
Kean Company, Inc.(3) as amended by the Amendment dated as of December 15,
1994, relating to Cherokee gaming project (5)
10.43 Management Agreement dated February 1995 between CRC West, Inc. and
Hoh Indian Tribe (5)
10.44 Mutual Release dated August 31, 1995, between CRC West, Inc. and Hoh
Indian Tribe (5)
10.45 Memorandum of Understanding dated January 10, 1995, between The
Promus Companies Incorporated and the Company with respect to the
development of certain gaming projects (3)
10.46 Memorandum of Understanding dated January 18, 1995, between Monarch
Casinos, Inc. and the Company with respect to the development of certain
gaming projects (3)
10.47 Memorandum of Understanding dated March 10, 1995, between the
Company, the Kevin Kean Company, Inc. and James E. Barnes with respect to
the development of certain gaming projects (5)
10.48 Agreement dated May 8, 1995, between Monarch Casinos, Inc. an the
Company with respect to the January 18, 1995, Memorandum of
Understanding (5)
10.49 Lease Modification Agreement dated August 7, 1995, with respect to
the Elkhorn Wisconsin Lease (3)
10.50 Settlement Agreement dated August 7, 1995, between the Company, John
J. Pilger and Richard A. Howarth, Jr. (3)
10.51 Letter Agreement dated August 22, 1995, relating to extension of
maturity date for September 23, 1994 Term Note (3)
10.52 Agreement dated December 1, 1995, between the Company and Kevin M.
Kean (5)
10.53 Warrant Purchase Agreement and Cherokee Dispute Resolution dated
December 1, 1995, between the Company and Kevin M. Kean (5)
10.54 Promissory Notes dated December 1, 1995, made to Kevin M. Kean in
favor of the Company (5)
10.55 Promissory Note dated December 31, 1994, between the Company and John
J. Pilger (6)
10.56 Promissory Note dated October 25, 1995, between the Company and John
J. Pilger (6)
<PAGE>
10.57 Promissory Note dated April 8, 1996 between the Company and John J.
Pilger (6)
10.58 Non-Circumvention and Non-Disclosure Agreement dated July 26, 1996,
between the Company and Huong "Henry" Le (6)
10.59 Consulting Agreement dated December 6, 1995, between the Company and
Monarch Casinos (6)
10.60 Technical Assistance and Consulting Agreement dated June 10,1996,
between the Company and Harrah's Southwest Michigan Casino Corporation (6)
10.61 Lease Agreement dated September 4, 1996, between J. MacDonald
Burkhart, M.D. and Country Tonite Theatre L.L.C (6)
10.62 Operating Agreement of Country Tonite Theatre, L.L.C. dated September
24, 1996 (6)
10.63 Limited Liability Company Operating Agreement of New Palace Casino,
L.L.C. (6)
10.64 Lease Contract dated June, 1996 between the Company and Samara Casino
Company (6)
10.65 Consulting Agreement between the Company and Mondhor Ben Hamida (6)
10.66 $800,000 Lyle Berman Family General Partnership Loan Agreement (7)
10.67 $800,000 Promissory Note (7)
10.68 Stock Pledge Agreement (7)
10.69 Mutual Release Agreement (7)
10.70 $1,000,000 SeaMar Ventures, LLC Loan Agreement (7)
10.71 $1,000,000 Term Note (7)
10.72 Guaranty Agreement (7)
10.73 Matt Walker Consulting Agreement (7)
10.74 Tunisia Casino License (7)
10.75 Agreement with Robert and Lawana Low (8)
10.76 Lease for 707 Blenville (8)
10.77 Kevin Kean Settlement Agreement (8)
11.1 Statement Re. Computation of Per Share Earnings (8)
21.1 Subsidiaries of Registrant (8)
23.1 Consent of BDO Seidman, L.L.P. (8)
27.1 Financial Data Schedule (8)
1) Incorporated by reference to the Company's Registration Statement on Form
SB-2, File No. 33-66504, declared effective September 15, 1993.
2) Incorporated by reference to the Company's Form 10-KSB for the fiscal year
ended September 30, 1994, filed on January 12, 1995.
<PAGE>
3) Incorporated by reference to the Company's Registration Statement on Form
SB-2, File No. 33-90114, originally declared effective May 5,1995.
4) Incorporated by reference to the Company's Form 10-KSB for the fiscal year
ended September 30, 1995, filed on January 16, 1996.
5) Incorporated by reference to the Company's Registration Form S-3, File No.
33-31534, originally declared effective February 29,1996.
6) Incorporated by reference to the Company's Form 10-KSB, as amended for the
fiscal year ended September 30, 1996, filed on June 9, 1997.
7) Incorporated by reference to the Company's Registration Statement on Form
S-3, as amended, File 333-37267, filed on November 19, 1997.
8) Filed herewith.
<PAGE>
Exhibit 1
Form of Debenture
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER (THE
"1933 ACT"). THIS DEBENTURE, HOWEVER, CONTAINS CERTAIN RIGHTS THAT ARE ATTACHED
AND MADE A PART THEREOF WITH RESPECT TO REGISTRATION RIGHTS THAT ARE
INCORPORATED AND MADE A PART THEREIN OF THIS DEBENTURE. (SEE SECTION ________.)
6.0% CUMULATIVE CONVERTIBLE DEBENTURE DUE AND PAYABLE UPON THE EARLIER OF (1) 24
MONTHS AFTER CLOSING DATE OF PALACE CASINO TRANSACTION OR (2) SALE OF CASINO
BY PURCHASER (LLC) PRIOR TO EXPIRATION OF 24 MONTHS AFTER CLOSING DATE. THE
FORM OF CONVERSION IS AT THE SOLE DISCRETION OF CASINO RESOURCE CORPORATION IN
CASH OR COMMON STOCK.
$1,500,000.000
January 31, 1997
Number 001
FOR VALUE RECEIVED, Casino Resource Corporation a Minnesota corporation
(the "Company"), hereby promises to pay to Maritime Group, LTD. or registered
assigns (the "Holder") on date of closing of Palace transaction (the
"Maturity Date"), the principal amount of One Million Five Hundred Thousand
Dollars ($1,500,000.000) U.S., by means of this Debenture instrument, and to
pay interest on the principal amount hereof, in such amounts, and on such
terms and conditions as are specified herein.
Article 1. INTEREST
The Company shall pay interest on the unpaid principal amount of this
Debenture (the "Debenture") at the rate of Six Percent (6%) per year,
accrued and payable 24 months after close date and shall additionally
reflect a 30-day grace period. Interest on this Debenture shall accrue from
the closing date of Palace Casino transaction. Interest shall be computed on
the basis of a 360-day year of 12-30-day months. If the Debenture is executed,
under terms and conditions as set out above, and interest accrual is less than a
24-month period, the Company shall pay to the Holder the pro-rata portion of
accrued interest.
Article 2. METHOD OF PAYMENT
This Debenture must be surrendered to the Company in order for the Holder
to receive payment of the principal amount hereof. The Company shall have
the option of paying the interest on this Debenture in United States dollars
or in Company Registered Common Stock.
Article 3. CONVERSION
Section 3.1 CONVERSION PRIVILEGE
CRC may, at its sole discretion, at Conversion Date, remit payment in cash
or in the Common Stock of CRC. If converted to CRC Common Stock, the Conversion
Price will be determined by calculating the fair market value of the Company's
Common Stock for each day in the 10 business day period ending
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<PAGE>
on and including the Conversion Date of the Debenture as reported on the
primary securities exchange or securities market in which the Common Stock
shall then be traded.
Section 3.2. CONVERSION PROCEDURE
If, at CRC's election, this Debenture is converted into Common Stock, the
Holder must surrender the original Debenture to the Company, furnish appropriate
endorsements and transfer documents if so requested by the Company. Within five
business days after Conversion Date, the Company shall deliver a certificate for
the number of shares of Common Stock issuable upon the conversion and a check
for any fraction of a share. The person in whose name the certificate of Common
Stock is to be registered shall be treated as a shareholder of record on and
after the conversion date. No payment shall be made for accrued interest until
Conversion Date or the Maturity Date.
Section 3.3. FRACTIONAL SHARES
The Company shall not issue a fractional share of Common Stock upon the
conversion of this Debenture. Instead, the Company shall pay in lieu of any
fractional share the cash value thereof at the then current market price of the
Common Stock as determined under Section 3.6 below.
Section 3.4. TAXES ON CONVERSION
The Company shall pay any documentary, stamp or similar issue or transfer
tax due on the issue of shares of Common Stock upon the conversion of this
Debenture. However, the Holder shall pay any such tax which is due because
the shares are issued in a name other than its name.
Section 3.5. COMPANY TO RESERVE STOCK
The Company shall reserve out of its authorized but unissued Common Stock
or Common Stock held in treasury enough shares of Common Stock to permit the
conversion of this Debenture. All shares of Common Stock which may be issued
upon the conversion hereof shall be fully paid and nonassessable.
