UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1 to
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, 1998
OR
[ ] 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 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. [X]
The Company's revenues for the fiscal year ended September 30, 1998
were $3,305,396.
As of December 29, 1998, 9,482,349 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 $4,551,573.
Transitional Small Business Disclosure Format (Check one): Yes __; No X
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PART I
ITEM 1. BUSINESS
Recent Developments
During fiscal 1998, the Company determined that the best way to
increase shareholder value was to change the focus of the Company's business.
The Company reached this conclusion because the Company had been engaged for
approximately a decade in businesses in, or related to, the gaming industry in
the United States. The Company's entry into those industries was effected at a
time when gaming was a relatively unexploited industry, except in very limited
geographical areas, in the United States. By contrast, by 1998, the gaming
industry had become ubiquitous in the United States, and many jurisdictions
which do not currently engage or authorize gaming, were actively examining
various gaming possibilities. Moreover, other jurisdictions where gaming was
permitted were exploring new gaming opportunities. In short, the Company
concluded that the industry had become increasingly competitive, and more
difficult in which to make a profit.
As part of this effort, the Company took a number of actions. First,
the Company sold the Grand Hinckley Inn in June 1998, to the Mille Lacs Band of
the Ojibwe Indians. The selling price was $5.4 million.
Second, the Company entered into an asset purchase agreement (the
"Agreement") with On Stage Entertainment, Inc. ("On Stage"), to sell
substantially all of the Company's assets relating to the Country Tonite Theater
in Branson, Missouri, and the production show, Country Tonite. The purchase
price is $13.8 million, of which $12.5 million is payable in cash and the
balance payable by 9.5% subordinated note. The Agreement is subject to, among
other things, On Stage's obtaining financing of the purchase price and approval
of the sales transaction by a majority of the shareholders of On Stage and the
Company.
Third, the Company and Burkhart Venture, LLC entered into an agreement,
whereby Burkhart Venture, LLC would acquire the Company's 60% ownership in
Country Tonite Theatre, LLC for $20,000. Because of these transactions the
entertainment segment and hospitality segment have been considered discontinued
operations in the consolidated financial statements. See "Item 7. Financial
Statements and Supplementary Data."
Fourth, and finally, the Company entered into a Letter of Intent with a
standstill component, with Mark McKenny, an Arkansas business man, to build a
spring water bottling plant. As conceived, the plant would incorporate
high-technology blow mold bottling techniques which management believes are the
most efficient available, and would, therefore, constitute a "state of the art"
plant. If the transaction is completed, the Company will receive 60% of the
equity for a minimum investment of $5 million. The parties expect to spend $27
million on the facility. The agreement is contingent upon, among other things,
(i) completion by the Company of a full legal and business due diligence
examination; and (ii) the Company's obtaining debt and equity financing in the
amount of not less than $25 million.
Before signing the Letter of Intent, the Company examined a number of
alternatives to its traditional businesses. In particular, the Company reviewed
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opportunities in the telecommunications and internet businesses, businesses in
the recreational manufacturing and air charter business, as well as others. The
Company decided to pursue the water bottling business because the Company
believes that the demographics in the United States, the aging of the population
and the emphasis on increasing health benefits were likely to keep long-term
demand for the proposed product high.
Upon the sale of the entertainment division assets, the Company will
still have its casino in Tunisia, North Africa, however the Company will have no
other entertainment assets. The following information provides historic
background information on the Company's businesses prior to the sale of the
Grand Hinckley Inn and the proposed sale of the entertainment segment.
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 from 1988 through 1991, and began
offering direct marketing services to the recreational real estate industry. The
marketing services provided were primarily focused toward 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. In March 1994, the Company purchased a
musical production company, which staged an award-winning show at the Aladdin
Hotel in Las Vegas, Nevada, but which 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. In May 1994, the Company
completed construction of and opened its 154 room hotel, "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"). This facility was sold to the Mille Lacs Band of the Ojibwe
Indians in June 1998. Also, in May 1994, the Company opened the Biloxi Star
Theatre, a 1,900 seat deluxe theater in Biloxi, Mississippi, which 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 (CTT), 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's operating
manager was the 60% owner of the joint venture. The Company's 60% interest was
sold to Burkhart Ventures, LLC, effective December 31, 1998. In April 1997, the
Branson Theatre added a second show "The Golden Girls," in a joint venture with
Greg Thompson Productions, and on October 18, 1997, the Company, through its 85%
owned subsidiary, CRC of Tunisie, Inc., opened its casino (Casino Caraibe) in a
leased facility in Sousse, Tunisia, North Africa. Additionally, the Country
Tonite Show appeared for three weeks at the Sahara Hotel and Casino, in Las
Vegas, Nevada, in December 1997.
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The Company had previously entered into a Technical Assistance and
Consulting Agreement with Harrah's Entertainment, Inc. ("Harrah's") which
provided that, upon the receipt of a compact and regulatory approval, Harrah's
was 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 would have received, upon commencement of operations 21.6%
of Harrah's management fee, but was not required to provide any development
capital. The Management Agreement between Harrah's and the Band was canceled
during fiscal year 1998. The Company asserts that it maintains a Right of First
Refusal to develop a casino or casinos with the Pokagon Band of Potawatomi
Indians (the "Band"), even though the Band announced that the agreement to
develop and manage one or more casinos, to be funded by Harrah's in northern
Indiana and southwestern Michigan was terminated.
Hospitality & Entertainment 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. Grand Hinckley Inn was sold to the
Mille Lacs Band of Ojibwe Indians, who was lessor of the hotel site, on June 29,
1998, for $5.4 million.
Country Tonite Theatre (Branson, MO)
The Company purchased the former Ray Stevens Theatre, now the Country
Tonite Theatre (the "Theatre") located at 4080 W. Highway 76, Branson, Missouri
65616 in March 1994, for a purchase price of $10 million. 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
features 38,000 square feet on two floors with an auditorium, a stage area,
control booths, dressing rooms, 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.
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. Branson is located approximately 250 miles from St. Louis and 40 miles
from Springfield. Its population is approximately 3,000. The city includes over
40 theaters featuring music stars such as Andy Williams, Bobby Vinton and the
Osmond family and provides a wide range of family entertainment for all ages. In
addition to approximately 20,000 hotel rooms, Branson offers diverse eating,
shopping and recreational activities to its approximately 6 million annual
visitors (according to Branson Chamber of Commerce), most of whom visit between
the months of 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 also 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.
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The Company purchased the Theatre for $2 million in cash and a
promissory note collateralized by the Theatre for $8 million in principal. The
note, with a principal balance of $7,225,037 at September 30, 1998, bears
interest at the prime rate plus 1%, with a floor of 7% and a ceiling of 10%
(9.5% at September 30, 1998), and matures on October 1, 1999. The note is
payable in monthly installments of principal and interest of $74,002, with a
final payment of approximately $7 million. If the Company retires the mortgage
on or before May 1, 1999, the Company will be given a $300,000 discount.
The Theatre 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.
The Company entered into the Agreement to sell substantially all of the
Company's assets relating to the Country Tonite Theatre in Branson, Missouri,
and the production show Country Tonite to On Stage Entertainment, Inc., a Nevada
corporation (NASDAQ: ONST), ("On Stage"), for $13.8 million, of which $12.5
million is payable in cash, and the balance of which is payable by delivery of a
two year subordinated 9.5% note in the amount of $1.3 million. Included in the
assets subject to the Agreement is the Branson Theatre. A portion of the
proceeds from the proposed sale will be used to retire the mortgage on the
Theatre. Consummation of the sale is subject to, among other things, On Stage's
obtaining acceptable financing of the purchase price and approval of the sales
transaction by a majority of the shareholders of On Stage and the Company.
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 (the "Show"), and played at the 1,100 room Aladdin Hotel and
Casino ("Aladdin") located on the "strip" in Las Vegas from 1992 until November
15, 1997, when the Aladdin Hotel closed for renovations. CTE, which produces the
Show, received the CMAA award as well as "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, the Company's Chief Executive Officer, was awarded "International
Producer of the Year," and inducted into the Country Music Organizations of
America Hall of Fame. Casts of the Country Tonite show perform at the Country
Tonite Theatre in Branson, Missouri and Pigeon Forge, Tennessee.
While the Company has been provided opportunities to present the
Country Tonite Show in Las Vegas, it has been unsuccessful in securing an
attractive financial arrangement to offset the cost to produce show in Las Vegas
since January 1998. The production show is included in assets which are subject
to the Agreement.
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Country Tonite Theatre (Pigeon Forge)
CRCT, a wholly owned subsidiary of the Company and Burkhart Ventures,
LLC formed a joint venture to present the Country Tonite Show in a 1,500-seat
state-of-the-art theatre located in Pigeon Forge, Tennessee, which opened on
March 21, 1997. CRCT owns 60% of the joint venture and manages the theater.
Under the terms of the Operating Agreement, the members contributed $500,000 of
operating capital and have advanced $1,416,710 to CTT (the Company's portion of
which was $850,000). Theatre revenues increased 52% for fiscal 1998, over fiscal
1997, as 1997 reflects only a six-month seasonal period of operations as
compared to a full season's operation during 1998.
This was a new market for the Company's award-winning Country Tonite
Show, and CTT has sustained operating losses its first and second years of
operation. There is no assurance that CTT will ever become profitable.
Currently, there are approximately nine family oriented musical show theaters
operating in the Pigeon Forge area. It is likely that additional theaters will
open in the future, and although the Pigeon Forge area draws approximately 12
million tourists annually (according to Pigeon Forge Department of Tourism),
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 Company and Burkhart Venture, LLC entered into an agreement
executed November 4, 1998, which terminates the Company's 60% ownership of CTT
effective December 31, 1998. Under the terms of the agreement, CRC will continue
to manage CTT for a fee of $2,000 per week in season and $1,000 per week during
the off-season beginning January 1, 1999, but will have no vested ownership
interest in or financial obligation to CTT after December 31, 1998. Burkhart
Venture, LLC, representing 100% of the interest of CTT, has contracted with CTE
to produce shows for the 1999 calendar season for a fee of $36,000 per week.
Gaming Operations
Tunisia Casino
The Company, through its 85% owned subsidiary, CRC of Tunisie, S.A.,
leases and operates a casino in Sousse, Tunisia. The 42,000 square foot casino
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 pre-opening costs to open the Tunisia Casino totaled
approximately $4,500,000 through September 1998.
The entertainment complex/casino is a freestanding building, which is
located on a triangular piece of property in front of the 425-room Hotel Samara,
one of three hotels that Samara Casinos Company ("Samara") controls in Sousse.
The two other hotels contain 400 total rooms. 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. Three other casinos are open in other Tunisian
municipalities at distances of approximately fifty to three hundred miles from
Sousse.
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CRC of Tunisie also operates a gourmet restaurant, gift shop and
additional food and bar service on the property. The remaining 15% ownership
interest in CRC of Tunisie, S.A. is held by Samara who acquired it for nominal
consideration as part of the development transaction.
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 Sea, 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.
According to the Ministry of Tourism, the number of tourists visiting
Tunisia is estimated to be 4.5 million per year, and 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. According to the Ministry of Tourism, during
this time, the hotel rooms are historically, on average, 80% occupied and the
average occupancy rate year-round is 53%. The closest airport to Sousse is
approximately 30 minutes away. Tourists are typically bused from the airport to
Sousse. The Casino sustained an operating loss its first year of operation which
was exacerbated by amortization of pre-opening and start-up expenses. Due to
minimal spending per casino patron, gaming revenues were significantly below the
Company's expectations.
Pokagon Consulting Agreement
The Pokagon Band of Potawatomi Indians domiciled in northern Indiana
and southwestern Michigan do not have a designated reservation but have been
assigned certain service areas in northern Indiana and southwestern Michigan.
The Pokagon Band has the right to construct one or more casinos subject to the
approval of various regulatory authorities. In May 1996, the Pokagon Band
announced the selection of a site in 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 until December 1998.
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, which could provide substantial competition to the Pokagon casino(s).
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 thus acquired 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, which included a Right of First
Refusal on any Pokagon Gaming opportunity.
Also in January 1995, the Company executed a Memorandum of
Understanding with the Promus Companies Incorporated, now known as Harrah's
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Entertainment, Inc. ("Harrah's"), 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 1995,
and final agreements between Harrah's and the Pokagon Band were entered into
shortly thereafter. The agreements called for Harrah's to provide or cause to be
provided loans to finance the construction of one or more casinos in the Pokagon
Band's service area. The Band was to be responsible for repaying the loans and
paying Harrah's a management fee, for each Pokagon casino. Pursuant to its
obligations to Harrah's, Casino Resource facilitated the Band's Federal
recognition status. Upon signing the Technical Assistance Agreement with
Harrah's, Casino Resource was required, upon Harrah's request, to provide
Harrah's with consulting services which could include lobbying, planning,
developing, and management support.
