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EXHIBIT 13.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CROWN CASINO CORPORATION
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements appearing elsewhere in this annual report.
OVERVIEW
Crown Casino Corporation ("Crown" or the "Company") is a holding company which
presently owns 79% of Concorde Acceptance Corporation ("Concorde"), a sub-prime
mortgage lender, and 49% of Casino Magic Neuquen S.A. ("CMN"), a casino
operator in the Province of Neuquen, Argentina. Crown also owns 100% of Gaming
Entertainment Management Services, Inc. ("GEMS") which owns an 18.6 acre tract
of land in the gaming district of Las Vegas, Nevada. GEMS has entered into a
contract to sell the Las Vegas land for $15.25 million. The Company is
presently focusing on (i) the acquisition or development of other casino
gaming properties in Argentina, (ii) the development and expansion of
Concorde's mortgage based lending business, and (iii) the potential acquisition
or development of other businesses unrelated to casino gaming or mortgage based
lending.
Since its inception in 1983 through June 1993 the Company was principally
engaged in various facets of the cable and related programming businesses.
During fiscal 1992 management determined the Company's programming business had
become increasingly competitive from a profit margin standpoint and future
growth was limited. As a result, in late fiscal 1992 the Company sold the
majority of its programming business and began exploring new business
opportunities. In June 1993 the Company made the decision to enter the gaming
business, and, as a result, proceeded to sell the balance of its cable assets.
From June 1993, with the acquisition of 100% of St. Charles Gaming Company,
Inc. ("SCGC"), until November 1996 the Company's primary business focus was
that of owning, operating and developing casino gaming properties. SCGC owns
and operates a riverboat gaming casino located in Calcasieu Parish, Louisiana
which had been in the development stage until opening in July 1995. In June
1995 the Company sold a 50% interest in SCGC to Louisiana Riverboat Gaming
Partnership ("LRGP") and in May 1996 sold its remaining 50% interest in SCGC to
Casino America, Inc. ("Casino America").
In November 1996 the Company decided to cease pursuing gaming opportunities in
the United States and began pursuing business opportunities in fields unrelated
to casino gaming. As a result, in June 1997 the Company, along with certain
newly hired management personnel, formed Concorde. Concorde is in the business
of originating, purchasing, servicing and selling sub-prime mortgage loans
which are secured primarily by first and second liens on residential
properties. These loans are expected to be sold in privately negotiated
transactions as well as to institutional investors in the secondary market
through securitization programs.
Also in June 1997 the Company acquired a 49% interest in CMN from Casino Magic
Corp. CMN operates casinos in the cities of Neuquen and San Martin de los
Andes in the Province of Neuquen, Argentina under an exclusive concession
contract.
RESULTS OF OPERATIONS
Since its acquisition in June 1993 through June 8, 1995 SCGC was a consolidated
subsidiary of the Company. From June 9, 1995 (the date the first 50% interest
in SCGC was sold) through May 3, 1996 (the date the remaining 50% interest in
SCGC was sold) the Company accounted for its 50% interest in SCGC using the
equity method. Accordingly, operating results for fiscal year 1997, 1996 and
1995 are not entirely comparable.
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
General and administrative expenses for fiscal 1997 decreased $245,801 compared
to fiscal 1996. The decrease was primarily attributable to a reduction in
compensation costs, partially offset by increases in consulting and
transportation expenses. Gaming development costs for fiscal 1997 decreased
$175,030 compared to fiscal 1996 as a result of the Company's decision to cease
pursuing gaming opportunities in the United States and begin pursuing business
opportunities in other fields.
Interest expense for fiscal 1997 decreased $939,955 compared to fiscal 1996.
The decrease was principally the result of the Company no longer consolidating
the operating results of SCGC from and after June 9, 1995 as SCGC was formerly
responsible for substantially all of the Company's consolidated interest
expense. Interest income for fiscal 1997 decreased $762,272 compared to fiscal
1996. The decrease was principally the result of the prepayment of a $10
million note by Casino America in August 1996 and the sale of a second $10
million note in October 1996 both of which had been earning interest at 11.5%
per annum. The
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proceeds from such notes were placed in money market funds which earned
interest at approximately 5.3% per annum. Other income in fiscal 1997 pertains
to a fee earned by the Company in assisting another company complete an
acquisition.
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
General and administrative expenses for fiscal 1996 increased $1,033,755
compared to fiscal 1995. The increase was primarily attributable to greater
personnel, transportation, and consulting and directors fees, offset by a
decrease in professional fees. Gaming development costs for fiscal 1996
decreased $297,077 compared to fiscal 1995 principally as a result of the
Company ceasing to pursue a riverboat gaming license in the State of Illinois.
SCGC pre-opening and development costs for fiscal 1996 decreased $14,272,011
compared to fiscal 1995 as a result of the Company no longer consolidating
SCGC's operating results from and after June 9, 1995.
Interest expense for fiscal 1996 decreased $5,817,826 compared to fiscal 1995.
