UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
Commission file number: 0-26518
FITZGERALDS GAMING CORPORATION
(Exact name of registrant as specified in its charter)
Nevada | 88-0329170 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification Number) |
3097 E. Warm Springs Rd. Suite 100, Las Vegas, NV 89120
(Address of principal executive offices) (Zip Code)
(702) 940-2000
(Registrants telephone number, including area code)
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 than 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 o
Shares outstanding of each of the registrants classes of common stock as of August 13, 2002
Class | Outstanding as of August 13, 2002 | |||
Common stock, $.01 par value |
5,508,082 |
FITZGERALDS GAMING CORPORATION (DEBTOR-IN-POSSESSION)
FORM 10-Q
INDEX
PART I |
FINANCIAL INFORMATION | |||||||||||
Item 1 |
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
|||||||||||
Unaudited Condensed Consolidated Balance Sheets
as of June 30, 2002 and December 31, 2001 |
4 | |||||||||||
Unaudited Condensed Consolidated Statements of
Operations for the Quarters and Two Quarters
Ended June 30, 2002 and July 1, 2001 |
6 | |||||||||||
Unaudited Condensed Consolidated Statements of
Cash Flows for the Two Quarters Ended June 30,
2002 and July 1, 2001 |
7 | |||||||||||
Unaudited Notes to the Condensed Consolidated
Financial Statements |
8 | |||||||||||
Item 2 | Managements Discussion and Analysis of Financial Condition and Results of Operations |
16 | ||||||||||
Item 3 |
Quantitative and Qualitative Disclosures About Market Risk |
28 | ||||||||||
PART II |
OTHER INFORMATION | 29 | ||||||||||
SIGNATURES | 33 |
PART I
FINANCIAL INFORMATION
Item 1
Condensed Consolidated Financial Statements
FITZGERALDS GAMING CORPORATION (Debtor-In-Possession)
Unaudited Condensed Consolidated Balance Sheets
June 30, 2002 and December 31, 2001
June 30, 2002 | Dec. 31, 2001 | ||||||||||
ASSETS |
|||||||||||
CURRENT ASSETS: |
|||||||||||
Cash and cash equivalents |
$ | 23,108,792 | $ | 25,609,012 | |||||||
Accounts receivable, net of allowance for doubtful
accounts of $34,373 and $49,000 |
256,671 | 455,759 | |||||||||
Inventories |
379,473 | 493,020 | |||||||||
Prepaid expenses: |
|||||||||||
Gaming taxes |
821,491 | 1,316,804 | |||||||||
Other |
1,055,573 | 1,628,389 | |||||||||
Total current assets |
25,622,000 | 29,502,984 | |||||||||
PROPERTY AND EQUIPMENT, net |
73,790 | 55,397 | |||||||||
OTHER ASSETS: |
|||||||||||
Net assets held for sale |
12,184,730 | 12,000,000 | |||||||||
Restricted cash |
4,318,566 | 8,184,732 | |||||||||
Other assets |
1,590,992 | 1,629,020 | |||||||||
Total other assets |
18,094,288 | 21,813,752 | |||||||||
TOTAL |
$ | 43,790,078 | $ | 51,372,133 | |||||||
(continued)
See Unaudited Notes to the Condensed Consolidated Financial Statements
Page 4 of 33
FITZGERALDS GAMING CORPORATION (Debtor-In-Possession)
Unaudited Condensed Consolidated Balance Sheets (continued)
June 30, 2002 and December 31, 2001
June 30, 2002 | Dec. 31, 2001 | ||||||||||
CURRENT LIABILITIES: |
|||||||||||
Current portion of long-term debt |
$ | 173,539 | $ | 110,791 | |||||||
Accounts payable |
1,212,194 | 1,248,228 | |||||||||
Accrued and other: |
|||||||||||
Payroll and related |
1,310,230 | 2,567,982 | |||||||||
Progressive jackpots |
65,064 | 73,458 | |||||||||
Outstanding chips and tokens |
171,581 | 170,835 | |||||||||
Other |
778,816 | 638,193 | |||||||||
Due to Majestic |
| 3,812,945 | |||||||||
Total current liabilities |
3,711,424 | 8,622,432 | |||||||||
LONG-TERM DEBT, net of current portion |
2,236,080 | 2,295,588 | |||||||||
Total liabilities not subject to compromise |
5,947,504 | 10,918,020 | |||||||||
LIABILITIES SUBJECT TO COMPROMISE |
97,714,481 | 97,335,321 | |||||||||
Total liabilities |
103,661,985 | 108,253,341 | |||||||||
CUMULATIVE REDEEMABLE PREFERRED STOCK, |
|||||||||||
$.01 par value; $25 stated value; 800,000 shares authorized,
issued and outstanding; liquidation preference $20,000,000
stated value plus accrued dividends of $32,346,397 and
$28,630,707 recorded at liquidation preference, net of
unamortized offering costs and discount of $4,278,188 and $4,728,546, respectively |
48,068,209 | 43,902,161 | |||||||||
STOCKHOLDERS DEFICIENCY: |
|||||||||||
Common stock, $.01 par value; 29,200,000 shares
authorized; 5,508,082 shares issued and outstanding |
55,080 | 55,080 | |||||||||
Additional paid-in capital |
23,675,511 | 23,675,511 | |||||||||
Accumulated deficit |
(131,670,707 | ) | (124,513,960 | ) | |||||||
Total stockholders deficiency |
(107,940,116 | ) | (100,783,369 | ) | |||||||
TOTAL |
$ | 43,790,078 | $ | 51,372,133 | |||||||
See Unaudited Notes to the Condensed Consolidated Financial Statements
Page 5 of 33
FITZGERALDS GAMING CORPORATION (Debtor-In-Possession)
Unaudited Condensed Consolidated Statements of Operations
For the Quarters and Two Quarters Ended June 30, 2002 and July 1, 2001
Quarters Ended | Two Quarters Ended | |||||||||||||||||
June 30, 2002 | July 1, 2001 | June 30, 2002 | July 1, 2001 | |||||||||||||||
OPERATING REVENUES: |
||||||||||||||||||
Casino |
$ | 8,228,332 | $ | 49,359,437 | $ | 15,143,509 | $ | 97,349,580 | ||||||||||
Food and beverage |
1,511,516 | 6,450,951 | 2,841,723 | 12,941,871 | ||||||||||||||
Rooms |
1,350,642 | 5,739,390 | 2,367,476 | 11,081,047 | ||||||||||||||
Other |
190,705 | 1,146,254 | 397,058 | 2,409,248 | ||||||||||||||
Total |
11,281,195 | 62,696,032 | 20,749,766 | 123,781,746 | ||||||||||||||
Less promotional allowances |
1,033,914 | 8,820,576 | 2,228,313 | 17,776,813 | ||||||||||||||
Net |
10,247,281 | 53,875,456 | 18,521,453 | 106,004,933 | ||||||||||||||
OPERATING COSTS AND EXPENSES: |
||||||||||||||||||
Casino |
4,369,074 | 22,885,612 | 8,167,617 | 44,973,697 | ||||||||||||||
Food and beverage |
1,077,057 | 3,966,213 | 1,971,797 | 7,745,331 | ||||||||||||||
Rooms |
423,636 | 3,121,461 | 848,856 | 6,354,629 | ||||||||||||||
Other operating expense |
85,001 | 537,660 | 172,975 | 1,040,781 | ||||||||||||||
Selling, general and administrative |
4,315,635 | 14,506,787 | 8,649,208 | 28,577,024 | ||||||||||||||
Depreciation and amortization |
9,150 | 7,987 | 17,615 | 19,534 | ||||||||||||||
Reorganization items |
365,486 | 891,657 | 1,060,598 | 1,573,685 | ||||||||||||||
Total |
10,645,039 | 45,917,377 | 20,888,666 | 90,284,681 | ||||||||||||||
INCOME (LOSS) FROM OPERATIONS |
(397,758 | ) | 7,958,079 | (2,367,213 | ) | 15,720,252 | ||||||||||||
OTHER INCOME (EXPENSE): |
||||||||||||||||||
Interest income |
24,185 | 31,673 | 42,884 | 77,665 | ||||||||||||||
Interest expense (contractual interest for the quarter and two quarters ended
June 30, 2002 was $4,993,057 and
$10,820,373, respectively and for the
quarter and two quarters ended
July, 1, 2001 was $8,968,073 and
$17,851,544, respectively) |
(322,781 | ) | (507,212 | ) | (652,418 | ) | (1,015,101 | ) | ||||||||||
Other expense |
(13,345 | ) | (38,719 | ) | (13,952 | ) | (34,443 | ) | ||||||||||
NET INCOME (LOSS) |
(709,699 | ) | 7,443,821 | (2,990,699 | ) | 14,748,373 | ||||||||||||
PREFERRED STOCK DIVIDENDS AND
ACCRETION OF DISCOUNT |
(2,121,362 | ) | (1,837,615 | ) | (4,166,048 | ) | (3,611,329 | ) | ||||||||||
NET INCOME (LOSS) APPLICABLE TO
COMMON STOCKHOLDERS |
$ | (2,831,061 | ) | $ | 5,606,206 | $ | (7,156,747 | ) | $ | 11,137,044 | ||||||||
EARNINGS (LOSS) PER COMMON
SHARE BASIC AND DILUTED |
$ | (0.51 | ) | $ | 1.02 | $ | (1.30 | ) | $ | 2.02 | ||||||||
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING |
5,508,082 | 5,508,082 | 5,508,082 | 5,508,082 | ||||||||||||||
See Unaudited Notes to the Condensed Consolidated Financial Statements
Page 6 of 33
FITZGERALDS GAMING CORPORATION (Debtor-In-Possession)
Unaudited Condensed Consolidated Statements of Cash Flows
For the Two Quarters Ended June 30, 2002 and July 1, 2001
June 30, 2002 | July 1, 2001 | ||||||||
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES |
$ | (2,280,871 | ) | $ | 15,753,984 | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|||||||||
Proceeds from sale of assets |
| 55,405 | |||||||
Acquisition of property and equipment |
(75,320 | ) | (1,014,444 | ) | |||||
Increase in restricted cash |
| (350,822 | ) | ||||||
Net cash used in investing activities |
(75,320 | ) | (1,309,861 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|||||||||
Repayment of long-term debt |
(144,029 | ) | (218,792 | ) | |||||
Net cash used in financing activities |