From time to time, Casino Resource provided such services as requested.
On October 18, 1998, the Pokagon Band announced that it had terminated
its contract with Harrah's. The Company has asserted that it has a Right of
First Refusal in regards to a gaming management contract, separate and apart
from the gaming management contract which was the subject of the agreement
between the Company and Harrah's, and in turn Harrah's and the Pokagon Band. The
Company maintains that, although the Harrah's-Pokagon contract may have been
terminated, the Right of First Refusal that the Company maintained separately
from the agreement with Harrah's reverted back to the Company and with it the
right to participate in a gaming management contract with the Pokagon Band.
Under the agreement with Harrah's, the Company would have received
21.6% of Harrah's management fee as consulting fees over the term of Harrah's
management contract with the Pokagon Band. The Company would have had 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 would
reimburse Harrah's for the Company's share (21.6%) of specified development and
licensing costs incurred by Harrah's. Under the agreement, Harrah's paid 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 was payable over five years, commencing with
the opening of the first Pokagon casino. In turn, the Company agreed to pay
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.
The Company must, in any event, reconfirm its Right of First Refusal
with the Band relative to the Company securing its right to participate in a
gaming management contract. There are no assurances that the National Indian
Gaming Commission ("NIGC") will approve the agreement which is the subject of
the Company's asserted Right of First Refusal, nor is there any guarantee that
even if NIGC approves the agreement that the Company will be able to find the
appropriate partner to help finance the endeavor, although the Company has
opened a dialog with a casino operator in an effort to do so.
The Company filed suit against Harrah's on September 4, 1998, alleging
that Harrah's breached its agreements with the Company and tortuously interfered
with the Company's contractual and prospective economic advantage associated
with the Pokagon Band of Potawatomi Indians. The suit further alleges that
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Harrah's withheld vital business information from the Company. Harrah's has
moved the court for Summary Judgment against the Company. The Company responded
to the motion and plans to vigorously pursue its claim. See "Item 3. Legal
Proceedings."
Bottled Water Business
The Company has entered into a Letter of Intent with a standstill
component with Mark McKinney, a Bentonville, Arkansas, businessman, to build a
state of the art spring water bottling plant in Bentonville, Arkansas. If the
transaction is completed, the Company will receive 60% of the equity in the
Bottling Venture in consideration for investing a minimum of $5 million in the
bottling plant. The parties expect to spend $27 million on the facility. The
agreement is contingent on (i) completion by the Company of a full legal and
business due diligence examination; and (ii) obtaining debt and equity financing
of not less than $25 million. While the Company is actively attempting to secure
the financing needed, no commitment has been obtained at this time.
The business will lend $1.3 million to Mark McKinney, which will be
returned over a 5-year period commencing one year after the first month the
Bottling Venture produces water for sale. The principal and interest payments
shall not exceed more than 20% of Mark McKinney's cash flow from the Bottling
Venture with any deficits being added back to principal. The loan will be
secured by Mark McKinney's interest in the venture. During the two years
following the closing, Mark McKinney will only be required to contribute cash to
the extent that he has received distributions from the business. The agreement
has been amended to reflect an extension of the closing date to April 1999.
The bottled water management team is comprised of individuals who
possess extensive experience in the bottling industry. Mark McKinney, is an
entrepreneur with extensive experience dealing in the retail industry with such
retailers as Wal-Mart and Certified Grocers. Kevin Talbot slated to be the
President of the company came from the Pierre Group of America and has just
finished running the largest bottled water plant in the U.S. He was responsible
for executing $63 million in capital investments for the Pierre Group. Tom Smith
slated to be the Vice President of Operations, has 13 years experience in the
bottling industry and was formerly with the Pierre Group of America as a head
plant engineer and was responsible for the installation and start up of seven
production facilities during his career.
According to Beverage Industry Statistics, the bottled water business
has experienced explosive growth over the last three years; however there is no
assurance that this kind of growth can be sustained. Entry into the market at
this time with a private label as well as a brand name strategy would allow the
business to capitalize on what management believes are bottled water shortages,
higher pricing, and an increasing demand by the public for bottled natural
spring water. Nevertheless, there are many competitors in the bottled water
market, almost all of which have established brand names, and which are better
capitalized than the proposed bottling venture. The top ten brands make up
approximately 40% of the US market and include Poland Spring, Arrowhead and
Evian.
The water source is from a natural spring, which is located in
Bentonville, Arkansas. Water testing to date exceeds EPA and FDA requirements.
The water source is protected by impermeable clay. The spring water extraction
method is by use of a borehole, which protects the purity of the spring water.
Monthly testing has been done on the spring for the past four years and to date
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there are no indication of contaminates infiltrating the spring source. While
consultants have done substantial due diligence on the quality, capacity, and
purity of the water source, there are no assurances that the source will provide
the volume needed or quality desired.
Employees
At September 30, 1998, the Company had 13 employees at its headquarters
in Ocean Springs, Mississippi; 105 employees at the Country Tonite Theatre in
Branson, Missouri (reduced to approximately 6 employees during the off season);
94 employees at the Country Tonite Theatre in Pigeon Forge (reduced to
approximately 6 employees during the off season). The entertainers are
contracted for the subsequent season between December and February each year as
well as 115 employees at Casino Caraibe in Tunisia. The Company has entered into
an employment agreement with its CEO, which expires in 1999. See "Item 11.
Security Ownership of certain Beneficial Owners and Management." The total cost
of the agreement is approximately $375,000. None of the Company's employees is
represented by a union, and management considers its labor relations to be good.
Regulation
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.
By the Company's pursuing a management agreement with the Pokagon Band
or entering a partnership with another gaming operator to build one or more
casinos, the Company will be required to apply for and obtain gaming license
applications with the National Gaming Indian Commission ("NIGC"). To date the
Company's Chief Executive Officer and Chairman, Mr. Pilger, has been found
suitable to hold a gaming license in the State of Mississippi and in Tunisia,
North Africa.
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 Pokagon Band
received a signed compact by the Governor in September of 1995, and the state
legislature ratified the compact and certain amendments in December 1998.
The IGRA provides that before tribes can engage in Class III gaming (a
residual category of gaming which includes casino style gaming) in a particular
state, the tribe must negotiate a "tribal/state compact" with that state to
regulate such gaming.
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
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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 applicable laws and regulations.
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.
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 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
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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.
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.
Tunisia Gaming Regulation
The Company's first gaming venture is carried on in Sousse, Tunisia,
and is subject to Tunisian laws and regulations affecting the ownership and
operation of the casino. Tunisian nationalists are prohibited from gaming in
Tunisia. Casino guests are required to present a passport or valid
identification for entry into the Casino. Operations outside the U.S. are
subject to inherent risks, including 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 working permits for employees, limitations on technology transfers,
potential adverse tax consequences, and difficulties in operating in a different
cultural and legal system. The Casino opened October 18, 1997, and to date has
not generated a profit nor can the Company make any assurances that it will
generate a profit in the future.
The Company is required to pay a gaming tax, which is a sliding
variable tax with a minimal base of 10% on all revenue derived from tables
games. Additionally, the country of Tunisia imposes labor taxes, including
social securities and benefits tax; a value-added tax; an entertainment tax; as
well as import taxes.
ITEM 2. PROPERTIES
The Company's owned or leased properties include principally; the
casino and theatre complex in Sousse, Tunisia; the Country Tonite Theatres in
Branson, Missouri and Pigeon Forge, Tennessee; the Company's executive office in
Ocean Springs, Mississippi and a residential property in Ocean Springs,
Mississippi. The 2,000-seat Country Tonite Theatre in Branson, Missouri is owned
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by the Company, including underlying real estate of 10.7 acres. The Branson
theatre is included in the assets subject to the Agreement. The 1,500-seat
County Tonite Theatre in Pigeon Forge, Tennessee is leased by CTT of which the
Company was the majority partner by virtue of its 60% investment (although the
interest in CTT and therefore in the Pigeon Forge Theatre was transferred in
December 1998). The Company leases, pursuant to a five-year lease, executive
office space in Ocean Springs, Mississippi at a rate of $73,500 per annum.
The Company owns a residence in Ocean Springs, Mississippi, which is
rented to a principal of Monarch at a below-market rate. The lease is in
default. See "Item 3. Legal Proceedings."
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 an adjusted base rent of 480,000 dinars, which is approximately $436,360 at
the current exchange rate, plus value added taxes. (In addition, a scaled
variable rental fee is incurred when gross gaming revenues exceed 125,000 dinars
monthly.) The Company also pays rent on the Casino Theatre at the rate of two
dinars (equivalent to $1.80 US) 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.
All of the assets of Grand Hinckley Inn were sold to the Mille Lacs
Band of Ojibwe Indians on June 29, 1998 for $5,400,000.
The Company had guaranteed rent payments to the minority member of CTT,
who is lessor of the Pigeon Forge Theatre facility. Rent guarantees terminated
December 31, 1998, under a sale agreement entered into between the Company and
Burkhart Ventures, LLC on November 4, 1998.
ITEM 3. LEGAL PROCEEDINGS
In 1995, a suit was brought against the Company in the 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) asserted it had a contract with the Company to provide eight
professional boxing events at the Company's former Biloxi Star Theatre. 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 the plaintiff in December 1997, for $100,000 plus attorney's fees
and expenses, totaling $81,726.24 which was satisfied in November 1998, and all
claims were dismissed with prejudice.
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 the Company 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 the previously escrowed
$321,000. The decision resulted in a gain to the Company of approximately
$122,000 in fiscal 1997.
The Company has received notice that the action of CHQ against John J.
Pilger (CEO of the Company) in Jackson County Circuit Court, Mississippi
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originally set in abeyance pending completion of arbitration proceeding, is now
reconstituted. Cunningham alleges that Mr. Pilger and the Company owes CHQ
approximately $40,000 for services rendered in 1994. The Company and Mr. Pilger
deny these charges and plan to vigorously defend themselves in this matter.
James Barnes and Prudence Barnes, two former officers of a subsidiary
of the Company, have brought suit in State District Court, Clark County, Nevada,
against the Company in connection with their employment termination in June
1995. The Barnes have alleged the Company breached their contracts based on the
termination of the Barnes employment; intentional misrepresentation; and a
breach of contract based on the untimely registration of their stock. 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.
The suit was dismissed with prejudice and a judgment of dismissal entered on
September 1, 1998 in the Fourth District Court, State of Minnesota.
On December 31, 1997, the Company's former chairman, Kevin Kean,
defaulted on repaying the $1,232,000 (principal) of notes receivable due the
Company. The Company held 150,000 shares of the Company's stock as collateral
for the notes. On January 15, 1998, the Company signed an agreement with Mr.
Kean, under which 220,000 additional shares of the Company's stock owned by Mr.
Kean were canceled along with the 150,000 collateral shares held (at the market
price of $1.19 per share) and the notes could be reduced by $252,570 in the
aggregate. Additionally, the Company and Mr. Kean 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%, and matures on January 15,
2001. The note is collateralized by a security interest in Mr. Kean'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. Because Mr. Kean'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.
The Company initiated a civil suit against Harrah's on September 4,
1998, in Federal District Court for the District of Minnesota. The Company
alleges that Harrah's breached the Technical Assistance and Consulting Agreement
and tortuously interfered with the Company's contractual and prospective
economic advantage associated with the Pokagon Band of Potowatomi Indians. The
suit further alleges that Harrah's withheld vital business information from the
Company. Harrah's has filed a motion to dismiss based on denial that Harrah's is
a proper party to the lawsuit and that the Technical Assistance and Consulting
Agreements do not create a partnership or Joint Venture relationship with the
Company. The Company filed its response to Harrah's Motion for Summary Judgment
in late December 1998. The Company plans to vigorously pursue its claims and
seeks a judgment against Harrah's plus interest and legal fees.
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The Company initiated a civil suit against Willard Smith and Monarch
Casino, Inc., (Monarch) on December 19, 1998, in the Circuit Court of Jackson,
Mississippi. The Company alleges that Mr. Smith and Monarch have breached the
terms of the Memorandum of Understanding, Amendment and Modification Agreement,
and Consulting Agreement by failing to provide the services required under the
terms of the agreements, breaching their obligations of good faith to the
Company, and by attempting to secure the termination of the Company's interest
in the Pokagon project. The suit further alleges that Mr. Smith has defaulted on
his obligations to pay rent and maintain the up-keep of the Company's
residential property located at 303 LaSalle Street, Ocean Springs, Mississippi.
