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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ________________
Commission File No. 0-19128
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CAPITAL GAMING INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-3061189
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2701 East Camelback Road, 85016
Suite 484 (Zip Code)
Phoenix, Arizona
(Address of principal executive offices)
---------------------
Registrant's telephone number, including area code: (602) 667-0670
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
----------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all
reports required by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate the number of shares outstanding fo each of the issuer's class of
common stock as of November 1, 1997: 1,866,667
CAPITAL GAMING INTERNATIONAL, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 1997 and June 30, 1997 [Unaudited] 1
Consolidated Statements of Operations for the three months
ended September 30, 1997 and 1996 [Unaudited] 3
Consolidated Statements of Changes in Stockholders' Deficit for
the three months ended September 30, 1997 [Unaudited] 4
Consolidated Statements of Cash Flows for the three months
ended September 30, 1997 and 1996 [Unaudited] 5
Notes to Consolidated Financial Statements [Unaudited] 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 3. Default Upon Senior Securities 23
Item 6. Exhibits and Reports on Form 8-K 24
Signature Page 25
PART I., Item 1.
CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
ASSETS
September 30, 1997 June 30, 1997
------------------ -------------
[Unaudited]
CURRENT ASSETS:
Cash and Cash Equivalents $ 5,145 $ 3,923
Interest Receivable 62 72
Native American Management Fees & Expenses Receivable 834 771
Current Portion - Native American Loans Receivable 4,032 3,943
Current Portion - Notes Receivable, Other 17 20
Notes Receivable From Officers' 250 250
Prepaid Expenses and Other Current Assets 324 417
------- -------
TOTAL CURRENT ASSETS 10,664 9,396
------- -------
FURNITURE, FIXTURES AND EQUIPMENT, Net 25 15
------- -------
EXCESS REORGANIZATION VALUE, Net [Note 3] 8,494 9,072
------- -------
OTHER ASSETS:
Restricted Funds (Note 8] 948 926
Native American Loans Receivable 2,649 3,688
Investment In Native American Management
Agreements, Net 1,760 1,937
Notes Receivable, Other 83 80
------- -------
TOTAL OTHER ASSETS 5,440 6,631
------- -------
TOTAL ASSETS $24,623 $25,114
======= =======
[A] Due to the reorganization and implementation of fresh-start
reporting, the financial statements for the Reorganized Company
(Periods starting May 29, 1997) are not comparable to those of
the Predecessor Company. See Notes to The Financial Statements
for additional information.
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements
1
CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
LIABILITIES AND STOCKHOLDERS' DEFICIT
September 30, 1997 June 30, 1997
------------------ -------------
[Unaudited]
CURRENT LIABILITIES:
Accounts Payable and Accrued Expenses $ 1,433 $ 2,714
Accrued Interest 939 251
-------- --------
TOTAL CURRENT LIABILITIES 2,372 2,965
-------- --------
LONG TERM DEBT:
12% Senior Secured Notes Payable [Note 7] 23,100 23,100
-------- --------
TOTAL LIABILITIES 25,472 26,065
-------- --------
STOCKHOLDERS' DEFICIT:
Common Stock, No Par Value, Authorized 3,200,000 Shares;
Issued and Outstanding 1,866,667 400 400
Retained Earnings [Deficit] (Since May 29, 1997,
Date of Reorganization) (1,249) (1,351)
-------- --------
TOTAL STOCKHOLDERS' DEFICIT (849) (951)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 24,623 $ 25,114
======== ========
[A] Due to the reorganization and implementation of fresh-start
reporting, the financial statements for the Reorganized Company
(Periods starting May 29, 1997) are not comparable to those of
the Predecessor Company. See Notes to The Financial Statements
for additional information.
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements
2
CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
[UNAUDITED]
(In Thousands except Share Data)
Reorganized Company Predecessor Company
-------------------- --------------------
Three Months Ended Three Months Ended
September 30, 1997 September 30, 1996
-------------------- --------------------
REVENUES:
Native American Casino Management Fees $ 2,645 $ 2,137
----------- -----------
TOTAL REVENUES 2,645 2,137
----------- -----------
COSTS AND EXPENSES:
Salaries, Wages and Related Costs 440 473
Native American Gaming Development Costs 325 296
Professional Fees 194 682
General and Administrative 336 488
Depreciation and Amortization 760 235
----------- -----------
TOTAL COSTS AND EXPENSES 2,055 2,174
----------- -----------
INCOME [LOSS] FROM OPERATIONS 590 (37)
----------- -----------
OTHER INCOME [EXPENSE]:
INTEREST INCOME 245 168
INTEREST EXPENSE (688) (4,306)
----------- -----------
TOTAL OTHER INCOME [EXPENSE] (443) (4,138)
----------- -----------
INCOME (LOSS] BEFORE INCOME TAX 147 (4,175)
PROVISION FOR INCOME TAX EXPENSE [Note 6] (45) (115)
----------- -----------
INCOME [LOSS] BEFORE EXTRAORDINARY ITEM 102 (4,290)
Extraordinary Item - Loss on Early Extinguishment
of Debt [Note 9] (1,998)
----------- -----------
NET INCOME [LOSS] $ 102 $ (6,288)
=========== ===========
NET INCOME [LOSS] PER SHARE $ 0.05 $ N/A
=========== ===========
WEIGHTED AVERAGE COMMON AND EQUIVALENT
SHARES OUTSTANDING 1,866,667 N/A
=========== ===========
[A] Due to the reorganization and implementation of fresh-start
reporting, the financial statements for the Reorganized
Company (Periods starting May 29, 1997) are not comparable to
those of the Predecessor Company. See Notes to The Financial
Statements for additional information.
[B] The weighted average common and equivalent shares outstanding
and net income (loss] per share for the Predecessor Company
(Periods through May 28, 1997) are not presented becuase, due
to the Company's reorganization and implementation of
fresh-start reporting, they are not comparable.
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements
3
CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
[UNAUDITED]
(In Thousands except Share Data)
Common Stock Retained
------------------------- Additional Earnings
Shares Amount Capital (Deficit)
---------- -------- ---------- ----------
BALANCE - JUNE 30, 1997 1,866,667 $ 400 $ 0 $ (1,351)
Net Income for the Three Months 102
Ended September 30, 1997
---------- -------- ---------- ----------
BALANCE - SEPTEMBER 30, 1997 1,866,667 $ 400 $ 0 $ (1,249)
========== ======== ========== ==========
[A] Due to the reorganization and implementation of fresh-start
reporting, the financial statements for the Reorganized Company
(Periods starting May 29, 1997) are not comparable to those of the
Predecessor Company. See Notes to The Financial Statements for
additional information.
