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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: Commission file number:
APRIL 30, 1996 0-14939
CROWN CASINO CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 63-0851141
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
4040 N. MACARTHUR BLVD., SUITE 100, IRVING, TEXAS
(Address of principal executive office)
75038
(Zip Code)
(214) 717-3423
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 par share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange 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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Based on the average of the closing bid and asked prices of the Registrant's
common stock on August 8, 1996 the aggregate market value of the voting stock
held by non-affiliates (all persons other than executive officers, directors
and holder's of 5% or more of the Registrant's common stock) of the Registrant
(8,830,486 shares) was $20,420,499.
As of August 8, 1996 there were 11,450,759 shares of the Registrant's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Annual Report to Stockholders for the year ended
April 30, 1996 are incorporated by reference into Part II of this report, and
portions of the Registrant's definitive Proxy Statement for its Annual Meeting
of Stockholders to be held in 1996 are incorporated by reference into Part III
of this report, with the exception of information regarding executive officers
required under Item 10 of Part III, which information is included in Part I,
Item 1.
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PART I
ITEM 1. BUSINESS
GENERAL AND HISTORY
Crown Casino Corporation and subsidiaries (the "Company") owns an 18.6 acre
tract of land in the gaming district of Las Vegas, Nevada which may be used in
the development of a hotel and casino, and in June 1996 the Company entered
into a definitive asset purchase agreement to acquire the Mississippi Belle II,
Inc. ("MBII") riverboat casino located in Clinton, Iowa. The Company is also
actively pursuing other gaming opportunities in these and other jurisdictions.
Since its inception in 1983 through February 1994 the Company had been engaged
in various facets of the cable and related programming businesses. During the
fiscal year ended April 30, 1992 it became apparent to management that the
Company's Free-to-Guest ("FTG") programming business had become increasingly
competitive from a profit margin standpoint and that future growth in the FTG
programming business was limited. As a result, in late fiscal 1992 the Company
sold the majority of its FTG programming business for a pretax gain of $5.7
million. During fiscal 1993 the Company reviewed the status of its remaining
cable operations and began exploring new business opportunities. In early
fiscal 1994 the Company made the decision to enter the gaming business, and, as
a result, proceeded to sell the balance of its cable assets. The disposition
of the Company's remaining cable assets was completed in February 1994.
GAMING DEVELOPMENT
In June 1993 the Company completed the acquisition of 100% of the outstanding
common stock of St. Charles Gaming Company, Inc. ("SCGC"), a Louisiana
corporation, which had received preliminary approval from the Louisiana
Riverboat Gaming Commission to construct and operate a riverboat gaming casino.
In March 1994 SCGC received a license from the Louisiana Riverboat Gaming
Enforcement Division of the Office of State Police. In January 1995 SCGC made
the strategic decision to relocate the site for its planned Louisiana riverboat
casino from St. Charles Parish (near New Orleans) to Calcasieu Parish in the
southwest part of the state near the Texas border.
In June 1995 the Company sold a 50% interest in SCGC to Louisiana Riverboat
Gaming Partnership ("LRGP"), a joint venture owned 50% by Casino America, Inc.
("Casino America") and 50% by Louisiana Downs, Inc. LRGP owns the Isle of
Capri(SM) dockside riverboat casino in Bossier City, Louisiana. The purchase
price consisted of (i) a five-year $20 million note (the "LRGP Note"), (ii) $1
million cash, and (iii) a warrant (which may only be exercised by converting a
portion of the LRGP Note) to purchase 416,667 shares of Casino America common
stock at $12 per share. In connection with this transaction the Company
recorded a pretax gain of approximately $21.5 million. In July 1995 SCGC's
riverboat casino opened for business in Calcasieu Parish, Louisiana, as an Isle
of Capri(SM) themed property.
In May 1996 the Company sold its remaining 50% interest in SCGC to Casino
America for (i) 1,850,000 shares of Casino America common stock, (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 five- year warrant to purchase up
to another 416,667 shares of Casino America common stock (bringing the total
number of shares purchasable pursuant to warrants by the Company to 833,334 )
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.
The Company's decisions to sell the first 50% interest in SCGC and then the
remaining 50% interest in SCGC were unrelated and based upon differing
considerations. The Company decided to sell the first 50% interest because it
needed additional financing to complete the development of the Louisiana
project but desired to retain an interest in the project due to management's
belief that the value of the Company's remaining 50% interest would appreciate,
over the amount received by the Company for the sale of the first 50% interest,
once the casino became operational. The Company's decision to sell the
remaining 50% interest in SCGC resulted from management's belief that SCGC
needed a second riverboat casino at the site to effectively compete in the Lake
Charles market, and the Company and the other 50% shareholder, LRGP, as well as
LRGP's beneficial owners (Casino America and Louisiana Downs), were unable to
reach an agreement with respect to the ownership structure of the second
riverboat. The value of SCGC declined from June 1995 (when the Company sold
the first 50% interest
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in SCGC for a pretax gain of approximately $21.5 million) to May 1996 (when the
Company sold the remaining 50% interest in SCGC for a pretax gain of
approximately $14.9 million) because SCGC's operating results upon opening in
July 1995 were less than its projected results.
In December 1993 the Company acquired 100% of the outstanding common stock of
Gaming Entertainment Management Services, Inc. ("GEMS"), a Nevada corporation,
which was organized for the purpose of developing a hotel and casino in Las
Vegas, Nevada. GEMS' primary asset was its option to purchase an 18.6 acre
tract of land in the gaming district of Las Vegas. In June 1994 the option was
exercised and the land was purchased. The Company may develop such property by
itself or on a joint venture basis, or, if not developed, may sell the land.
In June 1996 the Company entered into a definitive asset purchase agreement to
acquire the assets and operations of the MBII riverboat casino located in
Clinton, Iowa, for a purchase price of $40 million. The MBII riverboat casino
contains approximately 485 slot machines, 20 table games and has on-board
dining and entertainment facilities. For the year ended December 31, 1995 MBII
had revenues and pretax profits of $30.5 million and $9.5 million,
respectively.
ACQUISITION OF MBII
General
On June 11, 1996 the Company entered into a definitive asset purchase agreement
with MBII and all the shareholders thereof to acquire substantially all the
assets and operations of MBII for a purchase price of $40 million. The MBII
riverboat casino located in Clinton, Iowa, has been operated by the Kehl family
(including Robert Kehl, who is a director of the Company) since its opening in
June 1991. In connection with the agreement, the Company will enter into
employment agreements with certain members of the Kehl family whereby the
majority of MBII's existing management will continue to operate the facility.
Closing of the transaction is subject to the satisfaction of certain conditions
including obtaining (i) $20 million of bank debt financing satisfactory to the
Company, (ii) the approval of the Iowa Racing and Gaming Commission (the "Iowa
Gaming Commission"), and (iii) a license to operate the purchased assets. The
Company has commenced the regulatory approval process with the filing of
certain corporate information and personal histories of its officers and
directors.
Location, Facilities and Operations
The MBII riverboat casino ("Casino") is a four deck riverboat measuring
approximately 228 feet in length by 64 feet in width. The Casino offers
approximately 37,700 square feet of floor space including 10,600 square feet
which is used for actual gaming operations. The Casino contains approximately
485 slot machines (the majority of which are equipped with IGT's computerized
player tracking system, which allows the building of a data base of customer
playing habits) and 20 table games (including black jack, craps, Caribbean stud
and roulette) on two levels for a total of approximately 625 gaming positions.
The third deck includes a buffet restaurant seating 320 persons, the Captains
Deli which serves hot and cold sandwiches, kitchen facilities, a gift shop, and
an entertainment stage. The fourth level of the riverboat contains
approximately 500 square feet of office space and 7,000 square feet of open
space which has been used for site- seeing, relaxation and light dining. The
Casino has a U.S. Coast Guard capacity of 1,000 passengers (excluding crew) and
has been designed to create a comfortable and spacious atmosphere.
The Casino's adjacent barge based support facilities include approximately
7,000 square feet of general office, guest service and storage areas. In
addition, located approximately four miles inland is MBII's 14,000 square foot
kitchen and warehouse facility. Parking for a total of approximately 750
vehicles is available on (i) Riverview Drive adjacent to the project, (ii) a
400 space public parking lot approximately 1/4 mile away for which MBII
provides shuttle services, and (iii) a nearby public swimming facility
providing an additional 100 spaces. While substantially all the operations are
conducted on the riverboat and supporting barge facilities, MBII leases
approximately three acres of riverfront land from the City of Clinton which is
used for docking the riverboat on the Mississippi River. The lease expires in
2000, however, the Company anticipates in connection with the MBII acquisition
it will enter into a new agreement with the City of Clinton for an extended
period.
Pursuant to Iowa law the license to conduct gaming is held by a qualified
non-profit sponsoring organization, in this case Clinton County Gaming
Association, Ltd. ("CCGA"). MBII in turn has an operating agreement with CCGA
(the "CCGA Gaming Agreement") to conduct gaming operations and is licensed to
operate a gaming excursion vessel. Under the current CCGA Gaming Agreement
MBII pays CCGA an admission fee for each adult passenger boarding the vessel
calculated on an
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annual basis equal to (i) $.54 for each of the first 50,000 passengers, (ii)
$1.08 for each of the next 50,000 passengers, and (iii) $1.35 for each
passenger thereafter. During 1995 approximately 704,000 passengers boarded the
Casino. The admission fees are subject to periodic increase equal to the same
percentage increase in the Consumer Price Index. The CCGA Gaming Agreement
expires in 2000, however, the Company anticipates in connection with the MBII
acquisition it will enter into a new agreement with CCGA for an extended
period.
The Casino operates seven days a week, 365 days a year from 9:00 a.m. to 2:00
a.m. on weekdays, and from 9:00 a.m. to 4:00 a.m. on weekends. While on board
passengers are offered a variety of slot machines and table games. The
majority of gaming operations are conducted dockside, except for the
requirement to conduct a total of at least one 2-hour excursion per day for an
aggregate of 100 days during the excursion season which runs from April 1 to
October 31 of each year. The majority of food is prepared off-site at MBII's
kitchen facilities and is transported periodically in insulated food containers
to the riverboat. MBII serves approximately 5,000 meals a week.
Market
Clinton County has a population of approximately 45,000, including
approximately 35,000 in the City of Clinton. Clinton County is a rural
community approximately 40 miles north of the Quad Cities of Davenport and
Bettendorf, Iowa and Moline and Rock Island, Illinois. Clinton is the home to
a number of large manufacturing facilities including International Paper,
Archer Daniels Midland, Ralston Purina, Custom-Pak and Quantum which with
others provide approximately 5,000 manufacturing jobs.
