1
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 December 31, 2000
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
---------------------
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)
3030 East Camelback Road, 85016
Suite 295 (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 [ ]
Applicable only to issuers involved in bankruptcy proceedings during
the preceding five years:
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
classes of common stock as of December 31, 2000: 2,200,550 (consisting of
2,068,000 shares of Class A Common Stock and 132,550 shares of Class B Common
Stock)
The within Form 10-Q has not been reviewed by an independent public
accountant. See Part II, Item 5 (Other Events - Part (a) Previous Independent
Accountants).
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CAPITAL GAMING INTERNATIONAL, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 2000
(Unaudited) and June 30, 2000 (Audited) 1
Consolidated Statements of Operations for the three months
And six months ended December 31, 2000 and 1999 (Unaudited) 3
Consolidated Statements of Cash Flows for the six months
ended December 31, 2000 and 1999 (Unaudited) 4
Notes to Consolidated Financial Statements (Unaudited) 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about Market Risks 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Use of Proceeds 12
Item 3. Default Upon First Amended Indenture 12
Item 4. Submission of Matters to a Vote of Securityholders 12
Item 5. Other Events 13
Item 6. Exhibits and Reports on Form 8-K 13
Signature Page 14
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PART I., Item 1.
CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
ASSETS
December 31, 2000 June 30, 2000
----------------- -------------
[Unaudited]
CURRENT ASSETS:
Cash and cash equivalents $ 2,053 $ 2,352
Restricted funds 559 9,497
Interest receivable 3 172
Current portion - Native American loans receivable 703 627
Current portion of direct financing leases 133 101
Prepaid expenses and other current assets 208 296
Income tax receivable 276 780
----------- -----------
TOTAL CURRENT ASSETS 3,935 13,825
----------- -----------
FURNITURE, FIXTURES AND EQUIPMENT, Net 21 5
OTHER ASSETS:
Native American loans receivable 661 927
Direct financing leases, net of current portion 528 584
----------- -----------
TOTAL OTHER ASSETS 1,210 1,516
----------- -----------
TOTAL ASSETS $ 5,145 $ 15,341
=========== ===========
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements
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CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
December 31 2000 June 30, 2000
---------------- -------------
[Unaudited]
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 863 $ 112
Due to related party 19 9
----------- -----------
TOTAL CURRENT LIABILITIES 882 121
LIABILITIES SUBJECT TO COMPROMISE -- 24,778
----------- -----------
TOTAL LIABILITIES 882 24,899
----------- -----------
COMMITMENT AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, no par value, authorized 5,000,000 shares;
issued and outstanding December 31, 2000 0 shares and
June 30, 2000 1,999,745 shares -- 400
Common stock, Class A, no par value, authorized 3,000,000
shares; issued and outstanding 2,068,000 shares 4,013 --
Common stock, Class B, no par value, authorized 2,000,000
shares; issued and outstanding 132,550 shares 257 --
Additional paid in capital -- 300
Accumulated equity (deficit) 135 (10,258)
Unearned stock compensation (142) --
----------- -----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 4,263 (9,558)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 5,145 $ 15,341
=========== ===========
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements
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CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
[UNAUDITED]
(In Thousands except Share Data)
Three Months Ended Six months Ended Three Months Ended Six Months Ended
December 31, 2000 December 31, 2000 December 31, 1999 December 31, 1999
------------------ ----------------- ------------------ -----------------
REVENUES:
Native American casino management fees $ - $ - $ 1,548 $ 3,524
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Salaries and related costs 1,088 1,273 214 427
Native American gaming development costs 168 211 39 91
Professional fees 52 249 222 362
General and administrative 124 199 77 159
Depreciation and amortization 2 4 554 1,107
---------- ---------- ---------- ----------
TOTAL COSTS AND EXPENSES 1,434 1,936 1,106 2,146
---------- ---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS (1,434) (1,936) 442 1,378
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest income 109 247 115 233
Interest expense - - (684) (1,368)
---------- ---------- ---------- ----------
TOTAL OTHER INCOME (EXPENSE) 109 247 (569) (1,135)
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE REORGANIZATION ITEMS,
INCOME TAXES AND EXTRAORDINARY ITEMS (1,325) (1,689) (569) (1,135)
REORGANIZATION ITEMS:
Professional fees (78) (312) - -
Interest income 16 103 - -