(144,029 | ) | (218,792 | ) | |||||
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS |
(2,500,220 | ) | 14,225,331 | ||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
25,609,012 | 8,181,388 | |||||||
CASH AND CASH EQUIVALENTS INCLUDED IN NET ASSETS
HELD FOR SALE, BEGINNING OF PERIOD |
| 10,111,872 | |||||||
CASH AND CASH EQUIVALENTS INCLUDED IN NET ASSETS
HELD FOR SALE, END OF PERIOD |
| (10,111,872 | ) | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 23,108,792 | $ | 22,406,719 | |||||
CASH PAID FOR INTEREST |
$ | 118,596 | $ | 2,006,019 | |||||
SUMMARY OF NON-CASH INVESTING AND FINANCING ACTIVITIES: |
|||||||||
Property and equipment acquired through issuance of debt |
$ | 147,269 | $ | | |||||
Accretion of discount on preferred stock |
450,358 | 404,417 | |||||||
Accrual of preferred stock dividends |
3,715,690 | 3,206,912 |
See Unaudited Notes to the Condensed Consolidated Financial Statements
Page 7 of 33
Fitzgeralds Gaming Corporation (Debtor-In-Possession)
Unaudited Notes to the Condensed Consolidated Financial Statements
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Fitzgeralds Gaming Corporation (the Company) (Debtor-In-Possession) have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (GAAP) have been condensed or omitted.
In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the interim condensed consolidated financial statements have been included. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2001. The results of operations for the two quarters ended June 30, 2002 are not necessarily indicative of the results to be expected for the year ending December 31, 2002 and, because of the sale of three of the Companys operating properties on December 6, 2001, are not comparable to prior periods.
The Company utilizes a 4-4-5 (weeks) financial reporting period which maintains a December 31 year-end. This method of reporting results in 13 weeks in each quarterly accounting period. The first and fourth accounting periods will have a fluctuating number of days resulting from the maintenance of a December 31 year end, whereas the second and third periods will have the same number of days each year.
Certain amounts in the 2001 condensed consolidated financial statements have been reclassified to conform to the 2002 method of presentation.
2. PETITION FOR RELIEF UNDER CHAPTER 11
General
On December 5, 2000, the Company commenced cases under Chapter 11 of the Bankruptcy Code (collectively, the Bankruptcy Cases) in the United States Bankruptcy Court for the Northern District of Nevada (the Bankruptcy Court). The Bankruptcy Cases are jointly administered and coordinated under Case No. BK-N-00-33467 GWZ. The Bankruptcy Cases were commenced in accordance with an Agreement Regarding Pre-Negotiated Restructuring, dated as of December 1, 2000 (the Restructuring Agreement), with the holders (the Consenting Noteholders) of a majority in interest of the Companys 12.25% Senior Secured Notes (the Notes) issued under an indenture dated December 30, 1997 (the Indenture).
Page 8 of 33
The Restructuring Agreement contemplates an expeditious and orderly sale of all of the Companys operating assets and properties as going concerns.
The Restructuring Agreement provides a vehicle for liquidating the assets of the Company in the Bankruptcy Court through Chapter 11 of the Bankruptcy Code. Upon execution of the Restructuring Agreement and before commencement of the Bankruptcy Cases, the Company distributed $13.0 million in Excess Cash (as that term is defined in the Restructuring Agreement) to the trustee under the Indenture (the Indenture Trustee) to be applied to unpaid and accrued Indenture Trustees fees and expenses incurred and as partial payment of accrued and unpaid interest and principal as provided in the Indenture.
Pursuant to the Restructuring Agreement and an order entered by the Bankruptcy Court, the Company was required to distribute unrestricted cash (which includes cash in net assets held for sale) in excess of $24.8 million to holders of its Notes within 45 days after the end of each quarter. In May, August and November 2001, the Company distributed $1.8 million, $7.7 million and $7.2 million, respectively, in Excess Cash to the Indenture Trustee to be applied to accrued and unpaid interest and principal as provided in the Indenture. On December 6, 2001, the Company sold substantially all of the assets and related liabilities of its Fitzgeralds Las Vegas, Fitzgeralds Mississippi and Fitzgeralds Black Hawk properties to Majestic Investors Holding, LLC (Majestic). At that time, approximately $133.3 million was distributed to the Indenture Trustee from the proceeds of the December 6, 2001 sale to Majestic. The Company and the Informal Committee are currently engaged in discussions to establish a new threshold for cash reserves subsequent to the December 6, 2001 sale to Majestic. As part of the Restructuring Agreement, the Consenting Noteholders and Indenture Trustee have agreed to forbear from exercising certain of their rights otherwise allowable under the Notes and the Indenture.
As of the commencement of the Bankruptcy Cases, the parties to the Restructuring Agreement each concluded that the fair market value of the Companys real and personal property given as collateral for the Notes was less than the total outstanding principal and interest due under the Notes, and that the fair market value of the real and personal property not securing the Notes was less than the amount of the unsecured deficiency claim of the holders of the Notes. As a result, it was not then and is still not expected that any distribution will be made to holders of the existing capital stock of the Company. The Restructuring Agreement requires that as part of the liquidation process, all of the existing common stock and preferred stock of the Company is to be canceled and extinguished without payment therefor.
In accordance with the Restructuring Agreement, an auction sale was to be scheduled for no later than June 15, 2001 in the Bankruptcy Court with respect to those operating assets and properties not sold pursuant to negotiated sales agreements such as the purchase agreement with Majestic, as referred to below. With the consent of the Consenting Noteholders, the auction sale was not conducted and the Company and the Consenting Noteholders are preparing an amendment to the Restructuring Agreement to conduct the auction sale of the one remaining operating asset, Fitzgeralds Reno, during 2002, although no assurance can be
Page 9 of 33
given as to if or when the Fitzgeralds Reno property will be sold or as to the amount that will be realized.
Under the terms of the Restructuring Agreement, upon the closing of each sale of the Companys assets, the net proceeds of the collateral for the Notes, less certain reserves for management incentives and other liabilities, must be distributed to the Indenture Trustee for the benefit of and distribution to the holders of the Notes in accordance with the Indenture. All of the Companys assets remaining after such sales, including any notes received as part of the consideration for the sales of the Companys assets and payment of remaining liabilities of the Company, will be transferred to a liquidating trust created for the benefit of the holders of the Notes and others under a plan of reorganization to be consistent with the terms of the Restructuring Agreement.
In light of the regulatory approvals needed to accomplish the liquidations, and recognizing the need to retain senior management in order to insure continuity and compliance with all gaming regulations and licensing requirements in the Companys operations during the process, the Restructuring Agreement required implementation of a senior management incentive and retention program. After obtaining Bankruptcy Court approval in December 2000, this program was adopted by the Company in order to retain Philip D. Griffith, Michael E. McPherson, Max L. Page and Paul H. Manske, (the Senior Management) each an officer, director and/or senior executive of the Company, as key executives and to compensate them for their continued employment with the Company during the process.
For further information concerning the sale to Majestic, please refer to our Current Report on Form 8-K, dated December 6, 2001, as filed with the Securities and Exchange Commission.