MBII believes more than half of its customers originate from cities and towns
in the State of Illinois as Clinton is located on the border of the states of
Iowa and Illinois. The Casino is located approximately 1/2 mile north of the
Highway 30 Mississippi River Bridge and 1 1/2 miles south of the Lyons/Fulton
Bridge which permit vehicular traffic between Iowa and Illinois. Aside from
these two bridges, the nearest bridge to the south is approximately 35 miles
away and the nearest bridge to the north is approximately 20 miles away. These
two bridges tend to funnel a certain portion of the east/west traffic through
the City of Clinton. In addition, many of the Casino's patrons are residents
of Clinton County, and other cities and towns in Iowa.
Marketing Strategy
The Company's marketing strategy is to attract customers to the Casino by
designing and implementing various marketing programs catering to specific
groups within MBII's overall target market. The Company believes many of
MBII's customers are attracted to its convenient location, accessible parking,
friendly atmosphere and the convenience and quality of its food operation. The
Company believes MBII's food operation is superior to other riverboat gaming
casinos in the area. MBII encourages participation in the "Players Club", of
which members can accumulate points that can be exchanged for cash, or other
prizes and food. Periodically, MBII sponsors events and trips exclusively for
its Players Club members.
In addition to marketing directly to members of its Players Club, MBII uses
newspaper, radio, outdoor and print media to promote its services and to
achieve greater recognition. Oftentimes MBII utilizes its highly regarded food
operation to attract and retain customers. In particular, MBII places a number
of complimentary food and other coupons in newspapers of towns and cities in
the vicinity of the Casino to encourage patronage. MBII also has an active bus
program with local and out of state bus tour operators.
COMPETITION
General
The casino gaming industry includes casinos which are either land-based in
jurisdictions such as Nevada and New Jersey, dockside casinos, riverboat
casinos and land-based casinos on Indian reservations. The gaming industry is
highly competitive and is composed of a large number of companies, many of
which have significantly greater resources than the Company. Numerous states
have legalized gaming and several other states are considering the legalization
of gaming in designated areas. As a result of the proliferation of gaming in
new jurisdictional areas as well as the proliferation of Indian gaming on
tribal land, the Company's proposed and future operations could be adversely
affected, particularly in instances where such other gaming operations are
conducted close to properties operated by the Company.
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Clinton, Iowa
The Company believes a majority of MBII's customers reside within a 75 mile
radius of the Casino. Within this radius MBII currently competes with (i)
three riverboat casinos in the Quad Cities area approximately 40 miles to the
south (two in Iowa and one in Illinois), (ii) a riverboat casino in DuBuque,
Iowa approximately 65 miles to the north, (iii) a riverboat casino in Galena,
Illinois approximately 65 miles to the north, and (iv) a land-based slots-only
casino which opened in November 1995 located within a dog racing facility in
DuBuque, Iowa. In November 1995, the riverboat casino located in Galena,
Illinois closed, but re-opened again in May 1996.
Iowa law does not limit the number of gaming licenses that may be granted
within the state, and accordingly other casinos may be subsequently authorized
within MBII's primary market area. Furthermore, the Company is aware that
recently a group of investors have expressed an interest in locating a casino
in Cedar Rapids, Iowa, approximately 85 miles west of the Casino. Prior to
gaming being authorized in Cedar Rapids, a referendum must be approved by the
residents of Linn County and the Iowa Gaming Commission must issue a license to
the proposed non-profit organization and casino operator.
Currently Illinois law limits the number of riverboat gaming licenses to ten.
All of such licenses have been granted, and all of the respective casinos are
currently in operation. Illinois law requires regular excursions, except when
cruising is unsafe due to inclement weather, mechanical or structural problems,
or river icing. Over the last two years a number of proposals have been
introduced in the Illinois legislature seeking to expand the number of gaming
licenses that may be granted, and to reduce the cruising requirements for
riverboats. The Company cannot predict the likelihood whether gaming
legislation in Illinois will be modified, and, if so, what impact it may have
on MBII's operations.
Las Vegas, Nevada
A hotel and casino on the Company's property located on Flamingo Road
approximately 3/4 of a mile west of the Las Vegas Strip, if developed, would
face competition from other casinos and hotels in the Las Vegas area,
particularly those located on or near the Las Vegas Strip. Currently, there
are approximately 27 major hotel-casinos located on or near the Las Vegas
Strip, nine major hotel-casinos located in the downtown area and several major
facilities located elsewhere in the Las Vegas area. As of July 1, 1996 there
were approximately 94,000 hotel and motel rooms in Las Vegas. Las Vegas room
capacity is expected to increase significantly during the next three years upon
the completion and opening of several new hotel-casinos and expansion projects.
Many of the proposed facilities have themes and attractions which are expected
to draw significant numbers of visitors. However, future additions and
expansions could result in a decrease in the number of casino patrons compared
to gaming square footage, and/or decrease the hotel occupancy levels in the Las
Vegas market. There can be no assurance that the Company would be able to
successfully compete in the Las Vegas market should it decide to enter that
market.
DEVELOPMENT OPPORTUNITY
In December 1993 the Company acquired all of the outstanding stock of GEMS,
which had an option to purchase an 18.6 acre tract of land in the gaming
district of Las Vegas located at the intersection of Flamingo Road and Arville
Street and across the street from the Gold Coast Hotel and Casino. GEMS
exercised the option and purchased the land on June 8, 1994. The land has
received zoning approval for the construction of a 12-story, 400-room hotel and
casino. The Company may develop a hotel and casino project on the property
either independently or through a joint venture. In connection with the stock
purchase agreement with LRGP, the Company granted LRGP a right of first
refusal, which expires in June 1998, to jointly develop a hotel and casino
project on the Company's Las Vegas property in the event the Company chooses to
develop such project on a joint venture basis. The Company is currently
pursuing potential opportunities to joint venture the development of a hotel
and casino project on such property, although no agreement has been reached
with any person in that regard. In addition to seeking an acceptable joint
venture arrangement, the Company has considered selling the property and has
had discussions with certain parties in that regard, although no agreement has
been reached with any party respecting such a sale.
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REGULATORY MATTERS
Iowa Gaming Legislation
In 1989 the State of Iowa legalized riverboat gaming on the Mississippi and
Missouri Rivers and certain other waterways located in Iowa. The Excursion
Gambling Act grants the Iowa Gaming Commission jurisdiction over all gaming
operations.
The legislation authorized the granting of licenses to conduct riverboat gaming
to not-for-profit corporations which, in turn, are permitted to enter into
operating agreements with persons who are licensed by the Iowa Gaming
Commission to operate riverboat casinos. The legislation gives each county the
opportunity to hold a referendum on whether to allow casino gaming within its
boundaries. Such a referendum was passed in Clinton County on May 10, 1994
with 85.2% voting in favor of passage, thereby authorizing casino gaming in
Clinton County for a period of nine years from May 1994. Another referendum
cannot be held until 2002 and if approved, subsequent referenda will occur at
eight year intervals. The number of licenses which may be granted in the
state is not limited by statute or regulation.
In 1994 Iowa amended its gaming legislation to remove several previous
restrictions including loss and wager limits and restrictions on the amount of
space on a vessel that may be utilized for gaming. Current law permits gaming
licensees to offer unlimited stakes gaming on games approved by the Iowa Gaming
Commission on a 24-hour basis. Gaming is permitted only on riverboats which
recreate, as nearly as practicable, Iowa's riverboat history and have a
capacity for at least 250 patrons. In addition the licensee must utilize Iowa
resources, goods and services in the operation of the riverboat. An excursion
gaming boat must operate at least one excursion each day for 100 days during
the excursion season which is from April 1 through October 31 of each year.
Excursions consist of a minimum of two hours. While an excursion gaming boat
is docked, passengers may embark or disembark at any time during its business
hours. If during the excursion season it is determined that it would be unsafe
to complete any portion of an excursion, or if mechanical problems prevent the
completion of any portion of an excursion, the boat may be allowed to remain
dockside. The legal age for gaming in Iowa is 21.
Gaming licenses are issued for not more than three years and are subject to
annual renewal thereafter. The Iowa Gaming Commission has broad discretion
with regard to such renewals. The annual license fee to operate an excursion
gaming boat is based on the passenger carrying capacity, including crew, for
which the excursion gaming boat is registered. The annual fee is five dollars
per person capacity. Licenses issued by the Iowa Gaming Commission may not be
transferred to another person or entity.
Minimum and maximum wagers on games are set by the licensee. Wagering may only
be conducted with chips, wagering debit cards or coins. Wagers may only be
made by persons 21 years of age and older. A licensee may not accept a credit
card to purchase coins, tokens or other forms of credit to be wagered.
The legislation imposes a graduated tax based on annual adjusted gross receipts
at a rate of 5% on the first $1 million, 10% on the next $2 million and 20% on
any amount over $3 million. Taxes are due from the licensee within 10 days
after the close of business of the day when the wagers were made. The
legislation also permits the Iowa Gaming Commission to impose an admission fee
for each person embarking on an excursion vessel, and the city or county in
which gaming is conducted is permitted to impose an admission fee per patron of
not greater than $.50.
Pursuant to its rulemaking authority, the Iowa Gaming Commission requires
officers, directors and certain key employees of the Company to be licensed by
the Iowa Gaming Commission. In addition, anyone having a material relationship
or involvement with the Company may be required to be found suitable or to be
licensed, in which case those persons would be required to pay the costs and
fees of the Iowa Gaming Commission. The Iowa Gaming Commission has
jurisdiction to disapprove a change in position by such officers or key
employees, or sever relationships with other persons who refuse to file
appropriate applications or whom the Iowa Gaming Commission finds unsuitable to
act in such capacities. Any contract in excess of $50,000 must be submitted to
and approved by the Iowa Gaming Commission.
The Iowa Gaming Commission may also require any individual who has a material
relationship with the Company to be investigated and licensed or found
suitable. Any person who acquires 5% or more of the Company's equity
securities must be approved by the Iowa Gaming Commission prior to such
acquisition. The applicant stockholder is required to pay all costs of such
investigation.
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The ownership and operation of gaming facilities in Iowa are subject to
extensive state laws, regulations of the Iowa Gaming Commission and various
county and municipal ordinances (collectively, the "Iowa Gaming Laws"),
concerning, among other things, the responsibility, financial stability and
character of gaming operators and persons financially interested or involved in
gaming operations. Iowa Gaming Laws seek to (i) prevent unsavory or unsuitable
persons from having direct or indirect involvement with gaming at any time or
in any capacity; (ii) establish and maintain responsible accounting practices
and procedures; (iii) maintain effective control over the financial practices
of licensees (including the establishment of minimum procedures for internal
affairs, the safeguarding of assets and revenues, the provision of reliable
record keeping and the filing of periodic financial and operating reports with
the Iowa Gaming Commission); (iv) prevent cheating and fraudulent practices;
and (v) provide a source of state and local revenues through taxation and
licensing fees.