The Company seeks a judgment against Monarch Casino, Inc. and Willard Smith,
plus interest and attorneys' fees for notes due and material breach of
agreements; removal of Mr. Smith from the rental property and punitive damages.
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, 1998.
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PART II
ITEM 5. MARKET PRICE FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information
The Company's common stock is traded on the NASDAQ National Market
System under the symbol "CSNR." In addition to the common stock, the Company has
publicly traded warrants, each entitling the holder to purchase one share of
common stock at an exercise price of $6.75 (the "Warrants"). The Warrants expire
on September 15, 1999. The Warrants trade under the symbol "CSNRW." The
following table sets forth, for the fiscal periods indicated, the high and low
closing prices per share and per warrant as reported by NASDAQ:
Common Stock Warrants
High Low High Low
FISCAL 1998
First Quarter $ 2.00 $ 1.06 $ 0.41 $ 0.09
Second Quarter 1.38 0.81 0.19 0.06
Third Quarter 1.19 0.69 0.13 0.06
Fourth Quarter 1.13 0.50 0.09 0.03
FISCAL 1997
First Quarter $ 2.23 $ 1.31 $ 0.28 $ 0.13
Second Quarter 2.45 1.38 0.25 0.13
Third Quarter 1.97 1.25 0.22 0.09
Fourth Quarter 2.19 1.19 0.44 0.06
The Warrants 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.
The Company has received two letters from NASD warning that if the
Company does not achieve minimum maintenance requirements under NASD rules the
Company's common stock will be delisted from the National Market System. Among
other things, the rules require that the publicly held shares have an aggregate
market capitalization of at least $5 million, and a minimum bid price per share
of $1. The Company satisfies neither requirement. The Company intends to request
a NASD hearing, and is actively planning and working to attain the minimum
maintenance standards. If the Company's Common Stock is delisted the Warrants
will also be delisted. Delisting of securities could have an adverse effect on
the common stock or the Warrants. If the Company's common stock is delisted from
the NASDAQ National Market System, the Company can seek listing on the NASDAQ
"Small Cap" market; however, the Company's common stock must also maintain a
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minimum bid price of $1 to satisfy the listing requirements for the Small Cap
market. If the $1 minimum bid price cannot be maintained, the Company's common
stock can trade on the OTC Bulletin Board. Such an occurrence could
significantly affect the marketability of the Company's common stock, and
subject it to additional requirements under the "Penny Stock" rules of the
Securities Exchange Act of 1934.
Holders
On November 1, 1998, there were approximately 308 record holders of the
common stock, and 83 record holders of the warrants. The Company estimates that
there are an additional 2,750 shareholders and 400 Warrant holders who own
shares or Warrants, respectively, in nominee or street name, at that date.
Sale of Unregistered Securities
On September 9, 1997, the Company sold $800,000 principal amount of 13%
convertible subordinated debentures. The Company redeemed $400,000 principal
($497,000 cash) on December 12, 1997, and $171,674 principal ($250,000 cash)
August 11, 1998. The balance of $228,326 will be paid in cash or stock in four
equal installments in January through April 1999.
Dividends
The Company has not declared or paid any cash dividend during the
reporting period and is unlikely to do so in foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
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.
CONSOLIDATED
The Company's revenues from operations were $3,305,396. Because the
Company carries its hospitality and entertainment assets as discontinued
operations, all of these revenues are attributable to the Company's gaming
operations; and because the Tunisia casino was not in operation in fiscal year
1997, there were no comparable revenues in that fiscal year.
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Continuing Operations
GAMING, TUNISIA
Revenue generated from October 18, 1997, the date of the Casino
opening, was $3,305,396 while operating expenses totaled $7,299,695 including a
corporate charge of $424,977, resulting in an operating loss of $3,994,299. The
loss was predominantly related to extensive write downs of pre-opening and
start-up expenses, which approximated $1.5 million, and significant operating
overhead expense incurred during post casino grand opening operations.
Management has implemented cost containment measures to decrease general and
administrative expenses as an overall percent of revenue. As a result, the
Company has reduced its labor expense by 23% from the first quarter compared to
the fourth quarter of fiscal 1998 and obtained a 20% reduction in rent expense
beginning November 1998.
GENERAL AND ADMINISTRATIVE
The Company's general and administrative expenses aggregated $2,606,544
in fiscal 1998 (not including a corporate charge to the gaming segment of
$424,977) compared to $2,158,811 in fiscal 1997. There were no such allocations
in 1997 as the two operating segments have been reflected as discontinued
operations. In total general and administrative expenses increased by $872,710.
Of this sum, $454,730 was payable to Karen Nelson Bell, the Manager of
the Country Tonite operation in Branson; Noreen Pollman, a director of the
Company; and Matthew Walker, a third party consultant. Legal expenses increased
$163,893 in 1998 over the costs in 1997 as a result of legal fees incurred in
connection with the sale of the Grand Hinckley Inn, costs incurred in the
proposed sale of the entertainment segment to On Stage, and litigation costs in
connection with the Gelb case, which was settled during the course of the year.
Accounting fees were $100,390 higher in 1998 than they were in 1997 as a result
of increased services provided in connection with the sale of the Grand Hinckley
Inn and the proposed sale of the entertainment segment to On Stage. Directors'
fees increased by almost $17,000 in fiscal 1998 as a result of the change in
policy with respect to the amortization of such fees.
INTEREST EXPENSE
Interest expense totaled $703,677 for fiscal 1998, compared to $242,290
for fiscal 1997. The increase of $461,387 is primarily due to the following:
$144,110 of interest expense on the $800,000 debenture repaid in June 1998
issued in September 1997; $215,872 of interest expense relating to the 13%
subordinated convertible debentures issued in September 1997 and $48,595 of
interest expense on the Palace Note as the debt was outstanding for all of 1998
as compared to 8 months in 1997.
OTHER
Interest income as of September 30, 1997 was $195,886 compared to
$206,195 for the same period in 1998.
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The Company accumulated $1.9 million dollars in deferred expenses
associated with its consulting relationship with Harrah's under its Technical
Assistance Agreement. Harrah's had entered into a Management Agreement with the
Pokagon Band of Potawatomi to build one or more casinos and under the Technical
Assistance Agreement, the Company would have received, upon commencement of
operations, approximately 21.6% of Harrah's management fee for its consulting
services. The Band announced it had terminated its Management Agreement with
Harrah's and therefore the Company has set up an impairment reserve for the
entire $1.9 million dollars.
The loss on gaming projects of $438,321 for fiscal 1997 consists
principally of the loss on the sale of the Company's interest in the Palace
Casino. The $791,900 impairment reserve represents the outstanding principal on
a note receivable due the Company from its former chairman. The individual's
ability to pay is not known and accordingly, the Company provided an impairment
reserve on the principal balance.
INCOME TAX BENEFIT
The Company recognized a $2,000,000 income tax benefit in fiscal 1998.
The benefit relates to the adjustment of the valuation allowance as it is now
more likely than not, that the Company will realize the deferred tax asset upon
the sale of its entertainment segment in fiscal 1999.
Discontinued Operations
ENTERTAINMENT
Country Tonite Theatre LLC
The Country Tonite Show in Pigeon Forge opened on March 21, 1997.
Revenues for fiscal 1998 totaled $3,330,777. Operating expenses including
project, general and administrative costs and depreciation totaled $4,033,185
(including $1,762,971 eliminated in consolidation) resulting in an operating
loss of $702,408 before the minority interest share of the loss ($280,963).
While CTT ticket sales increased from 21.9% of capacity in 1997, to 22.4% of
capacity in 1998, the average ticket price decreased from $16.67 in 1997 to
$15.57 in 1998, as a result of strong promotional sales at discounted ticket
prices. The Company is the operating manager and owns 60% of the CTT, LLC Joint
Venture, which has been sold to Burkhart Ventures effective December 31, 1998.
Country Tonite Production Show
Country Tonite Production show revenues totaled $2,037,669 in fiscal
1998, (including $1,762,971 eliminated in consolidation), a decrease of
$1,833,214 from 1997. Operating income decreased to $238,184 in fiscal 1998 from
$936,099 in fiscal l997 primarily as a result of the substantial reduction in
revenues. Operating expenses (including project, general and administrative
costs and depreciation) decreased from $2,934,785 in fiscal 1997 to $1,799,485
in fiscal 1998, or $1,135,300. This reduction is primarily a result of the
closing of the Aladdin Hotel in November 1997. Salaries and wages decreased
$917,023 and payroll taxes decreased $86,707. Other expenses decreased $124,793.
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Country Tonite Theatre
Fiscal 1998 revenue of $6,129,966 decreased $712,983 or 10.4%, from
fiscal 1997 revenues of $6,842,949. Paid attendance for the Country Tonite show
totaled 31% of capacity in 1998, compared to 38% of capacity in fiscal 1997.
Average ticket prices totaled $17.52 in fiscal 1998, compared to $15.43 in
fiscal 1997. While the average increased $2.09, the decrease in overall
occupancy resulted in a decline in revenues for Country Tonite Theatre. Through
cost containment efforts by Company management, operating expenses (including
project, general and administrative costs and depreciation) fell $231,203 or
5.2% to $4,195,850 in fiscal 1998, from $4,427,053 in fiscal 1997, which was the
result of cutbacks in the Golden Girls schedule. Operating income decreased
$481,780 or 19.9% to $1,934,116 in fiscal 1998, from $2,415,896 in fiscal 1997.
The Company entered into an Asset Purchase Agreement to sell
substantially all of the assets used in connection with the operation of the
Country Tonite Show to On Stage Entertainment, Inc. The closing is subject to,
among other things, On Stage's obtaining acceptable financing of the purchase
price and approval of the sales transaction by a majority of the shareholders of
On Stage and the Company. See "Item I. BUSINESS - Recent Developments"
HOSPITALITY
Grand Hinckley Inn
Revenues for fiscal 1998 total $2,255,037. Operating income decreased
to $809,601 in fiscal 1998 from $1,432,662 in fiscal 1997. The Company reported
a 12-month business operation in fiscal 1997 versus a 9-month business operation
in 1998 due to sale of the hotel on June 29, 1998 for $5.4 million.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased from $2,254,295 at September 30,
1997 to $1,151,925 at September 30, 1998. During fiscal 1998, the Company sold
its Grand Hinckley Inn for $5.4 million. In addition to funds used for expenses
incurred during business operations during fiscal 1998, the Company satisfied
$1.7 million in debt payments, paid for retirement of 184,050 shares of its
common stock and incurred one time pre-opening and start-up expenditures to
complete the Casino Caraibe project. Cash and cash equivalents does not reflect
any funds from the anticipated sale of the entertainment division.
On January 2, 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. The Company subsequently revised its January 2, 1998
resolution to reflect the purchase of up to 1.4 million shares of the Company's
common stock after the closing of the Grand Hinckley Inn purchase, of which it
has purchased 188,050 shares through October 30, 1998, for $190,859.48.
In the 13-month period ending October 31, 1999, the Company will be
required to repay or refinance obligations aggregating approximately $8,894,786
in principal amount (plus interest and premium). Three of the obligations,
aggregating approximately $1,669,749 in principal amount may be repaid by the
Company in cash or common stock. The largest obligation, approximating $7.2
million in principal amount, is secured by a mortgage on the Company's property
in Branson, Missouri. If the Company closes its sale transaction for certain of
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its entertainment division assets with On Stage, it will have the cash resources
to repay from the cash proceeds of the sale, the mortgage loan on the Branson
property. However, if the sale is not consummated, the Company will be obliged
to try to refinance the mortgage obligation. If the Company retires the mortgage
on or before May 1, 1999, the Company will be given a $300,000 discount.
Subject to its ability to refinance the Branson mortgage in the event
the On Stage transaction does not close, the Company expects that available 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 by the Company were $1,026,081 for the year ended
September 30, 1998 compared to $2,106,353 for the 1997 fiscal year. Capital
expenditures for 1998 consisted principally of purchases and expenditures for
the casino operations.
The Company has entered a Letter of Intent Agreement with a standstill
component to build a state of the art spring water bottling plant in
Bentonville, Arkansas. The agreement is comprised of the Company and Mark
McKinney, an entrepreneur. The Company retains a 60% interest in consideration
for investing $5 million in the bottling plant. The business will spend an
estimated $27 million on the facility, which will be equipped with
state-of-the-art bottle blow molding equipment, to be competitive with the
larger bottled water companies. The Company intends to produce and distribute
premium natural spring water taking advantage of location, efficiency, and
capacity of a natural spring source. At the same time the Company expects to
fill a void by meeting the demand for bottled water and at the lowest price in
the market today. Completion of the water bottling plant is contingent upon the
Company procuring $25 million in acceptable debt and equity financing.