The decrease was the result of the Company no longer consolidating SCGC's
operating results from and after June 9, 1995. Interest income for fiscal 1996
increased $2,115,707 compared to fiscal 1995. The increase was a result of
interest being recognized in fiscal 1996 on a $20 million note issued by LRGP
(the "LRGP Note") in connection with LRGP's purchase of 50% of SCGC in June
1995. The LRGP Note earned interest at the rate 11.5% per annum. During
fiscal 1995 the LRGP Note was not in existence.
LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 1997 the Company's sources of liquidity included (i) $12 million
cash on hand, (ii) the sale of the Company's Las Vegas land which is under
contract to be sold for $15.25 million in cash, and (iii) the issuance of debt
and/or equity.
While the Company is focusing on (i) the acquisition or development of other
casino gaming properties in Argentina, (ii) the development and expansion of
Concorde's mortgage based lending business, and (iii) the potential acquisition
or development of other businesses unrelated to casino gaming or mortgage based
lending, the Company has made no definitive plans for the utilization of the
Company's capital resources. Presently management believes the Company's
capital resources are sufficient to satisfy the capital needs of the Company
for the fiscal year ending April 30, 1998.
In March 1996 the Company's Board of Directors approved a program, as amended,
to repurchase up to 2,000,000 shares of the Company's common stock from time to
time in the open market. As of July 31, 1997 the Company had repurchased
1,739,774 shares pursuant to this program. The timing and amount of future
share repurchases, if any, will depend on various factors including market
conditions, available alternative investments and the Company's financial
position.
SEASONALITY AND INFLATION
Management of the Company does not believe inflation has had a material effect
on the Company's business. In addition, Concorde and CMN's businesses are not
subject to significant seasonal fluctuations.
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CONSOLIDATED BALANCE SHEETS CROWN CASINO CORPORATION
April 30,
1997 1996
----------- -------------
Assets
Current assets:
Cash and cash equivalents $ 21,117,960 $ 668,853
Receivables, net 345,780 742,246
Prepaid expenses 37,674 49,766
Land held for sale 15,150,000
------------ -------------
Total current assets 36,651,414 1,460,865
------------ -------------
Property and equipment:
Furniture, fixtures and equipment 1,811,581 1,892,666
Land held for development 16,169,709
------------ -------------
1,811,581 18,062,375
Less accumulated depreciation (226,404) (194,179)
------------ -------------
1,585,177 17,868,196
------------ -------------
Note receivable from LRGP 20,000,000
------------ -------------
$ 38,236,591 $ 39,329,061
============ =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 41,284 $ 72,773
Accrued liabilities 422,609 819,018
Current portion of long-term debt 69,005
Income taxes payable 335,000
Deferred income taxes 1,325,000
------------ -------------
Total current liabilities 2,123,893 960,796
------------ -------------
Long-term debt, less current portion 918,564
Deferred income taxes, less current portion 400,000 4,000,000
Investment in SCGC 3,297,043
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.01 per share, 1,000,000 shares
authorized; none issued or outstanding
Common stock, par value $.01 per share, 50,000,000 shares
authorized; 10,394,585 issued and outstanding (11,650,559 in 1996) 103,946 116,506
Additional paid-in capital 38,496,803 41,784,088
Accumulated deficit (2,888,051) (11,747,936)
------------ -------------
Total stockholders' equity 35,712,698 30,152,658
------------ -------------
$ 38,236,591 $ 39,329,061
============ =============
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS Crown Casino Corporation
Years Ended April 30,
1997 1996 1995
------------- ------------- -------------
Revenues $ - $ - $ -
Costs and expenses:
General and administrative 2,796,273 3,042,074 2,008,319
Write-down of land held for sale 1,019,709
SCGC pre-opening and development 536,110 14,808,121
Gaming development 40,933 215,963 513,040
Gaming acquisition abandonment 696,009 664,991
Depreciation and amortization 168,443 130,556 248,044
------------- ------------- -------------
4,721,367 4,589,694 17,577,524
------------- ------------- -------------
Other income (expense):
Interest expense (68,757) (1,008,712) (6,826,538)
Interest income 1,530,324 2,292,596 176,889
Equity in loss of SCGC (2,408,213)
Gain on sale of SCGC 14,934,543 21,512,640
Loss on sale of securities (5,254,858)
Other income 500,000
------------- ------------- -------------
11,641,252 20,388,311 (6,649,649)
------------- ------------- -------------
Income (loss) before income taxes 6,919,885 15,798,617 (24,227,173)
Provision (benefit) for income taxes (1,940,000) 3,500,000 (3,902,328)
------------- ------------- -------------
Net income (loss) $ 8,859,885 $ 12,298,617 $ (20,324,845)
============= ============= =============
Earnings (loss) per share $ .80 $ 1.03 $ (2.01)
============= ============= =============
Weighted average common and common
equivalent shares outstanding 11,027,077 11,981,757 10,103,993
============= ============= =============
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS CROWN CASINO CORPORATION