Reorganization Items
For the quarter and the two quarters ended June 30, 2002 and July 1, 2001, the Company incurred the following expenses subsequent to the filing of the Bankruptcy Cases:
Quarter Ended | Two Quarters Ended | |||||||||||||||
June 30, 2002 | July 1, 2001 | June 30, 2002 | July 1, 2001 | |||||||||||||
Post-petition professional fees |
$ | 435,849 | $ | 1,067,997 | $ | 873,099 | $ | 1,766,508 | ||||||||
U. S. trustee fees |
52,667 | 60,474 | 83,917 | 132,275 | ||||||||||||
Loss on sale of assets |
| | 290,703 | | ||||||||||||
Interest earned on accumulated
cash resulting from the
bankruptcy proceedings |
(123,030 | ) | (236,814 | ) | (187,121 | ) | (325,098 | ) | ||||||||
$ | 365,486 | $ | 891,657 | $ | 1,060,598 | $ | 1,573,685 | |||||||||
Liabilities Subject to Compromise
At June 30, 2002 and December 31, 2001 liabilities subject to compromise consisted of the following:
Page 10 of 33
2002 | 2001 | ||||||||
Liabilities subject to compromise: |
|||||||||
Notes |
$ | 99,733,642 | $ | 99,733,642 | |||||
Discount on the Notes |
(438,506 | ) | (613,709 | ) | |||||
Debt offering costs on the Notes |
(1,702,360 | ) | (2,054,572 | ) | |||||
Unsecured creditors |
121,705 | 269,960 | |||||||
$ | 97,714,481 | $ | 97,335,321 | ||||||
3. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141 (SFAS 141), Business Combinations, which requires the purchase method of accounting for business combinations initiated after June 30, 2001 and prohibits the use of the pooling-of-interest method. Adoption of this statement did not have a material impact on the Companys financial condition or results of operation.
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 142 (SFAS 142) Goodwill and Other Intangible Assets, which is effective January 1, 2002. SFAS 142 requires that goodwill and other intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually. The Company discontinued recording the amortization of its goodwill included in net assets held for sale subsequent to filing the Bankruptcy Cases. As of December 6, 2001, the Company wrote-down $13.0 million of its goodwill due to the sale of Fitzgeralds Black Hawk to Majestic.
Also in June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations, which is effective for financial statements issued for fiscal years beginning after June 15, 2002. This statement establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement cost. Adoption of this statement did not have a material impact on the Companys financial condition or results of operation.
In August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which is effective for financial statements issued for fiscal years beginning after December 15, 2001, and the interim periods within those fiscal years. This statement addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of, and supersedes Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and For Long-Lived Assets to be Disposed of. Adoption of this statement did not have a material impact on the Companys financial condition or results of operation.
Page 11 of 33
4. NET ASSETS HELD FOR SALE
In December 2000, the Company entered into the Restructuring Agreement with the Consenting Noteholders. The Restructuring Agreement contemplates an expeditious and orderly sale of all of the Companys operating assets and properties. In accordance with the provisions of the Restructuring Agreement, on December 6, 2001 substantially all the assets and liabilities of the Fitzgeralds Las Vegas, Fitzgeralds Mississippi and Fitzgeralds Black Hawk properties were sold to Majestic. The purchase price for the Assets was $149.0 million, subject to certain adjustments and holdbacks specified in the purchase agreement with Majestic, which resulted in net proceeds prior to distributions of approximately $146.9 million. The Company is actively seeking a buyer for the Fitzgeralds Reno property.
As of June 30, 2002 and December 31, 2001 assets included in net assets held for sale of $12.2 million and $12.0 million, respectively consist mainly of property and equipment transferable upon the sale of Fitzgeralds Reno.
5. LONG TERM DEBT
The Notes bear interest at a fixed annual rate of 12.25% payable on June 15 and December 15 of each year, commencing June 15, 1998. The Notes stated maturity date is on December 15, 2004. The Company has not paid the regularly scheduled interest payments of $12.5 million that were due and payable June 15, 1999. Under the Note Indenture, an Event of Default occurred on July 15, 1999, and continued until the Company filed the Bankruptcy Cases. Failure to make the scheduled interest payment on June 15, 1999 resulted in a 1.0% increase in the interest rate to 13.25%, effective June 16, 1999 until the Company filed the Bankruptcy Cases. Upon execution of the Restructuring Agreement and before commencement of the Bankruptcy Cases, the Company distributed $13.0 million in Excess Cash (as that term is defined in the Restructuring Agreement) to the Indenture Trustee to be applied to unpaid and accrued Indenture Trustees fees and expenses incurred and as partial payment of accrued and unpaid interest as provided in the Indenture. Pursuant to the Restructuring Agreement and an order entered by the Bankruptcy Court, the Company was required to distribute unrestricted cash (which includes cash in net assets held for sale) in excess of $24.8 million to holders of its Notes within 45 days after the end of each quarter. In May, August and November 2001, the Company distributed $1.8 million, $7.7 million and $7.2 million, respectively, in Excess Cash to the Indenture Trustee to be applied to accrued and unpaid interest and principal as provided in the Indenture. The Company and the Informal Committee are currently engaged in discussions to establish a new threshold for cash reserves subsequent to the December 6, 2001 sale of Fitzgeralds Las Vegas, Fitzgeralds Mississippi and Fitzgeralds Black Hawk to Majestic. On December 6, 2001, approximately $133.3 million was distributed to the Indenture Trustee from the proceeds of the December 6, 2001 sale to Majestic.
7. SEGMENT INFORMATION
The Company is a gaming holding company that until December 6, 2001 owned and operated four Fitzgeralds-brand casino-hotels, in downtown Las Vegas, Nevada, Reno, Nevada,
Page 12 of 33
Tunica, Mississippi, and Black Hawk, Colorado. Until the Company sold substantially all of the assets and related liabilities of its Fitzgeralds Las Vegas, Fitzgeralds Mississippi and Fitzgeralds Black Hawk properties to Majestic on December 6, 2001, the Company identified its business in four segments based on geographic location. The Company marketed, prior to December 6, 2001, in each of its segments, and currently markets Fitzgeralds Reno, primarily to middle-market customers, emphasizing its Fitzgeralds brand and its Fitzgeralds Irish Luck theme. The major products offered prior to December 6, 2001, in each segment were and currently offered at Fitzgeralds Reno are: casino and hotel (except for Fitzgeralds Black Hawk) and food and beverage.
The accounting policies of each business segment were, and in the case of Fitzgeralds Reno, are the same as those described in the summary of significant accounting policies in the Companys Annual Report on Form 10-K for the year ended December 31, 2001. There are minimal inter-segment sales. The Company continues to evaluate its business segment performance based on the Companys earnings before interest, income taxes, depreciation and amortization (EBITDA). The Company has not changed its basis of segmentation from the year ended December 31, 2001.
