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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-20840
PRESIDENT CASINOS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 51-0341200
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or Identification No.)
organization)
802 North First Street, St. Louis, Missouri 63102
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Address of principal executive offices-Zip Code
314-622-3000
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Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: Common Stock, $.06 par value,
5,033,161 shares outstanding as of July 14, 2003.
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PRESIDENT CASINOS, INC.
INDEX TO FORM 10-Q
Page No.
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
as of May 31 and February 28, 2003..................................1
Condensed Consolidated Statements of Operations (Unaudited)
for the Three Months Ended May 31, 2003 and 2002....................2
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Three Months Ended May 31, 2003 and 2002....................3
Notes to Condensed Consolidated Financial Statements (Unaudited)......4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................19
Item 3. Quantitative and Qualitative Disclosures About Market Risk....28
Item 4. Controls and Procedures.......................................29
Part II. Other Information
Item 1. Legal Proceedings.............................................29
Item 2. Changes in Securities.........................................29
Item 3. Defaults Upon Senior Securities...............................29
Item 4. Submission of Matters to a Vote of Security Holders...........30
Item 5. Other Information.............................................30
Item 6. Exhibits and Reports on Form 8-K..............................30
Signature................................................................31
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Part I. Financial Information
Item 1. Financial Statements
PRESIDENT CASINOS, INC.
(DEBTORS-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share data)
May 31, Feb. 28,
2003 2003
-------- --------
ASSETS
Current assets:
Cash and cash equivalents...................... $ 17,250 $ 16,120
Restricted cash................................ 1,862 5,304
Restricted short-term investments.............. 714 712
Accounts receivable, net of allowance for
doubtful accounts of $231 and $281........... 758 659
Other current assets........................... 6,113 3,960
--------- ---------
Total current assets....................... 26,697 26,755
--------- ---------
Property and equipment, net of accumulated
depreciation of $60,448 and $58,764............ 90,201 91,730
Assets of discontinued operations............... 2,005 2,349
--------- ---------
$118,903 $120,834
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable............................... $ 1,452 $ 1,340
Accrued payroll and benefits................... 3,656 3,866
Accrued interest............................... 37 9,818
Accrued loan fee............................... -- 7,000
Other accrued liabilities...................... 5,794 6,100
Liabilities from discontinued operations....... 198 305
Current maturities of long-term debt........... -- 30,000
--------- ---------
Total current liabilities.................. 11,137 58,429
Long-term liabilities............................ 45,429 --
--------- ---------
Total liabilities not
subject to compromise.................... 56,566 58,429
Liabilities subject to compromise................ 110,570 111,340
--------- --------
Total liabilities.......................... 167,136 169,769
--------- --------
Minority interest................................ 1,021 679
Commitments and contingencies.................... -- --
Stockholders' deficit:
Preferred Stock, $0.01 par value per share;
150 shares authorized; none issued
and outstanding.............................. -- --
Common Stock, $0.06 par value per share;
14,000 shares authorized; 5,033 shares
issued and outstanding....................... 302 302
Additional paid-in capital..................... 101,729 101,729
Accumulated deficit............................ (151,285) (151,645)
--------- ---------
Total stockholders' deficit................ (49,254) (49,614)
--------- ---------
$118,903 $120,834
========= =========
See Notes to Condensed Consolidated Financial Statements.
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PRESIDENT CASINOS, INC.
(DEBTORS-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except share data)
Three Months Ended May 31,
2003 2002
------ ------
OPERATING REVENUES:
Gaming......................................... $ 31,963 $ 32,574
Food and beverage.............................. 3,504 3,548
Hotel.......................................... 2,105 1,654
Retail and other............................... 1,191 1,292
Less promotional allowances.................... (6,664) (5,687)
--------- ---------
Net operating revenues....................... 32,099 33,381
--------- ---------
OPERATING COSTS AND EXPENSES:
Gaming......................................... 17,478 18,054
Food and beverage.............................. 2,078 2,326
Hotel.......................................... 259 375
Retail and other............................... 563 665
Selling, general and administrative............ 7,091 7,616
Depreciation and amortization.................. 2,084 2,090
Development.................................... -- 47
--------- ---------
Total operating costs and expenses........... 29,553 31,173
--------- ---------
OPERATING INCOME................................. 2,546 2,208
--------- ---------
OTHER INCOME (EXPENSE):
Interest expense (contractual interest of
$4,075 for the three-month period ended
May 31, 2003................................. (1,100) (3,813)
Interest income................................ 38 53
Reorganization items, net...................... (506) (218)
Loss on sale of property and equipment......... (30) (23)
--------- ---------
Total other income (expense)................. (1,598) (4,001)
--------- ---------
INCOME (LOSS) BEFORE MINORITY INTEREST AND
DISCONTINUED OPERATIONS........................ 948 (1,793)
Minority interest................................ 341 315
--------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS......... 607 (2,108)
--------- ---------
LOSS FROM DISCONTINUED OPERATIONS................ (247) (575)
--------- ---------
NET INCOME (LOSS)................................ $ 360 $ (2,683)
========= =========
Basic and diluted net income (loss)
per share from continuing operations........... $ 0.12 $ (0.42)
Basic and diluted loss per share
from discontinued operations.................... $ (0.05) $ (0.11)
--------- ---------
Basic and diluted net income (loss) per share.... $ 0.07 $ (0.53)
========= =========
Weighted average common and dilutive
potential shares outstanding.................... 5,033 5,033
========= =========
See Notes to Condensed Consolidated Financial Statements.