Years Ended April 30,
1997 1996 1995
------------- ------------- -------------
Operating activities:
Net income (loss) $ 8,859,885 $ 12,298,617 $ (20,324,845)
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Depreciation and amortization 168,443 130,556 248,044
Amortization of debt issuance costs/discount 389,360 3,376,392
Deferred income taxes (2,275,000) 3,500,000 (3,940,000)
Equity in loss of SCGC 2,408,213
Write-down of assets 1,715,718 51,496 3,131,359
Gain on sale of SCGC (14,934,543) (21,512,640)
Equity securities issued for services 1,562,500
Loss on sale of securities 5,254,858
Changes in assets and liabilities, net of transactions:
Receivables, net 396,466 (780,747) 592,447
Prepaid expenses 12,092 54,347 (902,259)
Accounts payable and accrued liabilities (145,398) 243,606 1,611,415
Income taxes payable (335,000)
------------- ------------- -------------
Net cash used by operating activities (1,282,479) (3,217,192) (14,644,947)
------------- ------------- -------------
Investing activities:
Purchase of assets (1,076,142) (4,536,401) (18,897,910)
Sale of assets 325,000 441,023
Purchase of securities (4,023,118)
Sale of securities 11,593,260
Sale/collection of notes receivable 19,200,000
Sale of SCGC 1,000,000
------------- ------------- -------------
Net cash provided (used) by investing activities 26,019,000 (3,095,378) (18,897,910)
------------- ------------- -------------
Financing activities:
Issuance of common stock 23,125 7,403,490
Purchase of common stock (3,299,845) (298,723) (55,000)
Issuance of debt and warrants 1,000,000 32,700,000
Debt issuance costs (1,633,407)
Advances from LRGP 4,627,897 2,179,083
Payments of debt and capital lease obligations (987,569) (63,316) (7,137,808)
------------- ------------- -------------
Net cash provided (used) by financing activities (4,287,414) 5,288,983 33,456,358
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents 20,449,107 (1,023,587) (86,499)
Cash and cash equivalents at: Beginning of year 668,853 1,692,440 1,778,939
------------- ------------- -------------
End of year $ 21,117,960 $ 668,853 $ 1,692,440
============= ============= =============
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY CROWN CASINO CORPORATION
For the Three Years in the Period Ended April 30, 1997
Common Stock Treasury Stock
------------------------ ------------------------
Shares Amount Shares Amount
---------- ------------ ---------- ------------
Balance at April 30, 1994 9,686,319 $ 96,863 687,394 $ (587,887)
Issuance of common stock 2,650,034 26,501
Issuance of warrants
Purchase of common stock 10,000 (55,000)
Stock options exercised 39,500 395
Cancellation of treasury stock (697,394) (6,974) (697,394) 642,887
Net loss
---------- ------------ ---------- ------------
Balance at April 30, 1995 11,678,459 116,785 - -
Issuance of common stock 50,000 500
Purchase of common stock (90,900) (909)
Stock options exercised 13,000 130
Net income
---------- ------------ ---------- ------------
Balance at April 30, 1996 11,650,559 116,506 - -
Purchase of common stock (1,255,974) (12,560)
Net income
---------- ------------ ---------- ------------
Balance at April 30, 1997 10,394,585 $ 103,946 - $ -
========== ============ ========== ============
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY CROWN CASINO CORPORATION
Additional Total
Paid-in Accumulated Stockholders
Capital Deficit Equity
-------------- -------------- --------------
Balance at April 30, 1994 $ 28,049,381 $ (3,721,708) $ 23,836,649
Issuance of common stock 12,418,442 12,444,943
Issuance of warrants 1,989,845 1,989,845
Purchase of common stock (55,000)
Stock options exercised 37,652 38,047
Cancellation of treasury stock (635,913)
Net loss (20,324,845) (20,324,845)
-------------- -------------- --------------
Balance at April 30, 1995 41,859,407 (24,046,553) 17,929,639
Issuance of common stock 199,500 200,000
Purchase of common stock (297,814) (298,723)
Stock options exercised 22,995 23,125
Net income 12,298,617 12,298,617
-------------- -------------- --------------
Balance at April 30, 1996 41,784,088 (11,747,936) 30,152,658
Purchase of common stock (3,287,285) (3,299,845)
Net income 8,859,885 8,859,885
-------------- -------------- --------------
Balance at April 30, 1997 $ 38,496,803 $ (2,888,051) $ 35,712,698
============== ============== ==============
See accompanying notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CROWN CASINO CORPORATION
A - History and Description of Business
Crown Casino Corporation ("Crown" or the "Company") is a holding company which
presently owns 79% of Concorde Acceptance Corporation ("Concorde"), a sub-prime
mortgage lender, and 49% of Casino Magic Neuquen S.A. ("CMN"), a casino
operator in the Province of Neuquen, Argentina. Crown also owns 100% of Gaming
Entertainment Management Services, Inc. ("GEMS") which owns an 18.6 acre tract
of land in the gaming district of Las Vegas, Nevada. GEMS has entered into a
contract to sell the Las Vegas land for $15.25 million (see Note E). The
Company is presently focusing on (i) the acquisition or development of other
casino gaming properties in Argentina, (ii) the development and expansion of
Concorde's mortgage based lending business, and (iii) the potential acquisition
or development of other businesses unrelated to casino gaming or mortgage based
lending.
