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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 March 31, 1998
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 by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934. Subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ X ] No [ ]
Indicate the number of shares outstanding for each of the issuer's class of
common stock as of May 1, 1998: 1,866,667
CAPITAL GAMING INTERNATIONAL, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 1998 and June 30, 1997 [Unaudited] 1
Consolidated Statements of Operations for the three months
and nine months ended March 31, 1998 and 1997 [Unaudited] 3
Consolidated Statements of Changes in Stockholders' Deficit for
the nine months ended March 31, 1998 [Unaudited] 4
Consolidated Statements of Cash Flows for the nine months
ended March 31, 1998 and 1997 [Unaudited] 5
Notes to Consolidated Financial Statements [Unaudited] 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 3. Default Upon Senior Securities 24
Item 6. Exhibits and Reports on Form 8-K 25
Signature Page 26
PART I, Item 1.
CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
ASSETS
March 31, 1998 June 30, 1997
-------------- -------------
[Unaudited]
CURRENT ASSETS:
Cash and Cash Equivalents $ 5,482 $ 3,923
Interest Receivable 37 72
Native American Management Fees & Expenses Receivable [Note 10] 1,350 771
Current Portion - Native American Loans Receivable 2,858 3,943
Current Portion - Notes Receivable, Other 20 20
Notes Receivable From Officers' -0- 250
Prepaid Expenses and Other Current Assets 320 417
------- -------
TOTAL CURRENT ASSETS 10,067 9,396
------- -------
FURNITURE, FIXTURES AND EQUIPMENT, Net 23 15
------- -------
EXCESS REORGANIZATION VALUE, Net [Notes 3 and 9] 7,673 9,072
------- -------
OTHER ASSETS:
Restricted Funds (Note 8] 522 926
Native American Loans Receivable 1,855 3,688
Investment In Native American Management
Agreements, Net 1,407 1,937
Notes Receivable, Other 73 80
------- -------
TOTAL OTHER ASSETS 3,857 6,631
------- -------
TOTAL ASSETS $21,620 $25,114
======= =======
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
March 31, 1998 June 30, 1997
-------------- -------------
[Unaudited]
CURRENT LIABILITIES:
Accounts Payable and Accrued Expenses $ 1,109 $ 2,714
Accrued Interest 1,040 251
-------- --------
TOTAL CURRENT LIABILITIES 2,149 2,965
-------- --------
LONG TERM DEBT:
12% Senior Secured Notes Payable [Note 7] 23,100 23,100
-------- --------
TOTAL LIABILITIES 25,249 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) (4,029) (1,351)
-------- --------
TOTAL STOCKHOLDERS' DEFICIT (3,629) (951)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $21,620 $ 25,114
======== ========
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 Nine Months Ended Three Months Ended Nine Months Ended
March 31, 1998 March 31, 1998 March 31, 1997 March 31, 1997
------------------ ----------------- ------------------ -----------------
REVENUES:
Native American Casino Management Fees
[Note 10] $ 2,023 $ 6,883 $ 1,981 $ 5,831
----------- ----------- -------- --------
TOTAL REVENUES 2,023 6,883 1,981 5,831
----------- ----------- -------- --------
COSTS AND EXPENSES:
Salaries, Wages and Related Costs 724 2,586 441 1,418
Native American Gaming Development Costs 493 1,146 750 1,887
Professional Fees 312 903 266 1,181
General and Administrative 334 975 349 1,326
Depreciation and Amortization 787 2,370 186 617
Reorganization Costs -0- -0- 1,171 1,267
Reorganization Fees Paid to Management -0- -0- -0- 900
----------- ----------- -------- --------
TOTAL COSTS AND EXPENSES 2,650 7,980 3,163 8,596
----------- ----------- -------- --------
[LOSS] FROM OPERATIONS (627) (1,097) (1,182) (2,765)
----------- ----------- -------- --------
OTHER INCOME [EXPENSE]:
INTEREST INCOME 178 629 247 665
INTEREST EXPENSE (693) (2,075) (7) (7,841)
----------- ----------- -------- --------
TOTAL OTHER INCOME [EXPENSE] (515) (1,446) 240 (7,176)
----------- ----------- -------- --------
(LOSS] BEFORE INCOME TAX (1,142) (2,543) (942) (9,941)
PROVISION FOR INCOME TAX EXPENSE [Note 6] (45) (135) (114) (423)
----------- ----------- -------- --------
[LOSS] BEFORE EXTRAORDINARY ITEM (1,187) (2,678) (1,056) (10,364)
Extraordinary Item - Loss on Early Extinguishment
of Debt [Note 11] -0- -0- -0- (1,998)
----------- ----------- -------- --------
NET [LOSS] $ (1,187) $ (2,678) $ (1,056) $(12,362)
=========== =========== ======== ========
NET [LOSS] PER SHARE $ (.64) $ (1.43) $ NA $ NA
=========== =========== ======== ========
WEIGHTED AVERAGE COMMON AND EQUIVALENT
SHARES OUTSTANDING $1,866,667 $ 1,866,667 $ NA $ NA
=========== =========== ======== ========
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 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 because, 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
Ended September 30, 1997 102
Net Loss for the Three Months