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements
4
CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
(In Thousands)
Reorganized Company Predecessor Company
-------------------- -------------------
Three Months Ended Three Months Ended
September 30, 1997 September 30, 1996
-------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income [Loss] $ 102 $(6,288)
------ -------
Adjustments to Reconile Net Income (loss) to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 760 235
Amortization of Deferred Finance Charges and Original
Issue Discounts 426
Loss on Early Debt Extinguishment 1,998
Changes in Assets and Liabilities:
[Increase] Decrease In:
Interest Receivable 10 140
Management Fees and Expenses Receivable (63) (128)
Prepaids and Other Current Assets 93 18
Restricted Funds (22)
Increase [Decrease] In:
Accounts Payable and Accrued Expenses (1,281) 83
Accrued Interest 688 3,852
------ -------
Total Adjustments 185 6,624
------ -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 287 336
------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Repayments of Native American Loans Receivable 950 1,104
Purchase of Furniture, Fixtures and Equipment (15)
------ -------
NET CASH PROVIDED BY INVESTING ACTIVITIES 935 1,104
------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Reduction in Equipment Notes (397)
------ -------
NET CASH USED IN FINANCING ACTIVITIES 0 (397)
------ -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,222 1,043
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIODS 3,923 2,102
------ -------
CASH AND CASH EQUIVALENTS - END OF PERIODS $5,145 $ 3,145
====== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid During the Periods for:
Interest $ 0 $ 27
Income Taxes $ 0 $ 0
[A] Due to the reorganization and implementation of fresh-start
reporting, the financial statements for the Reorganized
Company (Periods starting May 29, 1997) are not comparable to
those of the Predecessor Company. See Notes to The Financial
Statements for additional information.
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements
5
PART I., Item 1.
CAPITAL GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
[1] ORGANIZATION
Capital Gaming International, Inc. (the "Company"), together with its
subsidiaries, is a multi-jurisdictional gaming company with gaming management
interests with Native American Tribes in several states. The management of
Native American gaming facilities is conducted through Capital Gaming
Management Inc. ("CGMI"), a wholly-owned subsidiary of the Company. The
Company is also engaged in the development of the Narragansett Casino Project
in Rhode Island (the "Rhode Island Project"). The development of the Rhode
Island Project is conducted through Capital Development Gaming Corp. ("CDGC"),
a wholly-owned subsidiary of the Company.
CGMI developed and currently manages and operates three Class III
Native American gaming facilities located in separate jurisdictions as
follows:
Muckleshoot Tribe - Auburn, Washington (Class III facility
became operational in April 1995)
Tonto Apache Tribe - Payson, Arizona (Class III facility
became operational in April 1995)
Umatilla Tribes - Pendleton, Oregon (Class III facility
became operational in March 1995)
CDGC has a managment and development contract with the Narragansett
Tribe for the development of a Class II and Class III gaming facility in
Charlestown, Rhode Island.
[2] BASIS OF PRESENTATION
The Consolidated Balance Sheets and Changes in Stockholders' Deficit
as of September 30, 1997 and the Consolidated Statements of Operations and
Cash Flows for the three-month periods ended September 30, 1997 and 1996 are
unaudited. The June 30, 1997 Balance Sheet data was derived from audited
consolidated financial statements. These Consolidated Financial Statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, such
statements include all adjustments [consisting only of normal recurring items]
which are considered necessary for a fair presentation of the financial
position of the Company at September 30, 1997 and June 30, 1997, and the
results of its operations and cash flows for the three-month periods ended
September 30, 1997 and 1996. The results of operations for interim periods are
not necessarily indicative of a full year of operations. It is suggested that
these financial statements be read in
6
conjunction with the consolidated financial statements and notes included in
the Capital Gaming International, Inc. Form 10-K, as amended, for the fiscal
year ended June 30, 1997 as filed with the Securities and Exchange Commission.
The Consolidated Financial Statements include the accounts of the
Company and all of its wholly-owned subsidiaries. Intercompany transactions
and balances have been eliminated in consolidation.
Certain reclassifications have been made to the prior period financial
statements to conform to classifications used in the current period.
[3] REORGANIZATION UNDER CHAPTER 11
Reorganization Proceedings
On December 23, 1996 (the "Petition Date"), the Company, apart from
its subsidiaries, filed a voluntary petition for relief under Chapter 11 of
the United States Bankruptcy Code (the "Bankruptcy Code") in the United States
Bankruptcy Court for the District of Camden, New Jersey (the "Bankruptcy
Court"). The petition did not involve the Company's wholly-owned subsidiaries.
On the Petition Date, the Company filed a pre-negotiated plan of
reorganization (the "Plan") and an accompanying disclosure statement (the
"Disclosure Statement"). The Disclosure Statement was approved by the
Bankruptcy Court on February 6, 1997.
Subject to certain exceptions under the Bankruptcy Code, the
Company's reorganization proceedings automatically enjoined the continuation
of judicial or administrative proceedings against the Company. Any creditor
actions to obtain possession of, or control over, property of the Company, or
to create, perfect or enforce any liens against the property of the Company
were also enjoined. As a result, the creditors of the Company were precluded
from collecting pre-petition debts without approval of the Bankruptcy Court.
The Company operated as a debtor-in-possession until March 19, 1997.
As a debtor-in- possession, the Company was authorized to operate its business
but could not engage in transactions outside its ordinary course of business
without approval of the Bankruptcy Court. On March 19, 1997 the Bankruptcy
Court conducted a hearing regarding the confirmation of the Plan and entered
an order confirming the Plan. As contemplated by the Plan, on May 28, 1997
(the "Effective Date"), the Company emerged from Chapter 11 and consummated
the Plan.
Plan of Reorganization
The Plan provided for the continuation of the Company's operations.
Under the Plan, the old common stock of the Company (the "Old Common Stock")
was canceled and the Company, as reorganized, issued 1,866,667 shares of its
new common stock, no par value (the "New Common Stock")
The Plan provided generally that creditors of the Company receive
distributions as follows: (i) holders of Old Senior Secured Notes received in
the aggregate (A) on account of their Allowed Secured Claims (as defined in
the Plan), their pro-rata share of the Company's 12% Senior Secured Notes due
2001 (the "New Senior Secured Notes") having a
7
principal face amount of $21,450,000, and 1,225,000 shares of the New Common
Stock; and (B) on account of their Unsecured Deficiency Claims (as defined in
the Plan) totaling $80,688,850, the same treatment as is afforded to holders
of General Unsecured Claims (see subparagraph (iii) below); (ii) holders of
Secured Claims that are not Claims arising out of Old Senior Secured Notes
receive, at the option of the Company: (x) such treatment as will leave such
holders unimpaired; (y) payment in full, in cash; or (z) return of such
holder's collateral in the possession of the Company; and (iii) holders of
General Unsecured Claims against the Company receive their pro-rata share of
(A) 525,000 shares of New Common Stock; (B) the right to receive the net
proceeds of Avoidance Actions (as defined in the Plan) recovered pursuant to
the Plan; and $1,100,000 in New Senior Secured Notes. With respect to Class 4
Claims (as defined in the Plan), the trustee (the "Indenture Trustee") with
respect to the amended and restated indenture relating to the New Senior
Secured Notes (the "Amended Indenture") could receive no more than 375,000
shares of New Common Stock and $550,000 in New Senior Secured Notes on account
of its allowed Class 4 Claim, and any shares the Indenture Trustee would
otherwise receive on account of its Class 4 Claim in excess of $550,000 in New
Senior Secured Notes is required to be distributed pro-rata to all other
holders of Allowed Class 4 Claims.
The Plan additionally provided that the Holders of the Old Common
Stock receive their pro-rata share of 50,000 shares of New Common Stock.
Existing warrants, options and other rights to acquire Old Common Stock of the
Company were canceled and holders of such rights receive no distributions of
property on account thereof.