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEMS (1,387) (1,898) (127) 243
INCOME TAXES - 3 81 162
---------- ---------- ---------- ----------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS (1,387) (1,901) (208) 81
EXTRAORDINARY ITEMS (12,294) (12,294) - -
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 10,907 $ 10,393 $ (208) $ 81
========== ========== ========== ==========
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
BEFORE EXTRAORDINARY ITEM $ (.64) $ (.92) $ (0.10) $ .04
========== ========== ========== ==========
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE $ 5.07 $ 5.01 $ (0.10) $ .04
========== ========== ========== ==========
WEIGHTED AVERAGE BASIC AND DILUTIVE COMMON
AND EQUIVALENT SHARES OUTSTANDING 2,152,531 2,076,138 1,999,745 1,999,745
========== ========== ========== ==========
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements
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CAPITAL GAMING INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
(In Thousands)
Six months Ended Six Months Ended
December 31, 2000 December 31, 1999
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,393 $ 81
Adjustments to reconcile net income to net cash provided by operating
activities:
Extraordinary item (12,294) --
Depreciation and amortization 4 1,107
Stock Compensation 114 --
Payments on Muckleshoot settlement -- 575
Changes in assets and liabilities:
Interest receivable 169 (10)
Native American management fees and expenses receivable -- 285
Prepaid expenses and other current assets 89 (40)
Income tax receivable 504 --
Accounts payable and accrued expenses 751 (73)
Accrued interest -- (16)
Federal income taxes payable -- (72)
State income taxes payable -- (257)
Related party payable 10 --
--------------- ---------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (260) 1,580
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Repayments of Native American loans receivable 190 852
Decrease (increase) in restricted funds 8,938 (3,414)
(Increase) in deferred charges -- (1,699)
Payments received on direct financing lease 24 --
Purchase of furniture, fixtures and equipment (20) --
--------------- ---------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 9,132 (4,261)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on prepetition debt
Authorized by Bankruptcy Court (9,171) --
--------------- ---------------
NET CASH USED IN FINANCING ACTIVITIES (9,171) --
--------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (299) (2,681)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIODS 2,352 4,440
--------------- ---------------
CASH AND CASH EQUIVALENTS - END OF PERIODS $ 2,053 $ 1,759
=============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid During the Periods for:
Interest $ -- $ 1,385
Income Taxes $ 3 $ 499
Professional Fees paid for services rendered in
connection with the Chapter 11 filing $ 281 $ --
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements
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PART I., Item 1.
CAPITAL GAMING INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
[1] ORGANIZATION
Capital Gaming International, Inc., a New Jersey corporation
(the "Company"), together with its subsidiaries, is a multi-jurisdictional
gaming company.
The management and development of Native American gaming facilities is
conducted through Capital Gaming Management, Inc. ("CGMI"), a wholly-owned
subsidiary of the Company. CGMI developed and currently manages the Dancing
Eagle Casino for the Pueblo of Laguna in Casa Blanca, New Mexico.
Capital Development Gaming Corporation ("CDGC"), a wholly owned
subsidiary of the Company, also has a contract to develop and manage the
Narragansett casino project in Rhode Island ("Rhode Island Project"). Currently
the contract faces several regulatory issues and a disputed termination by the
Tribe, and there can be no assurance that the project will be successfully
launched.
[2] BASIS OF PRESENTATION
The Consolidated Balance Sheet as of December 31, 2000, the
Consolidated Statements of Operations for the three-month and six-month periods
ended December 31, 2000 and 1999, and the Consolidated Statement of Cash Flows
for the six-month periods ended December 31, 2000 and 1999 are unaudited. The
June 30, 2000 Balance Sheet data was derived from audited consolidated financial
statements. These consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, such statements include all adjustments
(consisting only of normal recurring items) which are considered necessary for a
fair presentation of the financial position of the Company at December 31, 2000,
and the results of its operations and cash flows for the three-month and
six-month periods ended December 31, 2000 and 1999. 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 conjunction with the
consolidated financial statements and notes included in the Capital Gaming
International, Inc. Form 10-K for the fiscal year ended June 30, 2000 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. Inter-company transactions and
balances have been eliminated in consolidation.