Ended December 31, 1997 (1,593)
Net Loss for the Three Months
Ended March 31, 1998 (1,187)
---------- -------- ---------- ----------
BALANCE - MARCH 31, 1998 1,866,667 $ 400 $ 0 $ (4,029)
========== ======== ========== ==========
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
-------------------- -------------------
Nine Months Ended Nine Months Ended
March 31, 1998 March 31, 1997
-------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net [Loss] ($2,678) $(12,362)
------- --------
Adjustments to Reconcile Net Income (loss) to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 2,370 617
Amortization of Deferred Finance Charges and Original
Issue Discounts 0 813
Loss on Early Debt Extinguishment 0 1,998
Changes in Assets and Liabilities:
[Increase] Decrease In:
Interest Receivable 35 533
Management Fees and Expenses Receivable (579) (149)
Notes Receivable from Officers 250 0
Prepaids and Other Current Assets 97 (48)
Excess Reorganizational Value (426) (421)
Restricted Funds 404 0
Notes Receivable, Other 7 0
Increase [Decrease] In:
Accounts Payable and Accrued Expenses (1,605) 621
Accrued Interest 789 7,019
------ -------
Total Adjustments 1,342 10,983
------ -------
NET CASH USED BY OPERATING ACTIVITIES (1,336) (1,379)
------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Repayments of Native American Loans Receivable 2,918 2,765
Purchase of Furniture, Fixtures and Equipment (23) 0
------ -------
NET CASH PROVIDED BY INVESTING ACTIVITIES 2,895 2,765
------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Reduction in Equipment Notes 0 (1,150)
------ -------
NET CASH USED IN FINANCING ACTIVITIES 0 (1,150)
------ -------
NET INCREASE [DECREASE] IN CASH AND CASH EQUIVALENTS 1,559 236
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIODS 3,923 2,102
------ -------
CASH AND CASH EQUIVALENTS - END OF PERIODS 5,482 2,338
====== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid During the Periods for:
Interest $1,286
Income Taxes $ 0 $ 423
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 the
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 two Class III
Native American gaming facilities located in separate jurisdictions as
follows:
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 management and development contract with the Narragansett
Tribe for the development of a Class II and Class III gaming facility in
Rhode Island.
CGMI also has a management contract with the Muckleshoot Tribe in
Auburn, Washington. See Note 10 to the consolidated Financial Statements and
Item I.
[2] BASIS OF PRESENTATION
The consolidated balance sheets and changes in stockholders' deficit as
of March 31, 1998, the consolidated statements of operations for the
three-month and nine-month periods ended March 31, 1998 and 1997 and the
consolidated statement of cash flows for the nine-month periods ended March
31, 1998 and 1997 are unaudited. The June 30, 1997 balance sheet data was
derived from the June 30, 1997 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 March 31, 1998 and June 30, 1997,
the results of its operations for the three-month and nine-month periods ended
March 31, 1998 and 1997 and its cash flows for the nine-month periods ended
March 31, 1998 and 1997. 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 provides 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 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 $9,765,000 as adjusted, 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
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") had
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. On January 22, 1998, a Proposed Rule on Class III Gaming Procedures
("Proposed Rule") was promulgated by the Department of the Interior.
Department of the Interior Proposed Rule on Class III Gaming Procedures
The proposed rule sets forth the authority and procedures by which the
Department of the Interior will review requests for approval for Class III
gaming when a State interposes its immunity from suit brought by an Indian Tribe
seeking to enter into a compact with the State pursuant to which gaming
activities would be governed. The proposed rule also sets forth the process and
standards under which such procedures would be adopted. Written comments
concerning the proposed rule are due with the Department on or before June 22,
1998. To date, the Department has not provided any further information regarding
issuance of the final rule on this matter. There can be no assurance as to when
a final rule will be issued or whether the final rule will apply to the
Narragansett Tribe in light of the Chafee Rider (defined below). However, as a
result of the Chafee Rider (as defined below), there can be no assurance that
the Secretary will have the authority under the final rules to impose a
Tribal/State Compact between the Narragansett Tribe and the State of Rhode
Island.