The Iowa Gaming Commission may revoke a gaming license if, among other
conditions, the licensee: (i) has been suspended from operating a gaming
operation in another jurisdiction by a board or commission of that
jurisdiction; (ii) has failed to demonstrate financial responsibility
sufficient to adequately meet the requirements of the gaming enterprise; (iii)
is not the true owner of the enterprise; (iv) has failed to disclose ownership
of other persons in the enterprise; (v) is a corporation 10% of the stock of
which is subject to a contract or option to purchase at any time during the
period for which the license was issued, unless the contract or option was
disclosed to the Iowa Gaming Commission and the Iowa Gaming Commission approved
the sale or transfer during the period of the license; (vi) knowingly makes a
false statement of a material fact to the Iowa Gaming Commission; (vii) fails
to meet a monetary obligation in connection with an excursion gaming boat;
(viii) pleads guilty to, or is convicted of a felony; (ix) loans to any person,
money or other thing of value for the purpose of permitting that person to
wager on any game of chance; (x) is delinquent in the payment of property taxes
or other taxes, or fees or a payment of any other contractual obligation or
debt due or owed to a city or county; or (xi) assigns, grants or turns over to
another person the operation of a licensed excursion boat (this provision does
not prohibit assignment of a management contract approved by the Iowa Gaming
Commission), or permits another person to have a share of the money received
for admission to the excursion boat. If it were determined that gaming laws
were violated by a licensee, the gaming license held by such licensee could be
limited, made conditional, suspended or revoked. In addition, the Company and
the persons involved could be subject to substantial fines for each separate
violation of the Iowa Gaming Laws at the discretion of the Iowa Gaming
Commission.
Nevada Gaming Regulation
The Company is not currently seeking a Nevada gaming license. However, should
the Company finalize development plans for a hotel and casino project on its
Las Vegas land or otherwise acquire casino operations in Nevada, it will apply
for such a license and will be subject to the following regulations.
The ownership and operation of casino gaming facilities in Nevada are subject
to: (i) the Nevada Gaming Control Act and the regulations promulgated
thereunder (collectively, the "Nevada Act"); and (ii) various local ordinances
and regulations. Gaming operations in Nevada are subject to the licensing and
regulatory control of the Nevada Gaming Commission ("Nevada Commission"), the
Nevada State Gaming Control Board ("Nevada Board") and various other county and
city regulatory agencies, including the City of Las Vegas, collectively
referred to as the "Nevada Gaming Authorities."
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimum
procedures for internal fiscal affairs and the safeguarding of assets and
revenues, providing reliable record keeping and requiring the filing of
periodic reports with the Nevada Gaming Authorities; (iv) the prevention of
cheating and fraudulent practices; and (v) providing a source of state and
local revenues through taxation and licensing fees. Changes in such laws,
regulations and procedures could have an adverse effect on the Company's
proposed gaming operations.
The Company, upon application for a Nevada gaming license, will be required to
be registered with the Nevada Commission as a publicly traded corporation (a
"Registered Corporation") and to be found suitable to own the stock of any
entity which owns or operates a casino. A casino is generally licensed by the
Nevada Gaming Authorities as a corporate licensee ( a "Corporate Licensee")
under the terms of the Nevada Act.
As a Registered Corporation, the Company will be required periodically to
submit detailed financial and operating reports to
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the Nevada Commission and furnish any other information which the Nevada
Commission may require. No person may become a stockholder of, or receive, any
percentage of profits from a Corporate Licensee without first obtaining
licenses and approvals from the Nevada Gaming Authorities.
The Nevada Gaming Authorities may investigate any individual who has a material
relationship to, or material involvement with, the Company or the Corporate
Licensee in order to determine whether such individual is suitable or should be
licensed as a business associate of the Corporate Licensee. Officers,
directors and certain key employees of the Corporate Licensee will be required
to file applications with the Nevada Gaming Authorities and may be required to
be licensed or found suitable by the Nevada Gaming Authorities. Officers,
directors and key employees of the Company who are actively and directly
involved in the activities of the Corporate Licensee may be required to be
licensed or found suitable by the Nevada Gaming Authorities. The Nevada Gaming
Authorities may deny an application for licensing, and both require submission
of detailed personal and financial information followed by a thorough
investigation. The applicant for licensing or a finding of suitability must
pay all the costs of the investigation. Changes in licensed positions must be
reported to the Nevada Gaming Authorities and in addition to their authority to
deny an application for a finding of suitability or licensure, the Nevada
Gaming Authorities have jurisdiction to disapprove a change in a corporate
position.
If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company or the Corporate Licensee, the companies involved
would have to sever all relationships with such person. In addition, the
Nevada Commission may require the Company or the Corporate Licensee to
terminate the employment of any person who refuses to file appropriate
applications. Determinations of suitability or resolutions of questions
pertaining to licensing are not subject to judicial review in Nevada.
The Company and the Corporate Licensee will be required to submit detailed
financial and operating reports to the Nevada Commission. Substantially all
material loans, liens, sales of securities and similar financing transactions
by the Corporate Licensee will be required to be reported to or approved by the
Nevada Commission.
If it were determined that the Nevada Act was violated by the Corporate
Licensee, the licenses it holds could be limited, conditioned, suspended or
revoked, subject to compliance with certain statutory and regulatory
procedures. In addition, the Company, the Corporate Licensee and the persons
involved could be subject to substantial fines for each separate violation of
the Nevada Act at the discretion of the Nevada Commission. Limitation,
conditioning or suspension of the licenses of the Corporate Licensee could (and
revocation of any license of the Corporate Licensee would) materially adversely
affect the Company.
Any beneficial holder of a Registered Corporation's voting securities,
regardless of the number of shares owned, may be required to file an
application, be investigated and have its suitability as a beneficial holder of
the Registered Corporation's voting securities determined if the Nevada
Commission has reason to believe that such ownership would otherwise be
inconsistent with the declared policies of the State of Nevada. The applicant
must pay all costs of investigation incurred by the Nevada Gaming Authorities
in conducting any such investigation.
The Nevada Act requires any person who acquires more than 5% of a Registered
Corporation's voting securities to report the acquisition to the Nevada
Commission. The Nevada Act requires that beneficial owners of more than 10% of
a Registered Corporation's voting securities apply to the Nevada Commission for
a finding of suitability within thirty days after the Chairman of the Nevada
Board mails the written notice requiring such filing. Under certain
circumstances, an "institutional investor," as defined in the Nevada Act, which
acquires more than 10%, but not more than 15%, of a Registered Corporation's
voting securities may apply to the Nevada Commission for a waiver of such
finding of suitability if such institutional investor holds the voting
securities for investment purposes only. An institutional investor shall not
be deemed to hold voting securities for investment purposes unless the voting
securities were acquired and are held in the ordinary course of business as an
institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of the board of directors
of the Registered Corporation, any change in the Registered Corporation's
corporate charter, bylaws, management, policies or operations, or any of its
gaming affiliates, or any other action which the Nevada Commission finds to be
inconsistent with holding the Registered Corporation's voting securities for
investment purposes only. Activities which are not deemed to be inconsistent
with holding voting securities for investment purposes only include: (i) voting
on all matters voted on by stockholders; (ii) making financial and the other
inquiries of management of the type normally made by securities analysts for
informational purposes and not to cause a change in its management, policies or
operations; and (iii) such other activities as the Nevada Commission may
determine to the consistent with such investment intent. If the beneficial
holder of
7
9
voting securities who must be found suitable is a corporation, partnership or
trust, it must submit detailed business and financial information including a
list of beneficial owners. The applicant is required to pay all costs of
investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within thirty days after being ordered to do so by the Nevada
Commission or the Chairman of the Nevada Board, may be found unsuitable. The
same restrictions apply to a record owner if the record owner, after request,
fails to identify the beneficial owner. Any stockholder found unsuitable and
who holds, directly or indirectly, any beneficial ownership of the voting
securities of the Company beyond such period of time as may be prescribed by
the Nevada Commission may be guilty of a criminal offense. The Company will be
subject to disciplinary action if, after it receives a notice that a person is
unsuitableto be a stockholder or to have any other relationship with it, it (i)
pays that person any dividend or interest upon voting securities of the
Company, (ii) allows that person to exercise, directly or indirectly, any
voting right conferred through securities held by that person, (iii) pays
remunerations in any form to that person for services rendered or otherwise, or
(iv) fails to pursue all lawful efforts to require such unsuitable person to
relinquish his voting securities including, if necessary, the immediate
purchase of said voting securities for cash at fair market value.
The Nevada Commission may, in its discretion, require the holder of any debt
security of a Registered Corporation to file applications, be investigated and
be found suitable to own the debt security of a Registered Corporation. If the
Nevada Commission determines that a person is unsuitable to own such security,
then pursuant to the Nevada Act, the Registered Corporation can be sanctioned,
including the loss of its approvals, if without the prior approval of the
Nevada Commission, it: (i) pays to the unsuitable person any dividend,
interest, or any distribution whatsoever; (ii) recognizes any voting right by
such unsuitable person in connection with such securities; (iii) pays the
unsuitable person remunerations in any form; or (iv) makes any payment to the
unsuitable person by way of principal, redemption, conversion, exchange,
liquidation, or similar transaction.
The Company will be required to maintain a current stock ledger in Nevada which
may be examined by the Nevada Gaming Authorities at any time. If any
securities are held in trust by an agent or by a nominee, the record holder may
be required to disclose the identity of the beneficial owner to the Nevada
Gaming Authorities. A failure to make such disclosure may be grounds for
finding the record holder unsuitable. The Company will also be required to
render maximum assistance in determining the identity of the beneficial owner.
The Company will also be required to disclose to the Nevada Commission, upon
its request, the identities of any of its security holders. The Nevada
Commission has the power to require the stock certificates of the Company to
bear a legend indicating that the securities are subject to the Nevada Act.
After becoming a Registered Corporation, the Company may not make a public
offering of its securities without the prior approval of the Nevada Commission
if the securities or proceeds therefrom are intended to be used to construct,
acquire or finance gaming facilities in Nevada, or to retire or extend
obligations incurred for such purposes.
The regulations of the Nevada Board and the Nevada Commission also provide that
any entity which is not an "affiliated company," as such term is defined in the
Nevada Act, or which is not otherwise subject to the provisions of the Nevada
Act or such regulations, such as the Company, which plans to make a public
offering of securities intending to use such securities, or the proceeds from
the sale thereof for the construction or operation of gaming facilities in
Nevada, or to retire or extend obligations incurred for such purposes, may
apply to the Nevada Commission for prior approval of such offering. The Nevada
Commission may find an applicant unsuitable to be a holding company if it did
not submit such an application.