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[3] REORGANIZATION UNDER CHAPTER 11
Reorganization
In late 1999, management determined that the Company's capital
structure was impairing its ability to win new management contracts. While the
Company's operations were expected to generate sufficient revenue to make debt
service payments through the calendar year 2000, the Company anticipated that it
might not have sufficient revenue to make the final principal and interest
payment on the Senior Notes when they become due in May 2001. After extensive
meetings and negotiations with certain of the Senior Noteholders and the
Indenture Trustee, those Senior Noteholders and the Indenture Trustee, with the
concurrence of the Company, concluded that the best way to maximize recovery to
the Senior Noteholders and preserve the Company as a going concern was to
"de-leverage" the Company by converting the Senior Notes to equity. Although the
long-term success of the Company remained dependent upon its ability to obtain
new management contracts and gaming opportunities, the reorganization (i)
eliminated the uncertainty created by the existing debt structure; (ii) provided
the Company needed flexibility to finance future operations; and (iii) provided
the Company more flexibility to compete with better financed competitors.
Accordingly, on May 15, 2000 (the "Petition Date") the Company filed a
voluntary petition for reorganization of the Company under Chapter 11 of the
Bankruptcy Code in the Bankruptcy Court, Case No. 00-14052 (JHW). The Company
remained in possession of its property and assets and maintained and operated
its business as debtor-in-possession pursuant to the provisions of the
Bankruptcy Code. Additionally no trustee or receiver was appointed. The
Company's two operating subsidiaries were not included in the filing.
In connection with the filing of the petition, the Company and the
Indenture Trustee jointly submitted a Disclosure Statement and Plan of
Reorganization (the "Plan") for the Company. The Plan is the result of extensive
negotiations among the Company, the Indenture Trustee, and holders of
approximately eighty-four (84%) percent of the Company's then outstanding Senior
Notes and holders of approximately seventy (70%) percent of the Company's then
outstanding stock. A copy of the Plan is attached as Exhibit 10.181 to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2000.
The Plan provided that holders of the Senior Notes, as payment in full
for their claims, will receive a distribution on account of their annual secured
claims equal to their pro rata share of (a) the greater of (i) $9,000,000 or
(ii) the Distributable Cash (hereinafter defined) after payment of Indenture
Trustee fees and expenses, and (b) two million sixty-eight thousand (2,068,000)
shares of New Class A Common Stock, representing ninety-four (94%) percent of
the aggregate voting securities of the Company, as reorganized. "Distributable
Cash" means all cash of the Company, whether held by the Indenture Trustee or
the Company, in excess of $2,900,000, determined after payment of all Plan
distributions to creditors and equity security holders, other than holders of
Senior Notes. General unsecured creditors, including holders of deficiency
claims would receive a pro rata share of $100,000 and certain holders of the
Company's equity interests would receive their pro rata share of 550 shares of
New Class B Common Stock. The Company intends to use its post-confirmation cash
balance primarily to seek new gaming opportunities in order to create new
sources of cash flow for the Company.
On September 26, 2000 the Bankruptcy Court conducted a hearing
regarding Confirmation of the Plan and, on October 4, 2000, entered an order
confirming the Plan. In connection with creditor approval of the Plan, 99.9770%
of holders of the Senior Notes who voted approved the Plan. The Effective Date
of the Plan is October 23, 2000, at which time distribution commenced.
The effect of the reorganization was an extraordinary gain of
$12,294,000. This gain is comprised of total liabilities subject to compromise
of $24,778,000 and cancellation of all existing common stock of $700,000 which
was reduced by cash payments of $9,171,000 and the value of new stock issued of
$4,013,000.
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[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, 2000 as
filed with the Securities and Exchange Commission.
Recent Accounting Developments:
In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in
Financial Statements". SAB No. 101 summarizes some of the staff's
interpretations of the application of generally accepted accounting principles
to revenue recognition. The Company adopted SAB No. 101 during the quarter with
no effect on the financial statements.
[5] LEGAL PROCEEDINGS
There was no material litigation involving or pending against the
Company on December 31, 2000. The Company is or may become a defendant in
pending or threatened legal proceedings in the ordinary course of business
although it is not aware of the existence of any such pending or threatened
legal proceedings at this time. See the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 2000, section entitled "Risk Factors - Accounting
Disagreement" for a description of a disagreement with the Laguna Development
Corporation concerning accounting treatment of pre-opening expenses under the
Laguna Management Contract, which disagreement may result in arbitration in the
fiscal year ending June 30, 2001.