Section 3.6. CURRENT MARKET PRICE
For the purpose of any computation referenced in this Debenture, the
average of the per share bid and ask prices for the Common Stock for the 10
business day period ending on and including the Conversion Date of the Debenture
as reported by the National Association of Securities Dealers Automated
Quotation System ("NASDAQ").
Section 3.7. MERGERS, ETC.
If the Company merges or consolidates with another corporation or sells or
transfers all or substantially all of its assets to another person the holders
of the Common Stock are entitled to receive stock, securities or property in
respect of or in exchange for Common Stock, then as a condition of such merger,
consolidation, sale or transfer, the Company and any such successor, purchaser
or transferee shall amend this Debenture to provide that it may thereafter be
converted on the terms ans subject to the conditions set forth above into the
kind and amount of stock, securities or property receivable upon such merger,
consolidation, sale or transfer by a holder of the number of shares of Common
Stock into which the Debenture might have been
2
<PAGE>
converted immediately before such merger, consolidation, sale or transfer,
subject to adjustments which shall be as nearly equivalent as may be practicable
to adjustments provided for in this agreement.
Section 3.7.a.
Not withstanding anything to the contrary in Section 3.7, this Debenture
shall not be convertible into securities of the merged or acquiring company if
those securities are not trading (at the time of conversion) on the NYSE,
AMEX, or the NASDAQ NMS (National Market System). If the Debenture is not
convertible into securities under this provision, then the principal and accrued
interest shall be paid in cash upon maturity.
Article 4. MERGERS
The Company shall not consolidate or merge into, or transfer all or
substantially all of its assets to, any person, unless such person assumes the
obligations of the Company under this Debenture and immediately after such
transaction no Event of Default exists. Any reference herein to the Company
shall refer to such surviving or transferee corporation and the obligations of
the Company shall terminate upon such assumption.
Article 5. REPORTS
The company will mail to the Holder hereof at its address as shown on the
Register a copy of any annual, quarterly or current report that it files with
the Securities and Exchange Commission promptly after the filing thereof and a
copy of any annual, quarterly or other report or proxy statement that it gives
to its shareholders generally at the time such report or statement is sent to
shareholders.
Article 6. Defaults arid Remedies
Section 6.1. EVENTS OF DEFAULT
An "Event of Default" occurs if (a) the Company does not make the payment
of the principal and accrued interest of this Debenture when the same becomes
due and payable at maturity, upon redemption or otherwise or (b) the Company
does not issue Common Stock or (c) Company fails to comply with any of its other
agreements in this Debenture, and such failure continues for the period and
after the notice specified below, (d) the Company pursuant to or within the
meaning of any Bankruptcy Law (as hereinafter defined): (i) commences a
voluntary case; (ii) consents to the entry of an order for relief against it in
an involuntary case; (iii) consents to the appointment of a Custodian (as
hereinafter defined) of it or for all or substantially all of its property or
(iv) makes a general assignment for the benefit of its creditors or (v) a court
of competent jurisdiction enters an order or decree under any Bankruptcy Law
that: (A) is for relief against the Company in an involuntary case; (B) appoints
a Custodian of the Company or for all or substantially all of its property or
(c) orders the liquidation of the Company, and the order or decree remains
unstayed and in effect for 60 days. As used in this Section 6.1, the term
"Bankruptcy Law" means Title 11 of the United States Code or any similar federal
or state law for the relief of debtors. The term "Custodian" means any
receiver, trustee, assignee, liquidator or similar official under any Bankruptcy
Law. A default under clause -C- above is not an Event of Default until the
holders of the Debenture notify the Company of such default and the Company does
not cure it within 5
3
<PAGE>
days after the receipt of such notice, which must specify the default, demand
that it be remedied and state that it is a "Notice of Default".
Section 6.2. WORN AND LOST DEBENTURE
If this Debenture becomes worn, defaced or mutilated but is still
substantially intact and recognizable, the Company or its agent may issue a new
Debenture in lieu hereof upon its surrender. Where the Holder of this Debenture
claims that the Debenture has been lost, destroyed or wrongfully taken, the
Company shall issue a new debenture in place of the original Debenture if the
Holder so requests by written notice to the Company.
Article 7. NOTICES
Any notice which is required or convenient under the terms of this
Debenture shall be duly given if it is in writing and delivered in person or
mailed by first class mail, postage prepaid and directed to the Holder of the
Debenture at its address as it appears on the Register or if to the Company to
its principal executive offices. The time when such notice is sent shall be the
time of the giving of the notice.
Article 8. TIME
Where this Debenture authorizes or requires the payment of money or the
performance of a condition or obligation on a Saturday or Sunday or a public
holiday, or authorizes or requires the payment of money or the performance of a
condition or obligation within, before or after a period of time computed from a
certain date, and such period of time ends on a Saturday or a Sunday or a public
holiday, such payment may be made or condition or obligation performed on the
next succeeding business day, and if the period ends at a specified hour, such
payment may be made or condition performed, at or before the same hour of such
next succeeding business day, with the same force and effect as if made or
performed in accordance with the terms of this Debenture.
Article 9. WAIVERS
The holders of the Debentures may waive a default or rescind the
declaration of an Event of Default and it consequences except for a default in
the payment of principal of or interest on any Debenture.
Article 10. RULES OF CONSTRUCTION
In this Debenture, unless the context otherwise requires, words in the
singular number include the plural, and in the plural include the singular,
and words of the masculine gender include the feminine and the neuter, and
when the sense so indicates, words of the neuter gender may refer to any
gender. The numbers and titles of sections contained in the Debenture are
inserted for convenience of reference only, and they neither form a part of this
Debenture nor are they to be used in the construction or interpretation hereof.
Wherever, in this Debenture, a determination of the Company is required or
allowed, such determination shall be made by a majority of the Board of
Directors of the Company and if it is made in good faith, it shall be conclusive
and binding upon the Company and the Holder of this Debenture.
4
<PAGE>
Article 11. GOVERNING LAW
The validity, terms, performance and enforcement of this Debenture shall be
governed and construed by the provisions hereof and in accordance with the laws
of the State of Minnesota applicable to agreements that are negotiated,
executed, delivered and performed solely in the State of Minnesota.
5
<PAGE>
Article 12. REGISTRATION UNDER THE SECURITIES ACT OF 1933
CRC will use its best efforts to register securities under the Securities
Act of 1933 as of Conversion Security Date. If however, Common Stock is not
fully registered and tradable at the Conversion Security Date, through no fault
of CRC, CRC will be granted a thirty (30) day grace period after the Conversion
Security Date in order to complete registration so that stock is tradable. If
Common Stock is not fully registered, unrestricted and tradable, and after the
expiration of the Grace Period, CRC will be responsible to immediately remit
$1.5 million and accrued interest in cash.
Section 12.1. PAYMENT OF REGISTRATION
CRC shall pay all registrations expenses in connection with registration of
aforementioned securities.
IN WITNESS WHEREOF, the Company has duly executed this Debenture under its
Corporate Seal as of the 30th day of January, 1997.
CASINO RESOURCE CORPORATION
By /s/ John J. Pilger
-------------------------------------
Name
-----------------------------------
Title
----------------------------------
ATTEST: /s/ Noreen Pollman
--------------------
Secretary
6
<PAGE>
AMENDMENT TO 13% CONVERTIBLE DEBENTURE DUE SEPTEMBER 10, 1998
Casino Resource Corporation, a Minnesota corporation (the "Company") and G.P.S.
Fund, Ltd. (the "Holder") agree to amend the terms of a certain 13.0%
Convertible Debenture due September 10, 1998 in the original amount of $300,000
(the "Debenture") as follows:
1. Section 3.2(d) Conversion Procedure. This Section shall be amended by
deleting the phrase "...at anytime 90 days after the Closing Date,..." and
inserting in its place the phrase "...at anytime after April 30, 1998, so
long as the Purchaser does not convert more than 25% of the original
Debenture in May, 50% of the original Debenture in June, 75% of the
original Debenture in July, and 100% of the original Debenture in August of
1998 or in any month thereafter...".
Agreed to this 5th day of December, 1997:
G.P.S. Fund, Ltd. Casino Resource Corporation
By: /s/ G.P.S. Fund By: /s/ Maurice Gauder
-------------------------------- ---------------------------
Title: Title: CFO
------------------------------ ------------------------
<PAGE>
AMENDMENT TO 13% CONVERTIBLE DEBENTURE DUE SEPTEMBER 9, 1998
Whereas Casino Resource Corporation has elected to redeem $400,000 of the 13%
Convertible Debenture held by the Gifford Fund, Ltd.,
Casino Resource Corporation, a Minnesota corporation (the "Company") and Gifford
Fund, Ltd. (the "Holder") agree to amend the terms of a certain 13.0%
Convertible Debenture due September 9, 1998 in the original amount of $500,000
(the "Debenture") as follows:
1. Section 3.2(d) Conversion Procedure. This Section shall be amended by
deleting the phrase "...at anytime 90 days after the Closing Date,..." and
inserting in its place the phrase "...at anytime after April 30, 1998, so
long as the Purchaser does not convert more than $25,000 per month (on a
cumulative basis) thereafter (i.e. up to $25,000 in May, up to $50,000 in
June, etc.)"