Changes in control of a Registered Corporation through merger, consolidation,
stock or asset acquisitions, management or consulting agreements, or any act or
conduct by a person whereby he obtains control, may not occur without the prior
approval of the Nevada Commission. Entities seeking to acquire control of a
Registered Corporation must satisfy the Nevada Board and Nevada Commission in a
variety of stringent standards prior to assuming control of such Registered
Corporation. The Nevada Commission may also require controlling stockholders,
officers, directors and other persons having a material relationship or
involvement with the entity proposing to acquire control, to be investigated
and licensed as part of the approval process relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions opposed by
management, repurchases of voting securities and corporate defense tactics
affecting Nevada corporate gaming licensees, and Registered Corporations that
are affiliated with those operations, may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and
8
10
to further Nevada's policy to: (i) assure the financial stability of corporate
gaming licensees and their affiliates; (ii) preserve the beneficial aspects of
conducting business in the corporate form; and (iii) promote a neutral
environment for the orderly governance of corporate affairs. Approvals are, in
certain circumstances, required from the Nevada Commission before the
Registered Corporation can make exceptional repurchases of voting securities
above the current market price thereof and before a corporate acquisition
opposed by management can be consummated. The Nevada Act also requires prior
approval of a plan of recapitalization proposed by the Registered Corporation's
Board of Directors in response to a tender offer made directly to the
Registered Corporation's stockholders for the purposes of acquiring control of
the Registered Corporation.
License fees and taxes, computed in various ways depending on the type of
gaming or activity involved, are payable to the State of Nevada and to the
counties and cities in which the Nevada licensee's respective operations are
conducted. Depending upon the particular fee or tax involved, these fees and
taxes are payable either monthly, quarterly or annually and are based upon
either: (i) a percentage of the gross revenues received; (ii) the number of
gaming devices operated; or (iii) the number of table games operated. A casino
entertainment tax is also paid by casino operations where entertainment is
furnished in connection with the selling of food or refreshments. Nevada
licensees that hold a license to manufacture or distribute gaming devices also
pay certain fees and taxes to the State of Nevada.
Any person who is licensed, required to be licensed, registered, required to be
registered, or is under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside
of Nevada, is required to deposit with the Nevada Board, and thereafter
maintain, a revolving fund in the amount of $10,000 to pay the expenses of
investigation by the Nevada Board of their participation in such foreign
gaming. The revolving fund is subject to increase or decrease in the
discretion of the Nevada Commission. Thereafter, Licensees are required to
comply with certain reporting requirements imposed by the Nevada Act.
Licensees are also subject to disciplinary action by the Nevada Commission if
they knowingly violate any laws of the foreign jurisdiction pertaining to the
foreign gaming operation, fail to conduct the foreign gaming operation in
accordance with the standards of honesty and integrity required of Nevada
gaming operations, engage in activities that are harmful to the State of Nevada
or its ability to collect gaming taxes and fees, or employ a person in the
foreign operation who was denied a license or finding of suitability in Nevada
on the grounds of personal unsuitability.
Other Gaming Regulations
In connection with the Company's ownership of more than 5% of the outstanding
common stock of Casino America (as of August 6, 1996 the Company held
approximately 10.9%), the Company must be found suitable as a 5% or greater
shareholder in any jurisdiction where Casino America has gaming operations.
Currently Casino America has gaming operations in Louisiana and Mississippi.
The Company believes it is currently authorized to be a 5% or greater
shareholder of Casino America in Louisiana and has made application to the
Mississippi gaming authorities to be approved as such.
Non-Gaming Regulations
The Company is subject to certain federal, state and local safety and health
laws, regulations and ordinances that apply to non-gaming businesses generally,
such as the Clean Air Act, Clean Water Act, Occupational Safety and Health Act,
Resource Conservation Recovery Act, and the Comprehensive Environmental
Response, Compensation and Liability Act. The Company has not made, and does
not anticipate making, material expenditures with respect to such environmental
laws and regulations. However, the coverage and attendant compliance costs
associated with such laws, regulations and ordinances may result in future
additional costs to the Company's operations.
In order for any vessel owned by the Company to have United States flag
registry, the Company must maintain "United States citizenship" as defined in
the Shipping Act of 1916, as amended (the "Shipping Act"), and other applicable
statutes. A corporation operating any vessel in the coastwise trade, such as
the Company, is not considered a United States citizen unless, among other
things, United States citizens own 75% of its outstanding capital stock.
All navigable vessels must comply with U.S. Coast Guard requirements as to boat
design, on-board facilities, equipment, personnel (including requirements that
each vessel be operated by a minimum complement of personnel) and safety. Each
vessel must hold a Certificate of Inspection from the Coast Guard. The Coast
Guard requirements establish design standards, set limits on the operation of
the vessels and require individual licensing of certain personnel involved with
the operation of the vessel. MBII's riverboat is subject to periodic
inspections by the Coast Guard and every five years the riverboat must be dry
docked for hull and other inspections, which will result in a loss of service
that can have an adverse effect on the Company.
9
11
Failure to hold a Certificate of Inspection would preclude the use of the
riverboat as a floating casino.
All shipboard employees of MBII, even those not involved in the actual
operation of the vessel, such as dealers, cocktail hostesses and security
personnel, may be subject to the Jones Act which, among other things, exempts
those employees from state limits on workers' compensation awards.
Required Divestiture of Common Stock
There are various state and federal regulations that may affect the ownership
of the Company's common stock. The Articles of Incorporation of the Company
provide that any shareholder of the Company who is found to be unsuitable by
any gaming regulatory authority with jurisdiction over the Company's
operations, may, in the discretion of the Board of Directors, be required to
divest the shares of Company stock owned by such person within forty-five (45)
days from the date on which the Company notifies the disqualified holder of the
regulatory authority's determination of unsuitability, or the Company will have
the right to purchase such stock at a price equal to its fair market value, as
defined in the Articles of Incorporation, less twenty-five percent (25%).
In addition, the Articles of Incorporation require that the Company maintain
compliance under the federal Merchant Marine Act of 1936 and the federal
Shipping Act of 1916, as amended, restricting the amount of shares of Company
common stock which may be held by non-U.S. citizens. The Company may require
foreign persons to divest their shares of Company common stock in accordance
with the provisions of the Articles of Incorporation in the event that the
Company determines that it is in violation of either of these Acts.
EMPLOYEES
As of July 1, 1996 the Company employed nine persons full time. None of the
Company's employees are covered by a collective bargaining agreement and the
Company believes that its employee relations are satisfactory. MBII currently
employs approximately 400 persons.
PRIVATE SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this Form 10-K
and other materials filed or to be filed by the Company with the Securities and
Exchange Commission (as well as information included in oral statements or
other written statements made or to be made by the Company) contains statements
that are forward-looking, such as statements relating to plans for future
expansion and other business development activities as well as other capital
spending, financing sources and the effects of regulation (including gaming and
tax regulations) and competition. Such forward-looking information involves
important risks and uncertainties that could significantly affect anticipated
results in the future and, accordingly, such results may differ from those
expressed in any forward-looking statements made by or on behalf of the
Company. These risks and uncertainties include, but are not limited to, those
relating to development and construction activities, dependence on existing
management, leverage and debt service (including sensitivity to fluctuations in
interest rates), domestic or global economic conditions, changes in federal or
state tax laws or the administration of such laws and changes in gaming laws or
regulations (including the legalization of gaming in certain jurisdictions).
10
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EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
Edward R. McMurphy . . . . . . . . . . . . . . . 45 Chairman of the Board,
President and Chief Executive Officer
Tilman J. Falgout, III . . . . . . . . . . . . . 47 Executive Vice President,
General Counsel and Director
Mark D. Slusser . . . . . . . . . . . . . . . . . 38 Chief Financial Officer,
Vice President Finance and Secretary
Edward J. Preuss, Jr. . . . . . . . . . . . . . . 63 Vice President Project Development
EDWARD R. MCMURPHY, has served as President of the Company since July 1984 and
as Chief Executive Officer since January 1988. He has been a director of the
Company since its inception in April 1983. Prior to and during his involvement
with the Company, Mr. McMurphy served as President of Marion Properties, Inc.,
a real estate investment and development company, from 1979 to 1986.
TILMAN J. FALGOUT, III, has served as Executive Vice President and General
Counsel of the Company since March 1995 and as a director of the Company since
September 1992. From 1978 through June 1995, Mr. Falgout was a partner in the
law firm of Stumpf & Falgout, Houston, Texas.
MARK D. SLUSSER, has served as Chief Financial Officer of the Company since
October 1989 and as Secretary since April 1990. From 1981 until joining the
Company, Mr. Slusser was employed by Ernst & Young LLP, where he held various
positions in the Audit Department including Senior Manager. Mr. Slusser is a
Certified Public Accountant.
EDWARD J. PREUSS, JR., has served as Vice President Project Development since
April 1994. He was self employed as a general business consultant for 11 years
prior to joining the Company. Prior to his self-employment, Mr. Preuss worked
at Marion Corporation as Vice President of Corporate Communications from 1976
to 1983.
ITEM 2. PROPERTIES
The Company leases approximately 6,000 square feet of office space in Irving,
Texas which is used for the Company's executive offices. The lease expires in
February 2001, and is subject to two three-year renewal options thereafter.
The Company owns 18.6 acres of land at the southeast corner of the intersection
of Flamingo Road and Arville Street in Las Vegas, Nevada.
The Company has entered into a definitive asset purchase agreement to acquire
the assets and operations of MBII. Upon consummation of the transaction the
Company will:
(i) own a 228 foot four deck riverboat casino with approximately
37,700 square feet of floor space including 10,600 square feet
of casino space,
(ii) own an approximately 14,000 square foot kitchen and warehouse
facility situated on approximately 1 acre of land in Clinton,
Iowa,
(iii) lease approximately three acres of waterfront land adjacent to
the Mississippi River in Clinton, Iowa which is used as a
docking site for MBII's riverboat casino. The current lease
expires in April 2000, however, in connection with the
proposed acquisition of MBII, the Company expects to extend
the term of such lease.
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It is anticipated that the above properties pertaining to MBII's operation will
be collateral for bank indebtedness in the amount of $20 million.
ITEM 3. LEGAL PROCEEDINGS
On September 21, 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 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 that this litigation will not have a material adverse
effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company during
the fourth quarter ended April 30, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this item is included in the Company's 1996 Annual
Report to Stockholders ("1996 Annual Report") on page 26 under the heading
"Common Stock Information, Dividends and Related Stockholder Matters" and such
information is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is included in the Company's 1996 Annual
Report on page 27 under the heading "Selected Financial Data" and such
information is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this item is included in the Company's 1996 Annual
Report on pages 4 through 6 under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and such information
is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements on pages 7 through 25 of the Company's 1996 Annual
Report are incorporated herein by reference.