From June 1993, with the acquisition of 100% of St. Charles Gaming Company,
Inc. ("SCGC"), until November 1996, the Company's primary business focus was
that of owning, operating and developing casino gaming properties. SCGC owns
and operates a riverboat gaming casino located in Calcasieu Parish, Louisiana
which had been in the development stage until opening in July 1995. In June
1995 the Company sold a 50% interest in SCGC to Louisiana Riverboat Gaming
Partnership ("LRGP") and in May 1996 sold its remaining 50% interest in SCGC to
Casino America, Inc. ("Casino America") (see Note C).
In November 1996 the Company decided to cease pursing gaming opportunities in
the United States and began pursuing business opportunities in fields unrelated
to casino gaming. As a result, in June 1997 the Company, along with certain
newly hired management personnel, formed Concorde. Concorde is in the business
of originating, purchasing, servicing and selling sub-prime mortgage loans
which are secured primarily by first and second liens on residential
properties. These loans are expected to be sold in privately negotiated
transactions as well as to institutional investors in the secondary market
through securitization programs.
Also in June 1997 the Company acquired a 49% interest in CMN from Casino Magic
Corp. ("Casino Magic"). CMN operates casinos in the cities of Neuquen and San
Martin de los Andes in the Province of Neuquen, Argentina under an exclusive
concession contract (see Note D).
B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principals of Consolidation
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates. The consolidated
financial statements include the accounts of Crown Casino Corporation and all
of its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Since its acquisition in June 1993 through
June 8, 1995 SCGC was a consolidated subsidiary of the Company. From June 9,
1995 through May 3, 1996 the Company accounted for its 50% ownership in SCGC
using the equity method.
Cash and Cash Equivalents
The Company considers cash and all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Casino Pre-opening and Development Costs
All casino pre-opening and development costs are expensed as incurred.
Pre-opening and development costs consist principally of personnel costs,
advertising, insurance, travel, consulting and professional fees.
Property and Equipment
Property and equipment are stated at cost. Expenditures for additions,
renewals and improvements are capitalized. Interest costs during construction
of facilities are capitalized. Costs of repairs and maintenance are expensed
as incurred. Depreciation on furniture, fixtures and equipment is computed
using the straight-line method over five to ten years.
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Concentration of Credit Risk
At April 30, 1997 the majority of the Company's cash was invested in two large
institutional money market funds which balances are not insured. Management
believes the credit risk associated with these money market funds is nominal.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
Treasury Stock
During fiscal 1995 the Company formally canceled all of its shares held in
treasury. Also during fiscal 1996 and 1997 the Company repurchased some of its
common stock and immediately thereafter canceled the shares. The amount
credited to additional paid-in capital upon the original issuance of such
shares was estimated to be equal to or greater than the Company's cost of
reacquiring such shares. Accordingly, the carrying value in excess of the par
value of such shares was charged to additional paid-in capital upon such
cancellation.
Earnings (Loss) Per Share
Earnings (loss) per share has been calculated using the weighted average number
of shares outstanding, including common stock equivalents, if dilutive. Fully
diluted per share amounts are substantially the same as primary per share
amounts for the periods presented.
In February 1997 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per
Share ("EPS")," which is effective in fiscal 1998 and earlier application is
not permitted. SFAS No. 128 simplifies the standards for computing earnings
per share. It replaces the presentation of primary EPS with a presentation of
basic EPS. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common
shares outstanding during the period. If SFAS No. 128 had been applied to
fiscal 1997 results of operations, the Company's basic EPS would have been $.82
based upon a weighted-average number of common shares outstanding of
10,868,119. Fully dilutive EPS remains the same under SFAS No. 128 but will
be referred to as diluted EPS.
Recent Accounting Pronouncements
In June 1997 the FASB issued SFAS No. 130 "Reporting Comprehensive Income,"
which establishes standards for reporting comprehensive income and its
components in a full set of general purpose financial statements. Also in June
1997 the FASB issued SFAS No. 131 "Disclosures about Segments of an Enterprise
and Related Information," which requires public companies to disclose certain
operating and financial information by business segment in their annual and
interim financial statements. SFAS No. 130 and No. 131 are effective for
fiscal years beginning after December 15, 1997.
Reclassifications
Certain prior year amounts in the accompanying financial statements have been
reclassified to conform to the fiscal 1997 presentation.
C - SALE OF SCGC
On June 9, 1995 pursuant to a definitive stock purchase agreement, the Company
sold a 50% interest in SCGC to LRGP, a joint venture then owned 50% by Casino
America and 50% by Louisiana Downs, Inc. The purchase price consisted of (i) a
five-year $20 million non-recourse note with interest payable monthly at 11.5%
per annum (the "LRGP Note"), (ii) $1 million cash, and (iii) a non-detachable
five-year warrant to purchase 416,667 shares of Casino America common stock at
$12 per share. In connection with this transaction, in June 1995, the Company
recorded a gain before income taxes of approximately $21.5 million.