For the Quarters Ended | |||||||||
June 30, 2002 | July 1, 2001 | ||||||||
(in thousands) | |||||||||
Net operating revenues: |
|||||||||
Fitzgeralds Las Vegas |
$ | | $ | 13,616 | |||||
Fitzgeralds Tunica |
| 20,827 | |||||||
Fitzgeralds Reno |
10,232 | 10,928 | |||||||
Fitzgeralds Black Hawk |
| 8,516 | |||||||
Other |
15 | (12 | ) | ||||||
Total |
$ | 10,247 | $ | 53,875 | |||||
For the Quarters Ended | ||||||||||
June 30, 2002 | July 1, 2001 | |||||||||
(in thousands) | ||||||||||
Income (loss) from operations: |
||||||||||
Fitzgeralds Las Vegas |
$ | (86 | ) | $ | 840 | |||||
Fitzgeralds Tunica |
(131 | ) | 4,889 | |||||||
Fitzgeralds Reno |
904 | 1,363 | ||||||||
Fitzgeralds Black Hawk |
(15 | ) | 2,003 | |||||||
Other |
(1,067 | ) | (1,125 | ) | ||||||
Total Properties |
(395 | ) | 7,970 | |||||||
Nevada Club |
(3 | ) | (12 | ) | ||||||
Total |
$ | (398 | ) | $ | 7,958 | |||||
Page 13 of 33
Reconciliation of total business segment operating income to consolidated net income (loss) before income tax:
For the Quarters Ended | |||||||||
June 30, 2002 | July 1, 2001 | ||||||||
(in thousands) | |||||||||
Total segment operating income |
$ | 672 | $ | 9,095 | |||||
Nevada Club |
(3 | ) | (12 | ) | |||||
Other |
(1,067 | ) | (1,125 | ) | |||||
Eliminations |
(700 | ) | (8,087 | ) | |||||
Interest income |
24 | 32 | |||||||
Interest expense |
(323 | ) | (507 | ) | |||||
Other expense |
687 | 8,048 | |||||||
Net income (loss) |
$ | (710 | ) | $ | 7,444 | ||||
For the Two Quarters Ended | |||||||||
June 30, 2002 | July 1, 2001 | ||||||||
(in thousands) | |||||||||
Net operating revenues: |
|||||||||
Fitzgeralds Las Vegas |
$ | | $ | 27,925 | |||||
Fitzgeralds Tunica |
| 42,063 | |||||||
Fitzgeralds Reno |
18,497 | 19,591 | |||||||
Fitzgeralds Black Hawk |
| 16,392 | |||||||
Other |
24 | 34 | |||||||
Total |
$ | 18,521 | $ | 106,005 | |||||
For the Two Quarters Ended | ||||||||||
June 30, 2002 | July 1, 2001 | |||||||||
(in thousands) | ||||||||||
Income (loss) from operations: |
||||||||||
Fitzgeralds Las Vegas |
$ | (295 | ) | $ | 2,504 | |||||
Fitzgeralds Tunica |
(148 | ) | 10,330 | |||||||
Fitzgeralds Reno |
681 | 1,291 | ||||||||
Fitzgeralds Black Hawk |
(385 | ) | 3,596 | |||||||
Other |
(2,205 | ) | (1,954 | ) | ||||||
Total Properties |
(2,352 | ) | 15,767 | |||||||
Nevada Club |
(15 | ) | (47 | ) | ||||||
Total |
$ | (2,367 | ) | $ | 15,720 | |||||
Page 14 of 33
Reconciliation of total business segment operating income to consolidated net income (loss) before income tax:
For the Two Quarters Ended | |||||||||
June 30, 2002 | July 1, 2001 | ||||||||
(in thousands) | |||||||||
Total segment operating income |
$ | (147 | ) | $ | 17,721 | ||||
Nevada Club |
(15 | ) | (47 | ) | |||||
Other |
(2,206 | ) | (1,954 | ) | |||||
Eliminations |
227 | (17,782 | ) | ||||||
Interest income |
43 | 78 | |||||||
Interest expense |
(652 | ) | (1,015 | ) | |||||
Other expense |
(241 | ) | 17,747 | ||||||
Net income (loss) |
$ | (2,991 | ) | $ | 14,748 | ||||
Page 15 of 33
Item 2
Managements Discussion and Analysis of
Financial Condition and Results of Operations
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. The following discussion should be read in conjunction with, and is qualified in its entirety by, the Condensed Consolidated Financial Statements and the Notes thereto included in this report. The following discussion and other material in this Quarterly Report on Form 10-Q contain certain forward-looking statements. The forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the control of the Company, and upon assumptions with respect to future business decisions which are subject to change. Risks to which the Company is subject include, but are not necessarily limited to, its efforts to restructure its indebtedness and capital structure, the ability to successfully sell its assets and the successful conclusion of the Bankruptcy Cases, competition, high level of indebtedness, the need for additional financing, development and construction risks, market fluctuations, gaming, liquor and other regulatory matters, geographic concentration in Reno since December 6, 2001, limited operations since December 6, 2001, the uncertainties and possible disruption as a result of the ReTrac Project, the proliferation of Indian gaming facilities in California and elsewhere, taxation, the availability and retention of key management, environmental matters and other factors discussed in the Companys other filings with the Securities and Exchange Commission. Accordingly, actual results could differ materially from those contemplated by such forward-looking statements.
General
Fitzgeralds Gaming Corporation (the Company) is a gaming holding company that until December 6, 2001 owned and operated four Fitzgeralds-brand casino-hotels, in downtown Las Vegas, Nevada (Fitzgeralds Las Vegas), Reno, Nevada (Fitzgeralds Reno), Tunica, Mississippi (Fitzgeralds Tunica), and Black Hawk, Colorado (Fitzgeralds Black Hawk), collectively referred to as (the Operating Properties). On December 6, 2001, the Company sold substantially all of the assets and related liabilities of its Fitzgeralds Las Vegas, Fitzgeralds Tunica and Fitzgeralds Black Hawk properties to Majestic and currently has only one Operating Property Fitzgeralds Reno.
The Company currently conducts substantially all of its business through wholly owned subsidiaries: Fitzgeralds Reno, Inc. (FRI); Fitzgeralds South, Inc. (FSI); and Fitzgeralds Incorporated (FI). FRI directly owns and operates Fitzgeralds Reno; FSI owns the residual assets and liabilities of Fitzgeralds Las Vegas (FLVI) and Fitzgeralds Tunica (FMI) through wholly owned subsidiaries; and FI owns the residual assets and liabilities of Fitzgeralds Black
Page 16 of 33
Hawk through wholly-owned subsidiaries, including 101 Main Street Limited Liability Company.
Unless the context otherwise requires, the Company refers to Fitzgeralds Gaming Corporation and its subsidiaries. The Company was incorporated in Nevada in 1994 to serve as a holding company. The executive office of the Company is located at 3097 E. Warms Springs Rd. Suite 100, Las Vegas, Nevada 89120; telephone (702) 940-2000; facsimile (702) 940-2207.
In the narrative discussion below, the 2002 Q2 Period is defined as the quarter ended June 30, 2002 and the 2001 Q2 Period is defined as the quarter ended July 1, 2001. The Cumulative 2002 Period is defined as the two quarters ended June 30, 2002 and the Cumulative 2001 Period is defined as the two quarters ended July 1, 2001. The comparison of the 2002 Q2 Period to the 2001 Q2 Period and the comparison of the Cumulative 2002 Period to the Cumulative 2001 Period will not be meaningful due to the December 6, 2001 sale of substantially all of the assets of Fitzgeralds Las Vegas, Fitzgeralds Tunica and Fitzgeralds Black Hawk. Operating results for the Cumulative 2002 Period and the 2002 Q2 Period reflect the ongoing operating results for Fitzgeralds Reno, corporate expenses and administrative expenses associated with the residual assets and liabilities of the operations sold on December 6, 2001. Unless otherwise noted, the narrative discussion below is focused on the results of the Companys Operating Properties which are collectively referred to as (the Properties) and excludes Nevada Club, which was sold in June 1999, and in managements opinion, is not material to the ongoing operations of the Company. Corporate expense of $0.25 million was allocated to each of the four Operating Properties for each of the two quarters during 2001. In the Cumulative 2002 Period the Company did not allocate any corporate expense to the Operating Properties, however Fitzgeralds Reno incurred $0.2 million of net expense for services previously provided by the Company. Such expenses are included in selling, general and administrative expenses at the Operating Properties. The remainder of the unallocated corporate expense is included in the selling, general and administrative expenses of Other Operations of the Properties. See Note 1 of Statement of Operations Data.
Quarter Ended June 30, 2002 Comparison to Quarter Ended July 1, 2001
The table below sets forth Net Operating Revenues, Income (Loss) from Operations, EBITDA, Adjusted EBITDA and other financial data for the 2002 Q2 Period and the 2001 Q2 Period. EBITDA for the Properties was $(0.3) million and $8.0 million for the 2002 and 2001 Q2 Periods, respectively. Adjusted EBITDA, which the Company uses as a reasonable measure of its ability to generate cash from operating activities and as a means to compare the Companys performance with that of its competitors, decreased from $8.9 million for the 2001 Q2 Period to $0.004 million for the 2002 Q2 Period. For a definition of EBITDA and Adjustments to EBITDA, see Notes 2 and 3, respectively, of Statement of Operations Data.