During the quarter the Company continued to manage the Dancing Eagle
Casino for the Pueblo of Laguna. Because of the above described disagreement and
in accordance with generally accepted accounting principles the Company has not
recognized revenue from the Laguna Management Contract for the quarter and year
ended December 31, 2000. The Laguna Development Corporation paid approximately
$57,000 to the Company during the second quarter of fiscal 2000.
The Company is presently in settlement discussions with the Laguna
Development Corporation which could result in cash or term payments in exchange
for cancellation of all contracts between the parties. In such event, the
Company will consider all of its options, including (i) investing its cash in
other gaming or non-gaming businesses or (ii) adopting a plan of liquidation of
the Company.
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PART I., 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 Consolidated Financial Statements as of December 31, 2000 (unaudited)
and June 30, 2000 (audited) and for the three-month and six-month periods ended
December 31, 2000 and 1999 (unaudited) contained herein and the Company's
audited Consolidated Financial Statements and the related notes thereto
appearing in the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 2000 filed with the Securities and Exchange Commission.
Notice Regarding Forward-Looking Statements
To the extent the information contained in this management discussion
and analysis of consolidated financial condition as of December 31, 2000
(unaudited) and June 30, 2000 (audited) and results of operations for the
three-month and six-month periods ended December 31, 2000 and 1999 (unaudited)
are viewed as forward-looking statements, the reader is cautioned that various
risks and uncertainties exist that could cause the actual future results to
differ materially from those inferred by the forward-looking statements. Words
such as "expects", "anticipates", "intends", "potential", "believes" and similar
expressions are intended to identify forward-looking statements, which speak
only as of the date the statements were made. Those statements may include
projections of revenues, income or loss, capital expenditures, plans for future
operations or strategies, and financing needs or plans, as well as assumptions
relating to the foregoing.
Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Future events
and actual results could differ materially from those set forth in, contemplated
by, or underlying the forward-looking statements. Additional risk factors that
could cause actual results to differ materially from those expressed in such
forward-looking statements are set forth in Exhibit 99, which is attached hereto
and incorporated by reference into this Quarterly Report on Form 10-Q. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise. The following management discussion and analysis should be
read in conjunction with the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 2000.
Liquidity and Capital Resources
Sources and Uses of Cash
For the six months ended December 31, 2000, the Company had a net
decrease in cash and cash equivalents of $299,000, of which $260,000 was used by
Company operating activities, $9,132,000 was provided by Company investing
activities, and $9,171,000 was used by Company Financing activities.
Operating Activities: Cash flows from operating activities for the six
months ended December 31, 2000 were provided by interest income of approximately
$350,000. Significant operating activity balances required to reconcile the
Company's GAAP accrual net income of $10,393,000 for the six months ended
December 31, 2000 to net cash flows used by operating activities include (i) a
decrease in interest receivable of $169,000, (ii) a decrease in prepaid expenses
and other current assets of $89,000, (iii) a decrease in income tax receivable
of $504,000, (iv) an increase in accounts payable and accrued expenses of
$751,000. Additionally, non-cash items of extraordinary gain of $12,294,000 and
stock compensation expense of $114,000 were used in the reconciliation.
Investing Activities: Cash flows from investing activities for the six
month period ended December 31, 2000 were provided by an decrease in restricted
funds of $8,938,000, a $190,000 collection of Native American loans receivable
and a $24,000 decrease in direct financing leases, and used by an increase in
furniture, fixtures and equipment of $20,000.
Financing Activities: Cash flows from financing activities for the six
month period ended December 31, 2000 were used by principal payments on
prepetition debt of $9,171,000.
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The Company's source of cash for the next twelve months is expected to
be derived from the receipt of management fees from the Dancing Eagle Casino
(Pueblo of Laguna), the receipt of debt service payments on the Native American
loans receivable from the Dancing Eagle Casino and the receipt of lease payments
in relation with the Dancing Eagle Casino, contingent upon current settlement
discussions.
Capital Requirements: The Company will continue to operate, through
CGMI, on the management fees, principal and interest loan repayments, and lease
payments from the Dancing Eagle Casino as well as with its post-Plan cash
reserves.
The development, management and operation of Native American gaming,
other gaming establishments and ancillary and complimentary businesses is time
consuming and capital intensive. Substantial capital is needed to finance the
licensing, development, construction, architectural, engineering, equipping,
legal and accounting fees and operating expenses associated with the management,
development and operation of casino gaming establishments. It is anticipated
that the Company will require significant additional capital in order to fund
future projects. There can be no assurance that such financing will be available
or, if available, that the terms thereof will be attractive to the Company.