The Chafee Rider
In September 1996, Federal legislation was passed as a non-relevant
rider (introduced by U.S. Senator John Chafee of Rhode Island, the "Chafee
Rider") to the must-pass Omnibus Appropriations Bill which has the effect of
singling out the Narragansett Tribe's reservation (where the gaming facility
was planned) for exclusion from the benefits of IGRA. The Chafee Rider, which
the Company believes discriminates against the Narragansett 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. An appeal has been filed by the Narragansett Tribe in the
United States Court of Appeals for the District of Columbia and is pending.
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, known as "The Narragansett
Justice Act," 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 local referendum. As a result of the Chafee
Rider, the Narragansett Tribe is currently focusing its efforts on seeking voter
approval of a gaming facility to be located in Providence, Rhode Island. There
can be no assurance that any such referendum would be successful or, if
successful, what the ultimate scope of permitted gaming would be.
On February 5, 1998 a bill was introduced in the Rhode Island Senate as
an amendment to existing legislation which, by its terms, would allow Rhode
Island voters to approve a gaming facility for the Narragansett Tribe in
Providence, Rhode Island (the "Providence Bill"). The Providence Bill is
currently pending and if passed would identify the Narragansett Tribe by name in
a referendum question; irrespective of passage of the Providence Bill, however,
Rhode Island law currently allows for voter approval of the establishment of a
gaming facility in Rhode Island. In either event, the Providence City Council
must first adopt a resolution to have the issue placed on the ballot for
majority approval by both statewide and City of Providence voters. There can be
no assurance that the Providence Bill will be enacted into law or that the
Providence City Council will adopt a resolution placing the issue on the
November 1998 ballot or, if placed on the November 1998 ballot, that a majority
of the voters of the State of Rhode Island and the City of Providence will
approve the establishment of the gambling facility.
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 $363,000 and $1,218,000 in costs associated with the Rhode Island
Project for the three-month and nine-month periods ended March 31, 1998
respectively. Additionally, as of March 31, 1998, approximately $8,568,000 in
development costs of the Rhode Island Project may be recoverable by the Company;
however, 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.
These funds were expended cumulatively over the period from Spring 1993 to
present.
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 March 31, 1998, 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 reserved 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 $135,000 for the
three-month and nine-month periods ended March 31, 1998 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
Pursuant to the Amended Indenture, the Company is subject to certain
restrictive covenants, including dividend restrictions. 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 to (and in certain cases, approval from) the Advisory
Committee (as defined in the Plan). 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 not
formed as contemplated by the Amended Indenture and, as a result, there has been
no regulatory impact. In the absence of a functioning Advisory Committee,
however, 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 June 15, 1998. The Company has engaged in discussions with the Indenture
Trustee and a Noteholder representing a majority of the Noteholders ("Majority
Noteholder") for the purpose of amending the Amended Indenture to eliminate the
Advisory Committee concept from the Amended Indenture. These discussions have
resulted in an agreement in principle with the Majority Noteholder which
provides, among other things, that the Advisory Committee function will be
eliminated.
The Company believes that it is probable that the parties will be able
to amend the Amended Indenture by June 15, 1998 and that appropriate extensions
will be granted as necessary in order to implement the necessary changes to the
New Indenture. 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 could elect to declare an 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 Company made an interest
payment of $1,285,900 on November 12, 1997, and an interest payment of
$1,386,000 on May 15, 1998.
[8] RESTRICTED FUNDS
Restricted funds consist of approximately $522,000 and $926,000 held by
the Indenture Trustee as of March 31, 1998 and June 30, 1997, respectively, 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 Indenture Trustee has notified the Company
that the Restricted Funds held by the Indenture Trustee may be applied to
interest payments due on the New Senior Secured Notes.
At the Company's request, the Indenture Trustee conducted a detailed
transaction audit of all accounts held in the Company's name. As a result of the
audit, it was determined that approximately $426,000 previously reported as held
for the benefit of the Company and the New Senior Secured Noteholders as a
result of the sale of the Company's wholly-owned subsidiary, Crescent City
Capital Development Corp., was held for the benefit of the Old Senior Secured
Noteholders. Accordingly, the Consolidated Balance Sheets as of March 31,
1998 reflects a reclassification of approximately $426,000 from Restricted Funds
to Excess Reorganization Value (See footnote [9].)
[9] EXCESS REORGANIZATION VALUE
Excess Reorganization Value at March 31, 1998 includes the effect of a
reclassification of approximately $426,000 of Restricted Funds (see footnote
[8]). The $426,000 was previously reported as held by the Indenture Trustee for
the benefit of the Senior Secured Noteholders. An audit conducted by the
Indenture Trustee determined that these funds were held for the benefit of the
Old Senior Secured Noteholders as a result of the sale of the Company's
wholly-owned subsidiary, Crescent City Capital Development Corp. (CCCD) in May
1996. The sale of CCCD and the previously reported $426,000 in Restricted Funds
relate to the Predecessor Company. Had the $426,000 not been reported for the
benefit of The New Senior Secured Noteholders on the Consolidated Balance sheets
of the Predecessor Company, the Excess Reorganization Value of the Reorganized
Company would have been $9,765,000 or $426,000 higher than the $9,339,000
recorded on May 28, 1997, the Date of Reorganization.