Page 17 of 33
For the Quarters Ended | ||||||||||
June 30, 2002 | July 1, 2001 | |||||||||
(in thousands) | ||||||||||
Statement of Operations Data |
||||||||||
Net Operating Revenues: |
||||||||||
Fitzgeralds Las Vegas |
$ | | $ | 13,616 | ||||||
Fitzgeralds Tunica |
| 20,827 | ||||||||
Fitzgeralds Reno |
10,232 | 10,928 | ||||||||
Fitzgeralds Black Hawk |
| 8,516 | ||||||||
Other |
15 | (12 | ) | |||||||
Total |
$ | 10,247 | $ | 53,875 | ||||||
Income (Loss) from Operations: |
||||||||||
Fitzgeralds Las Vegas |
$ | (86 | ) | $ | 840 | |||||
Fitzgeralds Tunica |
(131 | ) | 4,889 | |||||||
Fitzgeralds Reno |
904 | 1,363 | ||||||||
Fitzgeralds Black Hawk |
(15 | ) | 2,003 | |||||||
Other (1) |
(1,067 | ) | (1,125 | ) | ||||||
Total Properties |
(395 | ) | 7,970 | |||||||
Nevada Club |
(3 | ) | (12 | ) | ||||||
Total |
$ | (398 | ) | $ | 7,958 | |||||
For the Quarters Ended | ||||||||||
June 30, 2002 | July 1, 2001 | |||||||||
(in thousands) | ||||||||||
Other Data |
||||||||||
EBITDA (2): |
||||||||||
Fitzgeralds Las Vegas |
$ | (87 | ) | $ | 840 | |||||
Fitzgeralds Tunica |
(131 | ) | 4,889 | |||||||
Fitzgeralds Reno |
914 | 1,363 | ||||||||
Fitzgeralds Black Hawk |
(15 | ) | 2,003 | |||||||
Other (1) |
(1,003 | ) | (1,117 | ) | ||||||
Total Properties |
(322 | ) | 7,978 | |||||||
Nevada Club |
(3 | ) | (12 | ) | ||||||
Total EBITDA |
(325 | ) | 7,966 | |||||||
Adjustments to EBITDA (3) |
368 | 904 | ||||||||
Adjusted EBITDA |
$ | 43 | $ | 8,870 | ||||||
(1) | Other includes corporate expenses not allocated to the Operating Properties of $1.1 million for both the 2002 Q2 Period and 2001 Q2 Periods. Both the 2002 and 2001 Q2 Periods include post-petition professional fees and expenses net of interest income included in reorganization items. | |
(2) | EBITDA is a supplemental financial measurement used by the Company in the evaluation of its gaming business and by many gaming industry analysts. EBITDA is calculated by adding depreciation and amortization expense to income from operations. At any property, EBITDA is calculated after the allocation of corporate costs. However, EBITDA should only be read in conjunction with all of the Companys financial data summarized above and its financial statements prepared in accordance with GAAP appearing elsewhere herein, and should not be construed as an alternative either to income from operations (as determined in accordance with GAAP) as an indication of the Companys operating performance or to cash flows from operating activities (as determined in accordance with GAAP) as a measure of liquidity. This presentation of EBITDA may not be comparable to similarly titled measures reported by other companies. | |
(3) | Adjustments to EBITDA include (i) exclusion of EBITDA for Nevada Club for both periods presented; (ii) exclusion of post-petition professional fees and expenses net of interest income included as reorganization items of $0.4 million for the 2002 Q2 Period and $0.9 million for the 2001 Q2 Period. |
Page 18 of 33
(4) | Includes financial results of Nevada club for both periods presented. |
Operating Revenues
Total revenues for the Operating Properties were $11.3 million and net operating revenues were $10.2 million for the 2002 Q2 Period, representing decreases of 82.0% and 81.0%, respectively, over total revenues of $62.7 million and net operating revenues of $53.9 million for the 2001 Q2 Period. The decrease is due to the sale of the Fitzgeralds Las Vegas, Fitzgeralds Tunica and Fitzgeralds Black Hawk properties to Majestic on December 6, 2001. Total net revenue for Fitzgeralds Reno decreased 6.4% to $10.2 million for the 2002 Q2 Period from $10.9 million for the 2001 Q2 Period.
The Companys business can be separated into four operating departments: casino, food and beverage, rooms and other. Casino revenues for the Operating Properties represented 72.9% and 78.7% of total revenues for the Operating Properties for the 2002 and 2001 Q2 Periods, respectively. Casino revenues for the Operating Properties (of which approximately 76.5% and 86.9% were derived from slot machine revenues for the 2002 and 2001 Q2 Periods, respectively) decreased 83.3% to $8.2 million for the 2002 Q2 Period from $49.4 million for the 2001 Q2 Period. Casino revenues at Fitzgeralds Reno decreased 6.2% to $8.2 million for the 2002 Q2 Period from $8.8 million for the 2001 Q2 Period.
Room revenues for the Operating Properties (12.0% and 9.2% of total revenues for the operating Properties for the 2002 and 2001 Q2 Periods, respectively) decreased 76.5% from the 2001 Q2 Period. Fitzgeralds Reno room revenues decreased 14.3% due to a decrease in the average daily rate of 6.4% and a decrease in the average occupancy rate to 87.6% for the 2002 Q2 Period from 95.0% for the 2001 Q2 Period.
Food and beverage revenues for the Operating Properties (13.4% and 10.3% of total revenues for the Operating Properties for the 2002 and 2001 Q2 Periods, respectively) decreased 76.6% to $1.5 million for the 2002 Q2 Period. Fitzgeralds Reno decreased 4.1% to $1.5 million for the 2002 Q2 Period from $1.6 million for the 2001 Q2 Period.
Other revenues for the Operating Properties decreased 83.4% or $1.0 million for the 2002 Q2 Period.
Promotional allowances for the Operating Properties decreased $7.8 million or 88.3% for the 2002 Q2 Period primarily as a result of the sale to Majestic. Promotional allowances for Fitzgeralds Reno decreased 13.8% to $1.0 million for the 2002 Q2 Period from $1.2 million for the 2001 Q2 Period.
Operating Costs and Expenses
Total operating costs and expenses for the Operating Properties decreased 76.8% to $10.6 million for the 2002 Q2 Period from $45.9 million for the 2001 Q2 Period primarily due to the sale of the Fitzgeralds Las Vegas, Fitzgeralds Tunica and Fitzgeralds Black Hawk properties to
Page 19 of 33
Majestic on December 6, 2001. Total operating expenses for Fitzgeralds Reno decreased 2.5% to $9.3 million for the 2002 Q2 Period from $9.6 million for the 2002 Q2 Period.
Casino expenses for the Operating Properties were $4.4 million for the 2002 Q2 Period, an 80.9% decrease from $22.9 million for the 2001 Q2 Period. Food and beverage expenses for the Operating Properties decreased 72.8% to $1.1 million for the 2002 Q2 Period from $4.0 million for the 2001 Q2 Period. Room expenses for the Operating Properties decreased 86.4% to $0.5 million for the 2002 Q2 Period from $3.1 million for the 2001 Q2 Period. Selling, general and administrative expenses for the Operating Properties decreased 70.2% to $4.3 million for the 2002 Q2 Period from $14.5 million for the 2001 Q2 Period. Professional fees and expenses incurred in conjunction with the ongoing development, negotiation and implementation of the Companys restructuring were $0.4 million for the 2002 Q2 Period and $0.9 million for the 2001 Q2 Periods, respectively. Such expenses also include professional fees and expenses paid by the Company for the financial and legal advisors to the Committee, the Indenture Trustee, and the administrative fees paid to the U.S. Trustee in connection with the Bankruptcy Cases.
Personnel expenses for the Operating Properties decreased 79.2% to approximately $4.4 million for the 2002 Q2 Period from approximately $21.2 million for the 2001 Q2 Period. Such expenses are included in the operating departmental expense to which they relate on the consolidated statement of operations.
Marketing expenses for the Operating Properties, which include advertising, promotional material, special events and the operations of the Fitzgeralds player-tracking card, decreased 74.0% or $2.8 million for the 2002 Q2 Period. Such expenses are included in selling, general and administrative expenses on the consolidated statements of operations.
Depreciation and amortization expenses for the Operating Properties increased to approximately $0.009 million for the 2002 Q2 Period from $0.008 million for the 2001 Q2 Period.
Income from Operations
Loss from operations for the Operating Properties was $0.4 million for the 2002 Q2 Period compared to income from operations of $8.0 million for the 2001 Q2 Period. Income from operations for Fitzgeralds Reno decreased to $0.9 million for the 2002 Q2 Period from $1.4 million for the 2001 Q2 Period.
Net Interest Expense
Interest expense for the Operating Properties (net of interest income), decreased 37.2% to $0.3 million for the 2002 Q2 Period from $0.5 million for the 2001 Q2 Period. Section 506(b) of the Bankruptcy Code permits the allowance of interest on an allowed secured claim secured by property, the value of which is greater than the amount of the claim. Inasmuch as the parties to the Restructuring Agreement have concluded that the fair market value of the collateral securing the Notes is less than the outstanding principal of the Notes, concurrently with the filing of the Bankruptcy Cases on December 5, 2000 the Company ceased accruing interest on the Notes.
Page 20 of 33
Net Income
Net loss for the Properties was $0.7 million in the 2002 Q2 Period compared to a net income of $7.6 million in the 2001 Q2 Period primarily as a result of the sale to Majestic. Fitzgerald Renos net income decreased to $0.8 million for the 2002 Q2 Period from $1.2 million for the 2001 Q2 Period.
Two Quarters Ended June 30, 2002 Comparison to Two Quarters Ended July 1, 2001
The table below sets forth Net Operating Revenues, Income (Loss) from Operations, EBITDA, Adjusted EBITDA and other financial data for the Cumulative 2002 Period and the Cumulative 2001 Period. EBITDA for the Properties was $(2.3) million and $15.8 million for the Cumulative 2002 and 2001 Periods, respectively. Adjusted EBITDA, which the Company uses as a reasonable measure of its ability to generate cash from operating activities and as a means to compare the Companys performance with that of its competitors, decreased from $17.4 million for the Cumulative 2001 Period to $(1.3) million for the Cumulative 2002 Period. For a definition of EBITDA and Adjustments to EBITDA, see Notes 2 and 3, respectively, of Statement of Operations Data.