The terms of the Plan further provides for the discharge of all
claims against the Company and/or release of liability only of the Company,
its wholly-owned subsidiaries and their respective present and former
directors, officers and employees, the Indenture Trustee and the Noteholders
Steering Committee (as defined in the Plan) of all liabilities in any way
related to the Company. In addition, a critical element of the Plan is the
release by the Indenture Trustee and each of the Noteholders of all their
claims against subsidiaries of the Company arising out of guarantees and
pledges, except for the treatment of their claims provided under the Plan.
The Plan also provides for the continued employment of the Company's
key management officials under their existing employment contracts, as
modified.
Fresh-Start Reporting
In accordance with AICPA Statement of Position 90-7 "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP
90-7"), the Company was required to adopt fresh-start reporting on the
Effective Date.
In adopting fresh-start reporting, the Company, with the assistance
of its financial advisors, estimated the fair value of the Company without
regard to liabilities (the "Reorganization Value") at $23,500,000. The excess
of the Reorganization Value over the fair market value of the net assets of
the Company, totaling approximately $9,339,000 was recorded as Excess
Reorganization Value on the Effective Date. The estimate of Reorganization
Value was based on cash flow projections, under varying scenarios and
assumptions, for the post-reorganization operations of the Company. The
significant assumptions underlying the estimate were: (i) various scenarios
regarding the acquisition of new management contracts and the
8
completion of the Rhode Island Project; (ii) term of post-reorganization
operations from three to eight years; (iii) a discount rate of 12%; and (iv)
no consideration for federal income taxes due to the Company's expected
utilization of its Net Operating Loss Carryforwards. As the assumptions
underlying the estimate of Reorganization Value relate to events and
circumstances that have not yet taken place, such estimates and assumptions
are inherently subject to significant economic and competitive uncertainties
and contingencies beyond the control of the Company, including, but not
limited to, those with respect to the future courses of the Company's business
activity. Accordingly, there will usually be differences between projections
and actual results because events and circumstances frequently do not occur as
expected, and those differences may be material.
The effect of the adjustments required in adopting fresh-start
reporting are reflected in the Balance Sheet data as of June 30, 1997. As a
result of the adoption of fresh-start reporting, the Consolidated Financial
Statements for the Reorganized Company are not comparable to those of the
Predecessor Company prepared prior to the Effective Date.
[4] SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of the Company are set forth in
the Company's form 10-K, as amended, for the fiscal year ended June 30, 1997
as filed with the Securities and Exchange Commission.
[5] RHODE ISLAND DEVELOPMENT PROJECT
Narragansett Contract
Through CDGC, the Company entered into a seven-year management and
development contract with the Narragansett Indian Tribe (the "Narragansett
Contract") for the development of a Class II and Class III gaming facility in
Charleston, Rhode Island. The Narragansett Contract provides for the Company
to receive a management fee of 30% of net distributable profits (as defined
therein) of the gaming facility for the first five years, commencing on the
opening of the facility and 20% for the remaining two years. As part of the
Narragansett Contract, the Company is required to advance funds for the
development of the Rhode Island Project and the construction of the gaming
facility which will be repaid over a seven-year period commencing with opening
of the facility. The Narragansett Contract was submitted to the National
Indian Gaming Commission ("NIGC") for approval in June 1995.
In August 1996, the NIGC submitted comments on the Narragansett
Contract. As a result of the Decision (as defined below) invalidating the
Compact (as defined below), the NIGC informed the Company and the Narragansett
Tribe that the NIGC would only consider a contract relating solely to Class II
gaming. In light of this, the Company bifurcated the Narragansett Contract
(the "Management Agreement") and submitted it on June 21, 1996 for review and
approval by the NIGC of only the portions relating to Class II gaming. The
Company reclassified the Class III contract as a development contract until
such time as a Tribal/State Compact for Class III gaming was signed. However,
as a result of the Chafee Rider (as defined below), on December 16, 1996, the
NIGC declined further review of the Management Agreement.
9
In declining to review the Management Agreement, the Chairman of the NIGC
asserted that as a result of the application of the Chafee Rider, the
Narragansett Tribe lost its rights to conduct both Class II and Class III
gaming under the Indian Gaming Regulatory Act ("IGRA"). An appeal of the
NIGC's action was filed on December 20, 1996, and on June 17, 1997, the NIGC
issued a final decision upholding the Chairman's actions.
In light of the Decision (as defined below) to invalidate the Compact
and the application of the Chafee Rider (as defined below), no assurance can
be given if, or when, such approval will be obtained or if the Narragansett
Tribe will be able to establish a commercial gaming enterprise (Class II or
Class III) under IGRA. Additionally, it is possible, as a condition of
obtaining such approval, that the NIGC will require material modifications to
the Narragansett Contract.
Tribal/State Compact
In August 1994, a Tribal/State Compact (the "Compact") was entered
into between the Narragansett Tribe and Governor Bruce Sundlan of Rhode
Island. In October and November of 1994, two lawsuits were filed, including
one filed by Rhode Island Attorney General Pine (the "Pine Case") seeking to
void the Compact on the grounds that the Governor of Rhode Island lacked the
authority to bind the State of Rhode Island absent State Legislative approval.
In 1995, Rhode Island's new Governor, Governor Almond, joined in the Pine
Case.
In February 1996, the United States District Court for the District
of Rhode Island decided that the Compact was void for lack of State
Legislative approval (the "Decision"). The State of Rhode Island has
subsequently refused to negotiate with the Narragansett Tribe. In light of
this Decision, and similar decisions in other states, the Secretary of the
Interior (the "Secretary") has requested comments as to whether the Secretary
has the authority to adopt Secretarial procedures to permit gaming under IGRA
for the Tribes in states (such as Rhode Island) that refuse to negotiate
Tribal/State Compacts in good faith. If the Secretary concludes that the
authority exists to adopt such procedures, the Company believes that the
Secretary may adopt such procedures so as to impose a Tribal/State Compact
allowing gaming under IGRA by the Narragansett Tribe in the State of Rhode
Island. However, as a result of the Chafee Rider (as defined below), there can
be no assurance that the Secretary will have the authority to impose a
Tribal/State Compact between the Narragansett Tribe and the State of Rhode
Island.
The Chafee Rider
In September 1996, federal legislation was passed as a non-relevant
rider (introduced by U.S. Senator John Chafee of Rhode Island, the "Chafee
Rider") to the must-pass Omnibus Appropriations Bill which has the effect of
singling out the Narragansett Tribe's reservation (where the gaming facility
is planned) for exclusion from the benefits of IGRA. The Chafee Rider, which
the Company believes discriminates against the Narragansett Tribe by treating
it differently than every other Tribe in the United States, was passed without
hearings or debate, with no consultation with the Narragansett Tribe and over
the objections of ranking members of the Senate Indian Affairs Committee.
10
In February 1997, as a result of the NIGC's decision and the
application of the Chafee Rider, the Narragansett Tribe initiated litigation
in the United States District Court for the District of Columbia (the"District
Court"), naming the NIGC and its Chairman as defendants. In this action, the
Narragansett Tribe sought a declaration of the District Court, that among
other things, the Chafee Rider is unconstitutional under the equal protection
component of the Fifth Amendment to the U.S. Constitution, and an injunction
requiring the NIGC to review the Management Agreement. Both the Narragansett
Tribe and the NIGC filed cross-motions for summary judgement in the matter. In
August 1997, the District Court granted the NIGC's motion for summary
judgement. A notice of appeal has been filed by the Narragansett Tribe in the
United States Court of Appeals for the District of Columbia.