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PRESIDENT CASINOS, INC.
(DEBTORS-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Three Months Ended May 31,
2003 2002
------ ------
Net cash provided by operating activities......... $ 1,539 $ 988
--------- ---------
Cash flows from investing activities:
Expenditures for property and equipment......... (571) (1,388)
Changes in restricted cash, net................. 2,178 (172)
Maturity of short-term investments.............. -- 75
Purchase of short-term investments.............. (2) --
Proceeds from the sale of property
and equipment................................. 1,500 7
--------- ---------
Net cash provided by (used in)
investing activities...................... 3,118 (1,478)
--------- ---------
Cash flows from financing activities:
Payments on notes payable....................... (3,551) (105)
Payment of minority interest.................... -- (68)
--------- ---------
Net cash used in financing activities....... (3,551) (173)
--------- ---------
Net increase (decrease) in cash and
cash equivalents............................... 1,106 (663)
Cash and cash equivalents at beginning of period.. 16,159 10,110
--------- ---------
Cash and cash equivalents at end of period........ $ 17,265 $ 9,447
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.......................... $ -- $ 66
========= =========
See Notes to Condensed Consolidated Financial Statements.
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PRESIDENT CASINOS, INC.
(DEBTORS-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data and unless otherwise stated)
1. BANKRUPTCY PROCEEDINGS
On June 20, 2002, President Casinos, Inc. together with its subsidiary,
President Riverboat Casino-Missouri, Inc. ("President Missouri"), which owns
and operates the St. Louis operations, filed voluntary petitions for
reorganization under Chapter 11 of Title 11, United States Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the Southern
District of Mississippi (the "Mississippi Bankruptcy Court"). Subsequently,
on July 9, 2002, President Casinos, Inc.'s subsidiary The President Riverboat
Casino-Mississippi, Inc. ("President Mississippi") filed a voluntary
reorganization petition in the same Court. On July 11, 2002, substantially
all of President Casinos, Inc.'s other operating subsidiaries filed voluntary
reorganization petitions under Chapter 11 in the same Mississippi Bankruptcy
Court. Subsequently, orders were entered by the Mississippi Bankruptcy Court
transferring venue of all of the bankruptcy cases, except President Riverboat
Casino-New York, Inc. and President Broadwater Hotel, LLC, to the United
States Bankruptcy Court for the Eastern District of Missouri (the "Missouri
Bankruptcy Court," and together with the Mississippi Bankruptcy Court, the
"Bankruptcy Courts,") where they are now pending and being administered. As
used herein, the term "Company" refers to President Casinos, Inc., its wholly-
owned subsidiaries, a 95%-owned limited partnership and a limited liability
company in which a wholly-owned subsidiary of President Casinos, Inc. owns a
Class A ownership interest and in which an entity wholly-owned by the Chairman
of President Casinos, Inc. owns a Class B unit and has a preferred right to
certain cash flows.
The Company and its operating subsidiaries, except President Broadwater
Hotel, LLC, each continue in possession and use of their assets as debtors-in-
possession. The Company and its subsidiaries have had their Missouri
Bankruptcy Chapter 11 cases administratively consolidated under the President
Casinos, Inc. case.
Prior to any of the cases being transferred to the Missouri Bankruptcy
Court, the Mississippi Bankruptcy Court established "bar dates," all of which
have expired, by which all claimants were required to submit and characterize
claims against the Company. As part of the Company's Chapter 11
reorganization process, the Company has attempted to notify all known or
potential creditors of the filings for the purpose of identifying all pre-
petition claims. In the Company's Chapter 11 cases, substantially all of the
Company's liabilities as of the filing date are subject to adjustment under a
plan of reorganization. Generally, actions to enforce or otherwise effect
repayment of all pre-petition liabilities as well as all pending litigation
against the Company are stayed while the Company continues its business
operations as debtors-in-possession. Schedules have been filed by the Company
with the Bankruptcy Courts setting forth the assets and liabilities of the
debtors as of the filing dates as reflected in the Company's accounting
records. Differences between amounts reflected in such schedules and claims
filed by creditors will be investigated and amicably resolved or adjudicated
before the Bankruptcy Courts. The ultimate amount and settlement terms for
such liabilities are subject to a plan of reorganization, and accordingly, are
not presently determinable. Under the Bankruptcy Code, the Company may elect
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to assume or reject real estate leases, employment contracts, personal
property leases, service contracts and other executory pre-petition contracts
and unexpired leases, subject to Bankruptcy Court review. The Company cannot
presently determine or reasonably estimate the ultimate liability that may
result from rejecting leases or from filing of claims for any rejected
contracts, and no provisions have been made for these items.
The consummation of a plan or plans of reorganization (a "Plan") is the
principal objective of the Company's Chapter 11 filings. A Plan would, among
other things, set forth the means for satisfying claims against and interests
in the Company, including setting forth the potential distributions on account
of such claims and interests, if any. Pursuant to the Bankruptcy Code, the
Company had the exclusive right for 120 days from the filing date to file a
Plan, and for 180 days from the filing date to solicit and receive the votes
necessary to confirm a Plan. The Company was unable to have a plan confirmed
prior to the expiration of these exclusivity periods, and the Missouri
Bankruptcy Court denied the Company's motion to further extend the exclusivity
period. Accordingly, in addition to the Company, any party-in-interest,
including a creditor, an equity holder, a committee of creditors or equity
holders, or an indenture trustee, may file its own Plan for the Company.