Results of Operations
Overview
The following discussion about the Company's results of operations
includes the Company and its subsidiaries, CGMI, and CDGC.
Three-month Period Ended December 31, 2000 as Compared to the Three-month Period
Ended December 31, 1999
Income From Operations
Loss from operations for the three-month period ended December 31, 2000
totaled approximately $1,512,000 as compared to income of $442,000 for the
three-month period ended December 31, 1999, representing a decrease in income
from operations of $1,954,000. This decrease in income is due to the combination
of two factors, (i) a decrease in revenues of $1,548,000, and (ii) an increase
in operating expenses of $406,000.
Revenues
The following table outlines the Company's revenues for the three months
ended December 31, 2000 and 1999:
3 Months 3 Months
Ended Ended
12/31/00 12/31/99 Inc. (Dec.) % Change
-------- -------- ----------- --------
Umatilla $ - $1,139 $(1,139) -100.0%
Tonto Apache - 409 (409) -100.0%
------ ------ ------- -------
$ - $1,548 $1,548 -100.0%
====== ====== ======= =======
Revenues decreased $1,548,000, or 100.0% from $1,548,000 to $0 for the
three-month period ended December 31, 2000 as compared to the three-month period
ended December 31, 1999. The decreased revenue from the Umatilla Casino of
$1,139,000 resulted from the expiration of the management agreement in February
2000. The decreased revenue from the Tonto Apache Casino of $409,000 resulted
from the expiration of the management agreement in March 2000.
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Costs and Expenses
Salaries and wages increased to $1,088,000 from $214,000, a $874,000 or
408.4% increase in the second quarter of fiscal 2001 as compared to the second
quarter of fiscal 2000. This increase in salaries and related expenses is
primarily attributable to severance and stock compensation expense. See Part II,
Item 5 (Other Events - Part (b) Agreements with Management).
Company development costs increased $129,000 or 330.8% to $168,000 for
the three months ended December 31, 2000 as compared to the three months ended
December 31, 1999. This increase is primarily due to South American development
activity.
Professional fees decreased to $52,000 from $222,000, a 76.6% or
$170,000 decrease in the second quarter of fiscal 2001 as compared to the second
quarter of fiscal 2000. This decrease is primarily due to management's continued
efforts to reduce expenses.
General and administrative expenses increased $47,000 or 61.0% to
$124,000 for the three months ended December 31, 2000. This increase is
primarily attributable to automobile lease terminations of $23,000 and increased
printing and copying costs of $11,000.
Depreciation and amortization expense for the second quarter of fiscal
year 2001 decreased $552,000 to $2,000, a decrease of 99.6% over the second
quarter of fiscal year 2000. The decrease is primarily due to no amortization of
deferred charges.
Other Income and Expenses
Interest income decreased $6,000 or 5.2% to $109,000 for the three
months ended December 31, 2000. This decrease is the result of a decrease in
restricted funds.
Interest expense decreased $684,000 or 100.0% to $0 for the second
quarter of fiscal 2001 due to the Chapter 11 reorganization.
Reorganization Items
The effect of the reorganization was an extraordinary gain of
$12,294,000. This gain is comprised of total liabilities subject to compromise
of $24,778,000 and cancellation of all existing common stock of $700,000 which
was reduced by cash payments of $9,171,000 and the value of new stock issued of
$4,013,000. In addition, the Company earned interest of $16,000 on funds that
would have been used to make the May 15, 2000 payment on the Senior Secured
Notes that was not made due to the bankruptcy filing. Also, the Company incurred
$78,000 in professional fees related to the Reorganization during the second
quarter of fiscal 2001.
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Six-month Period Ended December 31, 2000 as Compared to the Six-month Period
Ended December 31, 1999
Income From Operations
Loss from operations for the six-month period ended December 31, 2000
totaled approximately $2,248,000 as compared to income of $1,378,000 for the
six-month period ended December 31, 1999, representing a decrease in income from
operations of $3,626,000. This decrease in income is due to the combination of
two factors, (i) a decrease in revenues of $3,524,000, and (ii) an increase in
operating expenses of $102,000.