In May 1997, a Congressional Review of the Chafee Rider was initiated
with a hearing before the Committee on Resources of the U.S. House of
Representatives (the "Committee"). The hearing included testimony from the
U.S. Department of the Interior, the Narragansett Tribe and the National
Council of American Indians, all of whom testified in support of the repeal of
the Chafee Rider, as well as several political leaders from the State of Rhode
Island who supported the Chafee Rider. In June 1997, legislation that would
amend and effectively repeal the Chafee Rider ("H.R. 1983") was introduced in
the House of Representatives by Rep. Patrick J. Kennedy (D-RI), a member of
the Committee, and co-sponsored by Rep. Don Young (R-AK), the Chairman of the
Committee and Rep. Dale E. Kildee (D-MI), a member of the Committee and
Co-Chairman of the Congressional Native American Caucus. H.R. 1983 has been
referred to and is pending before the Committee. No assurances can be given as
to the ultimate outcome of H.R. 1983.
Ongoing Project Development
Unless the Chafee Rider is overturned, the Narragansett Tribe is
precluded from establishing a Class II or Class III gaming facility under
IGRA. Under Rhode Island State Law, therefore, the Narragansett Tribe's only
recourse to establish a gaming facility, absent a repeal of the Chafee Rider,
is to submit the issue to a statewide and, possibly, local referendum. There
can be no assurance that any such referendum would be successful or, if
successful, what the ultimate scope of permitted gaming would be.
In spite of the set-backs caused by the invalidation of the Compact
and the application of the Chafee Rider, the Company intends to pursue the
Rhode Island Project. There can be no assurance that any legislative, judicial
or administrative efforts will be successful. The Company has continued to
fund the on-going development costs of the Rhode Island Project. None of the
these costs have been capitalized. Included in Native American Gaming
Development Costs are approximately $467,000 and $281,000 in costs associated
with the Rhode Island Project for the three-month periods ended September 30,
1997 and 1996 respectively. Additionally, as of September 30, 1997,
approximately $7,917,000 in development costs of the Rhode Island Project is
expected to be recoverable by the Company. These costs will be recoverable
only if and when a gaming facility is established by the Narragansett Tribe as
repayment of the development costs will be made solely from the net
distributable profits of the gaming facility.
11
[6] INCOME TAXES
Net Operating Loss Carryforwards ("NOLs")
The following description of the Company's NOLs is based on the
Company's analysis of the application of the relevant sections of the United
States Tax Code (the "Tax Code"). There can be no assurance that the Internal
Revenue Service ("IRS") or the courts will agree with the Company's analysis.
There are substantial risks associated with the Company's utilization of the
NOLs.
If a corporation undergoes a 50% "ownership change" (as defined), Tax
Code ss. 382 limits the corporation's right to use its NOLs each year to an
annual percentage (based on the federal long-term tax-exempt rate) of the fair
market value of the equity of the corporation at the time of the ownership
change (the "382 Limitation").
A 50% ownership change was expected to occur as a result of the
transfer of stock of the Company to creditors pursuant to the Plan, however,
the Company believes that an exception under Tax Code ss. 382(l)(5) applies to
the transfer. Tax Code ss. 382(l)(5) provides that the 382 Limitation does not
apply to a loss corporation if (1) the corporation, immediately before the
ownership change, is under the jurisdiction of a court in a United States Code
Title 11 or similar case and (2) the shareholders and creditors of the old
corporation own at least 50% of the total voting power and value of the stock
of the corporation after the "ownership change" as a result of being
shareholders and creditors before the change. Stock transferred to such
creditors counts only if it is transferred with respect to "old and cold"
indebtedness. Indebtedness of creditors qualifies as "old and cold" if the
indebtedness (i) was held by a particular creditor for at least 18 months
before the date of the filing of the Chapter 11 case, or (ii) arose in the
ordinary course of the trade or business of the old loss corporation and was
held by the person who at all times held a beneficial interest in that debt.
The Company has attempted to determine the extent to which the
indebtedness of the creditors who receive New Common Stock pursuant to the
Plan qualifies as "old and cold". In certain instances there is still a lack
of corroborative evidence as to the status of certain creditors. Further, the
Indenture Trustee has not, as of yet, fixed the record date for determining
who is entitled to receive a distribution of the New Common Stock as a result
of being a holder of the Old Senior Secured Notes. Due to the uncertainty
related to these issues, the Company is unable to document that Tax Code ss.
382(l)(5) applies to the ownership change that occurred as a result of the
implementation of the Plan. However, based on the information available to the
Company, the Company believes that sufficient indebtedness of creditors will
qualify as "old and cold" so that Tax Code ss. 382(l)(5) will apply. There is
no assurance that documentation will ultimately be obtained by the Company to
confirm this belief. Likewise, if the Indenture Trustee fixes a record date
for distribution of the New Common Stock that is after the Effective Date of
the Plan, transfers of the right to receive New Common Stock after the
Effective Date, may cause the Company not to be able to avail itself of Tax
Code ss. 382(l)(5).
As of September 30, 1997, assuming the 382 Limitation does not apply,
the Company believes it has a Net Operating Loss Carryforward (after
reductions as a result of the cancellation of indebtedness under the Plan) of
approximately $31,500,000, which begins to expire in the year 2009.
12
If the Company is subject to the 382 Limitation, its annual 382
Limitation would be equal to the product of the applicable long-term
tax-exempt rate (5.54% on the Effective Date) times the fair market value of
the equity of the Company immediately before the ownership change ($400,000 on
the Effective Date). Thus if the Company is subject to the 382 Limitation,
then the Company could use only approximately $23,000 of its NOLs each year
until they expire.
Any deferred tax asset resulting from the Net Operating Loss
Carryforwards has been fully allowed because realization cannot be assured at
this time. Pursuant to SOP 90-7, any benefits the Company may receive from the
utilization of the Net Operating Loss Carryforwards will first reduce the
Excess Reorganization Value until exhausted and thereafter be reported as a
direct addition to paid-in capital.
Provision for Income Tax Expense
The Provision for Income Tax Expense of $45,000 and $115,000 for the
three-month periods ended September 30, 1997 and 1996 respectively, relate
solely to state income taxes. No provision was made for federal income taxes
due to the expected utilization of the Net Operating Loss Carryforwards. As
such, no relationship exists between income tax expense and Consolidated
Income [Loss] Before Income Tax for the Company.
[7] NEW SENIOR SECURED NOTES
The Amended Indenture
The proceeds from the issuance of the Company's New Senior Secured
Notes are subject to certain restrictions, and the Company is subject to
certain restrictive covenants, including divided restrictions , pursuant to
the Amended Indenture. The Company is also required to repurchase the New Senior
Secured Notes under certain conditions.