Agreed to this 5th day of December, 1997:
The Gifford Fund, Ltd. Casino Resource Corporation
By: /s/Gifford Fund By: /s/ Maurice Gaudet
--------------------------------- ---------------------------
Title: Title: CFO
------------------------------ -------------------------
<PAGE>
01/30/97
AGREEMENT
THIS AGREEMENT made and entered into this 30th day of January, 1997, by and
between ROBERT E. LOW and LAWANA LOW (the "Lows"), and CASINO RESOURCE
CORPORATION ("CRC").
RECITAL
The Lows and CRC own all of the membership interest in New Palace Casino,
L.L.C. ("New Palace"). New Palace has been issued a gaming license by the
Mississippi Gaming Commission (the "Commission") and the Lows have been found
suitable for licensing purposes by the Commission. CRC has been approved by
the Commission to participate as a Member of New Palace but Jack Pilger and the
officers of CRC have not as yet been found suitable for licensing purposes and
as a result CRC and New Palace are unable to enter into the management agreement
as Provided by the New Palace Operating Agreement ("Operating Agreement"). CRC
is hesitant to perform all of its closing obligations under the terms of the
Operating Agreement without the certainty of a finding of suitability of Pilger
or its officers, and the Lows are concerned about the finding of suitability of
Pilger, the key ingredient for the Lows entering into the Operating Agreement
with CRC, in a timely manner, as well as the effect of a finding of
unsuitability of Pilger.
Neither CRC nor the Lows contemplated a finding of suitability for the Lows
and not the CRC officers at the same time or vice versa, a finding of
suitability for CRC and its officers and not the Lows.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein
<PAGE>
contained the Lows' agreement to proceed with the Closing of the Asset Purchase
Agreement with Maritime Group, Ltd. (the "Purchase Agreement"), it is hereby
agreed as follows:
1. At the time of the Closing of the Purchase Agreement (the "Closing")
the Lows shall perform all of the obligations required of them by the Operating
Agreement. CRC shall issue the Debenture (as that term is defined in the
Operating Agreement and the Purchase Agreement). The Lows shall loan to CRC $1.1
Million representing CRC's First Additional Contribution cash requirement. CRC
shall immediately thereafter contribute the $1.1 Million to New Palace
representing its First Additional Contribution cash requirement CRC shall
simultaneously with transfer by the Lows of the $1.1 Million execute a
promissory note (the "Note") payable to the Lows in the amount of $1.1 Million,
together with interest at the rate of 10% per annum and due and payable in 90
days and simultaneously New Palace Casino, L.L.C. and the Lows shall return the
$400,000.00 to CRC presently in escrow at Hancock Bank. At the Closing, the
Lows shall have applied for and shall within three business day thereafter cause
the Mercantile Bank, St Louis, Missouri, to deliver to CRC, an irrevocable
letter of credit in the amount of $1,000,000.00 naming CRC beneficiary. The
terms and conditions of the letter of credit shall be in form acceptable to CRC
and shall provide that the letter of credit is payable on demand by CRC provided
the Lows have not already paid CRC the $1 Million upon transfer of its
membership interest. In New Palace to the Lows, provided such is done within 100
days of the Closing. If CRC fails to transfer its membership interest in New
Palace to the Lows within said 100 days the letter of credit shall expire. Said
demand for payment to the Mercantile Bank shall be accompanied by (I) a copy of
the instrument of conveyance of CRC's membership interest in
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New Palace to the Lows and (II) CRC's written statement that it has demanded
payment of the sum of $1,000,000.000 from the Lows and payment of such amount
has not been received from the Lows.
2. In the event (i) Pilger withdraws his name from consideration by the
Commission for a finding of suitability prior to the expiration of 90 days
following Closing; (ii) Pilger is found unsuitable by the Commission at anytime
during the 90-day period following Closing (iii) Pilger has not been found by
the Commission within 90 days following Closing; (iv) The Commission makes a
ruling that CRC must divest its interest in New Palace during the 90 days
following Closing (v) The Commission makes a ruling that CRC must terminate the
employment of any individual or cause the resignation of any Board member or
take any other action, the failure of which would result in the loss of New
Palace's gaming license, and CRC fails to take or cause such action within 48
hours, then in any such event CRC shall immediately withdraw as a Member of New
Palace and relinquish all right, title, ownership interest, and all other
interests in New Palace, subject to the following conditions:
(a) The return of the Note by the Lows to CRC marked "paid in full";
(b) The payment to CRC by the Lows or Mercantile Bank within 10 days of $1
Million, less accrued interest on the Note. In the event the Lows fail to pay
said sum within 2 days, CRC may demand payment from the Mercantile Bank of the
Letter of Credit issued to CRC as required by paragraph 1, hereof. The Lows
shall not be relieved of their
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<PAGE>
obligation to pay said sum to CRC until CRC has received payment of said sum in
full from either the Lows or the Mercantile Bank;
(c) The agreement by the Lows to pay CRC $250,000.00 two (2) years from
date of Closing with no interest which the Lows by their signatures hereto agree
to pay to CRC upon the occurrence of CRC conveying its Interest in New Palace
to the Lows; and
(d) The payment to CRC of all expenses advanced by CRC on behalf of New
Palace (and not on its own behalf) after the date or execution of the Operating
Agreement, notwithstanding any provision to the contrary in the Operating
Agreement. Expenses are itemized in Exhibit B.
3. If during the 90 days following Closing CRC shall desire to withdraw
from New Palace they may do so by tendering their membership interest to the
Lows. The Lows agree to purchase the same by performing the obligations
contained in subparagraphs a, b, c, & d of paragraph 2 hereof, and upon the
performance of CRC of the obligations set forth in paragraph 5.
4. Should any of the events itemized in paragraph 2 hereof occur, and
the conditions itemized in paragraph 2 hereof be met, CRC agrees that it shall
have no further claim whatsoever of any interest in New Palace and further
acknowledges that the consideration provided for herein is sufficient.
5. In the event of the withdrawal of CRC as a member of New Palace
provided paragraph 2 hereof, the books New Palace shall be closed as of the
effective date of CRC's withdrawal. The capital account of CRC shall be settled
as of such date. A liquidating
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distribution of the positive capital account balance of CRC, if such is the
case, shall be made by New Palace no later than ten business days after the
withdrawal of CRC as a member of New Palace. In the event CRC has a deficit
balance in its capital account upon its withdrawal as a member, it shall, within
ten business days after its withdrawal, restore the amount of such deficit
balance to New Palace. The Lows and New Palace shall have the right of offset
against amounts owed CRC hereunder.
6. In the event Pilger is found suitable by the Commission within 90 days
following Closing, and neither of the events set out in sub-paragraphs (iv) and
(v) of paragraph 2 hereof have occurred, CRC shall pay the Note together with
accrued interest and shall not be required to withdraw from New Palace as herein
provided.
7. If CRC shall fail to issue the Debenture at the time of Closing and
thereby fails to participate in the Closing as required by the terms of the
Operating Agreement, then CRC shall immediately withdraw as a Member of New
Palace and relinquish all right, title and ownership interest, and all other
interests in New Palace, and shall quit claim any such interest to the Lows.
In such event and in the further event the Purchase Agreement is closed, the
Lows shall return the $400,000.00 held in escrow to CRC together with accrued
interest.
IN WITNESS WHEREOF, the parties have hereunto set their hands and seals on the
date first written herein.
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<PAGE>
____________________________
ROBERT E. LOW
____________________________
LAWANA LOW
CASINO RESOURCE CORPORATION
BY ____________________________
Its ____________________________
"CRC"
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<PAGE>
LEASE
This lease is made between Security Financial Services, L.L.C, herein
called Lessor, and Casino Resource Corporation, herein called Lessee.
Lessee hereby offers to lease from Lessor the premises situated in the
City of Ocean Springs, County of Jackson, State of Mississippi, described as
the land and building depicted in Exhibit "A", upon the following terms and
conditions:
1. TERM AND RENT. Lessor demises the above premises for a term of five
(5) years, commencing May 15, 1997 and terminating on May 14, 2002, or sooner
as provided herein at the annual rental of Seventy-three Thousand Five
Hundred and no/100 ($73,500.00) payable in equal monthly installments. Upon
the execution of this lease, Lessee will tender 1 1/2 months rent which shall
be credited to the first 1 1/2 months rent. Thereafter, each month's rent
shall be due in advance on the first day of each month for that month's
rental, but no later than the seventh day.
The rent which Lessee agrees to pay Lessor during the basic term shall
be adjusted up to the amount determined through multiplying the annual rental
paid for the first lease year by a percentage equal to the percentage
increase in the Consumer Price Index for the United States as published by
the Bureau of Labor Statistics, U.S. Department of Labor, or its successor
index, on the next ensuing year anniversary date of this lease. However,
both parties agree to an annual cap of five (5 %) percent.