SEASONALITY
The casino in Tunisia will 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.
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 that pertain to
fluctuations in foreign exchange rates and potential restrictions or costs
associated with the transfer of funds to the United States. The Company
currently does not hedge, nor has it purchased any foreign currency as a hedge,
and therefore is subject to currency exchange fluctuation risk.
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YEAR 2000 UPDATE
The "Year 2000 Issue" is whether the Company's computer systems will
properly recognize date sensitive information when the year changes to 2000, or
"00". Systems that do not properly recognize such information could generate
erroneous data or cause a system to fail. The Company has conducted preliminary
reviews of its computer systems and its purchased software programs (including
accounting software). Although the Company believes it will be required to
replace its accounting software and probably its related computer hardware, it
does not believe the Year 2000 Issue will pose any significant operational
problems for its systems, software, or non-information technology operations.
The Company has reviewed its accounting software; project information
systems; including its Easy Ticket Reservation System software (a system for
automated ticket reservation); Point of Sale system; and telecommunication
system. All software that is not Year 2000 compliant, where available from
supplier, will be replaced. Management is commencing the process of reviewing
replacement systems. Vendor software replacement and upgrades are scheduled to
be complete by September 30, 1999. In addition, the Company intends to make
similar reviews of the systems of potential acquisition candidates for any
financial or operational impact the Year 2000 Issue may pose.
Although the Company has not yet incurred any Year 2000 Issue costs, it
estimates that replacement of necessary accounting hardware and software, and
the related costs of conversion and transition will approximate $15,000 to
$20,000.
In addition, the Company has completed a thorough inspection of its
systems at the Branson, Missouri Theatre conducted by Easy Computer Systems,
Inc. (provider of ticket reservations software and support to theatres) and has
determined 15 personal computers will require upgrade for Year 2000 compliant
components. The approximate cost for the upgrade at Branson is estimated to be
less than $10,000. As of September 30, 1998 Shopline Computer Services evaluated
the Pigeon Forge Theatre and determined 24 personal computers will require
upgrade for Year 2000 compliant components. The approximately cost for the
upgrade is estimated to be approximately $10,000.
The only suppliers which the Company deems to be critical to its Year
2000 Issue are its outside payroll company and its financial institutions, all
of which have provided assurances of Year 2000 compliance. The Company does not
have any online or electronic dealings with any other vendor. Consequently,
although other vendors or suppliers could conceivably have difficulty beginning
in January, as long as the Company's own systems are satisfactory, the Company
does not anticipate any material disruption in its business. The Company
anticipates obtaining a printed statement of Company accounts from each of its
vendors as of December 31, 1999 as a double check on future accounting entries.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Due to the general uncertainty inherent in the Year 2000 problem,
resulting in part from the uncertainty of the Year 2000 readiness of third party
suppliers and customers, the Company is unable to determine at this time whether
the consequences of Year 2000 failures will have a material impact on Company's
operation. In a "worst case scenario," critical suppliers, despite their
22
<PAGE>
assurances to the contrary, will not be ready for the Year 2000, in which case,
electronic interfaces with such critical suppliers could result in failure of
the Company's systems, or difficulty in achieving accurate reconciliations with
such suppliers. Any such difficulties could be expensive and time consuming to
correct. The Company believes, at this time, that there should be minimal
interruptions in its normal operations due to Year 2000.
The Company is currently reviewing Year 2000 problems that may arise
with its operations in Tunisia. At this time a contingency plan to handle the
Year 2000 problem has not been established, however the Company does intend to
establish one, prior to the end of 1999.
NEW ACCOUNTING PRONOUNCEMENTS
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. Comprehensive income is
defined to include all changes in equity except those resulting from investments
by owners and distributions to owners. 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.
In April 1998, the Accounting Standard Executive Committee issued
Statement of Position ("SOP") 98-5 "Reporting on the Costs of Start-up
Activities." The SOP requires that all costs of start-up activities should be
expensed as incurred. The SOP is effective for years beginning after December
15, 1998. When the Company adopts this SOP, it is not expected to have a
material impact on the Company's financial statements.
In June 1998, the Financial Accounting Standard Board issued SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities." This
standard established accounting and reporting standards for derivatives and for
hedging contracts. This standard is effective for all fiscal quarters of all
fiscal years beginning after June 15, 1999. When the Company adopts this
statement, it is not expected to have a material impact on the Company's
financial statements or their presentation.
23
<PAGE>
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
All statements contained herein that are not historical facts are based
on current expectations. Management believes 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 as
it pertains to development and start up of the Bottled Water business; failure
by On Stage to obtain satisfactory financing underlying the purchase of CTE and
CRC of Branson; changes in travel patterns which could affect demand for the
Company's 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.
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. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is information as of September 30, 1998, 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 52, 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.
John W. Steiner, age 56, 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 38, was elected to serve as a director in 1997.
Dr. Murphy is a Chiropractic doctor who has maintained his own practice for more
than the past five years. Dr. Murphy serves as a trustee on the Board of Parker
College, as well as being its finance chairman. Additionally, Dr. Murphy is a
member of the American Chiropractic Association and 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 52, 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 served as President of Evans
Enterprise, a real estate brokerage business for more than the past five years.
Mr. Evans also acted as a consultant to Silverleaf Resorts and NACO. Mr. Evans
was a marketing employee of Country Tonite Theatre in Branson during 1995.
Further, Mr. Evans acted as a marketing consultant to Country Tonite Pigeon
Forge in 1996. From July 1997 to the present, Mr. Evans has acted as a
consultant to assist with the marketing and general management of Casino
Caraibe.
Noreen Pollman, age 50, has served as Secretary to the Company since
March 1995, and as a director since March 1995, and from 1987 to 1993. Ms.
Pollman was Vice President of Operations for each of the Company's operating
businesses with responsibility for the development and implementation of
operating budgets to February 1998, and now serves as a consultant to the
Company.
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
25
<PAGE>
and Chief Marketing Officer of the Company's former subsidiary Recreational
Property Management, Inc. from 1986 to 1987. He also previously served as Vice
President of Telecommunications.
Officers serve at the discretion of the Board of Directors.
The Company's outside directors (Messrs. Murphy, Ferrucci, Steiner and
Ms. Pollman) receive $10,000 per year for serving as directors. Additionally,
Messrs. Steiner, Evans and Ferrucci received $500 for each meeting which was
attended in person, as well as reimbursement of travel costs. Messrs. Steiner,
Ferrucci, Evans and Murphy receive an annual grant of Options to purchase 10,000
Shares, which are fully vested at the prevailing market price as of the date of
grant. The directors who serve as officers of the Company do not receive any
cash fees.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information concerning the annual and
long-term compensation earned by John J. Pilger, Noreen Pollman, and Robert J.
Allen, the Named Executive Officers (as defined) for services rendered in all
capacities to the Company for the fiscal years ended September 30, 1998, 1997
and 1996.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY COMPENSATION TABLE
Other Restricted Securities
Annual Stock Underlying All Other
Fiscal Salary Bonus Comp. Awards Options Compensation
Name and Principal Position (1) Year ($) ($) ($) ($) (#) ($)
- ------------------------------- ---- --- --- --- --- --- ---
John J. Pilger (5) . . . . . . . . 1998 464,747(2) -0- -0- -0- -0- -0-
Chief Executive Officer 1997 255,763(4) -0- -0- -0- 195,000 -0-
1996 203,435(3) -0- -0- -0- 20,000 -0-
Noreen Pollman . . . . . . . . . . 1998 126,233 81,530 -0- -0- -0- -0-
Executive Vice President, 1997 128,583 20,000 -0- -0- 90,000 -0-
Operations 1996 129,055(6) -0- -0- -0- 20,000 -0-
Robert J. Allen . . . . . . . . . 1998 119,412 -0- -0- -0- -0- -0-
Executive Vice President, 1997 116,583 -0- -0- -0- 90,000 -0-
Entertainment 1996 116,507(7) -0- -0- -0- 20,000 -0-
- -------------------------
<FN>
1) Under Securities and Exchange Commission rules, the "Named Executive
Officers" include (i) each person who served as Chief Executive Officer
during fiscal 1998, (ii) each person who (a) served as an executive officer
at September 30, 1998, (b) was among the four most highly paid executive
officers of the Company, not including the Chief Executive Officer, during
fiscal 1998, and (c) earned total annual salary and bonus compensation in
fiscal 1998, 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, 1998.
2) Includes contractual compensation and $125,000 fee paid for services
rendered for CRC Tunisia.
26
<PAGE>
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 $12,942 in unused vacation time.
5) During fiscal 1998, 1997 and 1996, 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.
6) Includes $5,499 of wages earned in 1995 paid in 1996.
7) Includes $5,001 of wages earned in 1995 paid in 1996.
</FN>
</TABLE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 30, 1998, 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. All Officers and Directors have
an address of 707 Bienville Boulevard, Ocean Springs, Mississippi 39564.
<TABLE>
<CAPTION>
<S> <C> <C>
Number of Shares Percentage of
Name and Address of Beneficial Owner Beneficially Owned (1) (10) Outstanding Shares
John J. Pilger .................................. 1,026,768(2) 10.60%
Noreen Pollman .................................. 125,000(3) 1.30%
John W. Steiner.................................. 76,000(4) 0.80%
Dr. Timothy Murphy............................... 15,781(5) 0.17%
Dennis Evans .................................... 50,100(6) 0.53%
Robert J. Allen.................................. 125,000(7) 1.30%
John Ferrucci.................................... 40,000(8) 0.42%
Kevin M. Kean ................................... 1,400,944(9) 14.65%
All Directors and Executive Officers as a group (8 Persons) 1,458,649 14.53%
- -------------------------
<FN>
1) Shares not outstanding but deemed beneficially owned by virtue of the right
of a person or 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 170,000 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 9 below.
With such shares, Mr. Pilger has the right to vote a total of 2,362,712
outstanding shares or 24.9% of the shares outstanding. Of the shares
reflected above 11,000 are owned by Mr. Pilger's wife and 11,000 shares are
27
<PAGE>
owned by minor children of Mr. Pilger. The above table does not reflect an
additional 65,000 options which were originally granted April 5, 1997, but
do not vest until April 7, 1999.
3) Includes 119,000 shares deemed beneficially owned pursuant to options,
which are immediately exercisable. The above table does not reflect an
additional 30,000 options which were originally granted April 3, 1997, but
do not best until April 7, 1999.
4) Includes 70,000 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 20,000 shares deemed beneficially owned pursuant to options, which
are immediately exercisable.
7) Includes 119,000 shares deemed beneficially owned pursuant to options,
which are immediately exercisable. The above table does not reflect an
additional 30,000 options which were originally granted April 3, 1997, but
do not vest until April 7, 1999.
8) Includes 40,000 shares deemed beneficially owned pursuant to options, which
is immediately exercisable.
9) Includes 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.
10) The stock table does not reflect shares of stock owned by Officers who
participated in the Company 401(k) plan which began July 1, 1997. Matching
contributions of Company stock issued by the Company under the plan to its
Officers through September 30, 1998, total 6,093 shares.
</FN>
</TABLE>
OPTION GRANTS AND EXERCISES
The following table sets forth information with respect to stock
options originally granted to the Named Executive Officers during fiscal 1998.
<TABLE>
<CAPTION>
OPTION GRANTS IN FISCAL 1998(1)
NUMBER OF % OF TOTAL
SECURITIES OPTIONS GRANTED EXERCISE
UNDERLYING TO EMPLOYEES PRICE EXPIRATION
NAME OPTIONS GRANTED (#) IN FISCAL 1998 ($/SHARE) DATE
- ----------------------------- ---------------------------- ------------------------ ------------------- ------------------
<S> <C> <C> <C> <C>
John J. Pilger 195,000(1) 46.4% 1.03 4/7/2008
Noreen Pollman 90,000(1) 21.4% .9375 4/7/2008
Robert J. Allen 90,000(1) 21.4% .9375 4/7/2008
28
<PAGE>
1) The Executives' options were originally granted under the Company's 1997
Long-Term Incentive and Stock Option Plan and implemented on April 3, 1997,
but options were cancelled and reissued this April 7, 1998 with 2/3 options
vesting immediately and the balance to vest April 7, 1999.