Default Under the Amended Indenture
The Amended Indenture contemplates that certain actions of the
Company require prior notice (and in certain cases, approval from) to the
Advisory Committee. No proposed member of the Advisory Committee has yet
executed an appropriate confidentiality agreement as required by the Amended
Indenture prior to the formation of the Advisory Committee, therefore no such
proposed member has qualified to serve on the Advisory Committee. Moreover,
the Company has been notified by several state gaming regulators in states in
which the Company conducts business, that the breadth and scope of the powers
granted to the Advisory Committee in the Amended Indenture require that the
proposed members of the Advisory Committee be licensed by the appropriate
gaming regulators and further that, in the absence of such licensure, actions
by members of the Advisory Committee would constitute an improper
circumvention of the applicable licensing requirements. As such, the Advisory
Committee has failed to form as required by the Amended Indenture. In the
absence of a functioning Advisory Committee, the Company may not be able to
enter into certain transactions or otherwise conduct its business without
violating certain covenants of the Amended Indenture. The Company has been
notified by the Indenture Trustee that the Indenture Trustee has reserved its
right to assert that certain actions taken by the Company to date relating to
the failure of the Company to have its budget
13
approved by the Advisory Committee and its failure to provide a Certificate of
Excess Cash in an acceptable form (the computation of which requires an
approved budget) constitutes a default under the Amended Indenture. To date,
however, the Indenture Trustee has not delivered to the Company any notice of
an Event of Default. Moreover, the Indenture Trustee has notified the Company
that it has been directed by a majority in principal amount of the New Senior
Secured Notes to forebear from taking any action to accelerate the New Senior
Secured Notes until December 15, 1997, during which time the Company will have
an opportunity to cure any such default. The Company is currently engaged in
discussions with the Indenture Trustee and a Noteholder representing a
majority of the Noteholders for the purpose of amending the Amended Indenture
to affect solely the rights, duties and powers of the Advisory Committee with
the authority to approve the Company's budget without the need for the
Advisory Committee members to be licensed as required by the gaming regulators
or, the possible elimination of the Advisory Committee concept from the
Amended Indenture altogether.
The Company believes that it is probable that the parties will be
able to amend the Amended Indenture to cure the default by December 15, 1997.
There is no assurance, however, that a satisfactory resolution of this matter
can be achieved. In the absence of a satisfactory resolution, the Indenture
Trustee would elect to declare and Event of Default in which case the Senior
Secured Notes could be accelerated and the Indenture Trustee could seek to
enforce its rights under the Amended Indenture, including foreclosing on its
collateral.
As per the terms of the Amended Indenture, the Indenture Trustee has
notified the Company that it is required to make an interest payment of
$1,285,900 (the "Interest Payment") by November 17, 1997. On November 11, 1997,
the Company tendered the Interest Payment as follows: (a) the Company authorized
and directed the Indenture Trustee to immediately apply $500,000 in Company
funds ("Company Funds") presently held by the Indenture Trustee, as partial
payment of the Interest Payment; and (b) the remaining $785,900 of the Interest
Payment was paid by the Company in funds payable to the Indenture Trustee. The
original source of the Company Funds was an escrow established in connection
with the sale by the Company of its former Crescent City Capital Development
Corp. subsidiary. On November 12, 1997 counsel for the Indenture Trustee
informed the Company that the Company Funds represent Net Cash Proceeds of an
Asset Sale pursuant to, and as defined in, the New Indenture and that the
Company cannot apply the Company Funds to the Interest Payment. The Company has
notified the Indenture Trustee that it disputes its characterization of the
Company Funds and that it reserves its rights in this matter. Should the
Indenture Trustee not issue a timely retraction of its position, the Company
intends to timely forward the sum of $500,000 to the Indenture Trustee in order
to avoid any potential event of default.
[8] RESTRICTED FUNDS
Restricted funds consist of approximately $522,000 and $426,000
(including accrued interest) held by the Indenture Trustee as Cash Collateral
(as defined in the Plan) pursuant to the Plan and the Amended Indenture for the
benefit of the New Senior Secured Noteholders for payment of the New Senior
Secured Notes. The Company anticipates that some or all of the Restricted Funds
held by the Indenture Trustee may be applied to interest payments due on the New
Senior Secured Notes. However, the ultimate utilization the Restricted Funds is
at present undetermined due to the discussions referenced in Note [7] above and
are therefore classified as non-current.
[9] EXTRAORDINARY ITEM
Approximately $1,998,000, comprised of the write-off of deferred
finance charges and original issue discounts of the Old Senior Secured Notes,
was recorded as early extinguishment of debt relating to the sale of Crescent
City Capital Development Corp ("CCCD"), a former wholly-owned subsidiary of
the Company, and a 50% partner with Grand Palais Inc. in a River City Joint
Venture, a general partnership formed to develop and operate two riverboats in
New Orleans, Louisiana. The joint venture was terminated in July 1995, CCCD
was sold in May 1996 to a wholly-owned subsidiary of Casino Magic Corp. and
the distribution of the sale proceeds by the Indenture Trustee to the Old
Senior Secured Noteholders was made in July 1996.
[10] NEW AUTHORITATIVE PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has issued Statement
of Financial Accounting Standard (SFAS) No. 128, Earnings Per Share and FASB
No. 129, Disclosure of Information About Capital Structure. Both are effective
for financial statements issued for periods ending after December 15, 1997.
SFAS No. 128 simplifies the computation of earnings per share by replacing the
presentation of primary earnings per share with a presentation of basic
earnings per share. The statement requires dual presentation of basic and
diluted earnings per share by entities with complex capital structures. Basic
earnings per share include no dilution and is computed by dividing income
available to common stockholders by the weighted average number of shares
outstanding for the period. Diluted earnings per share reflect the potential
dilution of securities that could share in the earnings of an entity similar
to fully diluted earnings per share. SFAS 128 is not expected to have a
material impact on the Company.
14
PART II., Item 2.
CAPITAL GAMING INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and the related notes
thereto appearing elsewhere in this report.
Due to the reorganization and implementation of fresh-start
reporting, financial information for the Reorganized Company (Periods starting
May 29, 1997) are not comparable to those of the Predecessor Company. See the
Notes to Consolidated Financial Statements appearing elsewhere in this report
for additional information
To the extent the information contained in this report are viewed as
forward-looking statements, the reader is cautioned that various risks and
uncertainties exist that could cause the actual future results to differ
materially from that inferred by the forward-looking statements. Words such as
"expects", "anticipates", "intends", "believes", "potential" and similar
expressions are intended to identify forward-looking statements. The reader is
further cautioned that risks and uncertainties exist that have not been
mentioned herein due to their unforeseeable nature, but which, nevertheless,
may impact the Company's future operations.
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Cash
For the three-month period ended September 30, 1997, the Company had
a net increase in cash of approximately $1,222,000.
Operating activities for the three-month period ended September 30,
1997 provided approximately $287,000 in cash. The primary sources of cash from
operations were (i) management fees and expenses which provided approximately
$2,582,000, and (ii) interest income which provided approximately $255,000.
Total expenses required the use of approximately $2,550,000 in cash.
Significant adjustments to cash provided by operating activities for non-cash
items were approximately [increase (decrease)]: Depreciation and amortization
- - $760,000; Interest accrued on Restricted Funds - ($22,000) and; Changes in
working capital balances - ($553,000). The changes in working capital balances
was comprised primarily of a reduction of Accounts Payable and Accrued
Expenses of approximately $1,281,000 and an increase in Interest Payable of
approximately $688,000. The reduction of Accounts Payable and Accrued Expenses
was due primarily to cash payments of accrued legal and professional fees
pursuant to the Plan and the payment of accrued legal and professional fees
relating to the Company's Rhode Island Project. No cash from operating
activities was used for the payment of interest or income taxes.