On May 3, 1996 the Company sold its remaining 50% interest in SCGC to Casino
America for (i) 1,850,000 shares of Casino America common stock, which the
Company valued at $6.50 per share, (ii) the exchange of the $20 million LRGP
Note for LRGP Note A ("Note A") and LRGP Note B ("Note B"), each in the
principal amount of $10 million and bearing interest at 11.5% per annum, and
(iii) an additional non-detachable five-year warrant to purchase up to another
416,667 shares of Casino America common stock at an exercise price of $12 per
share. In connection with this transaction, in May 1996, the Company recorded
a gain before income taxes of approximately $14.9 million.
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In August 1996 Casino America paid off Note A in full and in October 1996 the
Company sold Note B at a discount of $800,000. Also in August 1996 the Company
acquired 684,786 shares of Casino America common stock for an aggregate
purchase price of $4,023,118 in connection with a rights offering declared by
Casino America. These shares were sold in October and November 1996 resulting
in a gain before income taxes of $207,139. Also in November 1996 the Company
sold the 1,850,000 shares of Casino America common stock it had received in the
sale of its remaining 50% interest in SCGC for net proceeds of $7,363,003,
resulting in a loss before income taxes of $4,661,997.
The Company has included 100% of SCGC's operating results in its consolidated
results of operations through June 8, 1995. From and after June 9, 1995 (the
date of sale of the first 50% interest in SCGC), the Company has accounted for
its investment in SCGC on the equity method, and accordingly has included its
proportionate share of SCGC's operating results in its consolidated results of
operations. The Company's gain before income taxes on the sale of SCGC is
calculated as follows (in thousands):
Sale of Sale of
First 50% Second 50%
(June 1995) (May 1996)
----------- ----------
Consideration received in sale $ 21,000 $ 12,025
The Company's negative basis in stock sold 889 3,297
Transaction and other costs (376) (388)
------- ------
Gain before income taxes on sale of SCGC $ 21,513 $ 14,934
======== ========
Upon closing of the sale of its remaining 50% interest in SCGC on May 3, 1996,
the Company's investment in SCGC was eliminated. Other than a guarantee of
certain leases, for which the Company has been indemnified by LRGP, the Company
is not liable for any obligations of SCGC.
At April 30, 1996 SCGC had assets, liabilities and shareholders' deficit of
approximately $87 million, $94 million and $7 million, respectively. SCGC's
condensed results of operations for the years ended April 30, 1996 and 1995,
are as follows (in thousands):
Fiscal Fiscal
1996 1995
---- ----
Revenues $ 57,263 $ -
Costs and expenses 50,958
Pre-opening and development 4,196 14,809
Depreciation and amortization 3,289 111
Interest expense 6,210 6,810
Benefit for income taxes (1,056) (2,828)
-------- --------
Net loss $ (6,334) $(18,902)
======== ========
During the year ended April 30, 1996 the Company included approximately $3.4
million of net costs and expenses, or approximately $.28 per share,
attributable to SCGC in its consolidated results of operations.
D - ACQUISITIONS
In June 1997 the Company acquired 49% of the capital stock of CMN as well as
interests in certain other assets and contracts related to CMN from Casino
Magic for a purchase price of $7 million. CMN operates casinos in the cities
of Neuquen and San Martin de los Andes in the Province of Neuquen, Argentina
under an exclusive concession contract that expires in 2007, but can be
extended by CMN for an additional five years under certain circumstances.
CMN's revenues were $15.9 million and $13.0 million for the years ended
December 31, 1996 and 1995, respectively.
In June 1996 the Company entered into a definitive asset purchase agreement to
acquire the assets and operations of Mississippi Belle II, Inc. ("MBII") which
owns a riverboat casino in Clinton, Iowa for a purchase price of $40 million.
In November 1996 the Company decided to cease pursuing gaming opportunities in
the United States and began pursuing business opportunities in fields unrelated
to casino gaming and, as a result, elected to abandon the proposed acquisition
of MBII. As a result the Company wrote-off $696,009 of costs, including a
$500,000 non-refundable deposit.
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In July 1995 the Company entered into a definitive asset purchase agreement to
acquire the Bourbon Street Hotel and Casino located in Las Vegas, Nevada. In
November 1995 the Company determined not to proceed with the acquisition due to
(i) the possibility of more attractive investment opportunities, (ii) the lack
of attractive financing, and (iii) declining margins at the property. In
connection with this decision, the Company wrote off $664,991 of costs and
expenses related to the proposed acquisition.
E - LAND HELD FOR SALE
In April 1997 the Company entered into an agreement, subject to certain
conditions, to sell its 18.6 acre tract of land in Las Vegas, Nevada for $15.25
million. As a result of this agreement, the Company wrote down the value of
such land to $15.15 million, which represents the contract selling price of the
land less the estimated transaction costs. Closing is expected in September
1997. In the event the conditions to closing are satisfied and the buyer fails
to close, the buyer would be required to pay the Company $250,000 as liquidated
damages.
F - DEBT
In November 1995 the Company issued a $1 million ten year note to a bank
bearing interest at prime plus 1 1/2% that was collateralized by certain
equipment of the Company. The Note was paid off in December 1996.