2. USE. Lessor warrants that the Lessee shall receive quiet use ad
enjoyment of the leasehold premises. Lessee shall use and occupy the
premises for its corporate offices. Lessor represents that the premises may
lawfully be used for such purpose.
3. CARE AND MAINTENANCE OF PREMISES. Lessee acknowledges that the
premises are in good order and repair, unless otherwise indicated herein.
Lessee shall, at his own expense and at all times, maintain the premises in
good and safe condition, including plate glass, electrical wiring, plumbing
and heating installations and any other system or equipment upon the
premises, and shall surrender the same at termination hereof, in as good
condition as received normal wear and tear excepted. Lessee shall he
responsible for all repairs required, excepting the roof, exterior walls, and
structural foundations. Lessee shall be the beneficiary of all guarantees and
warranties issued to Lessor and Lessor shall perfect same.
4. ALTERATIONS. Lessee may make alterations on the interior with
Lessor's written permission. Such approval shall not be unreasonably
withheld.
5. ORDINANCES AND STATUTES. Lessee shall comply with all statutes,
ordinances and requirements of all municipal, state and federal authorities
now in force, or which may hereafter be in force, pertaining to the premises,
occasioned by or affecting the use thereof by Lessee, as long
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as Lessee is able to quietly enjoy premises. Lessor warrants that he is not
aware of any special assessments or requirements imposed by any agency that
he has not disclosed in writing to Lessee (see Exhibit "B").
6. ASSIGNMENT AND SUBLETTING. Lessee shall have the right to assign
this lease or sublet any portion of the premises, but shall at all times be
responsible for lease.
7. UTILITIES. All applications and connections for necessary utility
services on the demised premises shall be made in the name of Lessee only,
and Lessee shall he solely liable for utility charges as they become due,
including those for sewer, water, gas, electricity and telephone services.
8. POSSESSION. Lessee shall not be liable for any rent until possession
is delivered. Lessee may terminate this lease if possession is not delivered
within 20 days of the commencement of the term hereof. Lessee shall conduct
a walk through with Lessor on or before May 15, 1997, to go over completed
checklist which Lessor and his contractor agreed to complete at Lessor's
expense.
9. INSURANCE. It shall be the obligation of Lessor to insure the
improvements on the leased premises against loss or damage by fire, windstorm
or other casualty as he deems appropriate. Any amounts which may become
payable under said policies of insurance shall be the sole property of
Lessor, and Lessee hereby waives any and all claims he may have to said
insurance proceeds. However, Lessor shall make all appropriate repairs to the
building, as the Lessee deems appropriate, from any casualty.
It shall be the obligation of Lessee to obtain insurance against
liability for bodily injury for Lessee's lease of Lessor's premises, in
amounts of not less than One Million and no/100 ($1,000,000.000) Dollars, and
Lessor shall be named as an additional insured with evidence of such
insurance being in force during this lease and provided by Lessee to Lessor.
It shall be the obligation of Lessee to insure their inventory, any
property, all goods ad chattels inside the leased premises against loss or
damage as Lessee deems appropriate. Any amounts which may become payable
under said policies of insurance shall be the sole property of Lessee, and
Lessor hereby waives any and all claims he may have to said insurance
proceeds relating to Lessee's inventory, property, goods and chattels.
10. INDEMNIFICATION. Lessee covenants and warrants that it will
indemnify Lessor and save Lessor harmless from any and all claims, damages,
liabilities, and expense by Lessee, its agents, servants, employees, third
persons caused from loss of life, personal injury, damage to property or any
other loss arising (a) out of any occurrence in or at the leased premises, or
the occupancy of use by Lessee occurring at any time during this lease or
extension thereof; (b) out of any at of omission of Lessee, its employees,
servants, agents or concessionaires. If Lessor should be made a party to any
litigation commenced by or against Lessee, Lessee shall protect, indemnify,
and hold Lessor harmless and pay all costs, expenses, and reasonable
attorney's fees that may be incurred or paid by
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Lessor in enforcing the covenants and conditions of this agreement. There is
by agreement, specifically excluded from this hold harmless and indemnity
clause all claims, actions, expenses and damages for loss of life, personal
injury, damage to property or other loss arising out of any act or omission
of Lessor, its agents, servants, and employees.
11. EMINENT DOMAIN. If the premises or any part thereof or any estate
therein, or any other part of the building materially affecting Lessee's use
of the premises, shall be taken by eminent domain, this lease shall terminate
on the date when title vests pursuant to such taking. The rent, and any
additional rent, shall be apportioned as of the termination date, and any
rent paid for any period beyond that date shall be repaid to Lessee. Lessee
shall not be entitled to any part of the award for such taking or any payment
in lieu thereof but Lessee may file a claim for any taking of fixtures and
improvements owned by Lessee, and for moving expenses.
12. DESTRUCTION OF PREMISES. In the event of a partial destruction of
the premises during the term hereof from any cause, Lessor shall forthwith
repair the same, provided that such repairs can be made within sixty (60)
days under existing governmental laws and regulations, but such partial
destruction shall not terminate this lease, except that Lessee shall be
entitled to a proportionate reduction of rent while such repairs are being
made, based upon the extent to which the making of such repairs shall
interfere with the business of Lessee on the premises. If such repairs
cannot be made within said sixty (60) days, Lessor, at his option may make
the same within a reasonable time, this lease continuing in effect with the
rent proportionately abated as a foresaid, and in the event that Lessor shall
not elect to make such repairs which cannot be made within sixty (60) days,
this lease may be terminated at the option of either party. In the event
that the building in which the demised premises may be situated is destroyed
to an extent of not less than one-third of the replacement costs thereof
Lessor may elect to terminate this lease whether demised premises be injured
or not. A total destruction of the building in which the premises may be
situated shall terminate this lease.
13. LESSOR'S REMEDIES ON DEFAULT. If Lessee defaults in the payment of
rent, or any additional rent, or defaults in the performance of any of the
other covenants or conditions hereof, Lessor may give Lessee notice of such
default and if Lessee does not cure any such default within five (5) days,
after the giving of such notice (or if such other default is of such nature
that it cannot be completely cured within such period, if Lessee does not
commence such curing within such five (5) days and thereafter proceed with
reasonable diligence and in good faith to cure such default), then Lessor may
terminate this lease on not less than five (5) days' notice to Lessee. On
the date specified in such notice the term of this lease shall terminate, and
Lessee shall then quit and surrender the premises to Lessor, but Lessee shall
remain liable as hereinafter provided. If this lease shall have been so
terminated by Lessor, Lessor may at any time thereafter resume possession of
the premises by any lawful means and remove Lessee or other occupants and
their effects. No failure to enforce any term shall be deemed a waiver.
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If the premises shall be abandoned during the term or if Lessee shall be
evicted from said premises by summary proceedings or otherwise, or in the
event of the commencement of any bankruptcy proceedings by or against Lessee
which are not discharged or dismissed within thirty (30) days, or upon the
happening of any event of default as provided above, Lessor may at its
election terminate this lease (in which event Lessor shall be entitled to
recover damages for any such default), or Lessor may reenter the same by
force or otherwise, without being liable for prosecution therefor, and may
re-let the premises at any time as agent of Lessee, applying any monies
collected first to costs, fees and expenses of collecting, then to the
expense of obtaining possession, then to the payment of the rent and all
other sums owing and to become owing Lessor and paying any surplus thereof to
Lessee; and such reentry and re-letting shall not discharge Lessee from
liability for rent or from any other covenant of this lease by Lessee to be
kept and performed.
14. TAXES AND ASSESSMENTS. In the event there is any increase during
any year of the term of this lease in the City, County or State real estate
taxes over and above the amount of such taxes assessed for the tax year
during which the term of this lease commences, whether because of increased
rate or valuation, Lessee shall pay to Lessor upon presentation of paid tax
bills an amount equal to 100% of the increase in taxes upon the land and
building in which the leased premises are situated. In the event that such
taxes are assessed for a tax year extending beyond the term of the lease, the
obligation of Lessee shall be proportionate to the portion of the term
included in such year. Lessor shall be required to fund any special
assessments levied on the building by County, City or State governments.
Lessee agrees to pay all city and county ad valorem taxes.
15. ATTORNEY'S FEES. In case suit should be brought for recovery of the
premises, or any sum due hereunder, or because of any act which may arise out
of the possession of the premises, by either party, the prevailing party
shall be entitled to all costs incurred in connection with such action
including reasonable attorney's fees.
16. NOTICES. Any notice which either party may, or is required to give,
shall be given by mailing the same, postage prepaid, to Lessee at the
premises, or Lessor at the address shown below, or at such other places as
may be designated by the parties from time to time.
17. HEIRS, ASSIGNS, SUCCESSORS. This lease is binding upon and inures
to the benefit of the heirs, assigns, and successors in interest to the
parties.