</TABLE>
The following Table sets forth with respect to the Named Executive
Officers Information concerning the exercise of stock options during fiscal
1998, and unexercised options held as of the end of fiscal 1998. The Company has
never granted stock appreciation rights.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES
AND FISCAL 1998 YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY
ACQUIRED ON VALUE OPTIONS AT 9/30/98 (#) OPTIONS AT 9/30/98 ($)
----------------------------------------- ----------------------------------------
EXERCISE REALIZED
NAME (#) ($) UNEXERCISABLE EXERCISABLE UNEXERCISABLE EXERCISABLE
- ------------------- ------------ --------------- --------------------- ------------------- ---------------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
John J. Pilger -0- -0- 65,000 170,000 -0- -0-
Noreen Pollman -0- -0- 30,000 119,000 -0- -0-
Robert J. Allen -0- -0- 30,000 119,000 -0- -0-
</TABLE>
EMPLOYMENT AGREEMENTS
The Company entered into an 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. This agreement was amended April 3, 1998, to
extend the expiration date from July 19, 1999, to September 30, 1999, to
correspond to the Company's fiscal year. Additionally, the agreement provides
that if either party wishes to terminate the agreement a written notice of
intent must be delivered to the other party one year prior to the employment
expiration date and in the absence of such notice the agreement renews
automatically from year to year.
The Company entered into a Supplementary Employment Agreement with John
J. Pilger which provides Mr. Pilger certain benefits upon a Change of Control
Event, which is defined therein as: (a) the acquisition after the date of this
agreement by an individual, entity or group (within the meaning of Section 13(d)
or 14(d)(2) of the Securities Exchange Act of 1934, as amended, (a "Person") of
beneficial ownership of 20% or more of either (i) the issued and outstanding
shares of common stock of the Company or (ii) the combined voting power of the
then outstanding voting securities of the Company entitled to vote generally in
the election of directors; or (b) if any two or more members within a class of
the staggered Board of seven or more directors, as constituted on the date
hereof, are removed without the express approval or consent of the CEO and
Chairman of the Board, of if two or more members of the Board assume office
within any period of eighteen months after one or more contested elections; or
(c) A hostile reorganization, merger or consolidation which results from either
an actual or threatened election contest or actual or threatened solicitation of
proxies; or (d) A complete liquidation or dissolution of the Company, or the
sale or other disposition of all or substantially all of the assets of the
29
<PAGE>
Company, which liquidation, sale or dissolution occurs as a result of either
actual or threatened solicitation of proxies or consents by or on behalf of
persons other than the incumbent Board. The benefits which inure to Mr. Pilger
upon a voluntary termination under a Change of Control include: 2.99 times his
annual average salary and bonuses plus all taxes, including income taxes and any
excise tax which may be imposed.
The Company entered into an agreement with Robert J. Allen where upon a
Change of Control Event, which is substantially similar to that defined in Mr.
Pilger's Supplementary Employment Agreement and set out above, Mr. Allen has the
right to receive upon termination 2.99 times his average annual salary including
bonuses payable within 30 days plus other benefits.
Other
On October 16, 1997, John J. Pilger received a $150,000 payment from
the Company for services rendered to CRC Tunisia during fiscal 1998, and
$125,000 in October 1998, for services to be rendered in Fiscal 1999. Under a
Board approved resolution Mr. Pilger will receive an additional $125,000
compensation for fiscal 2000. Under Tunisian law, John J. Pilger is required to
sign, in his personal capacity, all documents necessary for the Company to
conduct operations in Tunisia. These payments are in consideration for the
additional risk of personal liability assumed by Mr. Pilger under Tunisian law.
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's officers, directors, and certain shareholders to file
reports of ownership and changes in ownership of the Common Stock with the
Securities and Exchange Commission. To the Company's knowledge, based on a
review of the copies of such reports furnished to the Company and written
representations that no other reports were required, during the Company's fiscal
year ended September 30, 1998, all Section 16(a) filing requirements were
complied with and filed in a timely fashion.
The Company issued a convertible debenture for $1.5 million, which is
due January 31, 1999, payable in cash or common stock, at Company's discretion.
If the Company elects to satisfy the debenture with common stock at the then
current fair market value, such issuance may constitute, if over 20% of the
Company's total shares outstanding, a change of control which would require
shareholder consent. Additionally, the Company may elect, at its discretion, to
satisfy the balance of outstanding debenture, in cash or common stock, which
totals $228,326 in four equal installment January through April 1999. Using the
five day trailing average closing bid price for the Company common stock as of
January 4, 1999, with a 17% discount would result in a stock issuance of 611,067
shares.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At September 30, 1998, John J. Pilger was indebted to the Company in
the amount of $449,461 including principal and interest. Such obligations accrue
interest at rates between 7% and 9.5% per year, mature from December 31, 1998,
to December 31, 2001. Mr. Pilger is current on his obligations to the Company.
The original loans include $150,000 advanced for the purchase by Mr. Pilger of a
Mississippi residence in 1994 and $299,461 in other advances made to Mr. Pilger
from 1994 to present. These transactions were done on terms as favorable to the
Company as would have been available in arms' length transactions in the
marketplace. These notes are required to be retired ratably over three years
beginning January 1, 1999.
30
<PAGE>
As of September 30, 1998, Noreen Pollman has paid the Company in full
for a loan which had an outstanding balance of $83,278 by applying a prorata
share of money earned under terms of a Consulting Agreement during fiscal 1998,
to satisfy the debt in full. The loan made to Ms. Pollman was on terms as
favorable to the Company as would have been available in an arms' length
transaction in the marketplace.
Through September 30, 1998, the Company has advanced $10,677 including
interest to Robert J. Allen, which note maintains an outstanding balance of
$7,500 plus interest as of September 30, 1998. The loan made to Mr. Allen was on
terms as favorable to the Company as would have been available in an arms'
length transaction in the marketplace.
On December 31, 1997, the Company's former chairman (Kevin Kean)
defaulted on repaying $1,232,000 plus interest due the Company. The Company
filed suit against Mr. Kean which resulted in a settlement agreement. Under the
agreement, 220,000 shares of the Company's common stock has been cancelled along
with the 150,000 shares currently pledged to the Company, at the market price of
$1.19 per share. The Company and Mr. Kean entered into a new note agreement. The
new note in the amount of $1,196,885 bears interest at 7% per annum and matures
on January 15, 2001. The note is collateralized by Mr. Kean'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. Mr. Kean has also granted the Chairman of the Company an
irrevocable proxy for 1,330,944 shares of the Company's common stock owned by
Mr. Kean, but pledged to a commercial bank.
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 provided the tenant the opportunity to purchase this
residence contingent upon the tenant, Mr. Smith, fulfilling certain obligations
due the Company. The Company has initiated a legal action against Mr. Smith for
non-performance of his obligations and breaches of his contractual obligations
as set out in under agreements with the Company. See "Item 3. Legal
Proceedings."
The Board of Directors authorized the Company to acquire from Mr.
Pilger two lots which are contiguous to residence at 303 LaSalle Court, Ocean
Springs, Mississippi, an asset of the Company, on August 11, 1998. In
consideration for Mr. Pilger's transfer of ownership, he was given consideration
equal to the land value of $86,000, of which $43,000 was paid in cash and
$43,000 was applied to Mr. Pilger's loans due to the Company.
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.
31
<PAGE>
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 therefor, 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 Mr. 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 to 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.
Relationship with Consultants
The Company has agreed to pay 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 collateralized his $1,196,885 note to
the Company with his right to 5% of such consulting fee income.
The Company has executed a Consulting Agreement with Monarch Casinos,
Inc. ("Monarch") which was subsequently assigned to Willard E. Smith, requiring
the Company to: (i) pay monthly fees commencing (retroactively) January 1995, at
various rates from $3,000 to $14,250 per month; (ii) loan an aggregate of
$250,000 (all of which has been advanced as of September 30, 1997), which may be
forgiven in part or in whole upon the occurrence of certain events; (iii)
reimburse pre-approved travel expenses; and (iv) lease to Mr. Smith the
Company's Ocean Springs, Mississippi residence at a below market lease rate. The
Consulting Agreement extends for the duration of the Management and Development
Agreement between the Pokagon Indians and an affiliate of Harrah's Casinos,
unless canceled earlier based on certain non-performance provisions. In
addition, the Company issued an aggregate of 100,000 registered shares of Common
Stock during fiscal 1995, which were subsequently sold. An additional 400,000
shares of Common Stock may be granted upon the groundbreaking for the first
Pokagon casino, subject to certain conditions, and 1,500,000 shares of Common
Stock may be granted upon the opening of a Pokagon casino. Monarch has granted
John J. Pilger an irrevocable proxy with regard to all shares owned by Monarch.
Pilger has assigned this proxy to the Company's Board of Directors. The Company
32
<PAGE>
cancelled Willard Smith's Consulting Agreement as per contract due to certain
criteria set out in contract not being met by September 1997. No additional fees
were paid to Mr. Smith during Fiscal 1998. The Company initiated a suit against
Mr. Smith in December 1998, for breach of contract, default of rental payment
and for collection of note due to the Company by Mr. Smith and Monarch Casinos,
Inc. See "Item 3. Legal Proceedings."
Ms. Pollman terminated her employment relationship in February 1998,
and entered into a Consulting Agreement for a two-year term to provide business
and consulting services to the Company. Ms. Pollman will continue to act as
Secretary of Company with responsibility for maintaining the Company's books and
records. The Consulting Agreement anticipates Ms. Pollman will work
approximately 25 hours per week at an hourly rate of $67.00, thus reducing the
Company's long term out-of-pocket expenses associated with Ms. Pollman's salary.
The Board approved agreement features Change of Control provisions where upon
termination of this agreement Ms. Pollman will receive 2.99 times her average
annual compensation which moneys will be payable in thirty days. Additionally,
this agreement provides for a one-time bonus of up to $156,000 in stock or cash
payable in full no later than December 31, 1999.
The Company has a consulting relationship with Dennis Evans, who serves
on the Board of Directors. Mr. Evans acts as a marketing consultant to Casino
Caraibe, and he has agreed to live in Tunisia from August 1997, through April
1999, in order to develop and initiate marketing programs and group junket
business for the benefit of Casino Caraibe. Mr. Evans receives $10,000 monthly
and 2,973 Tunisian dinars ($2,703 US dollar equivalent) monthly during his
consulting term. Mr. Evans is provided housing accommodations by the Company
while in Tunisia.
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.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The Exhibits to this Report are listed on pages 33-40 hereof.
(b) Current Reports on Form 8-K for the quarter ended September 30,
1998:
1) Form 8-K filed on July 16, 1998, Financial Statements.
Reference sale of Grand Hinckley Inn on June 30, 1998.