Excess Reorganization Value is amortized on a straight-line basis over
four years. Accordingly, accumulated amortization at March 31, 1998 and
amortization expense for the nine-months then ended includes an adjustment of
approximately $88,000 to reflect the increase in excess reorganization value.
This $88,000 adjustment is allocated amongst fiscal periods as follows:
approximately $26,000 relates to the three month periods ended March 31, 1998,
December 31, 1997, and September 30, 1997, and approximately $9,000 relates to
the period prior to June 30, 1997.
14
[10] IMPACT OF MUCKLESHOOT CONTRACT DISPUTE
On January 30, 1998 the Muckleshoot Tribal Gaming Commission summarily
notified the Company that the Company's gaming license had been revoked based on
an assertion that the Company's certification with the Washington State Gambling
Commission ("WSGC") had lapsed. Additionally, on the same date the Muckleshoot
Tribal Council purported to terminate the Company's management contract on
similar grounds. The WSGC has notified the Muckleshoot Tribe that the Company
remains in good standing with the WSGC and would be immediately recertified upon
request of the Muckleshoot Tribe. Moreover, on April 29, 1998 the WSGC notified
the Company that it had been recommended for the issuance of a gaming license.
The Company vigorously contests the actions of the Muckleshoot Tribe
and Muckleshoot Tribal Gaming Commission as wrongful and without merit and has
commenced litigation in the U.S. District Court in the Western District of
Washington at Seattle. The Complaint asserts, among other things, breach of
contract and defamation and seeks damages in the amount of $50 million. The
Company is entering into settlement discussions with the Muckleshoot Tribe to
resolve this dispute. There can be no assurance that a mutually acceptable
settlement will be reached to this dispute. Although there can be no assurance,
the Company is vigorously pursuing its litigation against the Muckleshoot Tribe
and anticipates that it will prevail on the merits of the Company's case.
The Company has accrued approximately $769,000 in management fees for
the months of December 1997 through March, 1998 which it believes to be
collectable. Further, the Company anticipates that it will prevail in this
dispute and that the ultimate outcome of this dispute will not have a material
adverse impact on the financial position of the Company or the results of its
future operations. However, as approximately 25% of the Company's revenues are
derived from the Muckleshoot contract, should the Company not prevail in this
dispute, the outcome would have a material adverse impact on the financial
position of the Company and the results of its future operations, including a
reversal of any accrued management fees.
[11] 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 the 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.
[12] 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. The Company has adopted SFAS 128 for all
reporting periods ending after December 15, 1997.
15
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 after May
28, 1997) are not comparable to those of the Predecessor Company. See the Notes
to the Company's Consolidated Financial Statements appearing elsewhere in this
report for additional information.
To the extent the information contained in this report is 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 nine-month period ended March 31, 1998, the Company had a net
increase in cash of approximately $1,559,000.
Operating activities for the nine-month period ended March 31, 1998
required approximately $1,336,000 in cash. The primary sources of cash were (i)
management fees which provided approximately $6,427,000 (ii) repayment of notes
receivable from officers which provided $250,000, and (iii) interest income
which provided approximately $592,000. The primary uses of cash were (i)
operating expenses which required approximately $6,623,000 and (ii) interest
payments which required approximately $1,286,000. Significant adjustments to
cash provided by operating activities for non-cash items were approximately
[increase (decrease)]: Depreciation and amortization - $2,370,000; Interest
accrued on restricted funds - ($22,000); Reclassification from restricted funds
to excess reorganization value of (i) excess reorganization value - ($426,000)
and (ii) restricted funds - $426, 000 and; Decrease in working capital accounts
- - ($1,013,000). The decrease in working capital accounts was due primarily to
cash payments of accrued legal and professional fees pursuant to the Company's
Plan of Reorganization and the payment of accrued legal and professional fees
relating to the Company's Rhode Island Project. No cash was used for the payment
of income taxes.
Investing activities for the nine-month period ended March 31, 1998
provided a total of approximately $2,895,000 in cash primarily from the
repayment of Native American loans receivable. Approximately $23,000 in cash was
required for the purchase of new telephone and computer systems associated with
the relocation of the Company's corporate 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 the receipt of debt service
payments on the Native American loans receivable. 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 its operations or service its debt
(See Note 10 to the Consolidated Financial Statements and Item 1. Legal
Proceedings.)