Investing activities for the three-month period ended September 30,
1997 provided a total of approximately $935,000 in cash primarily from the
repayment of Native American Loans
15
Receivable. Approximately $15,000 in cash was required for the purchase of a
new telephone system due to relocation of the Company's headquarters offices
from New Jersey to Arizona.
The Company's sources of cash for the next twelve months is expected
to be derived from the receipt of management fees and debt service on the
Native American loans. In the event conditions arise, for whatever reasons,
that cause a reduction or elimination in such sources of cash, the Company may
not be able to continue operations or service its debt.
Capital Requirements
The Company will continue to operate, through Capital Gaming
Managment Inc., the existing Muckleshoot, Tonto Apache and Umatilla managment
agreements. Absent any new developments, these three contracts, along with
debt service payments on the Tribal Loans with the Tonto Apache and Umatilla
Tribes and Cash and Cash Equivalents at September 30, 1997 of $5,145,000, will
provide the Company with its only sources of cash for the approximately two
and one-half years remaining on the contracts. The Company believes that these
sources of cash will exceed the ongoing cash requirements for all operating
expenses and general business development costs (including the Rhode Island
Project) as well as all interest payments on the New Senior Secured Notes and
principal payments on the New Senior Secured Notes, with the exception of the
final principal payment of $18,480,000 due in the year 2001. The excess,
although not assured, if realized is expected to assist in the funding of any
new projects.
In order to complete the funding of the construction or acquisition
costs any new projects or fund the construction costs of the Rhode Island
Project, if and when a gaming facility is approved in Rhode Island, it is
anticipated that the Company will require significant additional capital. The
Company believes that should any new projects become available or if the
gaming facility is approved for Rhode Island, the Company will have available
funding through the debt and/or equity markets or alternatively though bank
financing, based on the viability of the individual projects. This belief is
founded on the Company's past success in developing Class III gaming
facilities, the expertise of its management in the gaming industry and its
favorable position of being currently licensed by the NIGC and by several
state jurisdictions. However, there can be no assurance that such financing
will be available, or if available that the terms thereof will be acceptable
or favorable to the Company. Given the high level of uncertainty concerning
the prospects of new development projects and/or the Narragansett's Tribe's
ability to secure a binding compact or approval for non-compacted gaming, no
financing commitments have been obtained as of the date hereof. Further, the
timing, nature and amount of any new capital requirements cannot be reasonably
estimated at this time.
Debt
At September 30, 1997 the New Senior Secured Notes consist of the
face value $23,100,000 of the New Senior Secured Notes issued pursuant to the
Plan
16
payable in two scheduled principal payments of $4,620,000 and $18,480,000 due
in the years 2000 and 2001, respectively.
Interest accrues on the Senior Secured Notes at a rate of 12% per
annum and is payable semi-annually on May 15 and November 15. The Indenture
Trustee has notified the Company that approximately $1,286,000 is due November
17, 1997 in satisfaction of the first interest payment.
The Amended Indenture contemplates that certain actions of the
Company require prior notice (and in certain cases, approval from) to the
Advisory Committee. No proposed member of the Advisory Committee has yet
executed an appropriate confidentiality agreement as required by the Amended
Indenture prior to the formation of the Advisory Committee, therefore no such
proposed member has qualified to serve on the Advisory Committee. Moreover,
the Company has been notified by several state gaming regulators in states in
which the Company conducts business, that the breadth and scope of the powers
granted to the Advisory Committee in the Amended Indenture require that the
proposed members of the Advisory Committee be licensed by the appropriate
gaming regulators and further that, in the absence of such licensure, actions
by members of the Advisory Committee would constitute an improper
circumvention of the applicable licensing requirements. As such, the Advisory
Committee has failed to form as required by the Amended Indenture. In the
absence of a functioning Advisory Committee, the Company may not be able to
enter into certain transactions or otherwise conduct its business without
violating certain covenants of the Amended Indenture. The Company has been
notified by the Indenture Trustee that the Indenture Trustee has reserved its
right to assert that certain actions taken by the Company to date relating to
the failure of the Company to have its budget approved by the Advisory
Committee and its failure to provide a Certificate of Excess Cash in an
acceptable form (the computation of which requires an approved budget)
constitutes a default under the Amended Indenture. To date, however, the
Indenture Trustee has not delivered to the Company any notice of an Event of
Default. Moreover, the Indenture Trustee has notified the Company that it has
been directed by a majority in principal amount of the Senior Secured Notes to
forebear from taking any action to accelerate the Senior Secured Notes until
December 15, 1997, during which time the Company will have an opportunity to
cure any such default. The Company is currently engaged in discussions with
the Indenture Trustee and a Noteholder representing a majority of the
Noteholders for the purpose of amending the Amended Indenture to affect solely
the rights, duties and powers of the Advisory Committee with the authority to
approve the Company's budget without the need for the Advisory Committee
members to be licensed as required by the gaming regulators or, the possible
elimination of the Advisory Committee concept from the Amended Indenture
altogether.
The Company believes that it is probable that the parties will be
able to amend the Amended Indenture to cure the default by December 15, 1997.
There is no assurance, however, that a satisfactory resolution of this matter
can be achieved. In the absence of a satisfactory resolution, the Indenture
Trustee would elect to declare and Event of Default in which case the Senior
Secured Notes could be accelerated and the Indenture Trustee could seek to
enforce its rights under the Amended Indenture, including foreclosing on its
collateral.
17
Restricted Funds
Restricted funds consist of approximately $522,000 and $426,000
(including accrued interest) held by the Indenture Trustee as Cash Collateral
pursuant to the Plan and the Amended Indenture for the benefit of the New
Senior Secured Noteholders for payment of the New Senior Secured Notes. The
Company anticipates that some or all of Restricted Funds held by the Indenture
Trustee may be applied to interest payments due on the New Senior Secured
Notes. However, the ultimate utilization the Restricted Funds is at present
undetermined due to the discussions referenced in Note [7] to the Consolidated
Financial Statements and are therefore classified as non-current.
RESULTS OF OPERATIONS
General
The following discussion about the Company's results of operations
includes Capital Gaming International Inc. ("CGII") the parent and registrant,
and it's wholly-owned subsidiaries, Capital Gaming Managment Inc ("CGMI"), and
Capital Development Gaming Corp. ("CDGC").
On December 23, 1996 (the "Petition Date"), CGII, apart from its
subsidiaries, filed a voluntary petition for relief under Chapter 11 of the
Bankruptcy Code. On the Petition Date, the Company filed a pre-negotiated Plan
of Reorganization (the "Plan"). As contemplated by the Plan, on May 28, 1997
(the "Effective Date"), the Company emerged from Chapter 11 and consummated the
Plan.
On the Effective Date, upon emergence from bankruptcy, the Company
adopted fresh-start reporting as required by AICPA Statement of Position
90-7. Under fresh-start reporting, all assets and liabilities were restated to
reflect their Reorganization Value which represents the fair value of the
entities under Reorganization. As a result of adopting fresh-start reporting,
the consolidated financial statements of the Reorganized Company are not
comparable with those of the Predecessor Company prepared before the Effective
Date.
In addition to the Plan approved by the Bankruptcy Court, and in
furthering its strategy of reducing operating expenses, the Company's Board of
Director's approved an informal Business Plan for Consolidating Operations
(the "Business Plan"). The Business Plan called for the closure of the
Company's New Jersey headquarters offices and the relocation of the Company's
headquarters to its Arizona offices, thereby gaining substantial efficiencies
of operations, better communications amongst management and significant
reductions in staffing and administrative costs on a prospective basis.