18. OPTION TO RENEW. Lessee shall have four five-year options to renew
the lease commencing at the expiration of the initial lease term. All of the
terms and conditions of the lease shall apply during the renewal terms. The
options shall be exercised by written notice given to Lessor not less than
ninety (90) days prior to the expiration of the initial lease term.
19. SUBORDINATION. Lessor warrants and represents that there are no
mechanics' liens or
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any other liens that the leasehold premises is subject to.
20. SPECIAL CONDITIONS. Lessor shall provide a Five Hundred and no/100
($500.00) Dollar credit for missing light fixtures. Lessee will purchase one
(1) fire proof filing cabinet for One Hundred and no/100 (100.00) Dollars.
Lessee shall purchase one (1) antique mantel for Two Hundred and no/100
($200.00) Dollars. Any changes or alterations to the original design as
disclosed by Lessor shall be paid for by Lessee.
21. ASSIGNMENT OF LEASE. Lessor has the right to assign this lease.
22. OTHER CONDITIONS. If any. If none, so state.
23. ENTIRE AGREEMENT. The foregoing constitutes the entire agreement
between the parties and may be modified only by a writing signed by both
parties. The following Exhibits, if any, have been made a part of this lease
before the parties' execution hereof.
Signed MI day of May, 1997.
CASINO RESOURCE CORPORATION, SECURITY FINANCIAL SERVICES, L.L.C.,
Lessee Lessor
By: /s/ John J. Pilger By: /s/ Harry Geller
---------------------------- ----------------------------
John J. Pilger, CEO Harry Geller, President
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SETTLEMENT AGREEMENT AND RELEASE
This Settlement Agreement and Release ("Agreement") is entered into by
and between Casino Resource Corporation ("CRC") and Kevin M. Kean ("Kean") as
of this 15th day of January, 1998, as follows:
WHEREAS, Kean is the beneficial owner of 1,480,944 shares of common
stock of CRC;
WHEREAS, CRC and Kean have entered into a Cherokee Dispute and Warrant
Purchase Agreement whereby Kean delivered two Promissory Notes in the
aggregate amount of $1.5 million which were reduced to an outstanding, unpaid
principal balance of only $1,232,000;
WHEREAS, Kean subsequently executed and delivered to CRC a renewal
Promissory Note ("Note") in the principal amount of $1,232,000 dated as of
October 1, 1996;
WHEREAS, in order to support repayment of the Note, Kean provided CRC
with an unrestricted pledge of 150,000 shares of CRC common stock;
WHEREAS, Kean has also made a pledge of at least some of his CRC stock
to Hibernia National Bank of Baton Rouge, Louisiana;
WHEREAS, Kean is in default of the Note and currently owes CRC the
principal amount of $1.232 million, plus interest;
WHEREAS, in order to enforce collection of the Note, CRC has duly
provided Kean with notice of a private foreclosure sale of the 150,000 shares
of CRC common stock pledged in support of that obligation and has also
commenced an action entitled CASINO
<PAGE>
RESOURCE CORPORATION V. KEAN which is venued in the Circuit Court of Harrison
County, Mississippi, and identified by Court File No. A24002-98-00002 ("the
Litigation");
WHEREAS, Kean claims to have several defenses to CRC's effort to collect
the Note and claims against CRC and/or its officers or directors which
defenses and claims would be asserted in the Litigation;
WHEREAS, Kean has a contingent future interest in certain amounts and
consulting fees, particularly five percent (5%) of the net revenues from the
Pokagon Project, pursuant to that certain Agreement with CRC dated as of
December 1, 1995 (called, "Consulting Agreement"); and
WHEREAS, the undersigned parties wish to enter into this Agreement in
order to conclusively resolve all of the disputes and controversies between
them and to avoid the further time and expense of any further legal
proceedings or litigation, including attorney's fees.
NOW, THEREFORE, in consideration of the foregoing premises and all of
the terms and conditions hereinafter set forth, the undersigned parties
hereby stipulate and agree as follows:
1. Kean hereby unconditionally transfers and assigns to CRC full
ownership of the 150,000 shares of CRC common stock pledged to CRC in support
of payment of the Note. As soon as practicable after the execution of this
Agreement, but in no event more than
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seven (7) business days from the execution of this Agreement, Kean shall also
deliver and transfer to CRC full ownership of an additional 220,000 shares of
CRC common stock to which he holds clear and unrestricted title. Upon
transfer of the aforementioned 150,000 shares of CRC common stock and
delivery of the aforementioned 220,000 shares of CRC common stock, CRC will
process a credit against the outstanding balance of the Note (or the Renewal
Note attached as Exhibit B, as the case may be) for each share at the market
price of the stock (i.e., the closing bid price as quoted by NASDAQ) on the
date on which the transfer and delivery of each such share of stock is
effected.
2. Upon the execution of this Agreement, Kean shall provide
John J. Pilger with an unconditional and irrevocable proxy to vote all of the
shares of CRC common stock in which he holds a beneficial interest in the form
attached and hereby incorporated by reference as Exhibit A. Kean shall also
notify any party or parties as necessary to enable Mr. Pilger to exercise the
proxy as of the date of this Agreement. Such proxy is subject only to any
valid, prior security interest in favor of Hibernia National Bank and
associated rights to vote the stock, if any. Kean further covenants and
agrees that he shall not, directly or indirectly, take any action whatsoever
to direct or influence in any manner Hibernia National Bank's exercise of any
proxy rights; and any violation of this covenant shall constitute a material
breach of
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this Agreement and an Event of Default under the Renewal Note and Security
Agreement attached as Exhibit B and C. It is further understood and agreed
that should Kean attempt to directly or indirectly vote any of the stock
encompassed by this Agreement, such stock shall be subject to all of the first
prior proxy rights granted to Mr. Filger.
3. Kean hereby expressly confirms and warrants that he has clear and
unrestricted title to 150,000 shares of CRC common stock pledged in support
of the Note and that he will have at the time of transfer and delivery to CRC
clear and unrestricted title to the balance of the 220,000 shares of CRC
common stock referenced in the foregoing Paragraph No. 1, above; that he has,
or will have at the time of transfer, full rights and power to deliver and
transfer clear and unrestricted title to said stock in connection with the
execution and consummation of this Agreement; and that such stock is not
directly or indirectly encumbered in any way by any right or claim nor any
tax lien or security interest or lien (except in favor of CRC) including, but
not limited to, any such interest, lien, right or claim in favor of Hibernia
National Bank and/or the Internal Revenue Service and/or the State of
Louisiana. The obligation of this provision may be satisfied by timely
delivery of 220,000 unrestricted shares of CRC stock from a third party which
Kean shall cause to be delivered in conformity with all of the warranties of
clear title of this provision. Kean hereby further
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<PAGE>
expressly confirms and warrants that he has full rights and power to provide
the proxy of the balance of the shares of CRC stock in which he holds a
beneficial interest, subject only to any valid interest of Hibernia National
Bank as set forth in the foregoing Paragraph No. 2, above.
4. Upon the execution of this Agreement, the Note shall be replaced
with Kean's execution and delivery to CRC of a Renewal Note for the full
remaining balance of his unpaid obligation in the form attached and hereby
incorporated by reference as Exhibit B. Payment of the Renewal Note shall be
secured by a perfected security interest constituting a first lien on all of
Kean's right, title, and interest in the Consulting Agreement which shall be
evidenced by a Security Agreement in the form attached and hereby incorporated
by reference as Exhibit C. It is further expressly understood and agreed that
CRC may at any time and for any reason, upon five days' written notice,
whether or not an Event of Default under the Renewal Note or the Security
Agreement has occurred, exercise the option in its sole discretion to acquire
and accept all of Kean's right, title and interest in the Consulting
Agreement including, without limitation, the then existing and thereafter
arising rights to any amounts under Paragraph 4(b) of the Consulting
Agreement, in full satisfaction of the Renewal Note by returning the Renewal
Note to Kean marked "Paid", whereupon all of Kean's right, title, and
interest to any then existing and
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thereafter arising rights to any amounts under the Consulting Agreement shall
be immediately, completely, unconditionally, and irrevocably terminated and
released without any remaining redemption rights or claim to any surplus
relating thereto under the Consulting Agreement. It is further agreed that
upon the earlier of a) NIGG approval (or equivalent regulatory approval by
any successor agency or regulatory authority) of the Pokagon Project with
CRC, and CRC affiliated manager, or a company with which CRC has a
contractual relationship relating to the management of that Project or b)
commencement of gaming activities in connection with the Pokagon Project by
CRC, a CRC affiliated manager, or a company with which CRC has a
contractual relationship relating to the management of that Project, Kean
shall have the right to demand that CRC acquire and accept the collateral in
full satisfaction of the Renewal Note and upon such demand CRC shall be
obligated to acquire and accept such collateral in full satisfaction of the
Renewal Note, shall mark the Renewal Note "Paid" and return it to Kean.