16
Capital Requirements
The Company will continue to operate, through Capital Gaming Management
Inc., its existing management 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 on-hand at March
31, 1998 of $5,482,000, will provide the Company with its only sources of cash
for the approximately two years remaining on the management 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 on May 15,
2001. The excess cash, although not assured, if realized, is expected to assist
in the funding of any new projects.
In order to fund the construction or acquisition costs of any new
projects or to fund the construction costs of the Rhode Island Project, if and
when a gaming facility is approved in Rhode Island, it is anticipated that the
Company will require significant additional capital. The Company believes that
should a gaming facility be approved for Rhode Island, the Company will be
able to obtain funding through the debt and/or equity capital markets. The
Company's ability to fund other proposed projects will depend upon the economic
viability of the individual project and the current over-all state of the
capital markets and the Native American and non-Native American Gaming
industries. 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, collectively allow company management to believe that they should
be able to obtain the required investment capital for most economically viable
projects. 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 Tribe's ability to
secure a binding compact or approval for non-compacted gaming, no financing
commitments for any proposed projects have been obtained as of the date hereof,
and the timing, terms and amount of all capital requirements cannot be
reasonably estimated at this time.
Debt
At March 31, 1998 the New Senior Secured Notes consist of: face value
$23,100,000 of the New Senior Secured Notes issued pursuant to the Plan and
payable in two scheduled principal payments of $4,620,000 due May 15, 2000, and
a final balloon principal payment of $18,480,000 due on May 15, 2001.
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. Per the terms of
the Amended Indenture, the Company made an interest payments of $1,285,900 on
November 17, 1997, and $1,386,000 on May 15, 1998.
The Amended Indenture contemplates that certain actions of the Company
require prior notice to (and in certain cases, approval from) the Advisory
Committee as defined in the Plan. No proposed member of the Advisory Committee
has yet executed an appropriate confidentiality agreement as contemplated 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 not
formed as required by the Amended Indenture and, as a result, there has been no
regulatory impact. In the absence of a functioning Advisory Committee, however,
17
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 New
Senior Secured Notes to forebear from taking any action to accelerate the New
Senior Secured Notes until June 15, 1998. The Company has engaged in discussions
with the Indenture Trustee and the Majority Noteholder for the purpose of
amending the Amended Indenture to eliminate the Advisory Committee concept from
the Amended Indenture altogether. These discussions have resulted in an
agreement in principle which provides, among other things, that the Advisory
Committee function will be eliminated.
The Company believes that it is probable that the parties will be able
to amend the Amended Indenture to cure the default by June 15, 1998 and that
appropriate extensions will be granted as necessary in order to implement the
necessary changes to the New Indenture. 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 could elect to declare an 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.
Restricted Funds
Restricted funds consist of approximately $522,000 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 Indenture Trustee
has notified the Company that the Restricted Funds held by the Indenture Trustee
may be applied to interest payments due on the New Senior Secured Notes.
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 its wholly-owned subsidiaries, Capital Gaming Management 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
Directors approved an informal Business Plan for Consolidating Operations (the
"Business Plan"). The Business Plan called for the relocation of the Company's
New Jersey corporate offices to its Arizona offices, thereby gaining substantial
efficiencies
18
of operations, better communication amongst management and significant
reductions in staffing and administrative costs on a go-forward basis. Pursuant
to the Business Plan, the Company consolidated all of its operations into its
Phoenix offices in June 1997.
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 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 and nine-month periods ended March
31, 1998, as compared to the same periods in 1997, is presented on a
consolidated basis only, with information about an individual entity provided
where necessary.
Three-month period ended March 31, 1998 as compared to March 31, 1997
Loss From Operations
Loss from operations for the three-month period ended March 31, 1998
totaled approximately $627,000 as compared to a loss of $1,182,000 for the
three-month period ended March 31, 1997, a decrease in loss of $555,000. This
decrease in loss from operations is comprised of: (i) an increase in revenues
of $42,000, and (ii) a decrease in operating expenses of $513,000.
Revenues
Revenues for the three-month period ended March 31, 1998, comprised of
CGMI's management fees from the Company's three managed Class III gaming
facilities totaled approximately $2,023,000, an increase of $42,000 or 2.1% over
the three-month period ended March 31, 1997. The following table sets forth the
comparison in total management fees between 1998 and 1997 for the three-month
periods ended March 31, by facility (in thousands):
Facility 1998 1997 Inc(Dec) %
-------- ---- ---- -------- -
Muckleshoot Casino $ 570 $ 605 $(35) (5.8%)
Tonto Apache 453 418 35 8.4%
Umatilla 1,000 958 42 4.4%
------ ------ ---- ---
Total Revenues $2,023 $1,981 $ 42 2.1%
====== ====== ==== ===
Due to the Muckleshoot contract dispute (see footnote [10] to the
Company's consolidated financial statements), the Company has accrued
approximately $769,000 in management fees from the Muckleshoot Casino operations
for the four months of December, 1997 through March, 1998. The balances accrued
are based upon revenue estimates provided by the Muckleshoot Casino's management
in their 1998 budget proposal. Company management believes such balances accrued
closely approximate actual balances.