33
<PAGE>
2) Form 8-K filed on August 24, 1998, 1998, Other Events. The
Company accepted the resignation of the Chief Financial
Officer, effective August 17, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
DATE SIGNATURE AND TITLE
_____________________ s/ John J. Pilger
John J. Pilger, Chief Executive Officer,
President and Chairman of the Board of
Directors and Chief Financial and
Accounting Officer
_____________________ s/ Noreen Pollman
Noreen Pollman, Secretary
_____________________ 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/ John W. Steiner
John W. Steiner, Director
_____________________ s/ John Ferrucci
John Ferrucci, Director
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 Form of $300,000 Convertible Debenture between the Company and G.P.S. Fund,
Ltd., due September 10, 1998 (7)
4.2 Form of $500,000 Convertible Debenture, between the Company and Gifford
Fund, Ltd., due September 9, 1998 (7)
4.3 Form of Registration Rights Agreement, between the Company and Investor,
dated August 29, 1997 (7)
4.4 Form of Debenture Subscription Agreement, between the Company and
Subscriber, dated August 29, 1997 (7)
4.5 Common Stock Purchase Warrant (The Gifford Fund, Ltd.), between the Company
and Gifford Fund, Ltd., dated September 1997 (7)
4.6 Common Stock Purchase Warrant (G.P.S. Fund, Ltd.), between the Company and
G.P.S. Fund, Ltd. (7)
4.7 Common Stock Purchase Warrant (Joseph B. LaRocco), between the Company and
Joseph B. LaRocca, dated September, 1997 (7)
4.8 Common Stock Purchase Warrant (International Holding Company, Ltd.), between
the Company and International Holding Company, Ltd., dated September 1997 (7)
4.9 $1,500,000 6% Cumulative Convertible Debenture, between the Company and
Maritime Group, Ltd., dated January 31, 1997 (8)
4.10 Amendment to 13% Convertible Debentures Due September 9, 1998, and
September 10, 1998, between the Company, G.P.S. Fund, Ltd., and Gifford Fund,
Ltd. (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)
35
<PAGE>
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)
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)
36
<PAGE>
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 dated 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)
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)
37
<PAGE>
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)
38
<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)
39
<PAGE>
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)
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, between the Company and Lyle Berman Family
General Partnership, dated August 29, 1997 (7)
10.68 Stock Pledge Agreement, between the Company and the Lyle Berman Family
General Partnership, dated August 29, 1997 (7)
40
<PAGE>
10.69 Mutual Release Agreement, between the Company, Casino Building
Corporation, and the Lyle Berman Family General Partnership, dated August 29,
1997 (7)
10.70 $1,000,000 SeaMar Ventures, LLC Loan Agreement, between the Company and
SeaMar Ventures LLC, dated August 29, 1997 (7)
10.71 $1,000,000 Term Note, between the Company and SeaMar Ventures LLC, dated
August 29, 1997 (7)
10.72 Guaranty Agreement, between the Company and SeaMar Ventures LLC, dated
August 29, 1997 (7)
10.73 Matt Walker Consulting Agreement, between the Company and Matt Walker,
dated September 29, 1997 (7)
10.74 Tunisia Casino License (7)
10.75 Agreement with Robert and Lawana Low (8)
10.76 Lease for 707 Bienville (8)
10.77 Kevin Kean Settlement Agreement (8)
10.91 Employment Agreement (9)
10.92 Amendment to Employment Agreement (9)
10.93 Asset Purchase Agreement by and among On Stage Entertainment, Inc., Casino
Resource Corporation, Country Tonite Enterprises, Inc., and CRC of Branson,
Inc., dated September 21, 1998, relating to the sale of certain of the assets of
the entertainment division of Casino Resource Corporation, including the theatre
in Branson Missouri, and the Country Tonite Show (10)
10.94 Asset Purchase Agreement by and among Corporate Commission of the Mille
Lacs Band of Ojibwe Indians and Casino Resource Corporation and Casino Building
Corporation, dated June 29, 1998 relating to the sale of Grand Hinckley Inn
hotel property to the Mille Lacs Band of Ojibwe Indians for $5.4 million dollars
(10)
10.95 Burkhart Agreement by and among Burkhart Ventures, LLC and Casino Resource
Corporation and Casino Resource Corporation of Tennessee executed this agreement
November 4, 1998, which terminated the Company's 60% Joint Venture ownership
interest in CTT, LLC December 31, 1998 (10)
10.96 Extension of Promissory Note Maturity Date between Ahab of the Ozarks,
Inc. and Casino Resource Corporation and CRC of Branson, Inc. dated December 22,
1998 extending maturity date of note with outstanding principal balance of
approximately $7.1 million dollars from April 1, 1999 to October 1, 1999 (10)
41
<PAGE>
10.97 Consulting Agreement, between the Company and Noreen Pollman, dated
February 15, 1998 (10)
10.98 Robert J. Allen Agreement, between the Company and Robert J. Allen, dated
April 3, 1998 (10)
10.99 John J. Pilger Executive Employment Agreement Golden Parachute, between
the Company and John J. Pilger, dated March 9, 1998 (10)
10.100 Amendment to Employment Agreement, between the Company and John J.
Pilger, dated April 3, 1998 (10)
21.1 List of Subsidiaries of Registrant (8)
27.1 Financial Data Schedule
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.
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) Incorporated by reference to the Company's 10-KSB, as amended for fiscal
year ended September 30, 1997, filed on January 20, 1998.
9) Incorporated by reference to the Company's 10-QSB, filed on May 15, 1998.
10) Filed Herewith
42
<PAGE>
CASINO RESOURCE CORPORATION AND SUBSIDIARIES
Index to Financial Statements
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-26
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, 1998 and 1997, 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 amount 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.
As more fully discussed in Note 2, during 1998, the Company discontinued its
hospitality and entertainment segments and has sold or plans to sell the assets
related thereto. Historically, assets and operations of the hospitality and
entertainment segments have represented a substantial portion of the Company's
total assets and results of operations.
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, 1998 and 1997, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Chicago, Illinois
December 17, 1998
F-2
<PAGE>
<TABLE>
<CAPTION>
Casino Resource Corporation and Subsidiaries
Consolidated Balance Sheets
September 30, 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 1,151,925 $ 2,254,295
Accounts receivable - trade and other 108,183 73,228
Inventory 36,431 12,152
Prepaid expenses (Note 3) 59,013 804,899
Deferred tax asset (Note 12) 2,000,000 -
Net assets held for sale - entertainment (Note 2) 2,384,615 3,812,250
Net assets held for sale - hospitality (Note 2) - 3,070,662
- --------------------------------------------------------------------------------------------------------------------
Total Current Assets 5,740,167 10,027,486
- --------------------------------------------------------------------------------------------------------------------
Property and Equipment, less accumulated depreciation and 2,663,107 2,279,716
amortization (Note 5)
- --------------------------------------------------------------------------------------------------------------------
Noncurrent Assets
Deferred development costs (Note 6) - 1,229,959
Notes and advances receivable - related parties, net of allowance 473,891 753,988
for uncollectibles of $239,414 in 1998 and $189,121 in 1997 (Note 4)
Note receivable, Palace Casino 242,766 221,073
Preopening costs, less accumulated amortization of $1,568,954 in - 1,164,458
1998 and $0 in 1997 (Note 1)
Other assets - net (Note 7) 24,201 831,162
- --------------------------------------------------------------------------------------------------------------------
Total Noncurrent Assets 740,858 4,200,640
- --------------------------------------------------------------------------------------------------------------------
$ 9,144,132 $ 16,507,842
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
Casino Resource Corporation and Subsidiaries
Consolidated Balance Sheets
<S> <C> <C>
September 30, 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 732,984 $ 1,125,534
Subordinated convertible debentures (Note 9) - 321,735
Current maturities of long-term debt (Note 10) 188,344 374,329
Accrued expenses and other liabilities (Note 8) 1,412,407 1,220,155
- ----------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 2,333,735 3,041,753
- ----------------------------------------------------------------------------------------------------------------------
Long-Term Liabilities
Long-term debt, less current maturities (Note 10) 2,481,405 3,379,204
Subordinated convertible debentures (Note 9) 228,326 321,735
Deferred rent (Note 11) - 178,620
- ----------------------------------------------------------------------------------------------------------------------
Total Long-Term Liabilities 2,709,731 3,879,559
- ----------------------------------------------------------------------------------------------------------------------
Total Liabilities 5,043,466 6,921,312
- ----------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 1, 11, 16, 17, 18 and 19)
Stockholders' Equity (Notes 13, 14 and 15)
Preferred stock, 8% cumulative; $.01 par value; authorized - -
5,000,000 shares; none issued
Common stock, $.01 par value; authorized 30,000,000 shares; 94,893 96,734
9,489,314 and 9,673,364 shares issued and outstanding in 1998 and 1997,
respectively
Additional paid-in capital 22,630,909 22,793,110
Cumulative translation adjustment (310,000) -
Deficit (18,315,136) (13,303,314)
- ----------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 4,100,666 9,586,530
- ----------------------------------------------------------------------------------------------------------------------
$ 9,144,132 $ 16,507,842
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
Casino Resource Corporation and Subsidiaries
Consolidated Statements of Operations
<S> <C> <C>
Year ended September 30, 1998 1997
- --------------------------------------------------------------------------------------------------------------------
Revenue
Gaming $ 3,305,396 $ -
- --------------------------------------------------------------------------------------------------------------------
Costs and Expenses
Operating costs - gaming 7,299,695 -
General and administrative 2,606,544 2,158,811
Other income - (156,196)
Interest expense - net of interest income of $206,195 and $195,886 497,482 46,404
in 1998 and 1997, respectively
Allowance for impaired asset (Note 6) 1,909,959 -
Loss on abandonment of gaming projects - net (Note 1) - 438,321
Allowance for impaired receivable (Note 19) - 791,900
- --------------------------------------------------------------------------------------------------------------------
Total costs and expenses 12,313,680 3,279,240
- --------------------------------------------------------------------------------------------------------------------
Loss from continuing operations before income tax benefit (9,008,284) (3,279,240)
Income tax benefit (Note 12) 2,000,000 -
- --------------------------------------------------------------------------------------------------------------------
Loss from continuing operations (7,008,284) (3,279,240)
Income from discontinued operations - entertainment (Note 2) 824,794 2,132,876
Income from discontinued operations - hospitality (Note 2) 623,493 1,155,296
Gain on sale of discontinued operations - hospitality (Note 2) 548,175 -
- --------------------------------------------------------------------------------------------------------------------
Net (Loss) Income $ (5,011,822) $ 8,932
- --------------------------------------------------------------------------------------------------------------------
Basic and Fully Diluted Income (Loss) Per Common and Common
Share
Continuing operations $ (0.73) $ (0.33)
Discontinued operations 0.21 0.33
- --------------------------------------------------------------------------------------------------------------------
Net (Loss) Income $ (0.52) $ 0.00
- --------------------------------------------------------------------------------------------------------------------
Weighted Average Number of Common Shares Outstanding 9,616,155 10,015,873
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Casino Resource Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
Additional Cumulative Notes
Common Stock Paid-in Translation Receivable -
Shares Amount Capital Adjustment Common Stock Deficit
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1996 9,761,803 $97,618 $22,671,175 $ -- $ (1,232,000) $(13,312,246)
Issuance of common stock - conversion of debentures 281,561 2,816 352,299 -- -- --
and payment of accrued interest
Cancellation of common stock and receivable impairment (370,000) (3,700) (436,400) -- 1,232,000 --
reserve (Note 19)
Debt discount relating to 13% convertible debentures -- -- 206,036 -- -- --
Net income -- -- -- -- -- 8,932
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997 9,673,364 96,734 22,793,110 -- -- (13,303,314)
Repurchase and cancellation of common stock (184,050) (1,841) (166,701) -- -- --
Cumulative translation adjustment -- -- -- (310,000) -- --
Other -- -- 4,500 -- -- --
Net loss -- -- -- -- -- (5,011,822)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 9,489,314 $94,893 $22,630,909 $(310,000) $ -- $(18,315,136)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
Casino Resource Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Year ended September 30, 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net loss $ (7,008,284) $ (3,279,240)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation 642,690 44,774
Amortization 1,771,678 5,351
Minority interest in net loss of a consolidated subsidiary (280,963) (341,206)
Deferred tax asset (2,000,000) -
Abandonment cost - gaming ventures - 438,321
Discount upon conversion of convertible debentures 212,315 243,226
Reserve for impaired asset 1,909,959 791,900
Gain on sale of The Hinckley Hotel (548,175) -
Accretion of note receivable interest (21,693) (14,461)
Changes in assets and liabilities
Accounts receivable - trade and other (34,955) 52,617
Inventory (24,279) (12,152)
Prepaid expenses 745,886 (268,883)
Other assets 4,237 11,030
Accounts payable (392,550) (47,915)
Accrued expenses and other liabilities 192,252 278,253
Deferred rent (178,620) 178,620
- --------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (5,010,502) (1,919,765)
- --------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Proceeds from sale of the Hinckley Hotel 2,029,241 -
Proceeds from sale of Palace Casino - 829,381
Decrease in restricted cash - 338,602
Increase in deferred development costs - (202,722)
Refund of deferred development costs - 405,655
Purchase of property and equipment (1,026,081) (2,106,353)
Decrease (increase) in due from related parties 200,097 (197,093)
Increase in preopening costs and other (404,496) (1,077,128)
Proceeds from minority interest in a consolidated subsidiary - 280,000
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 798,761 (1,729,658)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
Casino Resource Corporation and Subsidiaries
Consolidated Statements of Cash Flows
<S> <C> <C>
Cash Flows From Financing Activities
Payments on line-of-credit borrowings $ - $ (589,410)
Proceeds from long-term debt - 2,959,470
Payments on long-term debt (1,711,243) (95,714)
Payment of loan costs - (93,000)
Repurchase of common stock (168,542) -
Warrant expense 4,500 -
- --------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (1,875,285) 2,181,346
- --------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash (29,037) -
Cash Provided by Discontinued Operations - Entertainment 2,252,429 1,785,196
Cash Provided by Discontinued Operations - Hospitality 2,761,264 1,206,798
- --------------------------------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents (1,102,370) 1,523,917
Cash and Cash Equivalents, at beginning of year 2,254,295 730,378
- --------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, at end of year $ 1,151,925 $ 2,254,295
- --------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash paid (received) during the year for
Interest $ 632,783 $ 172,769
Income taxes (8,047) 25,908
Supplemental Disclosures of Noncash Investing and Financing
Activities
Conversion of subordinated convertible debentures and payment of $ - $ 355,115
accrued interest
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
</TABLE>
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
gaming business. The Company leases and
operates a casino in Tunisia, which opened
on October 18, 1997, through its 85% owned
subsidiary (CRC of Tunisia S.A.).
Prior to 1998, the Company operated in two
other business segments: hospitality and
entertainment. During 1998, these operations
were discontinued as described below and in
Note 2.