Confirmation of a Plan is subject to certain statutory findings by the
Bankruptcy Court. Subject to certain exceptions as set forth in the
Bankruptcy Code, confirmation of a Plan requires, among other things, a vote
on the Plan by certain classes of creditors and equity holders whose rights or
interests are impaired under the Plan. If any impaired class of creditors or
equity holders does not vote to accept the Plan, but all of the other
requirements of the Bankruptcy Code are met, the proponent of the Plan may
seek confirmation of the Plan pursuant to the "cram down" provisions of the
Bankruptcy Code. Under these provisions, the Bankruptcy Court may still
confirm a Plan notwithstanding the non-acceptance of the Plan by an impaired
class, if, among other things, no claim or interest receives or retains any
property under the Plan until each holder of a claim senior to such claim or
interest has been paid in full. There can be no assurance that a Plan will be
confirmed by the Bankruptcy Court, or that any such Plan will be consummated.
It is not possible to predict the length of time the Company will operate
under the protection of Chapter 11 and the supervision of the Bankruptcy
Court, the outcome of the bankruptcy proceedings in general, or the effect of
the proceedings on the business of the Company or on the interest of the
various creditors and stakeholders. Since the filing date, the Company has
operated in the ordinary course of business. Management is in the process of
evaluating their operations as part of the development of a Plan. During the
pendency of the Chapter 11 filings, the Company may, with Bankruptcy Court
approval, sell assets and settle liabilities, including for amounts other than
those reflected in the financial statements. The administrative and
reorganization expenses resulting from the Chapter 11 filings will unfavorably
affect the Company's results of operations. In addition, under the priority
scheme established by the Bankruptcy Code, most, if not all, post-petition
liabilities must be satisfied before most other creditors or interest holders,
including stockholders, can receive any distribution on account of such claim
or interest.
On May 15, 2003, the Missouri Bankruptcy Court issued an order approving a
joint motion filed by the Company, the unsecured creditors' committee (the
"Committee") and certain bondholders of the Company (the "Bondholders") with
respect to a timetable and process for the Company's reorganization
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proceedings. Specifically, the joint motion sought entry of an order
approving a timetable and process set forth in a Term Sheet, dated March 25,
2003 (the "Term Sheet"), with respect to either (i) the refinancing of the
Company by July 18, 2003, or (ii) a sale of the assets related to the
Company's St. Louis gaming operations. In addition, the Court approved
motions by the Company to approve the appointment of Libra Securities LLC to
serve as the Company's investment banker in connection with any sale of the
St. Louis operations.
As set forth in the Term Sheet, the Company, the Committee and the
Bondholders have agreed that the Company shall have until July 18, 2003 to
effect a recapitalization of the Company pursuant to a plan of reorganization
with qualified financing commitments under which the unsecured creditors and
bondholders would be repaid in full. The Term Sheet also outlines a process
and timetable under which the Company's St. Louis operations would be sold in
the event that a recapitalization of the Company is not completed as set forth
in the Term Sheet. As part of such process, the Company would be required to
meet certain benchmarks which, if not met, would permit the Committee to file
a motion with the Court for the sale of the Company's St. Louis operations and
to appoint a chief restructuring officer to manage the sale process. Such
benchmarks include: (i) submission of draft marketing materials by May 1,
2003, (ii) delivery of marketing materials to qualified prospective purchasers
within 3 days of the end of the 2003 Missouri Legislative Session, or no later
than June 1, 2003, (iii) execution of a definitive asset purchase agreement by
August 1, 2003, (iv) filing of a motion to approve the sale by August 4, 2003,
and (v) good faith efforts by the Company to locate a purchaser and cooperate
with the sale process. The Term Sheet also contemplates that preliminary bids
would be received by July 11, 2003, and that a preliminary "stalking horse"
bidder would be selected by July 18, 2003.
The Company believes that, as a practical matter, a refinancing can be
accomplished, if at all, only if Missouri's gaming law is changed to eliminate
current loss limits which place a five hundred dollar limit on the amount a
gaming customer can lose during a two-hour gaming session. Legislation
eliminating loss limits in Missouri was proposed during the January 2003
session of the Missouri General Assembly, but the session was adjourned
without the legislation being passed. Missouri law gives the Governor of
Missouri the ability to call a special session of the legislature. The
Missouri Governor announced the veto of several of the bills passed by the
legislature and announced the call of a special session on June 2, 2003 for
these bills to be reconsidered. The special session adjourned June 30, 2003
without the legislation being passed. The Company currently anticipates that,
if a second special session is convened, the subject of removing the five
hundred dollar loss limit will again be presented, and that such a proposal
may also be accompanied by a proposal or proposals to increase tax revenue
from gaming companies.
If the legislature removes loss limits and does not modify the existing
gaming tax structure such that a substantial portion of the economic benefit
of removal of the loss limits is decreased through the imposition of new
taxes, it is possible that the Company will be able to effect a refinancing.