In June 1994 SCGC issued a $28 million Senior Secured Increasing Rate Note (the
"Senior Note") to an institutional investor. The Senior Note carried a 12%
coupon increasing 67 basis points each quarter up to a maximum interest rate of
14%. The Senior Note was issued with a five year warrant to purchase 508,414
shares of the Company's common stock. The proceeds from the private placement
were allocated between the Senior Note ($26.7 million) and the warrant ($1.3
million) based upon the relative fair value of each of the securities at the
time of issuance. The resulting original issue discount was amortized over the
life of the Senior Note using the effective interest method. SCGC repaid $6.5
million of the Senior Note in October 1994 and the balance was repaid in August
1995.
G - INCOME TAXES
The provision (benefit) for income taxes for the fiscal years ended April 30,
1997, 1996 and 1995 was as follows:
Fiscal Fiscal Fiscal
1997 1996 1995
---------- ---------- ---------
Provision (benefit) for income taxes:
Current $ 335,000 $ -- $ 37,672
Deferred (2,275,000) 3,500,000 (3,940,000)
------------ ----------- ------------
$ (1,940,000) $ 3,500,000 $ (3,902,328)
============ =========== ============
The provision (benefit) for income taxes is different from the amount computed
by applying the statutory federal income tax rate to income (loss) before
income taxes for the following reasons:
Fiscal Fiscal Fiscal
1997 1996 1995
---------- ---------- ---------
Federal statutory rate 34% 34% (34)%
State income tax, net of federal benefit (5)
Equity in loss of SCGC 5
Basis difference in SCGC stock (62) (22)
Valuation allowance 23
Other 5
---------- ------------ ----------
(28)% 22% (16)%
========== ============ ==========
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Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets were as follows:
April 30,
1997 1996
----------- -----------
Deferred tax liabilities:
Installment sale $ 3,768,841
Land held for sale $ 1,445,553 1,792,255
Other 395,332 460,560
----------- -----------
Total deferred tax liabilities 1,840,885 6,021,656
----------- -----------
Deferred tax assets:
Pre-opening expenses 1,436,428
Net operating loss carryforward 466,510
Other 115,885 118,718
----------- -----------
Total deferred tax assets 115,885 2,021,656
----------- -----------
Net deferred tax liability $ 1,725,000 $ 4,000,000
=========== ===========
In fiscal 1997 the Company utilized approximately $1.4 million of net operating
loss carryforwards in determining its federal income tax provision.
H - CAPITAL STOCK
In March 1996 the Company's Board of Directors approved a program, as amended,
to repurchase up to 2,000,000 shares of the Company's common stock from time to
time in the open market. At April 30, 1997 the Company had repurchased
1,280,974 shares pursuant to this program. The timing and amount of future
share repurchases, if any, will depend on various factors including market
conditions, available alternative investments and the Company's financial
position.
The Company is authorized to issue up to one million shares of $.01 par value
preferred stock in one or more series having such respective terms, rights and
preferences as are designated by the Board of Directors. No preferred stock
has been issued.
I - STOCK OPTIONS AND WARRANTS
Options
The shareholders of the Company have approved two stock option plans, the 1986
Incentive Stock Option Plan ("1986 Plan") for employees covering 1,250,000
shares of common stock and the 1991 Non-Qualified Stock Option Plan ("1991
Plan") for directors and key employees covering 250,000 shares of common stock.
While previously granted options remain effective, the provisions of the 1986
and 1991 Plans permitting additional option grants have expired. As a result,
in July 1997 the Board of Directors of the Company adopted the 1997 Stock
Option Plan ("1997 Plan") for employees, directors and certain advisors and
consultants covering 1,000,000 shares of common stock. Certain aspects of the
1997 Plan are subject to shareholder approval. Generally, stock options are
granted with the exercise price equal to the market value of the Company's
common stock on the date of grant. Options granted under the 1986 and 1991
Plans expire in the years 1998 through 2006.
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13
The following is an aggregate summary of the 1986 Plan and 1991 Plan activity
since April 30, 1994:
Number Exercise Price Proceeds
of Shares per Share on Exercise
--------- -------------------------- -----------
Outstanding at April 30, 1994 667,143 $ .41 to $ 7.38 $ 2,993,047
Granted 480,000 $ 3.31 to $ 4.03 1,671,094
Exercised (39,500) $ .41 to $ 1.41 (38,047)
Canceled (310,000) $ 7.31 (2,266,875)
-------- ----------
Outstanding at April 30, 1995 797,643 $ .41 to $ 7.38 2,359,219
Exercised (18,000) $ 1.41 to $ 3.31 (53,906)
Canceled (25,000) $ 7.31 (182,813)
-------- ----------
Outstanding at April 30, 1996 754,643 $ .41 to $ 7.38 2,122,500
Granted 60,000 $ 2.81 168,750
-------- ----------
Outstanding at April 30, 1997 814,643 $ .41 to $ 7.38 $2,291,250
======== ==========
A summary of stock options outstanding as of April 30, 1997 is as follows:
Weighted Average
Range of Remaining Contractual Weighted
Exercise Number of Life Average
Prices Shares (in years) Exercise Price
--------- ---------- -------------------- --------------
$ .41 to $ 1.55 254,643 4.29 $ .96
$ 2.81 to $ 4.03 525,000 7.93 3.41
$ 7.31 to $ 7.38 35,000 6.94 7.33
-------
$ .41 to $ 7.38 814,643 6.75 $ 2.81
=======
All of the above options were exercisable at April 30, 1997 with the exception
of options to purchase 150,000 shares at prices ranging from $3.31 to $3.88
which become exercisable from 1998 through 1999.