The financial statements of St. Charles Gaming Company, Inc., a
non-consolidated 50% owned subsidiary of the Company as of April 30, 1996, are
as follows:
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders
St. Charles Gaming Company, Inc.:
We have audited the accompanying balance sheets of St. Charles Gaming Company,
Inc. as of April 30, 1996 and 1995, and the related statements of operations,
stockholders' equity (deficit), and cash flows for the years ended April 30,
1996 and 1995 and the period from June 25, 1993 (acquisition date) to April 30,
1994. 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 financial statements referred to above present fairly, in
all material respects, the financial position of St. Charles Gaming Company,
Inc. as of April 30, 1996 and 1995, and the results of its operations and its
cash flows for the years ended April 30, 1996 and 1995 and the period from June
25, 1993 (acquisition date) to April 30, 1994, in conformity with generally
accepted accounting principles.
Dallas, Texas Coopers & Lybrand L.L.P.
June 14, 1996
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BALANCE SHEETS ST. CHARLES GAMING COMPANY, INC.
April 30,
1996 1995
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents $ 4,807,940 $ 9,522
Accounts receivable:
Gaming, net of allowance for uncollectible
accounts of $92,649 in 1996 496,827
Related parties 84,907
Inventories 393,940
Prepaid expenses 592,370 769,527
Debt issuance costs, net of accumulated amortization 766,242 345,963
------------ -----------
Total current assets 7,142,226 1,125,012
------------ -----------
Property and equipment:
Building 248,232
Land and land improvements 2,659,280
Leasehold improvements 14,026,531
Furniture, fixtures and equipment 11,705,940 7,618,268
Construction in progress 26,324,321 1,539,627
Riverboat and barges 17,868,033 15,256,140
------------ -----------
72,832,337 24,414,035
Less accumulated depreciation (2,913,496) (14,563)
------------ -----------
69,918,841 24,399,472
------------ -----------
Other assets:
License costs, net of accumulated amortization 8,835,374 9,125,000
Noncompete agreement, net of accumulated amortization 216,678 316,674
Other 18,171
Deferred tax asset 1,055,968
------------ -----------
10,126,191 9,441,674
------------ -----------
$ 87,187,258 $34,966,158
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Progressive and casino liability $ 620,806
Accounts payable:
Related parties 2,370,284
Trade 2,864,538 $ 738,861
Accrued liabilities 7,862,979 768,834
Capital lease obligations 2,814,749 2,871,104
Advances from Crown 3,076,887
Notes payable:
Related parties 46,416,273 6,779,083
Other 30,194,608 21,811,603
------------ -----------
Total current liabilities 93,144,237 36,046,372
------------ -----------
Capital lease obligations, less current portion 637,107 2,265,641
Commitments and contingencies
Stockholders' deficit:
Common stock, no par value, 100,000 shares authorized,
issued and outstanding 5,600,000 5,600,000
Additional paid-in capital 13,985,388 10,900,000
Accumulated deficit (26,179,474) (19,845,855)
------------ -----------
Total stockholders' deficit (6,594,086) (3,345,855)
------------ -----------
$ 87,187,258 $ 34,966,158
============ ============
The accompanying notes are an integral part of the financial statements.
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STATEMENTS OF OPERATIONS ST. CHARLES GAMING COMPANY, INC.
Period From
June 25, 1993
(Acquisition Date)
Year Ended Year Ended to
April 30, 1996 April 30, 1995 April 30,1994
------------ ------------ -------------
Revenues:
Casino $ 56,588,560
Food, beverage and other 674,371
------------
Total revenue 57,262,931
------------
Operating expenses:
Pre-opening and development 4,195,653 $ 7,676,762 $ 1,181,551
Buy out of management contract 4,000,000
St. Charles Parish site abandonment 3,131,359
Casino 10,152,749
Gaming taxes 13,742,267
Food, beverage and other 2,423,471
Marine and facilities 3,224,484
Marketing and administrative 19,812,648
Management fees to related party 1,602,482
Depreciation and amortization 3,288,555 111,326 334,329
------------ ------------ -------------
Total operating expenses 58,442,309 14,919,447 1,515,880
------------ ------------ -------------
Operating loss (1,179,378) (14,919,447) (1,515,880)
Interest expense 6,210,209 6,810,357 171
------------ ------------ -------------
Loss before income taxes (7,389,587) (21,729,804) (1,516,051)
Income tax benefit (1,055,968) (2,827,483) (572,517)
------------ ------------ -------------
Net loss $ (6,333,619) $(18,902,321) $ (943,534)
============ ============ =============
The accompanying notes are an integral part of the financial statements.
15
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STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) ST. CHARLES GAMING COMPANY, INC.
For the Period from June 25, 1993 (Acquistion Date) to April 30, 1994 and for
the Years Ended April 30, 1995 and 1996
Additional Total
Common Paid-In Accumulated Stockholders'
Stock Capital Deficit Equity (Deficit)
------------ ------------ ------------- ------------
Balance at June 25, 1993 $ 5,600,000 $ 500,000 $ 6,100,000
Capital contribution 3,500,000 3,500,000
Net loss $ (943,534) (943,534)
------------ ------------ ------------- ------------
Balance at April 30, 1994 5,600,000 4,000,000 (943,534) 8,656,466
Capital contribution 6,900,000 6,900,000
Net loss (18,902,321) (18,902,321)
------------ ------------ ------------- ------------
Balance at April 30, 1995 5,600,000 10,900,000 (19,845,855) (3,345,855)
Capital contribution 3,085,388 3,085,388
Net loss (6,333,619) (6,333,619)
------------ ------------ ------------- ------------
Balance at April 30, 1996 $ 5,600,000 $ 13,985,388 $ (26,179,474) $ (6,594,086)
============ ============ ============= ============
The accompanying notes are an integral part of the financial statements.
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STATEMENTS OF CASH FLOWS ST. CHARLES GAMING COMPANY, INC.
For the Period from June 25, 1993 (Acquisition Date) to April 30, 1994 and for
the Years Ended April 30, 1995 and 1996
Period From
June 25, 1993
(Acquisition Date)
Year Ended Year Ended to
April 30, 1996 April 30, 1995 April 30, 1994
----------- ------------- ------------
Cash flows from operating activities:
Net loss $ (6,333,619) $ (18,902,321) $ (943,534)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,288,555 111,326 336,564
Provision for bad debts 92,649
Amortization of debt issuance costs/discount 832,680 3,376,392
Write-down of assets 3,131,359
Deferred income taxes (1,055,968) (2,827,483) (572,517)
(Increase) decrease in:
Accounts receivable (674,383)
Inventories (393,940)
Prepaid expenses 177,157 (838,971) (55,962)
Other assets (18,171)
Increase (decrease) in:
Accounts payable and accrued liabilities 11,590,106 1,416,151 (49,246)
Progressive and casino liability 620,806
----------- ------------- ------------
Net cash provided by (used in) operating activities 8,125,872 (14,533,547) (1,284,695)
----------- ------------- ------------
Cash flows from investing activities:
Purchase of property and equipment (48,290,177) (8,795,064) (11,196,868)
Purchase of assets (350,000)
----------- ------------- ------------
Net cash used in investing activities (48,290,177) (8,795,064) (11,546,868)
----------- ------------- ------------
Cash flows from financing activities:
Capital contributions from Crown 3,522,655 3,500,000
Advances from Crown 8,501 9,304,590
Payments to Crown (6,227,703)
Advances from LRGP 39,637,190 2,079,083
Issuance of debt 30,194,608 32,700,000
Debt issuance costs (1,252,959) (1,633,407)
Payments of debt and capital lease obligations (23,624,617) (7,125,522)
----------- ------------- ------------
Net cash provided by financing activities 44,962,723 23,315,106 12,804,590
----------- ------------- ------------
Increase (decrease) in cash and cash equivalents 4,798,418 (13,505) (26,973)
Cash and cash equivalents, beginning of period 9,522 23,027 50,000
----------- ------------- ------------
Cash and cash equivalents, end of period $ 4,807,940 $ 9,522 $ 23,027
=========== ============= ============
The accompanying notes are an integral part of the financial statements.
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ST. CHARLES GAMING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
1. Organization and Description of Business:
St. Charles Gaming Company, Inc., a Louisiana corporation (the "Company"), was
incorporated on January 18, 1993 for the purpose of operating a riverboat
gaming casino to be based in St. Charles Parish, Louisiana (near New Orleans).
In January 1995, the Company changed its riverboat berthing site from St.
Charles Parish to Calcasieu Parish, Louisiana (near Lake Charles).
Effective June 25, 1993, the Company was acquired by Crown Casino Corporation
("Crown"). Effective June 9, 1995, Crown sold a 50% interest in the Company to
Louisiana Riverboat Gaming Partnership ("LRGP"), a joint venture owned 50% by
Casino America, Inc. ("Casino America") and 50% by Louisiana Downs, Inc. LRGP
owns the Isle of Capri dockside riverboat casino in Bossier City, Louisiana.
Effective May 3, 1996, Crown sold its remaining 50% interest in the Company to
Casino America (see Note 11).
The Company commenced operations effective July 29, 1995. Prior to that time,
the Company's activities were focused on the pursuit of a riverboat gaming
license and other regulatory approvals, the raising of capital, the
construction of the riverboat casino and land based facilities, and the
development of the project in general. In previous financial statements, the
Company reported as a development stage enterprise.
2. Summary of Significant Accounting Policies:
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.
The Company is required to maintain cash or cash equivalents in sufficient
amount to protect patrons against defaults in gaming debts owed by the Company.
The Company's requirements are computed in accordance with Section 2713 of the
regulations of the Louisiana State Police, Riverboat Gaming Enforcement
Division. At April 30, 1996, approximately $4,807,940 of cash and cash
equivalents was available to satisfy this requirement. Additionally, at April
30, 1996, the Company had cash deposits concentrated primarily in two financial
institutions. The Company believes risk associated with these concentrations
is minimal.
Inventories
Inventories, which consist primarily of food, beverage, and gift shop items,
are stated at the lower of cost (determined by the first-in, first-out method)
or market.
Debt Issuance Costs
In conjunction with the issuance of the "New Notes" in August 1995 and
subsequent amendments to the agreement governing the "New Notes" (see Note 4),
the Company incurred debt issuance costs of approximately $1,500,000. These
costs are being amortized over the term of the New Notes using the effective
interest method.
In connection with the issuance of the "Senior Note" (see Note 4) and
subsequent amendments to the agreement governing the Senior Note, the Company
incurred debt issuance costs of $2,569,717. These costs were amortized over
the term of the Senior Note using the effective interest method and were fully
amortized upon the retirement of the Senior Note.
Property and Equipment
Property and equipment are stated at cost. Expenditures for additions,
renewals and improvements are capitalized. During periods of construction,
interest costs associated with borrowings utilized to fund construction are
capitalized. The capitalized interest is recorded as part of the asset to
which it relates and is depreciated over the asset's estimated useful life.
Interest capitalized during the year ended April 30, 1996 and 1995 was
approximately $2,400,000 and $10,000, respectively. Costs
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of repairs and maintenance are expensed as incurred. Effective July 29, 1995,
the Company began depreciating gaming related equipment and facilities.