As a consequence of the implementation of its Business Plan, and the
resulting consolidation of operations, the Company effected a change in the
method used to distribute operating expenses among the Company and its
subsidiaries. Effective in June 1997, all staffing costs (with the exception
of officers of CGII), selling, general and administrative expenses of the
Company are charged to CGMI as the primary operating entity of the Company.
CGII officers payroll and public-company general and administrative expenses
are charged to CGII. CDGC continues to be charged with the expenses relating
to the development of the Rhode Island Project. Accordingly, the results of
operations for each of the entities of the
18
Reorganized Company are not necessarily comparable to that of the Predecessor
Company. As such, the following discussion of the results of operations for
the three-month period ended September 30, 1997 as compared to the same period
in 1996 is presented on a consolidated basis only, with information about an
individual entity provided where necessary.
Three-month period ended September 30, 1997 as compared to September 30, 1996
Income [Loss] From Operations
Income from operations for the three-month period ended September 30,
1997 totaled approximately $590,000 as compared to a loss of $37,000 for the
three-month period ended September 30, 1996, an increase of $627,000. This
increase in income from operations is comprised of: (i) an increase in
revenues of $508,000, and (ii) a decrease in operating expenses of $119,000.
Revenues
Revenues for the three-month period ended September 30, 1997, comprised
of CGMI's managment fees from the Company's three managed Class III gaming
facilities totaled approximately $2,645,000, an increase of $508,000 or 23.8%
over the three-month period ended September 30, 1996. The following table sets
forth the comparison in total management fees between 1997 and 1996 for the
three-month periods ended September 30, by facility (in thousands):
Facility 1997 1996 Inc(Dec) %
-------- ---- ---- -------- -
Muckleshoot Casino $ 540 $ 588 $(48) (8.2%)
Muckleshoot Bingo 0 (93) 93 100.0%
Tonto Apache 740 671 69 10.3%
Umatilla 1,365 971 394 45.2%
------ ------ ---- -----
Total Revenues $2,645 $2,137 $508 23.8%
====== ====== ==== =====
Note: The Muckleshoot Bingo contract expired on September 30, 1996
The increase in management fees is due primarily to the strong
financial performance of each of Company's managed facilities. In comparison
to the three-month period ended September 30, 1996, total revenues for the
same period in 1997 were [higher (lower)] for each facility by the following
percentages: Muckleshoot - (16.7%); Tonto Apache - 4.7% and; Umatilla 20.8%.
The decrease in revenues at the Muckleshoot facility is due to the opening of
a dockside riverboat gaming facility by the Puyallup Tribe in the Tacoma,
Washington area early in the first calendar quarter of 1997. This opening
caused an anticipated dilution of the Muckleshoot facility's market. Even so,
the actual performance of the Muckleshoot facility is up over anticipated
revenues by 10.9% and in managment fees by 5.7%. Operating performance of each
of the three facilities for the three-month period ended September 30, 1997,
as measured by their EBITDA margins were: Muckleshoot - 38.0%; Tonto Apache -
56.6% and; Umatilla 59.1%. This compares to their operating performance for
the three-month period ended September 30, 1996, as measured
19
by their EBITDA margins which were: Muckleshoot - 47.9%; Tonto Apache - 56.0%
and; Umatilla 55.1%. The decline in the Muckleshoot facility's EBITDA margin
is also due to the opening of the Puyallup facility, however, performance was
still better than anticipated. The Company anticipates the continued strong
performance of each of the managed facilities. The $93,000 negative amount for
the Muckleshoot Bingo Facility for the three-month period ended September 30,
1996, is the result of minimum guaranteed payments made to the Tribe (as defined
in the Management Agreement) and represents a reduction to fees earned and
recorded in prior reporting periods.
Costs and Expenses
Salaries, wages and related costs for the three-month period ended
September 30, 1997 were approximately $440,000. This represents a decrease of
$33,000 or 7.0% and is due directly to the Company's efforts to reduce
operating expenses.
Native American devlopment costs increased approximately $29,000 or
9.8% from $296,000 to $325,000 for the three-month periods ended September 30,
1996 and 1997, respectively. By reporting entity Native American development
costs were (in thousands):
Entity 1997 1996 Inc(Dec) %
------ ---- ---- -------- -
CGII 0 49 (49) (100.0%)
CDGC 467 232 235 101.3%
CGMI (142) 15 (157) 1,046.7%
---- ---- ---- -------
TOTAL $325 $296 $ 29 9.8%
==== ==== ==== =======
Development costs for CGII and CDGC for both 1997 and 1996 were
primarily for the benefit of the Narragansett Tribe in Rhode Island. The
increase in Rhode Island development costs is due primarily to increased
activity in attempting to further the Tribe's position toward an approved
Compact. As of September 30, 1997 the cumulative investment expended on the
Rhode Island Project is approximately $9.1 million. About $7.9 million is
expected to be recoverable by the Company if and when a gaming facility is
established by the Narragansett Tribe. The decrease in CGMI development costs
is attributable to a $130,000 adjustment for the write-off of accrued
liabilities related to an inactive development contract and approximately
$619,000 in refunds from the NIGC for unexpended investigation costs.
Professional fees (primarily legal) decreased approximately $488,000
or 71.6% to $194,000 for the three-month period ended September 30, 1997 as
compared to the three-month period ended September 30, 1996. The decrease is
due primarily to the reduced legal activity of CGII following the
Reorganization of the Company as compared to the prior year.
General and administrative costs for the three-month period ended
September 30, 1997 were approximately $336,000. This represents a decrease of
$152,000 or 31.1% and is due primarily to the Company's efforts to reduce
operating expenses.
Depreciation and amortization expenses were approximately $760,000
and $235,000 for the three-month periods ended September 30, 1997 and 1996,
respectively. The 1997 amount
20
includes amortization of Excess Reorganization Costs of approximately $579,000
as compared to zero in 1996.
Interest Income
Interest income for the three-month period ended September 30, 1997
was approximately $245,000 as compared to approximately $168,000 for the same
period in 1996. For 1997, Interest Income is comprised of approximately: (1)
$74,000 from investments; (2) $165,000 from Tribal Loans; and (3) $6,000 from
officer loans and other notes. For 1996, Interest Income was comprised of
approximately: (1) $15,000 from investments; (2) $248,000 from Tribal Loans;
and (3) a $95,000 reduction from adjustments related to the final distribution
of the CCCD sale. The decrease in interest from Tribal Loans is due to the
paydown of the principal balances.
Interest Expense
Interest expense for the three-month period ended September 30, 1997
is comprised of accrued interest on the New Senior Secured Notes.
Interest expense for the three-month period ended September 30, 1996
is comprised of the following: (i) Old Senior Secured Notes - $3,307,000; (ii)
amortization of original issue discount and deferred finance charges -
$427,000; (iii) Republic Note Payable - $546,000; and (iv) CGMI equipment
notes- $26,000, for a total of $4,306,000.
Income Taxes
The provision for income taxes for the three-month periods ended
September 30, 1997 and 1996 represents an estimate for state income tax
expense for CGMI. No provision is made for federal income taxes due to the
expected utilization of the Net Operating Loss Carryforwards of the Company.
As such, no relationship exists between Income Tax Expense and Consolidated
Income [Loss] Before Income Tax for the Company.