However, the Company believes that it is unlikely that such refinancing could
be completed prior to July 18, 2003 as specified in the Term Sheet. No
assurance can be given as to the achievement of a refinancing due to the
uncertainty of the scope of any potential legislation, the actual and
potential effect of the removal of loss limits as of the date refinancing is
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sought as well as other inherent difficulties and risks of obtaining financing
on acceptable terms. However, if loss limits are not removed and a
refinancing cannot be completed, for whatever reason, then pursuant to the
order of the Missouri Bankruptcy Court, the Company will be obligated to begin
a process pursuant to which the St. Louis operations would be sold. At the
current time, in the absence of the removal of loss limits, the Company
believes that the value of revenues from operations, projected at current
rates receivable for gaming operations earning such levels, would in all
probability not produce sufficient proceeds to retire in full all of the
Bondholder indebtedness which is currently outstanding. In such event,
following the sale of the St. Louis operations the Company would continue to
owe monies to the Bondholders. While it is not possible to predict what might
happen in this event, if the proceeds from any such sale of the St. Louis
operations are insufficient to satisfy the Company's obligations to the
Bondholders, the Company may be forced to sell or otherwise liquidate its
investment in its Biloxi operations. In such event, there can be no assurance
that the assets of the Company will exceed its obligations, or that the
Company would not be dissolved without any distribution to its stockholders.
President Broadwater Hotel, LLC ("PBLLC"), a limited liability company in
which Broadwater Hotel, Inc., a wholly-owned subsidiary of the Company
("BHI"), has a Class A ownership interest, was in default under a $30,000
promissory note and associated $7,000 loan fee incurred in connection with the
July 1997 purchase by PBLLC of the real estate and improvements utilized in
the Company's operations in Biloxi, Mississippi. On April 19, 2001, PBLLC
filed a voluntary petition for reorganization under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the Southern
District of Mississippi. PBLLC continued in possession and use of its assets
as a debtor-in-possession and had an agreement with Lehman Brothers Holdings
Inc., its lender and largest creditor ("Lehman"), approved by the Mississippi
Bankruptcy Court, which allowed PBLLC's use of its cash collateral.
On October 16, 2001, PBLLC filed its plan of reorganization which would
permit PBLLC to restructure its debt obligations in a manner which was
designed to permit it to continue as a going concern. Subsequently, on
February 28, 2003, PBLLC filed Modifications to Debtor's Plan of
Reorganization (together with the reorganization plan, the "Modified Plan").
On May 14, 2003, the Mississippi Bankruptcy Court entered the confirmation
order confirming the Modified Plan. The Modified Plan became effective on May
28, 2003 and the Company initiated consummation of the Modified Plan at that
time. The Modified Plan provides that the unsecured creditors of PBLLC will
receive 100% of their claims. Under the Modified Plan, the obligations to
Lehman were modified with respect to the debt amount, the interest rate and
the due date. See "Note 5. Long-Term Debt and Current Portion of Long-Term
Debt."
Due to certain debt covenants and cross default provisions associated with
other debt agreements, the Company is also currently in default under the
terms of its $2,100 M/V "President Casino-Mississippi" note. See "Note 6.
Liabilities Subject to Compromise and Reorganization Items, Net."
Management is pursuing various strategic financing alternatives in order to
fund its debt obligations and the Company's continuing operations. The
Company is pursuing alternatives, including the restructuring and refinancing
of outstanding debt obligations and/or the sale of all or a portion of its
assets. The Company's ability to continue as a going concern is dependent on
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its ability to restructure successfully, including refinancing its debts,
selling assets on a timely basis under acceptable terms and conditions, and
the ability of the Company to generate sufficient cash to fund future
operations. There can be no assurance in this regard.
The descriptions of the Company's business, financial condition and
prospects contained in this Quarterly Report on Form 10-Q are qualified in
their entirety by the foregoing description of the significant risks
associated with the Company's bankruptcy proceedings.
As of May 31, 2003, the Company had $17,250 of unrestricted cash and cash
equivalents. Of this amount, the Company requires approximately $6,500 of
cash to fund daily operations. The Company is heavily dependant on cash
generated from operations to continue to operate as planned in its existing
jurisdictions and to make capital expenditures. Management anticipates that
its existing available cash and cash equivalents and its anticipated cash
generated from operations will be sufficient to fund its ongoing operations
during the bankruptcy proceedings. Payments under the Company's defaulted
debt obligations generally will be stayed during the bankruptcy proceedings.
Costs previously incurred and which will be incurred in the future in
connection with the reorganizations have been and will continue to be
substantial and, in any event, there can be no assurance that the Company will
be able to restructure its indebtedness or that its liquidity and capital
resources will be sufficient to maintain its normal operations during the
reorganization period. To the extent cash generated from operations is less
than anticipated, the Company may be required to curtail certain planned
expenditures and/or seek additional financing.
2. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts and
operations of President Casinos, Inc., its wholly-owned subsidiaries, a 95%-
owned limited partnership and a limited liability company in which a wholly-
owned subsidiary of the Company has a Class A ownership interest and in which
an entity wholly-owned by the Chairman of the Board of the Company owns a
Class B Unit and has preferred rights to certain cash flows. All material
intercompany balances and transactions have been eliminated.
The accompanying condensed consolidated financial statements have been
prepared assuming that the Company will continue as a going concern, which
assumes continuity of operations, realization of assets and satisfaction of
liabilities in the ordinary course of business. The Company has experienced
operating losses since 1995 and has recently experienced significant
difficulty in generating sufficient cash flows to meet its obligations and
sustain its operations. As such, the Company has been in default under
various of its financial obligations as described elsewhere herein. Such
conditions raise substantial doubt about its ability to continue as a going
concern. The condensed consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments, consisting only of
normal recurring entries unless otherwise disclosed, necessary to present
fairly the Company's financial information for the interim periods presented
and have been prepared in accordance with accounting principles generally
accepted in the United States of America. The interim results reflected in
the condensed consolidated financial statements are not necessarily indicative
of results for the full year or other periods.