For the Two Quarters Ended | ||||||||||
June 30, 2002 | July 1, 2001 | |||||||||
(in thousands) | ||||||||||
Statement of Operations Data |
||||||||||
Net Operating Revenues: |
||||||||||
Fitzgeralds Las Vegas |
$ | | $ | 27,925 | ||||||
Fitzgeralds Tunica |
| 42,063 | ||||||||
Fitzgeralds Reno |
18,497 | 19,591 | ||||||||
Fitzgeralds Black Hawk |
| 16,392 | ||||||||
Other |
24 | 34 | ||||||||
Total |
$ | 18,521 | $ | 106,005 | ||||||
Income (Loss) from Operations: |
||||||||||
Fitzgeralds Las Vegas |
$ | (295 | ) | $ | 2,504 | |||||
Fitzgeralds Tunica |
(148 | ) | 10,330 | |||||||
Fitzgeralds Reno |
681 | 1,291 | ||||||||
Fitzgeralds Black Hawk |
(385 | ) | 3,596 | |||||||
Other (1) |
(2,205 | ) | (1,954 | ) | ||||||
Total Properties |
(2,352 | ) | 15,767 | |||||||
Nevada Club |
(15 | ) | (47 | ) | ||||||
Total |
$ | (2,367 | ) | $ | 15,720 | |||||
Page 21 of 33
For the Two Quarters Ended | ||||||||||
June 30, 2002 | July 1, 2001 | |||||||||
(in thousands) | ||||||||||
Other Data |
||||||||||
EBITDA (2): |
||||||||||
Fitzgeralds Las Vegas |
$ | (295 | ) | $ | 2,504 | |||||
Fitzgeralds Tunica |
(141 | ) | 10,330 | |||||||
Fitzgeralds Reno |
701 | 1,291 | ||||||||
Fitzgeralds Black Hawk |
(84 | ) | 3,595 | |||||||
Other (1) |
(2,514 | ) | (1,933 | ) | ||||||
Total Properties |
(2,333 | ) | 15,787 | |||||||
Nevada Club |
(15 | ) | (47 | ) | ||||||
Total EBITDA |
(2,348 | ) | 15,740 | |||||||
Adjustments to EBITDA (3) |
1,076 | 1,621 | ||||||||
Adjusted EBITDA |
$ | (1,272 | ) | $ | 17,361 | |||||
For the Two Quarters Ended | |||||||||
June 30, 2002 | July 1, 2001 | ||||||||
(in thousands) | |||||||||
Net Cash Provided by (Used in) (4): |
|||||||||
Operating Activities |
$ | (2,281 | ) | $ | 15,754 | ||||
Investing Activities |
(75 | ) | (1,310 | ) | |||||
Financing Activities |
(144 | ) | (219 | ) | |||||
Depreciation and Amortization |
18 | 20 | |||||||
Capital Expenditures |
(223 | ) | (1,014 | ) | |||||
Earnings to Fixed Charges (5): |
| 9.7x |
(1) | Other includes corporate expenses not allocated to the Operating Properties of $2.5 million and $1.9 million for the Cumulative 2002 Period and Cumulative 2001 Period, respectively. Both the Cumulative 2002 and 2001 Periods include post-petition professional fees and expenses net of interest income included in reorganization items. | |
(2) | EBITDA is a supplemental financial measurement used by the Company in the evaluation of its gaming business and by many gaming industry analysts. EBITDA is calculated by adding depreciation and amortization expense to income from operations. At any property, EBITDA is calculated after the allocation of corporate costs. However, EBITDA should only be read in conjunction with all of the Companys financial data summarized above and its financial statements prepared in accordance with GAAP appearing elsewhere herein, and should not be construed as an alternative either to income from operations (as determined in accordance with GAAP) as an indication of the Companys operating performance or to cash flows from operating activities (as determined in accordance with GAAP) as a measure of liquidity. This presentation of EBITDA may not be comparable to similarly titled measures reported by other companies. | |
(3) | Adjustments to EBITDA include (i) exclusion of EBITDA for Nevada Club for both periods presented; (ii) exclusion of post-petition professional fees and expenses, net of interest income included as reorganization items of $1.6 million for the Cumulative 2001 Period and $1.1 million for the Cumulative 2002 Period. | |
(4) | Includes financial results of Nevada Club for both periods presented. | |
(5) | For the Ratio of Earnings to Fixed Charges, earnings are defined as earnings before income taxes, interest on indebtedness, imputed interest on capital lease obligations and the portion of rent expense deemed to represent interest. Fixed charges consist of interest on indebtedness, imputed interest on capital lease obligations and the portion of rent expense deemed to represent interest. The Fixed Charged Coverage Ratio was 9.7x for the Cumulative 2001 Period, primarily as a result of the reduction in depreciation and amortization and interest expense; however, earnings were insufficient to cover fixed charges by $3.0 million for the Cumulative 2002 Period. |
Page 22 of 33
Operating Revenues
Total revenues for the Operating Properties were $20.8 million and net operating revenues were $18.5 million for the Cumulative 2002 Period, representing 83.2% and 82.5% decreases, respectively, over total revenues of $123.8 million and net operating revenues of $106.0 million for the Cumulative 2001 Period. The decrease is due to the sale of the Fitzgeralds Las Vegas, Fitzgeralds Tunica and Fitzgeralds Black Hawk properties to Majestic on December 6, 2001. Total net revenue for Fitzgeralds Reno decreased 5.6% to $18.5 million for the Cumulative 2002 Period from $19.6 million for the Cumulative 2001 Period.
The Companys business can be separated into four operating departments: casino, food and beverage, rooms and other. Casino revenues for the Operating Properties represented 73.0% and 78.7% of total revenues for the Operating Properties for the Cumulative 2002 and 2001 Periods, respectively. Casino revenues for the Operating Properties (of which approximately 75.1% and 86.9% were derived from slot machine revenues for the Cumulative 2002 and 2001 Periods, respectively) decreased 84.4% to $15.1 million for the Cumulative 2002 Period from $97.4 million for the Cumulative 2001 Period. Fitzgeralds Reno casino revenue decreased 4.1%.
Room revenues for the Operating Properties (11.4% and 9.2% of total revenues for the Operating Properties for the Cumulative 2002 and 2001 Periods, respectively) decreased 78.6% from the Cumulative 2001 Period. Fitzgeralds Reno room revenues decreased 11.8% due to a 6.7% decrease in the average daily rate and a decrease in the average occupancy rate to 84.1% for the Cumulative 2002 Period from 88.4% for the Cumulative 2001 Period.
Food and beverage revenues for the Operating Properties (13.7% and 10.3% of total revenues for the Operating Properties for the Cumulative 2002 and 2001 Periods, respectively) decreased approximately $10.1 million or 78.0% for the Cumulative 2002 Period. Food and beverage revenue for Fitzgeralds Reno decreased 3.1% to $2.8 million for the Cumulative 2002 Period from $2.9 million for the Cumulative 2001 Period.
Other revenues for the Operating Properties decreased 83.5% or $2.0 million for the Cumulative 2002 Period.
Promotional allowances for the Operating Properties decreased $15.5 million or 87.5% for the Cumulative 2002 Period primarily as a result of the sale to Majestic. Promotional allowances for Fitzgeralds Reno remained approximately the same at $2.2 million for both the Cumulative 2001 and 2002 Periods.
Operating Costs and Expenses
Total operating costs and expenses for the Operating Properties decreased 76.9% to $20.9 million for the Cumulative 2002 Period from $90.2 million for the Cumulative 2001 Period primarily due to the sale of the Fitzgeralds Las Vegas, Fitzgeralds Tunica and Fitzgeralds Black Hawk properties to Majestic on December 6, 2001. Total operating expenses for Fitzgeralds
Page 23 of 33
Reno decreased 2.6% to $17.8 million for the Cumulative 2002 Period from $18.3 million for the Cumulative 2001 Period.
Casino expenses for the Operating Properties were $8.2 million for the Cumulative 2002 Period, an 81.8% decrease from $45.0 million for the Cumulative 2001 Period. Food and beverage expenses for the Operating Properties decreased 74.5% to $2.0 million for the Cumulative 2002 Period from $7.7 million for the Cumulative 2001 Period. Room expenses for the Operating Properties decreased 86.6% to $0.8 million for the Cumulative 2002 Period from $6.4 million for the Cumulative 2001 Period. Selling, general and administrative expenses for the Operating Properties decreased 69.7% to $8.6 million for the Cumulative 2002 Period from $28.5 million for the Cumulative 2001 Period. Professional fees and expenses incurred in conjunction with the ongoing development, negotiation and implementation of the Companys restructuring were $1.1 million and $1.6 million for the Cumulative 2002 and 2001 Periods, respectively. Such expenses also include professional fees and expenses paid by the Company for the financial and legal advisors to the Committee and the Indenture Trustee, and administrative expenses paid to the U.S. Trustee in connection with the Bankruptcy Cases.
Personnel expenses for the Operating Properties decreased 79.7% to approximately $8.5 million for the Cumulative 2002 Period from approximately $42.1 million for the Cumulative 2001 Period. Such expenses are included in the operating departmental expense to which they relate on the consolidated statements of operations.