Plans were adopted to discontinue the
entertainment segment. The Company entered
into an asset purchase agreement to sell
substantially all the assets used in
connection with the operations and
production of the Country Tonite Theater in
Branson, Missouri and the production show,
Country Tonite Enterprises.
Also the Company sold its 60% interest in
the joint venture, Country Tonite Theater,
LLC in Pigeon Forge, Tennessee for $20,000
to the 40% owner. The sale is effective as
of December 31, 1998.
In addition to the gaming operations, the
Company made plans to enter the spring water
bottling business. To that end, the Company
entered into a Letter of Intent with a
standstill component with an individual to
build a state of the art spring water
bottling plant. If the transaction is
completed, the Company will receive 60% of
the equity in the venture in consideration
for investing a minimum of $5 million. The
parties expect to spend $27 million on the
facility. The agreement is contingent on (i)
completion by the Company of a full legal
and business due diligence examination and
(ii) obtaining debt financing in the amount
of not less than $25 million.
BASIS OF
PRESENTATION
The accompanying consolidated financial
statements include the accounts of Casino
Resource Corporation and its majority and
wholly owned subsidiaries. All significant
intercompany balances and transactions have
been eliminated. The Company has recognized
100% of the loss of CRC of Tunisia, S.A.,
its 85% owned subsidiary for 1998 and 1997
because the loss has exceeded the minority
interest's investment in the subsidiary.
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
EQUIVALENTS
For purposes of the consolidated statements
of cash flows, cash equivalents consist of
short-term investments having an original
F-9
<PAGE>
maturity of three months or less. Carrying
amounts approximate fair value because of
the short-term maturity of the investments.
CONCENTRATIONS
OF CREDIT RISK
Financial instruments that potentially
subject the 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 $88,134 in 1998 and $1,106 in
1997.
INVENTORY
Inventory, consisting principally of
merchandise and concessions, is stated at
the lower of cost (first-in, first-out) or
market.
PROPERTY AND
EQUIPMENT
Property and equipment are stated at cost.
For 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 3 - 15 years
Office equipment 5 - 6 years
Other 5 years
COST IN EXCESS
OF FAIR VALUE OF
ASSETS ACQUIRED
Cost in excess of fair value of assets
acquired is amortized using the
straight-line method over fifteen years.
DEFERRED
DEVELOPMENT
COSTS Deferred development costs consist of
external costs incurred in the evaluation of
potential ventures. The costs are expensed
if a determination is made to abandon the
project. Losses related to impairment and
abandonment totaled $1,909,959 and $438,321
in the years ended September 30, 1998 and
1997, respectively.
PREOPENING
COSTS Preopening costs consist primarily of costs
incurred to establish operations at the
casino in Tunisia. The preopening costs of
the casino were amortized over a one-year
period beginning in October 1997 and are
fully amortized at September 30, 1998.
DEFERRED
CHARGES Deferred charges consist of loan and
convertible debt origination fees and
organization expenses. The deferred charges
are amortized on the straight-line method
over the estimated useful lives and are
fully amortized at September 30, 1998.
F-10
<PAGE>
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."
TAXES ON INCOME Income taxes are accounted for under the
asset and liability method. Deferred income
taxes are recognized for the tax
consequences in future years of differences
between the tax basis of assets and
liabilities and their financial reporting
amounts at each year end based on enacted
tax laws and statutory tax rates applicable
to the periods in which the differences are
expected to affect taxable earnings.
Valuation allowances are established when
necessary to reduce deferred tax assets to
the amount more likely than not to be
realized. Income tax expense is the total of
tax payable for the period and the change
during the period in deferred tax assets and
liabilities.
NET LOSS PER
SHARE In fiscal 1998, the Company adopted the
provisions of Statement of Financial
Accounting Standards No. 128 "Earnings Per
Share". Statement No. 128 replaces the
previously reported primary and
fully-diluted earnings per share with basic
and diluted earnings per share. Unlike
primary earnings per share, basic earnings
per share excludes any dilutive effects of
options and convertible securities. Diluted
earnings per share is computed similarly to
fully diluted earnings per share.
Basis and diluted net loss per share is
computed by dividing net loss by the
weighted average number of common shares
outstanding. Outstanding common stock
options, warrants and shares of common stock
issuable upon the conversion of debt have
been excluded from the computation as their
effect would be anti-dilutive.
TRANSLATION
OF FOREIGN The Company follows the translation policy
CURRENCIES as provided by Statement of Financial
Accounting Standards Board No. 52 "Foreign
Currency Translation." The functional
currency is the Tunisian dinar. Accordingly,
assets and liabilities are translated at the
exchange rate at the balance sheet date.
Income and expense items are translated at
the average exchange rate prevailing
throughout the year. Gains and losses from
foreign currency transactions included in
operations are not material.
RECENT
ACCOUNTING In June 1997, the Financial Accounting
PRONOUNCEMENTS Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." The new
standard discusses how to report and display
comprehensive income and its components.
Comprehensive income is defined to include
all changes in equity except those resulting
from investments by owners and distributions
to owners. 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 presentation of 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 information
about operating segments, their products and
services, geographic areas, and major
customers. This standard is effective for
F-11
<PAGE>
years beginning after December 15, 1997.
When the Company adopts this statement, it
not expected to have a material impact on
the presentation of the Company's financial
statements.
In April 1998, the Accounting Standards
Executive Committee issued Statement of
Position ("SOP") 98-5 "Reporting on the
Costs of Start-up Activities." The SOP
requires that all costs of start-up
activities should be expensed as incurred.
The SOP is effective for years beginning
after December 15, 1998. When the Company
adopts this SOP, it is not expected to have
a material impact on the Company's financial
statements.
In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and
Hedging Activities." This standard
establishes accounting and reporting
standards for derivative instruments and for
hedging contracts. This standard is
effective for all fiscal quarters of all
fiscal years beginning after June 15, 1999.
When the Company adopts this statement, it
is not expected to have a material impact on
the Company's financial statements or their
presentation.
RECLASSIFICATIONS
Certain reclassifications have been made to
the previously reported 1997 financial
statements to conform with the 1998
presentation.
2. DISCONTINUED
OPERATIONS The Company has sold or plans to sell the
assets related to the (a) hospitality
segment and (b) entertainment segment.
(a) On June 29, 1998, the Company sold
the Hinckley Hotel (The Grand
Hinckley Inn) for $5.4 million.
Accordingly, operating results have
been reclassified and reported as
discontinued operations hospitality.
Management used the proceeds to the
hotel debt and the note payable
collateralized by the stock of the
subsidiary that owns the Grand
Hinckley Inn.
Operating results of the
discontinued operations exclusive of
corporate charges are as follows:
1998 1997
------------------------------------------
Revenues $2,255,037 $3,965,710
------------------------------------------
Net income $ 623,493 $1,155,296
------------------------------------------
Interest on the mortgage payable
charged to discontinued operations
totaled $186,108 and $277,366 for
the years ended September 30, 1998
and 1997, respectively.
Assets and liabilities of the
discontinued operations are as
follows at September 30:
F-12
<PAGE>
1997
-------------------------------------------------------
Current assets
Cash and cash equivalents $ 219,304
Accounts receivable - trade and other 175,467
Inventory 11,725
Prepaid expenses 88,819
-------------------------------------------------------
$ 495,315
-------------------------------------------------------
Noncurrent assets
Property and equipment, at cost $ 6,370,478
Less accumulated depreciation and
amortization (1,299,441)
Other assets 22,333
-------------------------------------------------------
$ 5,093,370
-------------------------------------------------------
Long-term debt $ 2,518,023
-------------------------------------------------------
Net assets held for sale $ 3,070,662
-------------------------------------------------------
(b) In September, 1998 the Company entered into an Asset
Purchase Agreement to sell substantially all of the
assets used in connection with operations of the
Country Tonite Theater and the Country Tonite
Enterprises to On Stage Entertainment, Inc., a Nevada
corporation ("On Stage"), for $13.8 million, of which
$12.5 million is payable in cash, and the balance of
which is payable by delivery of a two year subordinated
9.5% note in the amount of $1.3 million. A portion of
the proceeds from the proposed sale will be used to
retire the mortgage on the Theater. Consummation of the
sale is subject to, among other things, On Stage's
obtaining acceptable financing of the purchase price
and approval of the sales transaction by a majority of
the shareholders of On Stage and the Company. Because
no such financing has been obtained, no closing date
has been set. Assets held for sale are stated at net
realizable value and the anticipated gain on sale will
be approximately $5,000,000.
The Company and Burkhart Venture, LLC entered into an
agreement dated November 3, 1998, which terminates the
Company's 60% ownership of the Country Tonite Theater,
LLC in Pigeon Forge, Tennessee ("CTT, LLC") effective
December 31, 1998. Under the terms of the agreement,
the Company will continue to manage CTT, LLC for a fee
of $2,000 per week in season and $1,000 per week during
the off-season beginning January 1, 1999, but will have
no vested ownership interest in or financial obligation
to CTT, LLC after December 31, 1998. Burkhart Venture,
LLC, representing 100% of the interest of CTT, LLC has
contracted with the Company to produce shows for the
1999 calendar season for a fee of $36,000 per week.
Operating results of the discontinued operations
exclusive of corporate charges are as follows:
F-13
<PAGE>
1998 1997
------------------------------------------------------------------------------
Revenues $ 9,735,443 $ 11,734,554
------------------------------------------------------------------------------
Net income $ 824,794 $ 2,132,876
------------------------------------------------------------------------------
Interest on the mortgage payable charged to discontinued
operations totaled $687,324 and $696,998 for the years ended
September 30, 1998 and 1997, respectively.
1998 1997
- -------------------------------------------------------------------------------
Current assets
Cash and cash equivalents $ 361,107 $ 623,568
Accounts receivable - trade and 208,253 282,320
other
Inventory 224,466 274,028
Prepaid expenses 104,724 229,887
- -------------------------------------------------------------------------------
$ 898,550 $ 1,409,803
- -------------------------------------------------------------------------------
Noncurrent assets
Property and equipment at cost $ 11,150,546 $ 11,150,546
Less accumulated depreciation (2,947,245) (2,270,416)
and amortization
Cost in excess of fair market 723,742 723,742
value
Less accumulated amortizated (221,144) (172,894)
Preopening costs 548,309 548,309
Less accumulated amortization (548,309) (211,842)
Other assets 35,453 57,414
Less accumulated amortization (30,250) (3,216)
- -------------------------------------------------------------------------------
$ 8,711,102 $ 9,821,643
- -------------------------------------------------------------------------------
Long-term debt $ 7,225,037 $ 7,419,196
- -------------------------------------------------------------------------------
Net assets held for sale $ 2,384,615 $ 3,812,250
- -------------------------------------------------------------------------------
F-14
<PAGE>
3. PREPAID EXPENSES Prepaid expenses consist of the following:
September 30, 1998 1997
- ------------------------------------------------------------------------------
Insurance $ 34,798 $ 32,523
Rent - 560,030
Consulting fees - 206,848
Miscellaneous 24,215 5,498
- ------------------------------------------------------------------------------
$ 59,013 $ 804,899
- ------------------------------------------------------------------------------
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 (see
Note 10). These fees were expensed during
the year ended September 30, 1998.
4. RELATED PARTIES Notes and advances receivable include notes
and related interest due from officers and
stockholders totaling $473,891 and $753,988
at September 30, 1998 and 1997,
respectively, at interest rates ranging from
6% to 11%. The notes mature from October 1,
1998 to December 31, 2001. Interest income
from these notes was $136,924 and $130,307
in 1998 and 1997, respectively.
Notes receivable of $449,461 will be retired
ratably over three years beginning January
1, 1999.
5. PROPERTY AND
EQUIPMENT Property and equipment consist of the
following:
<TABLE>
<CAPTION>
September 30, 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Land and improvements $ 83,000 $ -
Buildings 137,000 137,000
Leasehold improvements 1,106,802 688,541
Furniture, fixtures and equipment 2,079,407 1,554,587
- -------------------------------------------------------------------------------------
3,406,209 2,380,128
Less accumulated depreciation (743,102) (100,412)
and amortization
- -------------------------------------------------------------------------------------
Net property and equipment $ 2,663,107 $ 2,279,716
- -------------------------------------------------------------------------------------
</TABLE>
6. DEFERRED
DEVELOPMENT
COSTS The Company purchased in 1995 from Monarch
Casino, Inc. the rights to the Pokagon
Indian gaming contract. The Company, in
turn, entered into an agreement with
Harrah's Entertainment, Inc., ("Harrah's")
F-15
<PAGE>
whereby the Company's rights to the Pokagon
contract were assigned to Harrah's in return
for a share of Harrah's future management
fee from operations of planned Pokagon
Tribal casinos. In addition to the
agreement, Harrah's agreed to reimburse the
Company $600,000 for costs associated with
the venture related to the Eastern Band of
Cherokee Indians.