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The financial statements contained herein should be read in conjunction with
the audited consolidated financial statements and accompanying notes to the
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the period ending February 28, 2003. Accordingly, footnote
disclosure which would substantially duplicate the disclosure in the audited
consolidated financial statements has been omitted in the accompanying
unaudited condensed consolidated financial statements.
3. NATURE OF OPERATIONS
The Company owns and operates dockside gaming casinos through its
subsidiaries. The Company conducts dockside gaming operations in Biloxi,
Mississippi through its wholly-owned subsidiary President Mississippi and in
St. Louis, Missouri north of the Gateway Arch through its wholly-owned
subsidiary, President Missouri. In addition, the Company owns and manages
certain hotel and ancillary facilities associated with its gaming operations.
The President Broadwater Hotel, LLC, a limited liability company ("PBLLC") in
which Broadwater Hotel, Inc. ("BHI") has a Class A ownership interest, owns
approximately 260 acres in Biloxi, Mississippi, which includes a 111-slip
marina which contains the mooring site of "President Casino-Broadwater", two
hotels with approximately 500 rooms and an adjacent 18-hole golf course
(collectively, the "Broadwater Property"). BHI is a wholly-owned subsidiary
of the Company.
4. PROPERTY AND EQUIPMENT
During the fourth quarter of fiscal 2003, the Company held a sealed bid
auction of the "Surfside Princess" in accordance with Section 363 of the
United States Bankruptcy Code. In February, 2003, the auction closed and the
winning bid was $1,500. The purchase agreement was consummated on May 2,
2003. The Company recorded a $36 loss on the sale of the vessel during the
three-month period ended May 31, 2003.
Due to certain debt covenants and cross default provisions associated with
other debt agreements, the Company is in default under the terms of its $2,100
M/V "President Casino-Mississippi" note. The vessel and various equipment
aboard the M/V "President Casino-Mississippi" collateralizes the term note
payable which is also personally guaranteed by Mr. Connelly. On June 11,
2003, a United States Marshall served a warrant on the vessel. See "Note 6.
Liabilities Subject to Compromise and Reorganization Items, Net."
5. LONG-TERM DEBT AND CURRENT PORTION OF LONG-TERM DEBT
As of May 31, 2003, all of the Company's long-term debt, except the
Broadwater Hotel note, was classified as liabilities subject to compromise.
See "Note 6. Liabilities Subject to Compromise and Reorganization Items,
Net." As of February 28, 2003, current portion of long-term debt consisted of
the Broadwater Hotel note. The Broadwater Hotel note and related accrued loan
fee and accrued interest were modified, as discussed below, and the modified
obligation was classified as long-term debt as of May 31, 2003.
Broadwater Hotel Note
In conjunction with the purchase of the Broadwater Property, PBLLC borrowed
the sum of $30,000 from a third party lender (the "Original Indebtedness").
Except as set forth in the promissory note and related security documents,
PBLLC's obligations under the Original Indebtedness were nonrecourse and were
secured by the Broadwater Property, its improvements and leases thereon. The
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Original Indebtedness bore interest at a stipulated variable rate per annum
equal to the greater of (i) 8.75% or (ii) 4% plus the LIBOR 30-day rate.
PBLLC was obligated under the Original Indebtedness to make monthly payments
of interest accruing under the Indebtedness, and was obligated to repay the
Indebtedness in full on July 22, 2000. In addition, PBLLC was obligated to
pay to the lender a loan fee in the amount of $7,000 which was fully earned
and non-refundable when the Original Indebtedness was due. Neither the
Original Indebtedness nor the loan fee payments were made on the due date and
the Original Indebtedness was in default through the effective date of the
Modified Plan discussed below. PBLLC continued to make monthly interest
payment on the $30,000 principal through April 19, 2001, when the Company
announced that PBLLC had filed for reorganization under Chapter 11 in the
Mississippi Bankruptcy Court.
On October 16, 2001, PBLLC filed its plan of reorganization which would
permit PBLLC to restructure its debt obligations in a manner which was
designed to permit it to continue as a going concern. Subsequently, on
February 28, 2003, PBLLC filed Modifications to Debtor's Plan of
Reorganization (together with the reorganization plan, the "Modified Plan").
On May 14, 2003, the Mississippi Bankruptcy Court entered the confirmation
order confirming the Modified Plan. The Modified Plan became effective on May
28, 2003 and the Company consummated the Modified Plan at that time. The
Modified Plan provides that the unsecured creditors of PBLLC will receive 100%
of their claims. Under the Modified Plan, the obligations to Lehman were
modified with respect to the debt amount, the interest rate and the due date,
and was re-documented substantially along the lines of the Original
Indebtedness, including the non-recourse provision, (the "Modified
Indebtedness"). The Modified Indebtedness is non-recourse to the Company. On
May 28, 2003, the Company paid Lehman $3,551 pursuant to the Modified Plan.
The principal amount of the Modified Indebtedness is $45,429 plus interest at
the rate of 12.75% per annum from November 1, 2002 until May 28, 2003 on
$30,000 plus interest at the rate of 8.75% per annum from November 1, 2002
until May 28, 2003 on $7,000, less the payment by PBLLC to Lehman of $3,551.
As of May 31, 2003, the principal amount of the Modified Indebtedness was
$45,429. The principal amount of the Modified Indebtedness earns interest at
a rate of 12.75% per annum until the obligation is satisfied. The maturity
date of the Modified Indebtedness is June 1, 2005. Interest is payable during
the term of the Modified Indebtedness on the adjusted loan obligation amount.