The decrease in management fees for the Muckleshoot Casino was due to
increased competition from the Puyallup Tribe's riverboat gaming facility in the
Tacoma, Washington area as well as the inception of local card rooms in
proximity to the Muckleshoot Casino. The increase in management fees at the
Tonto Apache and Umatilla Casinos is primarily due to more effective marketing
and more efficient cost controls.
Costs and Expenses
Salaries, wages and related costs for the three-month period ended
March 31, 1998 were approximately $724,000, representing an increase of $283,000
or 64.2% over the comparable period in 1997. This increase is comprised
primarily of certain one time payments for retiring employees in the third
quarter of fiscal 1998, several new officer and staff appointments in 1998 and
miscellaneous changes to the Company's benefits program.
Native American development costs decreased approximately $257,000 or
34.3% from $750,000 to $493,000, for the three-month periods ended March 31,
1997 and 1998, respectively. Development costs for CGII and CDGC for both 1997
and 1998 were primarily for the benefit of the Narragansett Tribe in Rhode
Island.
19
The decrease in Rhode Island development costs is due primarily to
decreased legal activity required in attempting to further the Tribe's position
toward an approved Compact. Specifically, during the three-month period ended
March 31, 1997, the Company incurred the expenses of the Narragansett Tribe in
their attempt to further their position toward an approved Compact, as described
in footnote [5] of the Company's consolidated financial statements.
Additionally, during the three month period ended March 31, 1997, the Company
incurred costs in evaluating various projects which it ultimately did not
pursue.
Professional fees (primarily legal) increased approximately $46,000 or
17.3% to $312,000 for the three-month period ended March 31, 1998 as compared to
$266,000 the three-month period ended March 31, 1997. The increase
in professional fees is due primarily to legal activity of the Company
associated with its attempt to resolve the Muckleshoot contract dispute, as
described in footnote [10] of the Company's consolidated financial statements.
General and administrative costs for the three-month period ended March
31, 1998 were approximately $334,000, a $15,000 or 4.3% decrease, as compared to
$349,000 for the three months ended March 31, 1997. This decrease is due
primarily to the Company's on-going efforts to reduce operating expenses.
Depreciation and amortization expenses were approximately $787,000 and
$186,000 for the three-month periods ended March 31, 1998 and 1997,
respectively. The 1998 amount includes amortization of excess reorganization
costs, related to the Company's Reorganization, of approximately $606,000, as
compared to zero in 1997. Included in amortization expense for excess
reorganization costs for the three months ended March 31, 1998 is an adjustment
of approximately $26,000 for the increase in excess reorganization value due to
the reclassification of approximately $426,000 in restricted funds (see footnote
[9] to the Company's consolidated financial statements).
Reorganization costs for the three-month period ended March 31, 1997 of
$1,171,000 consisted primarily of post Petition Date legal and related fees
associated with the Company's Reorganization.
Interest Income
Interest income for the three-month period ended March 31, 1998 was
approximately $178,000 as compared to approximately $247,000 for the same period
in 1997. For the three months ended March 31, 1998, the Company earned
approximately $120,000 in interest income on Native American loans, and
approximately $58,000 in interest on excess cash. For the three months ended
March 31, 1997, the Company earned $206,000 in interest income on Native
American loans, and $41,000 in interest on excess cash. The decrease in interest
income is primarily due to the pay-down of the principal balances of the Native
American loans.
Interest Expense
Interest expense for the three-month period ended March 31, 1998 totals
$693,000 and is comprised of interest accruing at 12.0% per annum, on the New
Senior Secured Notes.
Interest expense for the three-month period ended March 31, 1997 is
comprised of interest on CGMI equipment notes and totals approximately $7,000.
Income Taxes
The provision for income taxes for the three-month periods ended March
31, 1998 and 1997 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 loss before income tax for
the Company.
20
Nine-month period ended March 31, 1998 as compared to March 31, 1997
Loss From Operations
Loss from operations for the nine-month period ended March 31, 1998
totaled approximately $1,097,000 as compared to a loss of $2,765,000 for the
nine-month period ended March 31, 1997, a decrease from 1997 of $1,668,000, or
60.3%. This decrease in loss from operations is comprised of: (i) an increase
in revenues of $1,052,000, and (ii) a decrease in operating expenses of
$616,000.