On October 18, 1998, the Pokagon Band
announced that it had terminated its
development and management contract with
Harrah's. The Company believes that the
right of first refusal reverts to the
Company with the termination of the
agreement. Due to the uncertainty of the
project, the Company has provided an
impairment reserve of $1,909,959 against the
deferred project costs, the $600,000
Harrah's reimbursement and the advance to
the Company's former chairman. The Company
has also initiated lawsuits against Harrah's
and Monarch Casinos, Inc. (see Note 18).
7. OTHER ASSETS Other assets consist of the following:
<TABLE>
<CAPTION>
September 30, 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Deposits and miscellaneous $ 24,201 $ 28,438
Due from Harrah's (Note 6) - 600,000
Organization costs, less amortization of - 115,075
$115,075 and $0
Loan origination costs, less amortization of - 87,649
$93,000 and $5,351
- -------------------------------------------------------------------------------------
$ 24,201 $ 831,162
- -------------------------------------------------------------------------------------
</TABLE>
8. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the
following:
<TABLE>
<CAPTION>
September 30, 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Professional fees $ 308,813 $ 83,188
Payroll and payroll taxes 261,291 297,455
Interest 207,633 159,102
Gaming taxes 158,736 -
Deferred income 120,239 55,123
Sales tax 94,888 89,098
Insurance 67,275 112,497
Other 193,532 423,692
- -------------------------------------------------------------------------------------
$ 1,412,407 $ 1,220,155
- -------------------------------------------------------------------------------------
</TABLE>
F-16
<PAGE>
9. SUBORDINATED
CONVERTIBLE
DEBENTURES
In September 1997, the Company completed a
placement of $800,000, 13% subordinated
convertible 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 plus interest was redeemed in
cash. In August 1998, $171,674 principal
amount of debentures plus interest was
redeemed in cash. The remaining $228,326 of
debenture principal was restructured to
permit the conversion of 25% of the
debentures into common stock each month
beginning on January 1, 1999 with a final
conversion date of April 1, 1999.
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
have 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 represents the required
holding period of the debentures. During
1997, the remaining $350,000 of the
principal amount of the debentures were
converted into 281,561 common shares,
respectively.
10. LONG-TERM
DEBT Long-term debt consists of the following:
September 30, 1998 1997
- ------------------------------------------------------------------------------
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 (a). $1,481,405 $1,425,620
Notepayable 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 1,000,000
F-17
<PAGE>
Notepayable, interest at prime plus 3%,
collateralized by gaming equipment,
payable in monthly installments of
$30,800 including interest through
December 1998. $ 96,872 $ 431,713
Note payable, interest at 9.5%,
collateralized by real estate, payable
in monthly installments of $1,139
through April 1999 with a final
payment of $88,497 due in May 1999. 91,472 96,200
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, paid off on June
29, 1998. (See Note 2.) -- 800,000
- -------------------------------------------------------------------------------
2,669,749 3,753,533
Less current maturities (188,344) (374,329)
- -------------------------------------------------------------------------------
Total long-term debt $ 2,481,405 $ 3,379,204
- -------------------------------------------------------------------------------
Maturities of long-term debt are as follows:
Year ending September 30,
- -------------------------------------------------------------------------------
1999 $ 1,669,749
2000 --
2001 --
2002 --
2003 --
Thereafter 1,000,000
- -------------------------------------------------------------------------------
$ 2,669,749
- -------------------------------------------------------------------------------
(a) The Company intends to satisfy the liability by the issuance of stock at
the maturity date, January 31, 1999. Accordingly, the debt has been
excluded from current maturities, in the accompanying consolidated balance
sheet.
The carrying value of the long-term debt approximates market value.
F-18
<PAGE>
11. 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
included in continuing operations was
$885,229 and $89,549 for the years ended
September 30, 1998 and 1997, respectively.
Minimum annual rental commitments of
continuing operations of noncancelable
operating leases covering facilities and
equipment at September 30, 1998 are
approximately:
Year ending September 30,
---------------------------------------------------------------
1999 $ 625,000
2000 620,000
2001 606,000
2002 581,000
2003 531,000
---------------------------------------------------------------
$ 2,963,000
---------------------------------------------------------------
The Company's lease agreement in Tennessee
is with the 40% joint venture partner of
Country Tonite Theater, LLC. Subsequent to
year end, the Company sold their interest in
the joint venture and amended the lease
agreement to month-to-month terms. The
previously recorded deferred rent was
reversed.
The annual rent for the Tunisian casino is
600,000 dinars which is approximately
$486,000 at the current exchange rate. 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. The variable rent was
$147,126 for the year ended September 30,
1998.
F-19
<PAGE>
12. TAXES ON
INCOME (BENEFIT) The composition of taxes on income (benefit) is as
follows:
1998 1997
Current
Federal $ -- $ 360,000
Utilization of net operating loss -- (360,000)
carryforward
Adjustment of valuation allowance (2,000,000) --
- --------------------------------------------------------------------------------
Total taxes on income (benefit) $(2,000,000) $ --
- --------------------------------------------------------------------------------
The Company and its subsidiaries file a consolidated federal income tax
return.
Deferred income taxes consist of the following:
<TABLE>
<CAPTION>
September 30, 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Total deferred tax assets, relating $ 4,926,000 $ 4,200,000
principally to net operating loss
carryforwards
Deferred tax liabilities - -
- -------------------------------------------------------------------------------------
4,926,000 4,200,000
Less valuation allowance (2,926,000) (4,200,000)
- -------------------------------------------------------------------------------------
Total net deferred tax asset $ 2,000,000 $ -
- -------------------------------------------------------------------------------------
</TABLE>
The Company has realized a net deferred tax
asset of $2,000,000 as it is more likely
than not that this amount will be realized
upon the sale of the Company's entertainment
segment. The Company has recorded a
valuation allowance equaling the remaining
deferred tax asset due to the uncertainty of
its realization in the future. At September
30, 1998, the Company had U.S. federal net
operating loss carryforwards available to
offset future taxable income as follows:
Loss Year Amount Expiration Date
--------- ------ ---------------
1994 $ 9,574,341 2009
1995 687,001 2010
1996 5,297 2011
1997 22,420 2017
1998 327,053 2018
------------
$10,616,112
===========
13. 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
F-20
<PAGE>
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).
Through September 30, 1998, 281,561 shares
were issued upon conversion of subordinated
convertible debentures. (See Note 9.)
14. 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, 1999,
for the purchase of 2,760,000 common shares
at $6.75 per share. None of these warrants
have been exercised to date.
The managing underwriter of the public
offering received warrants to acquire
240,000 shares at $8.25 per share expiring
on September 18, 1998. The warrants are
exercisable at $6.75 per share. These
warrants have not been exercised to date.
In connection with the 13% convertible
debentures issued in September 1997, the
Company issued 25,000 warrants to the
broker. 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 was amortized over one year. The
warrants have not been exercised to date.
15. OPTIONS AND
AWARDS
Certain financial consultants to the Company
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 exercise price per share is between
$1.625 and $1.813 for the employment options
and $1.375 for the consultant options, and
expire in 2002 and 2000, respectively.
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). The 1993 and 1997 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,
1998, there were 395,300 options with
respect to shares of common stock
outstanding under the 1993 Plan and there
were options with respect to 65,700 shares
available for grant under such plan; there
F-21
<PAGE>
were 478,833 options with respect to shares
of common stock outstanding under the 1997
Plan and there were options with respect to
21,167 shares available for grant under such
plan.
The following table summarizes the options
granted, exercised and outstanding under the
plans.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Shares Exercise Weighted
Price Average
Per Share Exercise
Price
- -------------------------------------------------------------------------------------
Outstanding, September 30, 1996 391,400 $ 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 896,800 1.34 - 3.75 1.71
Granted 420,000 0.94 - 1.88 1.00
Exercised 10,000 3.31 3.31
Canceled and expired (432,667) 1.34 - 3.13 1.45
- -------------------------------------------------------------------------------------
Outstanding, September 30, 1998 874,133 $ 0.94 - 3.75 $1.48
====================================================================================
Options exercisable at
September 30, 1998 716,633 $ 0.94 - 3.75 $1.55
- -------------------------------------------------------------------------------------
Options available for future grant 86,867
====================================================================================
</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.
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:
F-22
<PAGE>
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------------------------
<S> <C> <C>
Weighted average fair value per
options granted $ 0.68 $ 1.16
Significant assumptions (weighted-
average)
Risk-free interest rate at grant
date 5.55% 6.76%
Expected stock price volatility 0.56 0.85
Expected dividend payout -- --
Expected option life (years) (a) 10.0 9.51
Loss from continuing operations
As reported $ (7,008,284) $ (3,279,240)
Pro forma (7,293,334) (3,875,030)
Loss per share from continuing
operations
As reported $ (0.73) $ (0.33)
Pro forma (0.76) (0.39)
</TABLE>
(a) The expected option life considers historical option exercise
patterns and future changes to those exercise patterns
anticipated at the date of grant.
The following table summarizes information about stock options
outstanding at September 30, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- -----------------------
Range of Number Weighted- Weighted- Number Weighted-
Exercise Outstanding Average Average Exercisable Average
Prices at 9/30/98 Remaining Exercise at Exercise
Contractual Price 9/30/98 Price
Life
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.94 - 1.94 709,833 8.7 yrs. $1.29 557,333 $1.34
$2.00 - 2.13 127,000 6.2 yrs. 2.03 127,000 2.03
$3.13 - 3.75 37,300 6.2 yrs. 3.18 32,300 3.18
--------------------------------------------------------------------
874,133 8.2 yrs. $1.48 716,633 $1.55
====================================================================
</TABLE>
16. DEFINED
CONTRIBUTION
PLAN
Effective July 1, 1997, the Company adopted
a 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
F-23
<PAGE>
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, currently 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 $20,528
in the year ended September 30, 1998.
17. FOREIGN
OPERATIONS The Company leases and operates a casino in
Tunisia.
Specified financial information of the
foreign operation is as follows:
Year ended September 30, 1998 1997
- --------------------------------------------------------------------------------
Revenue $ 3,305,396 $ --
- --------------------------------------------------------------------------------
Operating loss $ (3,994,299) $ --
- --------------------------------------------------------------------------------
Identifiable assets $ 2,842,005 $ 4,164,685
- --------------------------------------------------------------------------------
18. COMMITMENTS AND
CONTINGENCIES (a) 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. All claims
were dismissed with prejudice in
November 1998.
(b) 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.
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
F-24
<PAGE>
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.
(c) 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.
(d) 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 suit was dismissed
with prejudice and a judgment of
dismissal was entered on September 1,
1998 in the fourth District Court, State
of Minnesota.
(e) The Company initiated a civil suit
against Harrah's on September 4, 1998,
in Federal District Court for the
District of Minnesota. The Company
alleges that Harrah's breached the
Technical Assistance and Consulting
Agreement and tortuously interfered with
the Company's contractual and
prospective economic advantage
associated with the Pokagon Band of
Potowatomi Indians. The suit further
alleges that Harrah's withheld vital
business information from the Company.
Harrah's has filed a motion to dismiss
based on denial that Harrah's is a
proper party to the lawsuit and that the
Technical Assistance and Consulting
Agreements do not create a partnership
or Joint Venture relationship with the
Company. The Company filed its response
to Harrah's Motion for Summary Judgment
in late December 1998. The Company plans
to vigorously pursue its claims and
seeks a judgment against Harrah's plus
interest and legal fees.
(f) The Company initiated a civil suit
against Willard Smith and Monarch
Casino, Inc., ("Monarch") on December
19, 1998, in the Circuit Court of
Jackson, Mississippi. The Company
alleges that Mr. Smith and Monarch have
breached the terms of the Memorandum of
Understanding, Amendment and
Modification Agreement, and Consulting
Agreement by failing to provide the
F-25
<PAGE>
services required under the terms of the
agreements, breaching their obligations
of good faith to the Company, and by
attempting to secure the termination of
the Company's interest in the Pokagon
project. The suit further alleges that
Mr. Smith has defaulted on his
obligations to pay rent and maintain the
upkeep of the Company's residential
property located at 303 LaSalle Street,
Ocean Springs, Mississippi. Company
seeks a judgment of and against Monarch
Casino, Inc. and Willard Smith, plus
interest and attorneys fees for notes
due and material breach of agreements;
removal of Mr. Smith from the rental
property and punitive damages.
19. ALLOWANCE FOR
IMPAIRED
RECEIVABLE 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.
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