As of May 31, 2003, the adjusted loan obligation amount was $43,013. PBLLC is
required to pay interest earned on the adjusted loan obligation monthly from
May 28, 2003 at a rate of the greater of 7.75% per annum or LIBOR plus 4% per
annum floating through the term of the Modified Indebtedness.
Certain interest amounts payable on the Modified Indebtedness may be
deferred until October 31, 2003. A discount of $3,500 with respect to the
Modified Indebtedness will occur and the deferred interest amounts will be
waived provided payment of the entire adjusted loan obligation amount is made
on or before November 1, 2003. In the event that payment in full of the
Modified Indebtedness is made after November 1, 2003 but prior to June 2,
2005, interest on the Modified Indebtedness will be calculated at a lower rate
as set forth in the Modified Plan.
Under the Modified Plan, the Modified Indebtedness is accelerated in the
event the Missouri Bankruptcy Court, having jurisdiction over President
Mississippi, does not approve the base rental increase on the marina leased to
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the Biloxi casino by PBLLC by November 1, 2003. This requirement does not
apply if PBLLC's aggregate net cash flow from its operations, after receiving
rental payments from President Mississippi at the current base rental, and
after certain adjustments are made, equals or exceeds the amount of funds that
would be necessary, on an annual basis, to pay the greater of 7.75% per annum
or LIBOR plus 4% per annum floating on the adjusted loan obligation amount as
of November 1, 2003. The Modified Plan contains an express waiver of rights
by PBLLC to seek future bankruptcy protection. J. Edward Connelly Associates,
Inc. ("JECA"), the holder of a Class B interest in PBLLC, retains its
membership interest, but any payments by PBLLC to JECA shall be restricted
until such time as all outstanding obligations to Lehman and other creditors
receiving funds under the Modified Plan are discharged.
6. LIABILITIES SUBJECT TO COMPROMISE AND REORGANIZATION ITEMS, NET
The components of liabilities subject to compromise are as follows:
May 31, Feb. 28,
2003 2003
------ ------
Senior Exchange Notes, 13%...................... $ 56,250 $ 56,250
Secured Notes, 12%.............................. 18,750 18,750
M/V "President Casino-Mississippi" note payable,
variable interest rate, 5.28%................. 2,100 2,100
Minority interest............................... 15,669 15,669
Accrued interest................................ 13,719 13,728
Accounts payable and other accrued expenses..... 4,143 4,843
--------- ---------
Total liabilities subject to compromise...... $110,632 $111,340
========= =========
Senior Exchange Notes and Secured Notes
The Senior Exchange Notes rank equal in right of payment to all present and
future senior debt, as defined in the indenture governing the Senior Exchange
Notes (the "Note Indenture"), of the Company and its subsidiaries and were
payable as follows: 25% of the outstanding principal amount on each of
September 15, 1999 and September 15, 2000 and the remainder of the outstanding
principal amount on September 15, 2001. In addition, the Senior Exchange
Notes are unconditionally guaranteed, jointly and severally on a senior basis,
by all of the Company's then existing wholly-owned subsidiaries (the
"Guarantors"), and, under certain circumstances, the Company's future
subsidiaries, although the subsidiary guarantee from The Connelly Group, LP
("TCG") is limited in amount. As security for the obligations of the Company
and the Guarantors under the Senior Exchange Notes, the Company and the
Guarantors have pledged their equity interests in each Guarantor and certain
indebtedness from, and certain investments in, certain gaming ventures. The
Note Indenture contains certain restrictive covenants which, among other
things, limit the Company's Guarantors' ability to pay dividends, incur
additional indebtedness (exclusive of $15,000 of senior debt), issue preferred
stock, create liens on certain assets, merge or consolidate with another
company and sell or otherwise dispose of all or substantially all of its
properties or assets.
On December 3, 1998, the Company repurchased $25,000 of its Senior Exchange
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Notes. The repurchased notes were used to satisfy the $25,000 principal
payment due September 15, 1999 on the Company's $100,000 Senior Exchange
Notes. The repurchase was funded by the issuance of $25,000 of new 12% notes
due September 15, 2001 (the "Secured Notes"). The Secured Notes have no
mandatory redemption obligation and are secured by a mortgage on the
"Admiral", as well as subsidiary guarantees.
See "Note 1. Bankruptcy Proceedings" regarding default of the Senior
Exchange Notes and Secured Notes.
M/V "President Casino-Mississippi" Note
The term note payable is collateralized by the vessel M/V "President Casino-
Mississippi" and various equipment and is personally guaranteed by Mr.
Connelly. This note also contains certain covenants which, among other
things, require the Company to maintain a minimum tangible net worth of
$40,000. The aforementioned default on the Company's Senior Exchange Notes
and Secured Notes also constituted a default under this note. The Company
continued to make the quarterly principal and interest payments on this note
prior to the bankruptcy filing. Under the terms of the note agreement, $2,100
principal became due and payable in August 2002. In November 2002, the lender
brought an action against Mr. Connelly for breach of contract under his
personal guarantee. In January 2003, the Mississippi Bankruptcy Court granted
a motion to relieve the lender from the automatic stay in order to enforce its
rights under the Preferred Fleet Ship Mortgage, including but not limited to
the right of the lender to seize and sell the vessel. In May 2003, the lender
filed a motion with the United States District Court of Southern Illinois for
an order directing the Clerk of Court to issue a warrant for the arrest of the
M/V "President Casino-Mississippi" pursuant to rules of admiralty and maritime
claims. On May 20, 2003, the Court executed the warrant, which allows the
vessel to be seized and sold. On June 11, 2003, a United States Marshall
served the warrant on the vessel. It is anticipated that the lender will seek
to sell the vessel and seek distribution of any sale proceeds.