Revenues
Revenues for the nine-month period ended March 31, 1998, comprised of
CGMI's management fees from the Company's managed Class III gaming facilities,
totaled approximately $6,883,000, an increase of $1,052,000 or 18.0% over the
nine-month period ended March 31, 1997. The following table sets forth the
comparison in total management fees between 1998 and 1997 for the nine-month
periods ended March 31, by facility (in thousands)
Facility 1998 1997 Inc(Dec) %
-------- ---- ---- -------- -
Muckleshoot Casino $1,690 $1,709 $ (19) (1.1%)
Muckleshoot Bingo 0 8 (8) (100.0%)
Tonto Apache 1,676 1,401 275 19.6%
Umatilla 3,517 2,713 804 29.6%
------ ------ ------ -------
Total Revenues $6,883 $5,831 $1,052 18.0%
====== ====== ====== =======
Note: The Muckleshoot Bingo contract expired on September 30, 1996
Due to the Muckleshoot contract dispute (see footnote [10] to the
Company's consolidated financial statements), the Company has accrued
approximately $769,000 in management fees from the Muckleshoot Casino operations
for the four months of December, 1997 through March, 1998. The balances accrued
are based upon revenue estimates provided by the Muckleshoot Casino's management
in their 1998 budget proposal. Company management believes such balances accrued
closely approximate the actual balances.
The decrease in management fees for the Muckleshoot Casino was due to
increased competition from the Puyallup Tribe's riverboat gaming facility in the
Tacoma, Washington area as well as the inception of local card rooms in close
proximity to the Muckleshoot Casino. The increase in management fees at the
Tonto Apache and Umatilla Casinos is primarily due to more effective marketing
and more efficient cost controls.
Costs and Expenses
Salaries, wages and related costs for the nine-month period ended March
31, 1998 were approximately $2,586,000, representing an increase of $1,168,000
or 82.4% over the comparable period in 1997. This increase is comprised
primarily of certain one time payments of year-end appreciation awards and
changes to the Company's benefits program for continuing employees, salary
adjustments, officer appointments and staff additions, and changes to the
Company's benefits program.
Native American development costs decreased approximately $741,000 or
39.3% from $1,887,000 to $1,146,000 for the nine-month periods ended March 31,
1997 and 1998, respectively. Development costs for the Company for both 1997 and
1998 were primarily for the benefit of the Narragansett Tribe in Rhode Island.
The decrease in Rhode Island development costs is due primarily to decreased
legal activity required in attempting to further the Tribe's position toward an
approved Compact. The decrease in Company development costs is attributable to a
$130,000 adjustment for the write-off of accrued liabilities related to an
inactive development contract, approximately $49,000 in refunds from the NIGC
for unexpended investigation costs, and fewer legal expenditures in 1998
associated with the Narragansett Tribe's litigation. As of March 31, 1998 the
cumulative investment expended on the Rhode Island Project was approximately
$9,763,000, of which, approximately $8,568,000 is expected to be recoverable by
the Company if and when a gaming facility is established by the Narragansett
Tribe.
Professional fees (primarily legal) decreased approximately $278,000,
or 23.5%, to $903,000 for the nine-month period ended March 31, 1998 as compared
to the comparable period ended March 31, 1997. The decrease in professional fees
is primarily due to reduced Reorganization legal activity following the
Reorganization of the Company.
21
General and administrative costs for the nine-month period ended March
31, 1998 were approximately $975,000, representing a decrease of $351,000 or
26.5%, as compared to the nine-month period ending March 31, 1997, and is due
primarily to the Company's on-going efforts to reduce operating expenses.
Depreciation and amortization expenses were approximately $2,370,000
and $617,000 for the nine-month periods ended March 31, 1998 and 1997,
respectively. The 1998 balance includes amortization of excess reorganization
costs of approximately $1,826,160 as compared to zero in 1997. Included in
amortization expense for excess reorganization costs is an adjustment of
approximately $88,000 for the increase in excess reorganization value due to
the reclass of approximately $426,000 in restricted funds. Of the $88,000
adjustment, approximately $9,000 relates to periods prior to June 30, 1997 (See
Notes [8] and [9] to the Company's consolidated financial statements).
Reorganization costs for the nine-month period ended March 31, 1997 of
$1,267,000 consisted primarily of post-Petition Date legal and related fees
associated with the Company's Reorganization.
Reorganization fees paid to Management for the nine-month period ended
March 31, 1997 consisted of a $900,000 transaction fee paid to Management
relating to the discontinuance and sale of the Company's wholly-owned subsidiary
Crescent City Capital Development Corp. in May 1996.
Interest Income
Interest income for the nine-month period ended March 31, 1998 was
approximately $629,000 as compared to approximately $665,000 for the comparable
period in 1997. For 1998, interest income is comprised of approximately: (i)
$186,000 from investments; (ii) $429,000 from Native American loans; and (iii)
$14,000 from officer loans and other notes. For 1997, interest income was
comprised of approximately: (i) $76,000 from investments; (ii) $680,000 from
Native American loans; and (iii) a $91,000 reduction from adjustments related to
the final distribution of the CCCD sale. The decrease in interest from Native
American loans is due to the pay-down of the principal balances.