Included in furniture, fixtures and equipment is approximately $5,900,000 of
equipment acquired under capital leases. Substantially all equipment acquired
under capital leases is gaming related.
In conjunction with the sale of 50% of the Company to LRGP, management changed
the estimated useful lives of certain assets from those previously reported to
match the estimated useful lives used at LRGP's other Louisiana riverboat
casino. As the Company had not commenced operations at the time of the sale,
no depreciation had been recorded on those assets. Accordingly, this change in
estimated useful lives had no significant impact on financial statement
amounts. Depreciation is computed using the straight-line method over the
following estimated useful lives:
Leasehold improvements 25 years
Building 25 years
Furniture, fixtures and equipment 5 years
Riverboat and barges 25 years
Depreciation expense was $2,898,933, $11,330 and $250,991, respectively, in
fiscal years 1996 and 1995 and the period from June 25, 1993 (acquisition date)
to April 30, 1994.
Included in leasehold improvements is approximately $3,600,000 of costs
incurred during the year ended April 30, 1996 for upgrades made to improve
access to the riverboat casino location. These costs arose from widening and
paving public roads and installing traffic signals. Such areas are not owned
or leased by the Company. In management's opinion, these costs do, and will
continue to contribute to the operating results of the casino and, as such,
have been capitalized.
Noncompete Agreement
In connection with the acquisition of the Company by Crown, the Company's
former owner agreed with Crown not to compete with the Company in the Louisiana
market for a period of five years. The noncompete agreement is stated at the
cost allocated to the agreement by Crown, at the time of its acquisition, net
of accumulated amortization. Amortization is recorded using the straight-line
method over a period of five years. The Company incurred amortization expense
of $99,996 for the years ended April 30, 1996 and 1995 and $83,330 for the
period from June 25, 1993 (acquisition date) to April 30, 1994.
License Costs
License costs principally represent the excess purchase price Crown paid in
acquiring the Company's net identifiable assets. In conjunction with the sale
of 50% of the Company to LRGP, management of the Company changed the estimated
useful life of the license, as previously reported, to match the estimated
useful lives utilized on other long-lived gaming related assets. The Company
began amortizing these costs effective July 29, 1995 (commencement of
operations) over a twenty-five-year period using the straight-line method.
Twenty-five years is management's best estimate of the useful life of the
license costs. The Louisiana license was issued on March 29, 1994 and has a
five-year initial term, which is subject to renewal.
Income Taxes
Through June 8, 1995, the Company was included in Crown's consolidated federal
income tax return. As a result of the sale of 50% of SCGC to LRGP, the Company
will file a separate return. The provision for income taxes in the
accompanying financial statements is computed on a separate return basis for
all periods presented.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between book bases and tax bases of
assets and liabilities. 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.
Revenue and Promotional Allowances
Casino revenue is the net win from gaming activities which is the difference
between gaming wins and losses. Casino revenues are net of accruals for
anticipated payouts of progressive electronic gaming device jackpots.
Revenue does not include the retail amount of food, beverages, and other items
provided gratuitously to customers. These amounts totaled $3,331,070 for the
year ended April 30, 1996. The cost of sales in providing such complementary
services was approximately $1,220,683 of which approximately $297,429 has been
classified as food, beverage and other and the
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remainder has been classified as casino expense.
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.
Reclassifications
The accompanying financial statements for the period ended April 30, 1995
reflect certain reclassifications made to conform the presentation with
classifications presented as of April 30, 1996.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Other Accounting Issues
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of."
This statement requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment whenever
circumstances indicate that the carrying amount of an asset may not be
recoverable. The impact of this standard, which the Company will adopt
effective May 1, 1996, has been assessed by management and should not have a
material effect on the Company's financial statements.
3. Operating Environment:
The Company operates in a highly regulated and competitive environment which is
currently facing political uncertainty. The Louisiana Riverboat Gaming
Commission and the Enforcement Division oversee virtually every aspect of
riverboat gaming in the State of Louisiana including the issuance and renewal
of riverboat gaming licenses. Management believes the Company's license will
be renewed at the end of the initial term. The gaming industry in the State of
Louisiana has recently received national media attention primarily as a result
of the commencement of a federal investigation of certain legislative members
and the recent bankruptcy of a gaming company in the Louisiana market. In
response to these and other incidents, the Louisiana governor called a special
session of the State legislature to consider the gaming statutes governing
riverboat gaming, video-poker and the New Orleans' land-based casino. The
outcome of this session resulted in a local option vote to be conducted on a
parish by parish basis in November 1996, with separate votes for riverboat
gaming, video poker and the New Orleans land-based casino. Based on recent
published polls, management of the Company believes that the riverboat gaming
operations in Calcasieu Parish will not be negatively impacted.
4. Debt:
At April 30, 1996 and 1995, the Company had the following debt outstanding:
1996 1995
----------- -----------
Senior Secured Increasing Rate Note, net of unamortized
discount of $118,397 ("Senior Note" $28,000,000) $ 21,811,603
Senior Secured Increasing Rate Notes ("New Notes" $38,400,000) $30,021,313
Note payable to LRGP 15,000,000 2,079,083
Note payable to LRGP 26,716,273
Notes payable to Casino America (the "Casino America Notes") 4,700,000 4,700,000
Other 173,295
----------- -----------
$76,610,881 $28,590,686
=========== ===========
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In June 1994, the Company issued a $28,000,000 Senior Secured Increasing Rate
Note (the "Senior Note") to an institutional investor. The Senior Note was
initially due on June 3, 1995, but was subsequently extended to August 31, 1995
and 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 warrant to
purchase 508,414 shares of Crown's common stock. The proceeds from the private
placement were allocated between the Senior Note ($26,728,965) and the warrant
($1,271,035) based upon the relative fair value of each of the securities at
the time of issuance. The amount allocated to the warrant was recorded as an
increase to advances from Crown. The resulting original issue discount was
amortized over the life of the Senior Note using the effective interest method.
On August 7, 1995, the Company and LRGP (collectively, the "Issuers") jointly
issued $38,400,000 of Senior Secured Increasing Rate Notes (the "New Notes"),
the proceeds of which were used to retire the Senior Note ($21,900,000) and
certain LRGP obligations ($8,400,000). The balance of the proceeds were used
in the development of the Calcasieu Parish project. The New Notes initially
become due on July 27, 1996, but can be extended up to an additional twelve
months at the option of the Issuers provided no event of default has occurred
and is continuing, carry a 12% coupon which increases 25 basis points each
quarter until maturity, and provide for contingent interest beginning in June
1996 equal to 7.5% of the Issuers' consolidated cash flow, as defined. The New
Notes are collateralized by substantially all the assets of the Issuers and
contain covenants relating to certain business, operational and financial
matters including limitations on (i) incurring additional debt, (ii) paying
dividends, (iii) merging or consolidating with others, (iv) changes in control,
(v) capital expenditures, (vi) investments and joint ventures, and (vii) the
sale of assets, and financial covenants pertaining to (a) minimum cash flow,
(b) minimum fixed charge ratio, (c) maximum leverage ratio, and (d) minimum net
worth.
As of April 30, 1996, the Issuers were not in compliance with certain financial
covenants provided for in the Note Purchase Agreement pertaining to the New
Notes. However, effective May 3, 1996 the Company obtained waivers from the
institutional lender for the lack of compliance. The violations were waived
through the effective date of the waivers. Additionally, in conjunction with
the Company obtaining these waivers, the New Note Agreement was amended to
reflect less stringent financial covenants going forward and to allow the
Company to enter into and modify certain agreements in conjunction with Casino
America's purchase of Crown's remaining 50% interest in the Company and the
Grand Palais Riverboat transaction. Management believes the Company will be
able to comply with the terms of the amended agreement.
In the event the Company fails to comply with these amended covenants, the Note
Purchase Agreement provides that the lender has the right, upon the giving of
notice, to (among other things) cause an acceleration of the maturity date of
all amounts outstanding under the Note Purchase Agreement. Management believes
that the Company will be able to comply with these amended covenants and as
such acceleration of the repayment obligations is not expected to occur.
However, in the event the Company does fail to comply with the amended and
restated Note Purchase Agreement, and such repayment obligations are
accelerated, SCGC and LRGP will need to locate other sources of capital in
order to meet such repayment obligations, and there can be no assurance that
such sources will be available, or be available on terms acceptable to LRGP and
SCGC.
In May 1995, the Company issued a promissory note to LRGP to facilitate
advances of up to $15,000,000. The note bears interest at 11.5% per annum, and
is due three business days after the New Notes are paid in full. The proceeds
from the issuance of the note have been used to develop the Calcasieu Parish
project.
In October 1995, the Company issued a promissory note to LRGP to facilitate
additional advances of up to $25,000,000. The note bears interest at 11.5% per
annum and is due in four equal quarterly installments beginning three months
after retirement of the New Notes. However, the Company shall only be
obligated to make principal and interest payments to the extent the Company has
cash available to make such payments. The proceeds are currently being
utilized to develop the Calcasieu project.
In March 1995, the Company issued promissory notes aggregating $4,700,000 to
Casino America (the "Casino America Notes"). The Casino America Notes bear
interest at 11.5% per annum and are due three business days after the New Notes
are paid in full.
As noted above and in the accompanying balance sheet, the Company has current
debt obligations that significantly exceed its available cash resources. As
stated previously, management does not anticipate future events of
noncompliance and as such, does not believe payment of the New Notes will be
accelerated by the lender. Further, the related party notes payable are
subordinate to the New Notes. Management is currently pursuing a restructuring
of existing debt obligations. While management believes such restructuring can
be completed, there can be no assurance that restructuring options will be
available.
At April 30, 1996, based on the interest rates and the short-term duration of
the notes, management believes the carrying value
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of all notes payable approximates the estimated fair value.
5. Income Taxes:
The components of the Company's income tax benefit for the years ended April
30, 1996 and 1995 and the period from June 25, 1993 (acquisition date) to April
30, 1994 are as follows:
1996 1995 1994
----------- ----------- ----------
Current $ - $ - $ -
Deferred (1,055,968) (2,827,483) (572,517)
----------- ----------- ----------
$(1,055,968) $(2,827,483) $ (572,517)
=========== =========== ==========
The benefit for income taxes is different from the amount computed by applying
the federal income tax rate to the loss before income taxes for the years ended
April 30, 1996 and 1995 and the period from June 25, 1993 (acquisition date) to
April 30, 1994 for the following reasons:
1996 1995 1994
----- ----- -----
Federal statutory rate (34)% (34)% (34)%
Valuation allowance 23 26
State income tax, net of federal benefit (5) (5) (3)
Other 2 (1)
----- ----- -----
(14)% (13)% (38)%
===== ===== =====
Significant components of the Company's deferred tax liabilities and assets as
of April 30, 1996 and 1995 were as follows:
1996 1995
------------ ------------
Deferred tax liabilities:
License costs $ 3,436,716 $ 3,442,030
Other 1,807
------------ ------------
Total deferred tax liabilities 3,436,716 3,443,837
------------ ------------
Deferred tax assets:
Pre-opening expenses 6,538,935 6,149,255
Net operating loss carryforwards 4,906,000 2,719,000
Other 410,782 272,571
------------ ------------
Total deferred tax assets 11,855,717 9,140,826
------------ ------------
Less valuation allowance 7,363,033 5,696,989
------------ ------------
Net deferred tax asset $ 1,055,968 $ -
============ ============
At April 30, 1996 and 1995, valuation allowances totaling $7,363,033 and
$5,696,989, respectively, were provided against the Company's deferred tax
assets to reflect the uncertainties surrounding the realization of such
deferred tax assets. Realization of the net deferred tax asset at April 30,
1996 is dependent on the Company generating sufficient future taxable income.