The various agreements governing the notes described above generally limit
borrowings by the Company's affiliates without the respective lenders' prior
consent.
As of May 31, 2003, all reorganization items consist of professional fees.
7. STOCK-BASED COMPENSATION
As of May 31, 2003, the Company has three stock Option Plans. The Company
applies Accounting Principles Board Opinion No. 25 and related interpretations
in accounting for its stock-based compensation plans using the intrinsic value
method. Accordingly, no compensation expense is reflected in net income for
stock options, as all options granted had an exercise price equal to the
market value of the underlying common stock on the date of grant.
Substantially all of the Company's stock options were vested as of May 31,
2003. Had compensation cost for the Company's Stock Option Plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of Statement of Financial Accounting
Standards ("SFAS") No. 123 "Accounting for Stock-Based Compensation," the
Company's pro forma net income (loss) and net income (loss) per share would be
the same. There were no options granted during the three-month period ended
May 31, 2003 or fiscal year 2003.
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8. COMMITMENTS AND CONTINGENT LIABILITIES
Bankruptcy Actions
On June 20, 2002, the Company together with its subsidiary, President
Missouri, which owns and operates the St. Louis operations, filed voluntary
petitions for reorganization under Chapter 11 of the Bankruptcy Code in the
United States Bankruptcy Court for the Southern District of Mississippi. On
July 9, 2002, the Company's subsidiary President Mississippi filed a voluntary
reorganization petition in the same Court. On July 11, 2002, substantially
all of the Company's other operating subsidiaries filed voluntary
reorganization petitions under Chapter 11 in the same Court. Subsequently,
orders were entered by the Mississippi Bankruptcy Court transferring venue of
all of the Chapter 11 cases, except President Riverboat Casino-New York, Inc.
and PBLLC, to the United States Bankruptcy Court for the Eastern District of
Missouri, where they are now pending and being administered. The Company and
its subsidiaries each continue in possession and use of their assets as
debtors-in-possession. See "Note 1. Bankruptcy Proceedings."
President Broadwater Hotel, LLC ("PBLLC"), a limited liability company in
which Broadwater Hotel, Inc., a wholly-owned subsidiary of the Company
("BHI"), has a Class A ownership interest, was in default under a $30,000
promissory note and associated $7,000 loan fee incurred in connection with the
July 1997 purchase by PBLLC of the real estate and improvements utilized in
the Company's operations in Biloxi, Mississippi. On April 19, 2001, PBLLC
filed a voluntary petition for reorganization under Chapter 11 of the
Bankruptcy Code in the Mississippi Bankruptcy Court. On May 28, 2003, PBLLC
emerged from its Chapter 11 protection. See "Note 1. Bankruptcy
Proceedings."
Litigation
--Poulos, McElmore and Shreier, et al. v. Caesar's World, Inc. et al.
In 1994, William H. Poulos filed a class-action lawsuit in the United States
District Court for the Middle District of Florida against over thirty-eight
(38) casino operators, including the Company, and certain suppliers and
distributors of video poker and electronic slot machines. This lawsuit was
followed by several additional lawsuits of the same nature against the same
and as well as additional defendants, all of which have now been consolidated
into a single class-action pending in the United States District Court for the
District of Nevada. Following a court order dismissing all pending pleadings
and allowing the plaintiffs to re-file a single complaint, a complaint was
filed containing substantially identical claims, alleging that the defendants
fraudulently marketed and operated casino video poker machines and electronic
slot machines, and asserting common law fraud and deceit, unjust enrichment
and negligent misrepresentation. Various motions were filed by the defendants
seeking to have this new complaint dismissed or otherwise limited. On
December 19, 1997, the Court, in general, ruled on all motions in favor of the
plaintiffs on all pending motions. The plaintiffs then filed a motion seeking
class certification and the defendants opposed it. On June 21, 2002, the
Court entered an order holding the action could not proceed as a class action.
The decision has been appealed to the 9th Circuit Court of Appeals. The last
briefs are scheduled to be filed July 14, 2003. Extensive paper discovery has
occurred. A motion to stay pending the Company's bankruptcy proceedings has
been filed. Although the outcome of litigation is inherently uncertain,
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management, after consultation with counsel, believes the action will not have
a material adverse effect on the Company's financial position or results of
operations.
--"Surfside Princess"
On October 12, 2001, the Company's subsidiary which owned the M/V "Surfside
Princess," formerly known as the M/V "New Yorker," initiated an action in the
United States District Court for the Middle District of Florida against
Southern Gaming, LLC and its assignee for breach of a Bareboat Charter and
Purchase Agreement dated March 29, 2001 pursuant to which the M/V "Surfside
Princess" was chartered from the Company. The suit alleges breach of the
charter. Subsequent proceedings followed in which various parties claimed
various rights with respect to the vessel and its contents. The matter is
currently pending before the Court.