In October 1995 the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation," which establishes a new fair value based accounting method for
stock-based compensation plans and encourages (but does not require) employers
to adopt the new method in place of the provisions of Accounting Principles
Board Opinion ("APB") No. 25 "Accounting for Stock Issued to Employees."
Companies may continue to apply the accounting provisions of APB No. 25 in
determining net income; however, they must apply the disclosure requirements of
SFAS No. 123 for all grants issued after fiscal 1995. The Company elected to
continue to apply the provisions of APB No. 25 in accounting for the employee
stock plans described above. Accordingly, no compensation cost has been
recognized. Had compensation cost for the Company's stock option plans been
determined based on the fair value of the options granted in accordance with
SFAS No. 123, the Company's net income and earnings per share would have been
$8,800,827 and $.80, respectively, for the fiscal year ended April 30, 1997.
The fair value of each option grant was determined as of the grant date using
the Black-Scholes valuation model with the following weighted average
assumptions: dividend yield of 0%, expected volatility of 52.5%; risk-free
interest rate of 6.56%, and expected life of 5 years.
Warrants
The Company issued common stock purchase warrants to a variety of parties in
connection with financing activities, the development of SCGC's riverboat
gaming project and certain other matters. The warrants issued were valued
based upon a composite of commonly accepted warrant valuation models.
The following is an aggregate summary of warrants outstanding as of April 30,
1997:
Number of
Underlying Exercise Price Proceeds
Shares per Share on Exercise
------------ -------------- -----------
1,184,246 $3.00 to $12.00 $6,121,412
========= ==========
All of the warrants are presently exercisable. The warrants expire between
1997 and 1999, contain certain anti-dilution provisions and provide the holders
with certain registration rights relative to the underlying shares.
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14
J - LEASES
The Company has certain operating leases for equipment and its office
facilities. As of April 30, 1997 the aggregate rentals due under such leases
were as follows:
Fiscal Amount
------ ------
1998 $ 112,968
1999 101,910
2000 79,248
2001 58,014
----------
$ 352,140
==========
Rent expense for all operating leases was approximately $136,000, $115,000, and
$94,000 during fiscal 1997, 1996 and 1995, respectively.
K - RELATED PARTY TRANSACTIONS
In June 1996 the Company entered into a definitive asset purchase agreement to
acquire the assets and operations of MBII, which owns and operates a riverboat
casino in Clinton, Iowa. MBII is principally owned by the adult children of a
director of the Company. In November 1996 the Company determined to abandon
the proposed transaction (see Note D).
During fiscal 1995 the Company entered into a teaming agreement with an
individual who subsequently became a director of the Company. Pursuant to such
agreement the Company issued warrants to purchase 50,000 shares of the
Company's common stock.
The Company incurred legal fees of approximately $7,000, $121,000, and $259,000
during fiscal 1997, 1996 and 1995, respectively, from a law firm of which a
director of the Company was a partner. In July 1995 this director left such
law firm and became a full-time executive officer of the Company.
L - COMMITMENTS AND CONTINGENCIES
Litigation
In September 1994 an action was filed against the Company and SCGC in the 24th
Judicial District Court for the Parish of Jefferson, Louisiana by Avondale
Industries, Inc. ("Avondale"). In this action Avondale alleges that the
Company was contractually obligated to Avondale for the construction of SCGC's
riverboat vessel based upon a letter of intent (allegedly reaffirming a
previous agreement entered into between Avondale and SCGC). Avondale alleges
that the Company breached a duty to negotiate in good faith toward the
execution of a definitive vessel construction contract. Alternatively,
Avondale alleges that a separate oral contract for the construction of the
vessel existed and that the Company committed unspecified unfair trade
practices and made certain misrepresentations. Avondale seeks unspecified
damages including "all lost profits and lost overhead" and attorneys fees.
Avondale has claimed its lost profits and lost overhead amount to approximately
$2.5 million. The Company intends to vigorously contest liability in this
matter. While no assurance can be given as to the ultimate outcome of this
litigation, management believes its resolution will not have a material
adverse effect on the Company.
In July 1997 an action was filed against certain officers of Concorde, along
with Concorde and the Company (collectively, the "Defendants") in the 134th
Judicial District Court of Dallas County, Texas by Eagle Capital Corp.
("Eagle"). In this action Eagle alleges that while such officers were employed
by Eagle they disseminated confidential and proprietary information regarding
Eagle to the Company in order to create a competing business. Eagle seeks to
enjoin all Defendants from their alleged possession and use of Eagle's
confidential business information and to recover damages in an unspecified
amount. The Company believes the allegations of this action are without merit
and intends to vigorously contest liability in this matter. While no assurance
can be given as to the ultimate outcome of this litigation, management believes
its resolution will not have a material adverse effect on the Company.