Extraordinary Item
Approximately $1,998,000, comprised of the write-off of deferred
finance charges and original issue discounts of the Old Senior Secured Notes,
was recorded as early extinguishment of debt relating to the sale of Crescent
City Capital Development Corp ("CCCD") a former wholly-owned subsidiary of the
Company and a 50% partner with Grand Palais Inc. in a River City Joint
Venture, a general partnership formed to develop and operate two riverboats in
New Orleans, Louisiana. The joint venture was terminated in July 1995, CCCD
was sold in May 1996 to a wholly-owned subsidiary of Casino Magic Corp. and
the distribution of the sale proceeds by the Indenture Trustee to the Old
Senior Secured Noteholders was made in July 1996.
21
PART II., Item 1.
CAPITAL GAMING INTERNATIONAL, INC.
LEGAL PROCEEDINGS
Pursuant to the Plan of Reorganization, all legal proceedings against
the Company prior to the Effective Date of the Plan were settled. As a result,
there was no material litigation pending against the Company on September 30,
1997. The Company is or may become a defendant in pending or threatened legal
proceedings in the ordinary course of business although it is not aware of the
existence of any material pending or threatened legal proceedings at this
time except as described below.
In connection with the consummation of the Company's Plan of
Reorganization, Republic Corporate Services, Inc. ("Republic") is to receive a
distribution on account of its unsecured claims its pro-rata share of the
150,000 shares of New Common Stock and of the $550,000 in New Secured Notes to
be distributed to the holders of Allowed Class 4 Claims other than the Indenture
Trustee. On August 20, 1997 the Arizona Department of Gaming ("ADOG") notified
the Company that, based upon its concerns regarding Republic, ADOG would conduct
a background investigation of Republic prior to issuing a permanent
certification to the Company. This notification was communicated to Republic by
the Company and ADOG sent further notification to Republic on October 5, 1997.
In response to ADOG's August 20, 1997 notification, the Company has notified
Republic that a License Event has occurred as defined in, and pursuant to, the
Company's Amended and Restated Certificate of Incorporation ("Amended
Certificate") and that the Company invoked its right to have Republic's equity
securities distributed to an independent trustee and that the Company further
intended to redeem such securities in accordance with the terms of the Amended
Certificate. On November 5, 1997 Republic filed a Complaint for Declaratory
Judgment, Specific Performance and Other Relief with the U.S. Bankruptcy Court
for the District of New Jersey seeking a declaration that its ownership of
equity securities is not a License Event or, in the alternative, that if such
equity ownership is a License Event then, in effect, that Republic's equity
securities should be redeemed at $2.38 per share and its New Secured Notes
should be redeemed at par. The Company believes Republic's action is without
merit and intends to vigorously contest this matter and counterclaim against
Republic for aggregate relief. The ultimate outcome of the Republic proceedings
will not have a material adverse impact on the Company's financial position or
results of operations.
22
PART II., Item 3.
CAPITAL GAMING INTERNATIONAL, INC.
DEFAULT UPON SENIOR SECURITIES
Default Under the Amended Indenture
The Amended Indenture contemplates that certain actions of the
Company require prior notice (and in certain cases, approval from) to the
Advisory Committee. No proposed member of the Advisory Committee has yet
executed an appropriate confidentiality agreement as required by the Amended
Indenture prior to the formation of the Advisory Committee, therefore no such
proposed member has qualified to serve on the Advisory Committee. Moreover,
the Company has been notified by several state gaming regulators in states in
which the Company conducts business, that the breadth and scope of the powers
granted to the Advisory Committee in the Amended Indenture require that the
proposed members of the Advisory Committee be licensed by the appropriate
gaming regulators and further that, in the absence of such licensure, actions
by members of the Advisory Committee would constitute an improper
circumvention of the applicable licensing requirements. As such, the Advisory
Committee has failed to form as required by the Amended Indenture. In the
absence of a functioning Advisory Committee, the Company may not be able to
enter into certain transactions or otherwise conduct its business without
violating certain covenants of the Amended Indenture. The Company has been
notified by the Indenture Trustee that the Indenture Trustee has reserved its
right to assert that certain actions taken by the Company to date relating to
the failure of the Company to have its budget approved by the Advisory
Committee and its failure to provide a Certificate of Excess Cash in an
acceptable form (the computation of which requires an approved budget)
constitutes a default under the Amended Indenture. To date, however, the
Indenture Trustee has not delivered to the Company any notice of an Event of
Default. Moreover, the Indenture Trustee has notified the Company that it has
been directed by a majority in principal amount of the Senior Secured Notes to
forebear from taking any action to accelerate the Senior Secured Notes until
December 15, 1997, during which time the Company will have an opportunity to
cure any such default. The Company is currently engaged in discussions with
the Indenture Trustee and a Noteholder representing a majority of the
Noteholders for the purpose of amending the Amended Indenture to affect solely
the rights, duties and powers of the Advisory Committee with the authority to
approve the Company's budget without the need for the Advisory Committee
members to be licensed as required by the gaming regulators or, the possible
elimination of the Advisory Committee concept from the Amended Indenture
altogether.
The Company believes that it is probable that the parties will be
able to amend the Amended Indenture to cure the default by December 15, 1997.
There is no assurance, however, that a satisfactory resolution of this matter
can be achieved. In the absence of a satisfactory resolution, the Indenture
Trustee would elect to declare and Event of Default in which case the Senior
Secured Notes could be accelerated and the Indenture Trustee could seek to
enforce its rights under the Amended Indenture, including foreclosing on its
collateral.
As per the terms of the Amended Indenture, the Indenture Trustee has
notified the Company that it is required to make an interest payment of
$1,285,900 (the "Interest Payment") by November 17, 1997. On November 11, 1997,
the Company tendered the Interest Payment as follows: (a) the Company authorized
and directed the Indenture Trustee to immediately apply $500,000 in Company
funds ("Company Funds") presently held by the Indenture Trustee, as partial
payment of the Interest Payment; and (b) the remaining $785,900 of the Interest
Payment was paid by the Company in funds payable to the Indenture Trustee. The
original source of the Company Funds was an escrow established in connection
with the sale by the Company of its former Crescent City Capital Development
Corp. subsidiary. On November 12, 1997 counsel for the Indenture Trustee
informed the Company that the Company Funds represent Net Cash Proceeds of an
Asset Sale pursuant to, and as defined in, the New Indenture and that the
Company cannot apply the Company Funds to the Interest Payment. The Company has
notified the Indenture Trustee that it disputes its characterization of the
Company Funds and that it reserves its rights in this matter. Should the
Indenture Trustee not issue a timely retraction of its position, the Company
intends to timely forward the sum of $500,000 to the Indenture Trustee in order
to avoid any potential event of default.
23
PART II., Item 6.
CAPITAL GAMING INTERNATIONAL, INC.
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number
- -----------
27 Financial Data Schedule
24
Signature Page
CAPITAL GAMING INTERNATIONAL, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
Dated: November 14, 1997 By: /s/ William S. Papazian
------------------------------------------
William S. Papazian, Senior Vice President
and General Counsel and Secretary
(Authorized Representative)
Dated: November 14, 1997 By: /s/ Mark J. Suglian
------------------------------------------
Mark J. Suglian, Vice President and
Chief Financial Officer
(Principal Accounting Officer)
25