Marketing expenses for the Operating Properties, which include advertising, promotional material, special events and the operations of the Fitzgeralds player-tracking card, decreased $5.4 million or 72.5% for the Cumulative 2002 Period. Such expenses are included in selling, general and administrative expenses on the consolidated statements of operations.
Depreciation and amortization expenses for the Operating Properties decreased to $0.018 million for the Cumulative 2002 Period from $0.02 million for the Cumulative 2001 Period.
Income from Operations
Loss from operations for the Operating Properties was $2.4 million for the Cumulative 2002 Period compared to net income from operation of $15.8 million for the Cumulative 2001 Period. Income from operations for Fitzgeralds Reno decreased 47.3% to $0.7 million for the Cumulative 2002 Period from $1.3 million for the Cumulative 2001 Period.
Net Interest Expense
Interest expense for the Operating Properties (net of interest income), decreased 35.0% to $0.6 million for the Cumulative 2002 Period from $0.9 million for the Cumulative 2001 Period. Section 506(b) of the Bankruptcy Code permits the allowance of interest on an allowed secured claim secured by property, the value of which is greater than the amount of the claim. Inasmuch as the parties to the Restructuring Agreement have concluded that the fair market value of the collateral securing the Notes is less than the outstanding principal of the Notes, concurrently with
Page 24 of 33
the filing of the Bankruptcy Cases on December 5, 2000 the Company ceased accruing interest on the Notes.
Net Income
Net loss for the Properties was $17.9 million to $3.0 million in the Cumulative 2002 Period compared to a net income of $14.9 million in the Cumulative 2001 Period. The decrease is primarily due to the sale of Fitzgeralds Las Vegas, Fitzgeralds Tunica and Fitzgeralds Black Hawk properties to Majestic on December 6, 2001. Fitzgerald Renos net income decreased to $0.5 million for the Cumulative 2002 Period from $1.0 million for the Cumulative 2001 Period.
Liquidity and Capital Resources
At June 30, 2002, the Company had unrestricted cash of $23.1 million, compared to $25.6 million at December 31, 2001. The Companys net cash used in operating activities was $2.3 million during the Cumulative 2002 Period. Net cash used in investing activities was $0.08 million for the Cumulative 2002 Period and $1.3 million for the Cumulative 2001 Period. Net cash used in financing activities was $0.1 million and $0.2 million for the Cumulative 2002 and 2001 Periods, respectively.
The Companys principal sources of capital have historically consisted of cash from operations and vendor or third party financing of gaming and other equipment. However, its relatively high degree of leverage had prevented it from making the level of capital expenditures required to maintain and enhance the competitive position of its properties. Management and the Board of Directors did not see any way to resolve this problem without restructuring the Companys indebtedness. An Event of Default under the Indenture pursuant to which the Notes were issued occurred on July 15, 1999. The Company believes that it has adequate sources of liquidity to meet the normal operating requirements of its reduced activities following the sale of Fitzgeralds Las Vegas, Fitzgeralds Tunica and Fitzgeralds Black Hawk
The Restructuring Agreement provides a vehicle for liquidating the assets of the Company in the Bankruptcy Court through Chapter 11 of the Bankruptcy Code. Upon execution of the Restructuring Agreement and before commencement of the Bankruptcy Cases, the Company distributed $13.0 million in Excess Cash (as that term is defined in the Restructuring Agreement) to the trustee under the Indenture (the Indenture Trustee) to be applied to unpaid and accrued Indenture Trustees fees and expenses incurred and as partial payment of accrued and unpaid interest and principal as provided in the Indenture.
Pursuant to the Restructuring Agreement and an order entered by the Bankruptcy Court, the Company was required to distribute unrestricted cash (which includes cash in net assets held for sale) in excess of $24.8 million to holders of its Notes within 45 days after the end of each quarter until the closure of its sale to Majestic. In May, August and November 2001, the Company distributed $1.8 million, $7.7 million and $7.2 million, respectively, in Excess Cash to
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the Indenture Trustee to be applied to accrued and unpaid interest and principal as provided in the Indenture. The Company and the Informal Committee are currently engaged in discussions to establish a new threshold for cash reserves subsequent to the December 6, 2001 sale to Majestic. As part of the Restructuring Agreement, the Consenting Noteholders and Indenture Trustee agreed to forbear from exercising certain of their rights otherwise allowable under the Notes and the Indenture.
On December 5, 2000, the Company commenced the Bankruptcy Cases in the Bankruptcy Court. For further information concerning the Bankruptcy Cases and related matters, see Note 2 to the Unaudited Notes to Condensed Consolidated Financial Statements.
By suspending the interest payments on the Notes other than the Post-petition Distributions and sales proceeds of collateral for the Notes until such time as the liquidation of the remainder of the Companys assets contemplated by the Restructuring Agreement has been completed, the Company believes that its liquidity and capital resources will be sufficient to maintain normal operations at Fitzgeralds Reno at current levels during the pendency of the Bankruptcy Cases and does not anticipate any adverse impact on operations, customers or employees at Fitzgeralds Reno. However, costs incurred and to be incurred in connection with the Bankruptcy Cases have been and will continue to be substantial and, in any event, there can be no assurance that the Company will be able to successfully consummate the Restructuring Agreement or that its liquidity and capital resources will be sufficient to maintain normal operations at Fitzgeralds Reno during the pendency of the Bankruptcy Cases.
EBITDA and Adjusted EBITDA
The Companys EBITDA was $(2.3) million for the Cumulative 2002 Period and $15.7 million for the Cumulative 2001 Period. EBITDA is calculated by adding depreciation and amortization expenses to income from operations. The Companys Adjusted EBITDA was $(1.3) million for the Cumulative 2002 Period and $17.4 million for the 2001 Period. Adjusted EBITDA is determined based on the adjustments described in Note 3 to Statement of Operations Data. However, EBITDA should only be read in conjunction with all of the Companys financial data summarized above and its financial statements prepared in accordance with GAAP appearing elsewhere herein, and should not be construed as an alternative either to income from operations (as determined in accordance with GAAP) as an indication of the Companys operating performance or to cash flows from operating activities (as determined in accordance with GAAP) as a measure of liquidity. This presentation of EBITDA may not be comparable to similarly titled measures reported by other companies.
Ratio of Earnings to Fixed Charges
The ratio of earnings to fixed charges measures the extent by which earnings, as defined, exceed certain fixed charges. Earnings are defined as earnings before income taxes, interest on indebtedness, imputed interest on capital lease obligations and the portion of rent expense deemed to represent interest. Fixed charges consist of interest on indebtedness, imputed interest on capital lease obligations and the portion of rent expense deemed to represent interest. The
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Fixed Charge Coverage Ratio was 9.7x for the 2001 Period, however earnings were insufficient to cover fixed charges by $3.0 million for the 2002 Period.
Business Seasonality and Severe Weather
The gaming operations of the Company are seasonal and could be significant. At Fitzgeralds Reno business levels are typically weaker from Thanksgiving through the end of the winter and typically stronger from mid-June to mid-November.
Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141 (SFAS 141), Business Combinations, which requires the purchase method of accounting for business combinations initiated after June 30, 2001 and prohibits the use of the pooling-of-interest method. Adoption of this statement did not have a material impact on the Companys financial condition or results of operation.
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 142 (SFAS 142) Goodwill and Other Intangible Assets, which is effective January 1, 2002. SFAS 142 requires that goodwill and other intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually. The Company discontinued recording the amortization of its goodwill included in net assets held for sale subsequent to filing the Bankruptcy Cases. As of December 6, 2001, the Company wrote-down $13.0 million of its goodwill due to the sale of Fitzgeralds Black Hawk to Majestic.
Also in June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations, which is effective for financial statements issued for fiscal years beginning after June 15, 2002. This statement establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement cost. Adoption of this statement did not have a material impact on the Companys financial condition or results of operation.
In August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which is effective for financial statements issued for fiscal years beginning after December 15, 2001, and the interim periods within those fiscal years. This statement addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of, and supersedes Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and For Long-Lived Assets to be Disposed of. Adoption of this statement did not have a material impact on the Companys financial condition or results of operation.
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Item 3
Quantitative and Qualitative Disclosures About Market Risk
The fair market value of the Companys fixed debt obligations have increased to approximately $52.0 million at June 30, 2002 compared to $51.9 million at December 31, 2001. See Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
Reno Transportation Rail Access Corridor (ReTRAC) Project
In October 1998, the Reno City Council approved a special assessment district to finance a portion of the costs to lower the railroad tracks that run through downtown Reno, Nevada (the ReTRAC Project). Preliminary plans for the ReTRAC Project provide for the construction of a temporary rail bypass that will be used to divert rail traffic around the main railroad during construction. The City of Reno (the City) estimates that a period of approximately two and one half years will be required to complete the ReTRAC Project. The southern boundary of the bypass will extend out into the middle of Commercial Row, the street where Fitzgeralds Reno hotel entrance, valet parking area and hotel loading zone are situated.