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15
Severance Agreements
In July 1996 the Board of Directors of the Company authorized the Company to
enter into severance agreements with its three executive officers which provide
for payments to the executives in the event of their termination after a change
in control, as defined, of the Company. The agreements provide, among other
things, for a compensation payment equal to 2.99 times the annual compensation
paid to the executive, as well as accelerated vesting of options under the
Company's incentive stock option plan, in the event of such executive's
termination in connection with a change in control.
M - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow disclosures for the fiscal years ended April 30, 1997,
1996 and 1995 are as follows:
Fiscal Fiscal Fiscal
1997 1996 1995
----------- ----------- -----------
Note received for sale of first 50% interest in SCGC $20,000,000
Stock received for sale of second 50% interest in $12,025,000
Common stock issued for equipment $1,450,000
Common stock issued for services and other 1,300,000
Equipment acquired under capital leases 5,778,767
Note payable exchanged for land 471,465
Warrants issued for equipment and services 337,500
Interest paid, net of amount capitalized 68,757 922,801 6,132,059
Income taxes refunded, net (124,328)
N - SUBSEQUENT EVENTS
In June 1997 the Company acquired 49% of the capital stock of CMN as well as
interests in certain other assets and contracts related to CMN from Casino
Magic for a purchase price of $7 million. CMN operates casinos in the cities
of Neuquen and San Martin de los Andes in the Province of Neuquen, Argentina
under an exclusive concession contract that expires in 2007, but can be
extended by CMN for five additional years under certain circumstances. CMN's
revenues were $15.9 million and $13.0 million for the years ended December 31,
1996 and 1995, respectively.
In June 1997 the Company, along with certain newly hired management personnel,
formed Concorde. Concorde is in the business of originating, purchasing,
servicing and selling sub-prime mortgage loans which are secured primarily by
first and second liens on residential properties. These loans are expected to
be sold in privately negotiated transactions as well as to institutional
investors in the secondary market through securitization programs.
F-15
16
REPORT OF INDEPENDENT ACCOUNTANTS Crown Casino Corporation
Stockholders and Board of Directors
Crown Casino Corporation
We have audited the accompanying consolidated balance sheets of Crown Casino
Corporation and subsidiaries as of April 30, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended April 30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Crown
Casino Corporation and subsidiaries as of April 30, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended April 30, 1997 in conformity with generally
accepted accounting principles.
Dallas, Texas Coopers & Lybrand L.L.P.
July 11, 1997
F-16
17
COMMON STOCK INFORMATION, DIVIDENDS AND Crown Casino Corporation
RELATED STOCKHOLDER MATTERS
The Company's common stock is authorized for quotation on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") Small
Cap Market under the NASDAQ symbol DICE. The following table sets forth, by
fiscal quarter, the high and low sale prices reported by NASDAQ for the
Company's common stock for the periods indicated.
Fiscal 1997 Fiscal 1996
High Low High Low
-------------------------------------------------------
First quarter $3 5/8 $1 11/16 $6 3/8 $4 3/4
Second quarter 3 1/16 2 5 3/4 2 7/8
Third quarter 3 1/4 2 3 13/64 1 11/16
Fourth quarter 2 15/16 2 2 1/4 1 7/16
As of July 1, 1997 there were approximately 1,712 stockholders of record. This
number excludes individual stockholders holding stock under nominee security
position listings.
Since its inception the Company has paid no dividends on its common stock. The
Company currently intends to follow a policy of retaining earnings to finance
future growth. Payment of dividends in the future will be determined by the
Company's Board of Directors and will depend upon, among other things, the
Company's future earnings, operations, capital requirements and surplus,
general financial condition, and contractual restrictions that may exist, and
such other factors as the Board of Directors may deem relevant.
F-17
18
SELECTED FINANCIAL DATA
The financial data set forth below was derived from the audited consolidated
financial statements of the Company and should be read in conjunction with the
consolidated financial statements and related notes thereto, and Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained elsewhere herein. (In thousands, except per share amounts.)
Years Ended April 30, 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
Revenues from:
Continuing operations $ - $ - $ - $ - $ -
Discontinued operations - - - 604 1,347
Income (loss) from:
Continuing operations $ 8,860 $ 12,298 $ (20,325) $ (2,052) $ (263)
Discontinued operations (177) (145)
------------ ------------- ---------- --------- --------
$ 8,860 $ 12,298 $ (20,325) $ (2,229) $ (408)
------------ ------------- ---------- --------- --------
Income (loss) per share:
Continuing operations $ .80 $ 1.03 $ (2.01) $ (.34) $ (.07)
Discontinued operations (.03) (.04)
------------ ------------- ---------- --------- --------
$ .80 $ 1.03 $ (2.01) $ (.37) $ (.11)
------------ ------------- ---------- --------- --------
Total assets $ 38,237 $ 39,329 $ 54,507 $ 30,974 $ 4,388
Long-term obligations - 919 2,271 2,330 -
Stockholders' equity 35,713 30,153 17,930 23,837 3,711
Shares outstanding 10,395 11,650 11,678 8,999 3,524
F-18