Furthermore, in the event that CRC shall sell, assign or transfer its
interest in the Pokagon Project, in whole or in part, to any other party, by
way of sale, loan, settlement, fee, or otherwise for consideration in an
amount in excess of $1 million, Kean's obligation under the Renewal Note
shall be fully discharged and satisfied and CRC shall mark the Renewal Note
"Paid" and return it to Kean. Any satisfaction pursuant to this Paragraph
shall be
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<PAGE>
without any remaining redemption rights or claim to a surprise as set forth
above.
5. Upon request, Kean further covenants and agrees to execute and
promptly deliver any such additional agreements and documents that may
reasonably be required to complete and effectuate the terms of this Agreement.
6. Kean shall be solely responsible for any state of federal income
taxes due by Kean as a result of the operation and performance of any
provision of this Agreement including, without limitation, the delivery and
transfer of the CRC common stock in partial satisfaction of the Note and/or
the satisfaction of the Renewal Note pursuant to the acquisition and
cancellation of the Consulting Agreement.
7. Kean, on behalf of himself and all of his assigns, successors, heirs,
and personal representatives hereby unconditionally remises, releases and
forever discharges CRC and all of its affiliated or related entities and all
of their respective predecessors, successors, assigns, insurers, officers,
directors, agents, representatives, attorneys and current and former
employees from any and all claims, demands, damages, rights, or causes of
action of any kind, at law or in equity, whether fixed or contingent,
liquidated or unliquidated, known or unknown, which Kean (or anyone claiming
through or under Kean) ever had, now has or may have as of the date of this
Agreement provided, however,
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<PAGE>
that nothing herein shall be deemed in any manner to extinguish any future
rights under the Consulting Agreement or to preclude Kean from taking legal
action to enforce the terms and conditions of this Agreement or any of its
Exhibits.
8. Subject to the warranties and covenants set forth in this Agreement,
CRC hereby unconditionally remises and forever releases Kean from any and all
claims, demands, damages, rights or causes of action of any kind, at law or
in equity, whether fixed or contingent, liquidated or unliquidated, known or
unknown, which CRC ever had, has or may have up to and including the date of
this Agreement provided, however, that nothing in this provision shall be
deemed in any manner to release Kean, or extinguish any future rights, under
the Consulting Agreement, this Agreement or any of the Agreements set forth
in the attached Exhibits nor extinguish any preexisting proxy rights in any
shares of CRC common stock beneficially owned by Kean, all of which are
expressly reserved.
9. Upon the full execution of this Agreement, together with all
Exhibits, and the delivery and transfer to CRC of all of the 370,000 shares
of CRC common stock referenced in the foregoing Paragraph No. 1, above, CRC
shall forthwith execute and file a Notice of Voluntary Dismissal without
Prejudice of the Litigation.
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<PAGE>
However, should Kean fail to deliver the balance of the 220,000 shares of CRC
stock pursuant to Paragraph No. 1, the transfer of the 150,000 shares of CRC
stock and the delivery of the proxy shall remain in full force and effect,
but, at the option of CRC, the balance of this Agreement shall be rescinded
and CRC shall be free to continue to pursue the Litigation.
10. The undersigned parties hereby expressly represent and warrant by
signing below that there has been no assignment of any right, claim or cause
of action encompassed by this Agreement to any individual, corporation or
other legal entity whatsoever; that they have read this Agreement and
consulted with legal counsel of their choice, where necessary; that this
Agreement has been signed freely, without any representation, promise or
inducement not expressed herein, or the exertion of influence by any party
upon any other party; that each of the undersigned parties understands all of
the terms and conditions of this Agreement; and that they agree to be bound
to and by this Agreement; and that they agree to be bound to and by this
Agreement in all respects.
11. Time is of the essence in the performance of this Agreement. The
undersigned parties hereby expressly agree that this Agreement constitutes
the complete and entire Settlement Agreement and Release between and among
the parties. This Agreement may not be changed orally, and no change,
addition, deletion or any other modification, oral or written, of this
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Agreement shall be binding unless and until each party to this Agreement
executes a written amendment.
12. This Agreement shall be governed by and construed according to the
substantive provisions of Mississippi law (excluding conflicts of law rules).
The undersigned parties expressly consent to the exclusive jurisdiction of
the Circuit Courts of Jackson or Harrison County, Mississippi, or the United
States District Court, Southern District of Mississippi, for any action
relating to the construction of this Agreement and the determination of any
and all controversies arising from this Agreement.
13. If any provision of this Agreement is held unlawful or
unenforceable in any respect, such illegality or unenforceability shall not
affect any other provision which can be given effect, and this Agreement
shall be construed and applied as if the unlawful or unenforceable provision
had never been contained herein.
14. This Agreement shall be binding upon, and the benefits and
obligations provided for herein shall inure to the parties hereto and all of
their respective heirs, legal representatives, successors, assigns, and
transferees.
15. This Agreement shall have no effect whatsoever unless and until it
is fully executed by all parties.
16. This Agreement may be executed in one or more counterparts, all of
which taken together shall constitute one and
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the same instrument. A signature transmitted by telecopier or other
equivalent facsimile shall be deemed an original provided, however, that the
parties shall promptly exchange originals as soon as possible upon the full
execution of this Agreement.
/s/ Kevin M. Kean
---------------------------------------
Kevin M. Kean
CASINO RESOURCE CORPORATION
By: John J. [ILLEGIBLE]
-----------------------------------
Its: CEO
------------------------------
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<PAGE>
PROMISSORY NOTE
$1,196,884.88 Ocean Springs, Mississippi
January 15, 1998
Maker: Kevin M. Kean
FOR VALUE RECEIVED, the Maker promises to pay to the order of CASINO
RESOURCE CORPORATION ("CRC"), at its office in Ocean Springs, Mississippi, or
at such other place as any present or future holder of this Note may
designate from time to time, the principal amount of $1,196,884.88, plus
interest thereon from the date of this Note until is fully paid, computed on
the basis of the actual number of days elapsed and a 365-day year.
INTEREST: The interest rate under this Note is a fixed rate of 7.00% per
annum.
PAYMENTS: The Maker shall make the following payments of principal and
interest under this Note:
The unpaid balance of principal and accrued interest under this Note shall
be due and payable in full on January 15, 2001.
PREPAYMENTS: The Maker shall have no right to prepay any amount under this
Note without the prior written consent of the holder of this Note.
OTHER PROVISIONS:
This Note is an amendment, extension, renewal or replacement of the Maker's
$1,232,000.00 Promissory Note to CRC dated October 1, 1996, and such previous
Promissory Note is hereby terminated.
At the option of the holder of this Note, any payment under this Note
may be applied first to the payment of changes, fees and expenses (other than
principal and interest) under this Note and any other agreement or writing in
connection with this Note, second to the payment of interest accrued through
the date of payment, and third to the payment of principal under this Note.
The Maker represents, warrants, certifies to CRC and agrees that all advances
under this Note shall be used solely for business purposes.
The occurrence of any of the following events shall constitute an Event
of Default under this Note:
(i) any breach or default in the payment or performance of this Note, or
the Maker's Security Agreement dated the date hereof in favor of CRC,
or the Maker fails to deliver to CRC 220,000 shares of CRC common
stock in accordance with the second sentence of paragraph 1 of the
Settlement
<PAGE>
Agreement and Release dated January 15, 1998 between CRC and the
Maker; or
(ii) the insolvency or death of the Maker; or
(iii) any appointment of a receiver, trustee or similar officer of any
property of the Maker; or
(iv) any assignment for the benefit of creditors of the Maker; or
(v) any commencement of any proceeding under any bankruptcy, insolvency,
receivership, dissolution, liquidation or similar law by or against
the Maker; or
(vi) the Maker takes any action to revoke or terminate any agreement,
liability or security in favor of the holder of this Note; or
(vii) the entry of any judgment or other order for the payment of money
in the amount of $25,000.00 or more against the Maker; or
(viii) the issuance or levy of any writ, warrant, attachment, garnishment,
execution or other process against any property of the Maker; or
(ix) the attachment of any tax lien to any property of the Maker; or
(x) any statement, representation or warranty made by the Maker (or any
representative of the Maker) to the holder of this Note at any time
shall be incorrect or misleading in any material respect when made.
Upon the commencement of any proceeding under any bankruptcy law by or
against the Maker, the unpaid principal balance of this Note plus accrued
interest and all other charges, fees and expenses under this Note shall
automatically become immediately due an payable in full, without any
declaration, presentment, demand, protest, or other notice of any kind. Upon
the occurrence of any other Event of Default and at any time thereafter, the
then holder of this Note may, at its option, declare this Note to be
immediately due and payable in full and thereupon the unpaid principal balance
of this Note plus accrued interest and all other charges, fees and expenses
under this Note shall immediately become due and payable in full, without any
presentment, demand, protest or other notice of any kind.