Interest Expense
Interest expense for the nine-month period ended March 31, 1998 is
comprised of interest, accruing at 12.0% per annum on the New Senior Secured
Notes, and totals approximately $2,075,000. For the nine-month period ended
March 31, 1997 interest expense is comprised of the following: (i) Old Senior
Secured, Notes - $5,929,000; (ii) amortization of original issue discount and
deferred finance charges - $813,000; (iii) Republic Note Payable - $1,050,000;
and (iv) CGMI equipment notes - $49,000, for a total of $7,841,000.
Income Taxes
The provision for income taxes for the nine-month periods ended March
31, 1998 and 1997 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.
22
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. There was no
material litigation pending against the Company on March 31, 1998. 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 existance of any
material pending or threatened legal proceedings at this time except as
described below.
1. Republic Litigation
In connection with the consummation of the Company's Plan of
Reogranization, Republic Corporate Service, Inc. ("Republic") is to receive a
distribution on account of its unsecured claims equal to its pro-rate 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 alterative,
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. On April 16, 1998 the Company and
Republic entered into a stipulation of settlement which provides, among other
things, that any equity securities slated for distribution to Republic pursuant
to the Plans will be distributed to a possession trustee and provides that
Edward M. Tracy, Chairman and CEO of the Company, will maintain all voting
rights with respect to such equity securities pursuant to a Voting Trust until
such time as such securities are sold to a suitable purchaser.
2. Muckleshoot Litigation
On January 30, 1998 the Muckleshoot Tribal Gaming Commission summarily
notified the Company that the Company's gaming license had been revoked based on
an assertion that the Company's certification with the Washington State Gambling
Commission ("WSGC") had lapsed. Additionally, on the same date the Muckleshoot
Tribal Council purported to terminate the Company's management contract on
similar grounds. The WSGC has notified the Muckleshoot Tribe that the Company
remains in good standing with the WSGC and would be immediately recertified upon
request of the Muckleshoot Tribe. Moreover, on April 29, 1998 the WSGC notified
the Company that it has been recommended for the issuance of a gaming license.
The Company vigorously contests the actions of the Muckleshoot Tribe
and Muckleshoot Tribal Gaming Commission as wrongful and without merit and has
commenced litigation in the U.S. District Court in the Western District of
Washington at Seattle. The Compliant asserts, among other things, breach of
contract and defamation and seeks damages in the amount of $50 million. The
Company is entering into settlement discussions with the Muckleshoot Tribe to
resolve this dispute. There can be no assurance that a mutually acceptable
settlement will be reached to this dispute. Although there can be no assurance,
the Company is vigorously pursuing its litigation against the Muckleshoot Tribe
and anticipates that it will prevail on the merits. The Company anticipates that
it will prevail in this dispute and that the ultimate outcome of this dispute
will not have a material adverse impact on the financial position of the Company
or the results of its future operations. However, as approximately 25% of the
Company's revenues are derived from the Muckleshoot contract, should the Company
not prevail in this dispute, the outcome would have a material adverse impact on
the financial position of the Company and the results of its future operations,
including a reversal of any accrued management fees.
23
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 to (and in certain cases, approval from) the Advisory
Committee as defined in the Plan. 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 not
formed as contemplated by the Amended Indenture and, as a result, there has been
no regulatory impact. In the absence of a functioning Advisory Committee,
however, 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 New
Senior Secured Notes to forebear from taking any action to accelerate the New
Senior Secured Notes until June 15, 1998. The Company has engaged in discussions
with the Indenture Trustee and the Majority Noteholder for the purpose of
amending the Amended Indenture to eliminate the Advisory Committee concept from
the Amended Indenture. These discussions have resulted in an agreement in
principle with the Majority Noteholder which provides, among other things, that
the Advisory Committee Function will be eliminated.
The Company believes that it is probable that the parties will be able
to amend the Amended Indenture to cure the default by June 15, 1998 and that
appropriate extensions will be granted as necessary in order to implement the
necessary changes to the New Indenture. 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 could 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.
24
PART II, Item 6.
CAPITAL GAMING INTERNATIONAL, INC.
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number
- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during this period.
25
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: May __, 1998 By: /s/ William S. Papazian
------------------------------------------
William S. Papazian, Senior Vice President
and General Counsel and Secretary
(Authorized Representative)
Dated: May __, 1998 By: /s/ Bradley A. Denton
------------------------------------------
Bradley A. Denton, Vice President and
Chief Financial Officer
(Principal Accounting Officer)
26