Revenues
The following table outlines the Company's revenues for the six months
ended December 31, 2000 and 1999:
6 Months 6 Months
Ended Ended
12/31/00 12/31/99 Inc. (Dec.) % Change
-------- -------- ---------- --------
Umatilla $ - $2,430 $(2,430) -100.0%
Tonto Apache - 1,094 (1,094) -100.0%
------ ------ ------- -------
$ - $3,524 $(3,524) -100.0%
====== ====== ======= =======
Revenues decreased $3,524,000, or 100.0% from $3,524,000 to $0 for the
six-month period ended December 31, 2000 as compared to the six-month period
ended December 31, 1999. The decreased revenue from the Umatilla Casino of
$2,430,000 resulted from the expiration of the management agreement in February
2000. The decreased revenue from the Tonto Apache Casino of $1,094,000 resulted
from the expiration of the management agreement in March 2000.
Costs and Expenses
Salaries and wages increased to $1,273,000 from $427,000, a $846,000 or
198.1% increase in the first six months of fiscal 2001 as compared to the first
six months of fiscal 2000. This increase in salaries and related expenses is
primarily attributable to severance and stock compensation expense. See Part II,
Item 5 (Other Events - Part (b) Agreements with Management).
Company development costs increased $120,000 or 131.9% to $211,000 for
the six months ended December 31, 2000 as compared to the six months ended
December 31, 1999. This increase is primarily due to South American development
activity.
Professional fees decreased to $249,000 from $362,000, a 31.2% or
$113,000 decrease in the first six months of fiscal 2001 as compared to the
first six months of fiscal 2000. This decrease is primarily due to management's
continued efforts to reduce expenses.
General and administrative expenses increased $40,000 or 25.2% to
$199,000 for the six months ended December 31, 2000. This increase is primarily
attributable to automobile lease terminations of $23,000 and increased printing
and copying costs of $11,000.
Depreciation and amortization expense for the first six months of
fiscal year 2001 decreased $1,103,000 to $4,000, a decrease of 99.6% over the
first six months of fiscal year 2000. The decrease is primarily due to no
amortization of deferred charges.
Other Income and Expenses
Interest income increased $14,000 or 60.1% to $247,000 for the six
months ended December 31, 2000. This increase is the result of an increase in
restricted funds, direct financing leases and Native American loans receivable.
Interest expense decreased $1,368,000 or 100.0% to $0 for the first six
months of fiscal 2001 due to the Chapter 11 reorganization.
Reorganization Items
The effect of the reorganization was an extraordinary gain of
$12,294,000. This gain included total liabilities subject to compromise of
$24,778,000 and cancellation of all existing common stock of $700,000 which was
reduced by cash payments of $9,171,000 and the value of new stock issued of
$4,013,000. In addition, the Company earned interest of $103,000 on funds that
would have been used to make the May 15, 2000 payment on the Senior Secured
Notes that was not made due to the bankruptcy filing. Also, the Company incurred
$312,000 in professional fees related to the Reorganization for the first six
month ended December 31, 2000.
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PART I., Item 3.
Quantitative and Qualitative Disclosures about Market Risks
Not applicable.
PART II., Item 1.
CAPITAL GAMING INTERNATIONAL, INC.
LEGAL PROCEEDINGS
There was no material litigation involving or pending against the
Company on December 31, 2000. The Company is or may become a defendant in
pending or threatened legal proceedings in the ordinary course of business
although it is not aware of the existence of any such pending or threatened
legal proceedings at this time. See the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 2000, section entitled "Risk Factors - Accounting
Disagreement" for a description of a disagreement with the Laguna Development
Corporation concerning accounting treatment of pre-opening expenses under the
Laguna Management Contract, which disagreement may result in arbitration in the
fiscal year ending June 30, 2001.
During the quarter the Company continued to manage the Dancing Eagle
Casino for the Pueblo of Laguna. Because of the above described disagreement and
in accordance with generally accepted accounting principles the Company has not
recognized revenue from the Laguna Management Contract for the quarter and year
ended December 31, 2000. The Laguna Development Corporation paid approximately
$57,000 to the Company during the second quarter of fiscal 2000.
The Company is presently in settlement discussions with the Laguna
Development Corporation which could result in cash or term payments in exchange
for cancellation of all contracts between the parties. In such event, the
Company will consider all of its options, including (i) investing its cash in
other gaming or non-gaming businesses or (ii) adopting a plan of liquidation of
the Company.
Part II., Item 2.
Changes in Securities and Use of Proceeds
See note [3] to the unaudited financial statements contained herein and
the Reorganization section in the Company's Annual Report filed on form 10-K for
the fiscal year ended June 30, 2000, filed with the Securities and Exchange
Commission.