The Maker: (i) waives demand, presentment, protest, notice of protest,
notice of dishonor and notice of nonpayment of this Note; (ii) agrees to
promptly provide the holder of this Note from time to time with the Maker's
financial statements and such other information respecting the financial
condition, business and property of the Maker as the holder of this Note may
request
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<PAGE>
in form and substance acceptable to the holder of this Note; (iii) agrees
that when or at any time after this Note becomes due the holder of this Note,
without notice, may offset or charge the full amount owning on this Note
against any amount then owning by the holder of this Note to the Maker,
whether or not then due; (iv) agrees to pay on demand all fees, costs and
expenses of the holder of this Note in connection with this Note and any
transactions and matters relating to this Note, including but not limited to
reasonable attorney's fees and legal expenses, plus interest on such amounts
at the rate set forth in this Note; and (v) consents to the personal
jurisdiction of the state and federal courts located in the State of
Mississippi in connection with any controversy related in any way to this
Note or any transaction or matter relating to this Note, waives any argument
that venue in such forums is not convenient, and agrees that any litigation
initiated by the Maker against CRC or any other holder of this Note relating
in any way to this Note or any transaction or matter relating to this Note,
shall be venued in either the Circuit Court of Jackson or Harrison County,
Mississippi, or the United States District Court, Southern District of
MIssissippi. Interest on any amount under this Note shall continue to
accrue, at the option of the holder of this Note, until such holder receives
final payment of such amount in collected funds in form and substance
acceptable to such holder.
No waiver of any right or remedy under this Note shall be valid unless
in writing executed by the holder of this Note, and any such waiver shall be
effective only in the specific instance and for the specific purpose given.
All rights and remedies of the holder of this Note shall be cumulative and
may be exercised singly, concurrently or successively. All references in this
Note to the holder of this Note shall mean CRC and any and all other present
and future holders of this Note. This Note shall bind the Maker and the
heirs, representative, successors and assigns of the Maker. This Note shall
benefit the holder of this Note and its successors and assigns. This Note
shall be governed by and construed in accordance with the internal laws of
the State of Mississippi (excluding conflict of law rules).
THE MAKER REPRESENTS AND WARRANTS TO CRC AND AGREES THAT THE MAKER HAS
READ ALL OF THIS NOTE AND UNDERSTANDS ALL OF THE PROVISIONS OF THIS NOTE.
Address of Maker: MAKER:
2644 East Lakeshore Drive /s/ Kevin M. Kean
Baton Rouge, LA 70808 ----------------------------
Telephone: (504) 388-9118 Kevin M. Kean
Casino Resource Corporation agrees to this Promissory Note.
3
<PAGE>
Executed as of the date first above written.
CASINO RESOURCE CORPORATION
By /s/ John Pilger
---------------------------
Title CEO
------------------------
4
<PAGE>
SECURITY AGREEMENT
Date: January 15, 1998
Secured
Debtor: Kevin M. Kean Party: Casino Resource Corporation
Address: 2644 East Lakeshore Drive Address: 707 Bienville Boulevard
Baton Rouge, LA 70808 Ocean Springs, MS 39564
Social Security No. ###-##-####
1. OBLIGATIONS SECURED. This Agreement secures the following (called
the "Obligations"):
All debts, liabilities and obligations under this Agreement, the
Settlement Agreement and Release dated January 15, 1998 by and
between the Secured Party and the Debtor, and the Debtor's
$1,196,884.88 Promissory Note dated January 15, 1998 in favor of
the Secured Party, including but not limited to all principal
interest, and other charges, fees, expenses and amounts, and all
amendments, extensions, renewals and replacements of the foregoing.
2. SECURITY INTEREST. To secure the payment and performance of the
Obligations, the Debtor grants the Secured Party a security interest (the
"Security Interest") in, and assigns to the Secured Party, the following
property (called the "Collateral"):
All of the Debtor's right, title and interest in the Agreement dated
December 1, 1995, by and between the Debtor and the Secured Party,
and all amendments, extensions, renewals and replacements of the
foregoing, including but not limited to all existing and future
payments and rights to receive payments thereunder, all whether now
existing or hereafter arising, whether now owned or hereafter
acquired, and all proceeds of the foregoing property, including
without limitation all accounts, instruments, chattel paper,
investment property, other rights to payment, deposit accounts,
money and general intangibles related to the foregoing property.
3. REPRESENTATION, WARRANTIES AND AGREEMENTS. The Debtor represents
and warrants to the Secured Party and agrees as follows:
a. The address of the Debtor's residence and chief executive office
is shown at the beginning of this Agreement. The Debtor has not used any
trade name, assumed name, or other name except the Debtor's name stated
above. The Debtor shall give the Secured Party prior written notice of any
change in such address or the Debtor's name or if the Debtor uses any other
name. The Debtor has authority to execute and perform this Agreement. The
Debtor's social security number is shown above.
<PAGE>
b. Except as set forth in any existing or future agreement executed
by the Secured Party, the Debtor is the owner of the Collateral, or will be
the owner of the Collateral hereafter acquired, free of all security
interest, liens and encumbrances other than the Security Interest and any
other security interest of the Secured Party, the Debtor shall not permit any
security interest, lien or encumbrance, other than the Security Interest and
any other security interest of the Secured Party, to attach to any Collateral
without the prior written consent of the Secured Party, the Debtor shall
defend the Collateral against the claims and demands of all persons other
than the Secured Party, and shall promptly pay all taxes, assessments and
other government charges upon or against the Debtor, any Collateral and the
Security Interest, and no financing statement covering any Collateral is on
file in any public office.
c. The Debtor shall not sell or otherwise dispose of any Collateral
or any interest therein without the prior written consent of the Secured
Party.
d. Each account, instrument, investment property, chattel paper,
other right to payment and general intangible constituting Collateral is, or
will be when acquired, the valid, genuine and legally enforceable obligation
of the account debtor or other issuer or obligor named therein or in the
Debtor's records pertaining thereto as being obligated to pay such
obligation, subject to no defense, setoff or counterclaim. The Debtor shall
not, without the prior written consent of the Secured Party, agree to any
material modification or amendment of any such obligation or agree to any
subordination or cancellation of any such obligation.
e. The Debtor shall (i) promptly notify the Secured Party of any
loss of any Collateral or of any adverse change in the prospect of payment of
any account, instrument, chattel paper, other right to payment or general
intangible constituting Collateral, (ii) at the Debtor's residence, keep
accurate and complete records pertaining to the Collateral and the Debtor's
financial condition, business and property, and provide the Secured Party such
periodic reports concerning the Collateral and the Debtor's financial
condition, business and property as the Secured Party may from time to time
request; (iii) at all reasonable times permit the Secured Party and its
representatives to examine, inspect and copy the Debtor's records pertaining
to the Collateral and the Debtor's financial condition, business and
property; and (iv) at the Secured Party's request, promptly execute, endorse
and deliver such financing statements and other instruments, documents,
control agreements, chattel paper and writings and take such other actions
deemed by the Secured Party to be necessary or desirable to establish,
protect, perfect or enforce the Security Interest and the rights of the
Secured Party under this Agreement and applicable law, and pay all costs of
filing financing statements and other writings in all public offices where
filing is deemed by the Secured Party to be necessary or desirable.
4. COLLECTION RIGHTS. At any time before or after an Event of Default,
the Secured Party may, and at the request of the Secured Party the Debtor
shall, promptly notify any account debtor, issuer or obligor of any account,
instrument, investment property, chattel paper, other right to payment or
general intangible constituting Collateral that the same has been assigned to
the
2
<PAGE>
Secured Party and direct such account debtor, issuer or obligor to make all
future payments to the Secured Party.
5. LIMITED POWER OF ATTORNEY. If the Debtor at any time fails to perform
or observe any agreement herein, the Secured Party, in the name and on behalf
of the Debtor or, at its option, in its own name, may perform or observe such
agreement and take any action which the Secured Party may deem necessary or
desirable to cure or correct such failure. The Debtor irrevocably authorizes
Secured Party and grants the Secured Party a limited power of attorney in the
name and on behalf of the Debtor or, at its option, in its own name, to
collect, receive, receipt for, create, prepare, complete, execute, endorse,
deliver and file any and all financing statements, control agreements,
insurance applications, remittances, instruments, documents, chattel paper
and other writings, to grant any extension to, compromise, settle, waive,
notify, amend, adjust, change and release any obligation of any account
debtor, issuer, obligor, insurer or other person pertaining to any
Collateral, and to take any other action deemed by the Secured Party to be
necessary or desirable to establish, perfect, protect or enforce the Security
Interest. All of the Secured Party's advances, fees, charges, costs and
expenses, including but not limited to audit fees and expenses and reasonable
attorneys' fees and legal expenses, in connection with the Obligations and in
the protection and exercise of any rights or remedies hereunder, together
with interest thereon at the highest rate then applicable to any of the
Obligations, shall be secured hereunder and shall be paid by the Debtor to
the Secured Party on demand.