Although realization is not assured, management believes it is more likely than
not that the amount of the deferred tax asset recorded for financial statement
purposes will be realized. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income are reduced. At April 30, 1996 the Company had net operating
loss carryforwards for federal income tax purposes of approximately $12,483,000
which expire in 2009 through 2011. These operating loss carryforwards are
subject to certain limitations due to the transaction discussed in Note 11.
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6. Leases:
In March and July 1995, the Company entered into agreements to lease the two
parcels of land that comprise the Calcasieu Parish riverboat casino site. The
leases have an initial term of five years with seven five-year renewal options.
During the initial term, the leases require annual aggregate rental payments of
$850,000 in years one through four, and $1,000,000 in year five, payable
monthly. During the first renewal term, the rent will be increased annually by
the greater of (i) 5%, or (ii) the percentage increase in the average consumer
price index for Calcasieu Parish, Louisiana for the previous twelve-month
period. During the second through seventh renewal terms, the lessor and the
Company will attempt to set the rent equal to 100% of the rent paid by other
riverboat gaming operators in Louisiana and Mississippi for comparable property
usage, or if no agreement can be made, then the parties will appoint real
estate appraisers to set the rent for such renewal term. However, in no event
shall the annual rent be less than $1,600,000 during the fourth and all
subsequent renewal terms. In addition, the Company will pay all real estate
taxes, except for taxes due on the unimproved value of the property.
In addition to the Calcasieu Parish site leases, the Company has entered into
various operating leases for equipment and office facilities. At April 30,
1996, future minimum lease payments to be made under these lease agreements are
as follows:
1997 $ 232,797
1998 109,409
1999 31,926
2000 26,605
---------
$ 400,737
=========
Rent expense for the years ended April 30, 1996 and 1995 and the period from
June 25, 1993 (acquisition date) to April 30, 1994 was $991,181, $61,539 and
$15,483, respectively.
The Company has also entered into various capital leases for equipment. As of
April 30, 1996 future minimum lease payments under capital leases were as
follows:
Fiscal Year Amount
----------- ------------
1997 $ 3,040,197
1998 613,531
1999 51,587
2000 614
------------
Total minimum lease payments 3,705,929
Less amount representing interest 254,073
------------
Present value of future minimum lease payments 3,451,856
Less current portion 2,814,749
------------
Capital lease obligations, less current portion $ 637,107
============
7. Commitments and Contingencies:
Commitments to Calcasieu Parish
In January 1995, the Company made a commitment to Calcasieu Parish to provide
certain payments to the Parish above and beyond the statutory admissions tax.
The Company committed to a $1,000,000 initial payment, which was paid upon the
opening of the casino, and a $1,000,000 annual payment for as long as the
casino is operating at its site in the Parish, but in no event less than six
years. In June 1995, the Company and the Parish entered into a definitive
development agreement whereby, in consideration for the payments to be made by
the Company to the Parish, the Parish is required to cooperate with and provide
assistance to the Company in obtaining and maintaining necessary permits and
approvals to operate its riverboat gaming casino.
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Litigation
On September 21, 1994, an action was filed against Crown and the Company in the
24th Judicial District Court for the Parish of Jefferson, Louisiana by Avondale
Industries, Inc. ("Avondale"). In this action, Avondale alleges that Crown was
contractually obligated to Avondale for the construction of the Company's
riverboat vessel based upon a letter of intent (allegedly reaffirming a
previous agreement entered into between Avondale and the Company). Avondale
alleges that Crown 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 Crown committed unspecified unfair trade practices and
made certain misrepresentations. Avondale has specified damages of
approximately $2,500,000. In conjunction with the sale of 50% of the Company
to LRGP, Crown indemnified LRGP against future losses arising from this
litigation, and as such, even though no assurance can be given as to the
ultimate outcome of this litigation, the Company believes this litigation will
not have a material adverse effect on the financial position or results of
operations of the Company.
8. Site Change and Buy Out of Management Contract:
In January 1995, the Company made the decision to abandon its site in St.
Charles Parish, Louisiana in favor of the site currently occupied in Calcasieu
Parish, Louisiana. As a result of this decision the Company recorded a charge
of approximately $3,100,000 for the year ended April 30, 1995, which represents
the write-off of previously capitalized costs specific to the St. Charles
Parish site.
In March 1995, in connection with Crown's sale of a 50% interest in the
Company's common stock to LRGP, the Company bought out its existing casino
management agreement for $4,000,000.
9. Related Party Transactions:
The Company entered into a management agreement with Riverboat Services, Inc.
("RSI") a subsidiary of Casino America which has a term of 99 years and
provides for a management fee of (i) 2% of "Revenues," as defined in the
agreement (generally net gaming revenues less gaming and admission taxes plus
all other operating revenues), plus (ii) 10% of "Net Operating Income," as
defined in the agreement, provided however, the total management fee shall not
exceed 4% of "Revenues." Additionally, in accordance with the agreement, key
employees of the riverboat are employees of RSI who pays the salaries of these
employees and is reimbursed by the Company. As of April 30, 1996, the Company
had incurred management fee costs of approximately $1,602,482 and had incurred
salary costs and other charges associated with these key employees of
approximately $1,400,000. No amounts were due or accrued to RSI at April 30,
1995.
Debartolo Properties Management, Inc., a wholly-owned subsidiary of Debartolo,
Inc. which owns 50% of LRGP is the general contractor for the construction of
the riverboat gaming site. For the year ended April 30, 1996, approximately
$300,000 was paid to Debartolo Properties Management, Inc. and other Debartolo
related companies for construction services provided.
The Company had net advances from Crown of $3,076,887 as of April 30, 1995.
Advances from Crown were used to fund the construction of the riverboat and
support pre-opening and development activities. Included in net advances from
Crown at April 30, 1995 is $1,500,000 relating to Crown common stock issued as
payment for expenses of the Company. In June 1995, in connection with Crown's
sale of a 50% interest in the Company's common stock to LRGP, Crown contributed
the balance in its advance account ($3,085,388) to the Company.
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10. Supplemental Cash Flow Information:
Supplemental cash flow disclosures for the years ended April 30, 1996 and 1995
and the period from June 25, 1993 (acquisition date) to April 30, 1994 are as
follows:
1996 1995 1994
----------- ----------- ----------
Interest paid, net of amounts capitalized $ 2,461,299 $ 6,115,878 $ 171
Noncash financing and investing activities:
Capital contribution from Crown 3,085,388 3,377,345
Equipment acquired under capital leases 128,175 5,762,267
11. Subsequent Events:
In May 1996, Crown sold its remaining 50% interest in the Company to Casino
America.
Also in May 1996, Casino America obtained all necessary approvals for the
acquisition and relocation of Grand Palais Riverboat, Inc. ("GPRI") from
bankruptcy. The relocation of the riverboat to the Company's current site in
Calcasieu Parish occurred in June 1996. The Company anticipates the GPRI
riverboat to be operational by July 1996. In conjunction with this relocation
of GPRI to Calcasieu Parish, the Company and GPRI entered into a joint
operating agreement whereby GPRI will pay to the Company a monthly docking fee
of $250,000 for the use of the existing facilities. Additionally, the Company
and GPRI will share certain administrative services and the taxable income/loss
will be allocated to the respective entities based on the terms of the
agreement.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Except as to information with respect to executive officers which is contained
in a separate heading under Item 1 to this Form 10-K, the information required
by Part III of Form 10-K is, pursuant to General Instruction G(3) of Form 10-K,
incorporated by reference from the Company's definitive proxy statement to be
filed pursuant to Regulation 14A for the Company's Annual Meeting of
Stockholders to be held on October 4, 1996. The Company will, within 120 days
of the end of its fiscal year, file with the Securities and Exchange Commission
a definitive proxy statement pursuant to Regulation 14A.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning directors and executive officers of the registrant
is set forth in the Proxy Statement to be delivered to stockholders in
connection with the Company's Annual Meeting of Stockholders to be held on
October 4, 1996 (the "Proxy Statement") under the headings "Election of
Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of
1934," which information is incorporated herein by reference. The name, age
and position of each executive officer of the Company is set forth under the
heading "Executive Officers" in Item 1 of this report.
ITEM 11. EXECUTIVE COMPENSATION
The information concerning executive compensation is set forth in the Proxy
Statement under the heading "Executive Compensation," which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning security ownership of certain beneficial owners and
management is set forth in the Proxy Statement under the heading "Security
Ownership of Certain Beneficial Owners and Management," which information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information concerning certain relationships and related transactions is
set forth in the Proxy Statement under the heading "Certain Transactions,"
which information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1). FINANCIAL STATEMENTS AND ACCOUNTANT'S REPORT
The following financial statements and accountant's report included in
the Company's 1996 Annual Report are incorporated herein by reference
in Item 8 of this report:
Report of Independent Accountants
Consolidated Balance Sheets as of April 30, 1995 and 1996
Consolidated Statements of Operations for the fiscal years
ended April 30, 1994, 1995 and 1996
Consolidated Statements of Cash Flows for the fiscal years
ended April 30, 1994, 1995 and 1996
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Consolidated Statements of Stockholders' Equity for the fiscal
years ended April 30, 1994, 1995 and 1996
Notes to Consolidated Financial Statements
The following financial statements and accountant's report of St.
Charles Gaming Company, Inc., a non- consolidated 50% owned subsidiary
of the Company as of April 30, 1996, are included in Item 8 of this
report:
Report of Independent Accountants
Balance Sheets as of April 30, 1995 and 1996
Statements of Operations for the period from June 25, 1993
(acquisition date) to April 30, 1994 and for the years ended
April 30, 1995 and 1996
Statements of Stockholders' Equity (Deficit) for the period
from June 25, 1993 (acquisition date) to April 30, 1994 and
for the years ended April 30, 1995 and 1996
Statements of Cash Flows for the period from June 25, 1993
(acquisition date) to April 30, 1994 and for the years ended
April 30, 1995 and 1996
Notes to Financial Statements
(a)(2). FINANCIAL STATEMENT SCHEDULES
The following supporting financial statement schedule for the three
years ended April 30, 1994, 1995 and 1996 is filed with this report:
II - Valuation and Qualifying Accounts
All other schedules are omitted since the required information is not
present, or is not present in amounts sufficient to require submission
of the schedules, or because the information required is included in
the consolidated financial statements and notes thereto.