On November 30, 1998, the Company filed a lawsuit against the City to challenge the method by which the special assessment to be levied against the Company was determined. Based on preliminary plans prepared by the City, Fitzgeralds Reno would expect to lose several parking spaces, the current valet parking area, an outdoor billboard structure advertising available rooms and a building used to house administrative offices, and be required to relocate the hotel entrance currently on Commercial Row. The City has also subsequently indicated that the ReTRAC Project might require the demolition of the Fitzgeralds Reno Rainbow Skyway. Implementation of the ReTRAC Project under these circumstances would cause the Company to suffer significant and permanent loss in business revenue and income; certain operating efficiencies from demolished or impaired physical structures; and a portion of its existing customer base as a result of the construction and operation of the proposed rail bypass.
The City of Reno filed an answer to the Companys lawsuit on January 19, 1999. Subsequent thereto, George Karadanis and Robert Maloff d/b/a Sundowner Hotel and Casino (the Sundowner) were permitted by court order to file a Complaint in Intervention. Notwithstanding that intervention, on December 22, 1999, the court granted the City of Renos Motion for Summary Judgment against the Sundowner which motion was joined in by the Company.
After hearing oral arguments and considering the parties briefs, the Court concluded that there was insufficient evidence before the Reno City Council to support a finding that the ReTRAC Project confers a special benefit on Fitzgeralds Reno as is required by statute before a special assessment may be imposed. The Court remanded the matter to the Reno City Council and directed the council to conduct a new hearing to consider evidence as to whether Fitzgeralds Reno would receive a special benefit from the proposed project. On June 20, 2001, the Reno City Council commenced a public hearing in compliance with the remand order of the Court. That public hearing was recessed and continued to November 29, 2001. After resuming the hearing on November 29, 2001, the Reno City Council again recessed and continued the proceedings to January 4, 2002, at which time the hearing was completed and the matter was
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submitted for decision of the Reno City Council. On February 19, 2002, the Reno City Council voted on the matter. By a 4-3 decision, the Reno City Council concluded that the ReTRAC Project would confer a special benefit on Fitzgeralds Reno. On a 5-2 decision, however, the Reno City Council determined that the value of the special benefit in light of the evidence presented was $1.00. The decisions of the Reno City Council are subject to judicial review, a petition for which must be filed within thirty days of the decisions. No judicial review petition was filed within the required period.
On February 27, 2001, the Reno City Council voted to continue the process of determining the actual cost of construction of the ReTRAC Project, which has previously been estimated to be $218 million. The construction cost analysis was completed in July 2002. On May 24, 2001, Fitzgeralds Reno commenced an action, CV-N-01-0329-PMP-RAM, in the United States District Court for the District of Nevada, against the Federal Highway Administration (FHWA), the Nevada Department of Transportation (NDOT), and the City (collectively, the Defendants) for violations of the National Environmental Policy Act (NEPA), codified at 42 U.S.C. §§ 4321-4327. The claims against all Defendants allege a violation of 42 U.S.C. § 4332 (Violation of NEPA: Failure to Consider Reasonable Alternatives & Failure to Consider and Provide Adequate Mitigation Measures). Specifically, Fitzgeralds Reno asserts the Defendants failed to consider the Partial Cover and Cut Tunnel Alternative and the use of the Feather River Route on a temporary basis, and failed to include a plan for mitigating the adverse environmental impacts, including construction disruption, loss of operating facilities, noise and vibration impacts, that will be caused by the ReTRAC Project and incurred by Fitzgeralds Reno and others.
On or about June 12, 2001, NDOT filed a motion to dismiss the Companys NEPA complaint based on a claim of sovereign immunity and the Company moved to amend its complaint to substitute as a defendant the Director of NDOT, Thomas E. Stephens, for the Defendant NDOT, in lieu of considering NDOTs Eleventh Amendment immunity claim. This unopposed motion was granted by the Court on August 17, 2001, and the Company filed its amended complaint on August 23, 2001. Defendant FHWA filed its answer to the Complaint on September 6, 2001 and Defendant Stephens filed his answer on October 3, 2001. The City filed a motion to dismiss the amended complaint so far as it named the City as defendant on September 6, 2001. On February 15, 2002, the United States District Court held a hearing to consider the Citys motion to dismiss. At the hearing, the Defendant FHWA and the Defendant NDOT joined the Citys motion to dismiss. The Citys motion to dismiss was fully argued and submitted to the Court for a ruling. On March 11, 2002, the Court issued an order dismissing all of the Companys claims against the City. The Court ruled the ReTRAC Project must comply with NEPA but the specific federal aid statute under which the City is receiving funding for the ReTRAC Project does not explicitly require the local government body to consent to suit under NEPA. Accordingly, the Court found the City is not a proper party in the case. The Court, however, denied the motions to dismiss by FHWA and NDOT stating the Company is entitled to proceed on the claims against those agencies for a violation of NEPA.
Other Litigation The Company is a party to various lawsuits relating to routine matters incidental to its business. Except as noted below, the Company does not believe that the outcome
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of such litigation, individually or in the aggregate, will have any material adverse effect on its financial condition.
Reliance From April 1, 1998 through September 30, 1999, the Companys general liability insurance and workers compensation insurance carrier was Reliance Insurance Company (Reliance). On May 29, 2001, a Pennsylvania court placed Reliance under the control of the Pennsylvania Insurance Department for rehabilitation. Thereafter, on October 3, 2001, the Reliance Insurance Company was declared insolvent and placed under an order of liquidation by the Pennsylvania Commonwealth Court at the request of the Pennsylvania Insurance Department. The Pennsylvania Insurance Department is now referring claims incurred in Mississippi, Nevada and Colorado from April 1, 1998 through September 30, 1999 to the Mississippi Insurance Guaranty Association, the Nevada Insurance Guaranty Association and the Colorado Insurance Guaranty Association, respectively. Each states Guaranty Insurance Association will investigate the claims incurred in their jurisdictions to determine if any of these claims are eligible for any insurance coverage under the respective Insurance Guaranty Association. The Company has not incurred any material amounts for liability claims or workers compensation claims that would be subject to reimbursement by Reliance. However, the statute of limitation has not expired for filing claims and it is unclear at this time what the insurance coverage would be from Reliance, if any, in the event that a future claim is filed that would be large enough to result in an insurance reimbursement from Reliance or any state Insurance Guaranty Association, or if there is insurance coverage for an existing claim that is currently under the threshold level for reimbursement, but increases in the future to an amount eligible for reimbursement. The reimbursement threshold per claim is $25,000 and $100,000 for liability claims and worker compensation claims, respectively. At the present time, the Company is unable to determine what effect this action may have on liability and workers compensation claims which arose during the coverage period for which Reliance was the Companys insurance carrier or whether any limitations on coverage would have a material adverse effect on the Companys financial condition.
Holiday Inn Upon notification by Majestic of its intent to not enter into a new franchise agreement with Holiday Inn Franchising, Inc. (Inns), the Company filed a motion with the Bankruptcy Court on October 26, 2001 to remove its pre-petition franchise and other agreements with Inns from the list of agreements to be assumed and assigned to Majestic. On October 26, 2001, the Bankruptcy Court granted the motion. Subsequently a motion to reject the franchise agreement was granted by the Bankruptcy Court. Since the transactions contemplated by the Purchase Agreement were consummated on December 6, 2001, the Company believes Inns will assert an unsecured claim in the Bankruptcy Cases based upon the liquidated damage provision of the franchise agreement, (approximately $1.6 million). The deadline for Inns to file its claim is August 8, 2002. While the Company would contest the allowance of such a claim by the Bankruptcy Court, the Company cannot predict the Bankruptcy Courts ultimate resolution of such a claim.
Item 2. Changes in Securities and Use of Proceeds.
Not Applicable
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Item 3. Defaults Upon Senior Securities.
(a) | As previously reported in its Report on Form 8-K filed July 22, 1999 and elsewhere in this Form 10-Q, the Company is in default on its $205.0 million Senior Secured Notes. |
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable
Item 5. Other Information.
The Company files monthly operating statements with the Bankruptcy Court. These filings are available for public inspection at the office of the clerk of the Bankruptcy Court at 300 Booth Street, Reno, Nevada 89509 or on the internet at www.nvb.uscourts.gov.
Item 6. Exhibits and Reports on Form 8-K.
(a) | Exhibits |
99. | 1 Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
99. | 2 Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
(b) | Reports on Form 8-K | |
None |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: August 13, 2002 | FITZGERALDS GAMING CORPORATION (DEBTOR-IN-POSSESSION) |
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/s/ Michael E. McPherson | ||
Michael E. McPherson Executive Vice President and Chief Financial Officer (Duly Authorized Officer, Principal Financial Officer and Principal Accounting Officer) |
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