6. EVENTS OF DEFAULT. The occurrence of any of the following events
shall constitute an "Event of Default": (a) any breach or default in the
payment or performance at any of the Obligations; or (b) the insolvency or
death of the Debtor; or (c) any appointment of a receiver, trustee or similar
officer of any property of the Debtor; or (d) any assignment for the benefit
of creditors of the Debtor; or (e) any commencement of any proceeding under
any bankruptcy, insolvency, receivership, dissolution, liquidation or similar
law by or against the Debtor; or (f) the Debtor takes any action to revoke or
terminate any agreement liability or security in favor of the Secured Party;
or (g) the entry of any judgment or other order for the payment of money in
the amount of $25,000.00 or more against the Debtor; or (h) the issuance or
levy of any writ, warrant, attachment, garnishment, execution or other
process against any property of the Debtor; or (i) the attachment of any tax
lien to any property of the Debtor; or (j) any statement, representation or
warranty made by the Debtor (or any representative of the Debtor) to the
Secured Party at any time shall be incorrect or misleading in any material
respect when made.
7. REMEDIES. Upon the commencement of any proceeding under any
bankruptcy law by or against the Debtor, all Obligations automatically shall
become immediately due and payable in full, without declaration, presentment,
or other notice or demand, all of which are hereby waived by the Debtor. In
addition, upon the occurrence of any Event of Default and at any time
thereafter, the Secured Party may exercise any one or more of the following
rights and remedies: (a) declare all Obligations to be immediately due and
payable in full, and the same shall thereupon be immediately due and payable
in full, without presentment or other notice or demand, all of which are
hereby waived by the Debtor; (b) exercise and enforce any and all rights and
remedies available upon default
3.
<PAGE>
under this Agreement, the Uniform Commercial Code, and any other applicable
agreements and laws. If notice to the Debtor of any intended disposition of
Collateral or other action is required, such notice shall be deemed
reasonably and properly given if mailed by regular or certified mail, postage
prepaid, to the Debtor at the address stated at the beginning of this
Agreement or at the most recent address shown in the Secured Party's records,
at least 10 days prior to the action described in such notice. The Debtor
consents to the personal jurisdiction of the state and federal courts located
in the State of Mississippi in connection with any controversy related to this
Agreement, the Collateral, the Security Interest or any of the Obligations,
waives any argument that venue in such forums is not convenient, and agrees
that any litigation initiated by the Debtor against the Secured Party in
connection with this Agreement, the Collateral, the Security Interest or any
of the Obligations shall be venued in either the Circuit Court of Jackson or
Harrison County, Mississippi, or the United States District Court, Southern
District of Mississippi.
8. MISCELLANEOUS. This Agreement supersedes and replaces the Pledge of
Shares of Stock dated February 11, 1997 and Subordination Agreement dated
October 1, 1996, both executed by the Debtor in favor of the Secured Party,
and such Pledge and Subordination Agreement are hereby terminated. All terms
in this Agreement that are defined in the Mississippi Uniform Commercial Code
(the "UCC") shall have the meanings set forth in the UCC. A carbon,
photographic or other reproduction of this Agreement is sufficient as a
financing statement. No provision of this Agreement can be waived, modified,
amended, abridged, supplemented, terminated or discharged and the Security
Interest cannot be released or terminated, except by a writing duly executed
by the Secured Party. A waiver shall be effective only in the specific
instance and for the specific purpose given. No delay or failure to act shall
preclude the exercise or enforcement of any of the Secured Party's rights or
remedies. All rights and remedies of the Secured Party shall be cumulative
and may be exercised singularly, concurrently or successively at the Secured
Party's option, and the exercise or enforcement of any one such right or
remedy shall not be a condition to or bar the exercise or enforcement of any
other. This Agreement shall bind and benefit the Debtor and the Secured Party
and their respective heirs, representatives, successors, and assigns and
shall take effect when executed by the Debtor and delivered to the Secured
Party, and the Debtor waives notice of the Secured Party's acceptance hereof.
If any provision or application of this Agreement is held unlawful or
unenforceable in any respect, such illegality or unenforceability shall not
affect other provisions or applications which can be given effect, and this
Agreement shall be construed as if the unlawful or unenforceable provision or
application had never been contained herein or prescribed hereby. All
representations and warranties contained in this Agreement shall survive the
execution, delivery and performance of this Agreement and the creation,
payment and performance of the Obligations. This Agreement and the rights and
duties of the parties shall be governed by and construed in accordance with
the internal laws of the State of Mississippi (excluding conflict of law
rules).
4.
<PAGE>
THE DEBTOR REPRESENTS AND WARRANTS TO THE SECURED PARTY AND AGREES THAT
THE DEBTOR HAS READ ALL OF THIS AGREEMENT AND UNDERSTANDS ALL OF THE
PROVISIONS OF THIS AGREEMENT.
/s/ Kevin M. Kean
------------------------------------
Kevin M. Kean
CASINO RESOURCE CORPORATION
By /s/ John J. Pilger
--------------------------------
Title CEO
-----------------------------
5.
<PAGE>
IRREVOCABLE PROXY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a stockholder of
Casino Resource Corporation, a Minnesota corporation (the "Company"), holding
1,330,944 shares of the $.01 par value Common Stock of the Company (as pledged
as collateral to Hibernia National Bank and as evidenced by stock certificate
numbers 2958, 2711-2720, 2349-2351, 2340-2348, 2360, 2052, and 2038) does hereby
grant to John J. Pilger, Chairman of the Board, an irrevocable proxy pursuant to
the provisions of Minnesota Statute Section 302A.449 (the "Proxy") to vote
1,330,944 shares of the $.01 par value Common Stock of the Company (the "Proxy
Stock") to the same extent and with the same effect as the undersigned might or
could do under any applicable laws or regulations governing the rights and
powers of stockholder of a Minnesota corporation. John J. Pilger shall be able
to vote the Proxy Stock, at his discretion, on any matter to come to a vote at
any meetings or actions of the stockholders of the Company.
So long as this Irrevocable Proxy remains in full force and effect, the
said Proxy shall have all powers the undersigned would possess if present
personally at any such meeting.
The undersigned hereby affirms that this Proxy is given in connection with
the execution of a certain Settlement Agreement and Release, dated January 15,
1998, by the undersigned and the Company, and as such this Proxy is coupled with
interest and is irrevocable; provided, however, that this Irrevocable Proxy (i)
shall bind solely the said 1,330,944 shares of the Proxy Stock and shall not be
binding upon any other shares of capital stock of the Company hereafter acquired
by the undersigned and (ii) shall remain in full force and effect until the
undersigned sells or transfers the said 1,330,944 shares of Proxy Stock to an
unaffiliated third-party in a bona fide transaction.
The certificates representing the Proxy Stock shall bear the following
legend:
"The shares represented by this certificate are subject to the terms,
conditions, and restrictions of an Irrevocable Proxy dated January 15,
1998, governing the voting of these shares for all purposes, a copy of
which Irrevocable Proxy is on file in the office of the corporation."
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this
15th day of January, 1998.
/s/ Kevin M. Kean
-------------------------------
KEVIN M. KEAN
Subscribed and sworn to before
me this _____ day of January, 1998.
- ------------------------------
<PAGE>
EXHIBIT 11.1
STATEMENT AS TO COMPUTATION OF EARNINGS PER SHARE
Net income (loss) per share data is computed using the weighted average number
of common stock outstanding during each period. Common equivalent shares from
stock options and warrants have been included in the computation using the
treasury stock method only when their effect would be dilutive. Fully dilutive
net income per share has not been presented, as the difference is not
significant.
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
As of September 30, 1997, subsidiaries of Casino Resource Corporation are as
follows:
CRC of Branson, Inc.
Casino Building Corporation
Country Tonite Enterprises, Inc.
Country Tonite Theatre, LLC (60% Owned)
CRC of Tunisie, S. A. (85% Owned)
Casino Entertainment Corporation of America, Inc.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Casino Resource Corporation
Ocean Springs, Mississippi
We hereby consent to the incorporation by reference in Casino Resource
Corporation's previously filed Registration Statement of our report dated
December 11, 1997, except for Note 19 as to which the date is January 15, 1998,
relating to the consolidate financial statements of Casino Resource Corporation
and Subsidiaries appearing in the Company's Annual Report on Form 10-KSB for
the year ended September 30, 1997.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
Chicago, Illinois BDO Seidman, LLP
January 16, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CASINO
RESOURCE CORPORATION'S ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED SEPTEMBER
30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 3,097
<SECURITIES> 0
<RECEIVABLES> 531
<ALLOWANCES> 0
<INVENTORY> 297
<CURRENT-ASSETS> 5,049
<PP&E> 19,901
<DEPRECIATION> (3,670)
<TOTAL-ASSETS> 26,378
<CURRENT-LIABILITIES> 3,520
<BONDS> 0
0
0
<COMMON> 100
<OTHER-SE> 9,486
<TOTAL-LIABILITY-AND-EQUITY> 26,445
<SALES> 15,700
<TOTAL-REVENUES> 15,700
<CGS> 0
<TOTAL-COSTS> 16,032
<OTHER-EXPENSES> (332)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 9
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