PART II., Item 3.
Default Under First Amended Indenture
See note [3] to the unaudited financial statements contained herein and
the Reorganization section in the Company's Annual Report filed on form 10-K for
the fiscal year ended June 30, 2000, filed with the Securities and Exchange
Commission.
Part II., Item 4.
Submission of Matters to a Vote of Securityholders
There were no matters required to be brought to a vote of the
securityholders during the three months ended December 31, 2000.
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Part II., Item 5.
Other Events
(a) Previous Independent Accountants
(i) On February 14, 2001 the independent accountants for the Company,
McGladrey & Pullen, LLP, resigned as the Company's auditors.
(ii) The reports of McGladrey & Pullen, LLP on the financial statements
of the Company for the past two fiscal years contain no adverse opinion or
disclaimer of opinion, and such reports were not qualified or modified as to
uncertainty, audit scope or accounting principles, with the exception of the
auditors' report covering the Company's financial statements included in the
Company's Form 10-K for the fiscal year ended June 30, 2000 which contained an
assumption that the Company would continue as a going concern.
(iii) In connection with the audits for the two most recent fiscal
years and through and including February 14, 2001 there have been no
disagreements with McGladrey & Pullen, LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure of the nature presented in Item 304(a)(1)(iv) of the Securities and
Exchange Commission Regulation S-K, which disagreements if not resolved to the
satisfaction of McGladrey & Pullen, LLP would have caused them to make reference
thereto in their report on the financial statements for such years.
(iv) During the two most recent fiscal years and through and including
February 14, 2001, there have been no reportable events as defined in Item
304(a)(1)(v) of Securities and Exchange Commission Regulation S-K.
(v) Due to the resignation of McGladrey & Pullen, LLP on February 14,
2001, the Company has not been afforded sufficient time to engage a new
independent auditor. Accordingly, this Form 10-Q has not been reviewed by an
independent public accountant. Upon the engagement of a new independent
auditor, the Company will endeavor to have this Form 10-Q reviewed by such
independent auditor and the fact of such review will be reported on Form 10-Q/A.
(b) Agreements with Management
Certain majority shareholders of the Company have informally expressed
to Chairman Charles B. Brewer an interest in having the Company seek ways to
maximize value with respect to the Laguna contract by effecting a settlement or
similar transaction, as well as disposing of certain other material assets of
the Company. Chairman Brewer has requested, and management (consisting of
Michael W. Barozzi and William S. Papazian) have agreed to, certain voluntary
agreements related to the termination of their employment agreements. Such
agreements with management include the following material terms: (i) management
has resigned its director and officer positions with parent company Capital
Gaming International, Inc., but remain in such positions with subsidiary Capital
Gaming Management, Inc., (ii) in addition to January 2001 salary, management
each received salary of $137,500 on January 2, 2001 in lieu of other salary or
termination payments previously provided for pursuant to their employment
agreements, (iii) management is providing services to Capital Gaming
International, Inc. in relation to the ongoing management and possible
disposition of the Laguna contract and other matters, (iv) additional severance
of $137,500 for Mr. Barozzi and $137,500 for Mr. Papazian has been placed into
escrow to be released to such individuals upon the completion of certain
services, (v) benefits for management will continue during the transitional
period and, (vi) the vesting of management's shares of stock pursuant to the
Plan has been contractually amended to provide that in lieu of the vesting
provisions pursuant to the Plan all of the management shares shall fully vest on
January 2, 2001 and (vii) mutual general releases.
PART II., Item 6.
CAPITAL GAMING INTERNATIONAL, INC.
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number
- ------------
# Filed herewith
99 Safe Harbor Compliance Statement for Forward-Looking Statements
(b) Reports on Form 8-K
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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, thereunto duly authorized.
Dated: February 15, 2001 By: /s/ William S. Papazian
---------------------------------------------
William S. Papazian, Executive Vice President
Capital Gaming Management, Inc.
(Authorized Representative)
Dated: February 15, 2001 By: /s/ William S. Papazian
------------------------------------------
William S. Papazian,
Executive Vice President
Capital Gaming Management, Inc.
(Authorized Representative --
Principal Accounting Officer)
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Exhibits Index
Exhibit Number Description
- -------------- -----------
99 Safe Harbor Compliance Statement for Forward-Looking Statements