(a)(3). EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
2.1 Amended Stock Purchase Agreement dated June 2, 1995 between the
Company and Louisiana Riverboat Gaming Partnership ("LRGP"). (10)
2.2 Stock Purchase Agreement dated January 18, 1996 by and between the
Company and Casino America, Inc., including form of Registration
Agreement, Promissory Notes and Warrants issued in favor of the
Company to purchase common stock of Casino America, Inc. (8)
2.3 Asset Purchase Agreement dated June 11, 1996 by and between the
Company, Mississippi Belle II, Inc., Roberts River Rides, Inc.,
Kenneth J. Bonnet, Christina M. Kehl, Daniel J. Kehl, Kevin A. Kehl,
Robert A. Kehl and Cynthia A. Winter, including Guarantee
Agreement.(1)
3.1 Articles of Incorporation of the Company (formerly SKAI, Inc.). (3)
3.1.1 Articles of Merger of the Company and SKAI, Inc. filed with the
Secretary of State of the State of Alabama on September 29, 1989. (3)
3.1.2 Articles of Merger of the Company and SKAI, Inc. filed with the
Secretary of State of the State of Texas on October 10, 1989. (3)
3.1.3 Articles of Amendment filed with the Secretary of State of the State
of Texas on October 7, 1993. (8)
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3.1.4 Articles of Amendment filed with the Secretary of State of the State
of Texas on October 5, 1994. (8)
3.2 By-Laws dated August 24, 1989. (4)
4.1 Specimen stock certificate. (9)
4.2 Form of Registration Rights Agreement dated January 5, 1994 by and
between the Company and Dabney-Resnick, Inc. (8)
4.2.1 Form of Stock Purchase Warrant dated January 5, 1994 allowing
Dabney-Resnick, Inc. to purchase shares of common stock of the
Company. (8)
4.3 Form of Registration Rights Agreement dated January 5, 1994 by and
between the Company and Sun Life Insurance Company of America, Inc.
(8)
4.3.1 Form of Stock Purchase Warrant dated January 5, 1994 allowing Sun Life
Insurance Company of America, Inc. to purchase shares of common stock
of the Company. (8)
4.4 Stock Purchase Warrant dated June 3, 1994, allowing Nomura Holding
America, Inc. ("Nomura") to purchase shares of Common Stock of the
Company. (9)
4.4.1 Amendment to Stock Purchase Warrant dated as of December 3, 1994. (8)
4.5 Form of Stock Purchase Warrant dated as of April 15, 1994 allowing the
following parties to purchase shares of Common Stock of the Company:
Daniel G. Goggin (38,990 shares), Gerard M. Jacobs (77,981 shares),
and The Hubbard Company, Inc. (77,981 shares). (9)
4.6 Form of Stock Purchase Warrant dated March 18, 1994 granting
Dabney-Resnick, Inc. the right to purchase 120,000 shares of Common
Stock of the Company. (8)
4.7 Stock Purchase Warrant dated July 8, 1994 granting Kehl River Boats,
Inc. the right to purchase 100,000 shares of Common Stock of the
Company. (8)
4.8 Stock Purchase Warrant dated October 6, 1994 granting Don Farris the
right to purchase 50,000 shares of Common Stock of the Company. (8)
4.9 Stock Purchase Warrant dated June 2, 1994 granting Gerard M. Jacobs
the right to purchase 50,000 shares of Common Stock of the Company.
(8)
4.10 Subordination Agreement dated as of July 20, 1995, among the Company,
LRGP, Nomura and First National Bank of Commerce, as agent for Nomura.
(11)
10.1 1986 Incentive Stock Option Plan. (2)
10.1.1 Amendment to 1986 Incentive Stock Option Plan adopted September 27,
1990. (5)
10.2 1991 Non-Qualified Stock Option Plan. (6)
10.3 Form of Indemnification Agreement between the Company and Edward R.
McMurphy, Mark D. Slusser, T.J. Falgout, III, David J. Douglas, J.
David Simmons, Gerald L. Adams, Robert J. Kehl, Gerard M. Jacobs and
Michael B. Cloud. (7)
10.4 Severance Agreement dated March 26, 1992 between the Company and Mark
D. Slusser. (6)
10.5 Shareholders Agreement dated June 9, 1995 by and between the Company
and LRGP. (10)
10.6 Teaming Agreement dated June 2, 1994 between the Company and Gerard M.
Jacobs. (8)
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30
10.7 Compromise Agreement dated January 27, 1995 among the Company, SCGC
and Century Casinos Management, Inc. (8)
10.8 Lease (South Tract) dated March 24, 1995 by and among Port Resources,
Inc. and CRU, Inc. (collectively, "Landlord"), SCGC and the Company.
(10)
10.8.1 Amendment to Lease (South Tract) dated May 3, 1995 by and among
Landlord, SCGC, the Company and LRGP. (10)
10.8.2 Second Amendment to Lease (South Tract) dated May 16, 1995 by and
among Landlord, SCGC, the Company and LRGP. (10)
10.9 Lease (North Tract) dated July 17, 1995 by and among Landlord, SCGC
and the Company. (11)
10.9.1 Amendment to Lease (North Tract) dated July 17, 1995 by and among
Landlord, SCGC, the Company and LRGP. (11)
10.9.2 Second Amendment to Lease (North Tract) dated July 25, 1995 by and
among Landlord, SCGC, the Company and LRGP. (11)
10.10 Lease Agreement dated May 20, 1994 by and between IGT-North America
and SCGC. (9)
10.10.1 Modification of Lease Agreement dated December 23, 1994 by and between
IGT-North America and SCGC. (8)
13.1 Annual Report to Stockholders for the fiscal year ended April 30,
1996. (1)
21.1 Subsidiaries of the Company. (1)
23.1 Consent of Coopers & Lybrand L.L.P. (1)
23.2 Opinion of Coopers & Lybrand L.L.P. on financial statement schedule.
(1)
24.1 Power of Attorney of Edward R. McMurphy. (1)
24.2 Power of Attorney of Tilman J. Falgout, III. (1)
24.3 Power of Attorney of David J. Douglas. (1)
24.4 Power of Attorney of J. David Simmons. (1)
24.5 Power of Attorney of Gerald L. Adams. (1)
24.6 Power of Attorney of Gerard M. Jacobs. (1)
24.7 Power of Attorney of Robert J. Kehl. (1)
27.1 Financial Data Schedule. (1)
______________________
(1) Filed herewith.
(2) Previously filed as an Exhibit to the Company's Registration Statement
on Form 10, as amended (No. 0-14939) and incorporated herein by
reference.
(3) Previously filed as an Exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended October 31, 1989 and incorporated herein by
reference.
29
31
(4) Previously filed as an Exhibit to the Company's Annual Report on Form
10-K for the year ended April 30, 1990 and incorporated herein by
reference.
(5) Previously filed as an Exhibit to the Company's Annual Report on Form
10-K for the year ended April 30, 1991 and incorporated herein by
reference.
(6) Previously filed as an Exhibit to the Company's Annual Report on Form
10-K for the year ended April 30, 1992 and incorporated herein by
reference.
(7) Previously filed as an Exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended July 31, 1993 and incorporated herein by
reference.
(8) Previously filed as an Exhibit to the Company's Registration Statement
on Form S-1, as amended, initially filed with the Securities and
Exchange Commission on May 31, 1994 (No. 33-79484) and incorporated
herein by reference.
(9) Previously filed as an Exhibit to the Company's Annual Report on Form
10-K for the year ended April 30, 1994 and incorporated herein by
reference.
(10) Previously filed as an Exhibit to the Company's Annual Report on Form
10-K for the year ended April 30, 1995 and incorporated herein by
reference.
(11) Previously filed as an Exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended July 31, 1995 and incorporated herein by
reference.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth fiscal quarter ended
April 30, 1996.
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32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
CROWN CASINO CORPORATION
Dated: August 9, 1996 By: /s/ Edward R. McMurphy
-------------------------------
Edward R. McMurphy
President and Chief Executive Officer
(principal executive officer)
Dated: August 9, 1996 By: /s/ Mark D. Slusser
------------------------------------
Mark D. Slusser
Vice President Finance and Chief
Financial Officer
(principal financial and accounting
officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
* Chairman of the Board, President August 9, 1996
- -------------------------------------
Edward R. McMurphy and Chief Executive Officer
* Executive Vice President, August 9, 1996
- --------------------------------------
Tilman J. Falgout, III General Counsel and Director
* Director August 9, 1996
- --------------------------------------
David J. Douglas
* Director August 9, 1996
- --------------------------------------
John David Simmons
* Director August 9, 1996
- --------------------------------------
Gerald L. Adams
* Director August 9, 1996
- --------------------------------------
Gerard M. Jacobs
* Director August 9, 1996
- --------------------------------------
Robert J. Kehl
* By/s/ Mark D. Slusser August 9, 1996
--------------------------
Mark D. Slusser
As Attorney-in-Fact
Pursuant to Powers of
Attorney filed herewith
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33
CROWN CASINO CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Balance at
Beginning of Costs and Charged to End of
Description Period Expenses Other Accounts Deductions (1) Period
- ----------------------------------------------------------------------------------------------------------------------
Year ended April 30, 1996:
Allowance for doubtful accounts $139,371 $(58,856) $80,515 $ -
Year ended April 30, 1995:
Allowance for doubtful accounts $200,000 $60,629 $139,371
Year ended April 30, 1994:
Allowance for doubtful accounts $38,500 $218,510 $57,010 $200,000
(1) Uncollectible accounts written off, net of recoveries.
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34
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
2.3 Asset Purchase Agreement dated June 11, 1996 by and
between the Company, Mississippi Belle II, Inc.,
Roberts River Rides, Inc., Kenneth J. Bonnet,
Christina M. Kehl, Daniel J. Kehl, Kevin A. Kehl,
Robert A. Kehl and Cynthia A. Winter, including
Guarantee Agreement.
13.1 Annual Report to Stockholders for the fiscal year
ended April 30, 1996.
21.1 Subsidiaries of the Company.
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Opinion of Coopers & Lybrand L.L.P. on financial
statement schedule.
24.1 Power of Attorney of Edward R. McMurphy.
24.2 Power of Attorney of Tilman J. Falgout, III.
24.3 Power of Attorney of David J. Douglas.
24.4 Power of Attorney of J. David Simmons.
24.5 Power of Attorney of Gerald L. Adams.
24.6 Power of Attorney of Gerard M. Jacobs.
24.7 Power of Attorney of Robert J. Kehl.
27.1 Financial Data Schedule.