On October 19, 2001, Southern Gaming filed suit in the United States
District for Middle District of Florida seeking damages in connection with the
charter of the "Surfside Princess." Subsequently this proceeding was
consolidated with the prior proceeding involving Southern Gaming. Other suits
and claims exist with respect to the vessel. The Mississippi Bankruptcy Court
granted a motion for the M/V "Surfside Princess" to be sold outside a plan of
reorganization. On May 2, 2003 a purchase agreement on the vessel was
consummated, at which time the liens against the vessel attached to the
proceeds from the sale. The Company is unable at this time to predict the
outcome of this matter with certainty.
--Other
The Company is from time to time a party to litigation, which may or may not
be covered by insurance, arising in the ordinary course of its business.
Management of the Company does not believe that the outcome of any such
litigation will have a material adverse effect on the Company's financial
condition or results of operations, or which would have any material adverse
impact upon the gaming licenses of the Company's subsidiaries.
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9. DISCONTINUED OPERATIONS
The Company sold one of two vessels accounted for in its leasing segment
during May 2003 and the second vessel is being foreclosed on by the lender
which holds a Preferred First Fleet Mortgage collateralizing debt owed to the
lender. See "Note 4. Property and Equipment." With the disposal of both
vessels, representing all of the operating assets of the segment, the segment
is accounted for as discontinued operations in accordance with the Financial
Accounting Standards Board SFAS No. 144 "Accounting for the Impairment and
Disposal of Long-Lived Assets."
The components of assets of and liabilities from discontinued operations are
as follows:
May 31, Feb. 28,
2003 2003
------ ------
Cash and cash equivalents.................. $ 15 $ 39
Restricted cash............................ 1,263 --
Accounts receivable........................ 39 --
Prepaid assets............................. -- 60
Property and equipment..................... 688 2,250
-------- --------
$ 2,005 $ 2,349
======== ========
Accounts payable........................... $ 122 $ 173
Other accrued liabilities.................. 76 132
-------- --------
$ 198 $ 305
======== ========
In addition, included in liabilities subject to compromise is $2,100 debt
which is collateralized by the M/V "President Casino-Mississippi," the vessel
being foreclosed on discussed above and $62 in other pre-petition liabilities,
for both periods presented.
10. SEGMENT INFORMATION
The Company's reportable segments, other than the discontinued operations,
are similar in operations, but have distinct and separate regional markets.
The Company's reportable segments are based on its two geographic gaming
operations. The Biloxi operations consist of the Biloxi casino and the
Broadwater Property and the St. Louis operations consist of the St. Louis
casino.
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The Company has no inter-segment sales and accounts for transfers of
property and inventory at its net book value at the time of such transfer.
Three Months Ended May 31,
2003 2002
------ ------
OPERATING REVENUES:
St. Louis operations................... $ 19,044 $ 19,895
Biloxi operations...................... 13,055 13,486
--------- ---------
Net operating revenues............. $ 32,099 $ 33,381
========= =========
Three Months Ended May 31,
2003 2002
------ ------
OPERATING INCOME (LOSS):
St. Louis operations................... $ 1,854 $ 2,025
Biloxi operations...................... 1,446 1,245
--------- ---------
Gaming and ancillary operations...... 3,300 3,270
Corporate administration............... (754) (1,015)
Corporate development.................. -- (47)
--------- ---------
Operating income.................. $ 2,546 $ 2,208
========= =========
A summary of assets by segment, is as follows:
May 31, Feb. 28,
2003 2003
------ ------
St. Louis operations.................... $ 49,075 $ 47,917
Biloxi operations....................... 61,385 63,562
--------- ---------
Gaming and ancillary operations....... 110,460 111,479
Corporate assets........................ 3,179 3,747
Development assets...................... 3,259 3,259
Discontinued operations................. 2,005 2,349
--------- ---------
Net assets.......................... $118,903 $120,834
========= =========
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A summary of net property and equipment and additions to property and
equipment, by segment, is as follows:
May 31, Feb. 28,
2003 2003
------ ------
Property and Equipment:
St. Louis operations.................. $ 35,427 $ 36,540
Biloxi operations..................... 51,503 51,919
--------- ---------
Gaming and ancillary operations.... 86,930 88,459
Corporate assets...................... 12 12
Development assets.................... 3,259 3,259
--------- ---------
Net Property and Equipment........ $ 90,201 $ 91,730
========= =========
Three Months Ended May 31,
2003 2002
------ ------
Additions to Property and Equipment:
St. Louis operations.................. $ 454 $ 1,063
Biloxi operations..................... 117 297
--------- ---------
Gaming and ancillary operations..... 571 1,357
Corporate assets...................... -- --
Development assets.................... -- 31
--------- ---------
$ 571 $ 1,388
========= =========
11. GUARANTEE OF CITY OBLIGATION
During 1998, the Company and the City of St. Louis reached an agreement for
the relocation of the "Admiral" approximately 1,000 feet north from its former
location on the Mississippi River. Under the terms of an agreement, the City
funded $3,000 of the relocation costs, $2,400 of which was financed through
bank debt. It is anticipated that the City will repay the debt from annual
allocations of $600 from the City's annual home dock city public safety fund
that is funded by admission taxes from the "Admiral." The Company has
guaranteed repayment of the bank debt if the City fails to pay the obligation.
As of May 31, 2003, the Company's guarantee was $1,101.
12. INSURANCE RISK
The Company was partially self-insured for employee health and workers
compensation claims and third party liability costs through April 1999.
Effective May 1999, the Company became fully insured for workers compensation
claims. The Company continues to be partially self-insured for employee
health and third party liability claims. The self-insurance claim liability
is based on claims reported and claims incurred but not reported using the
Company's historic experience with such matters.
The Company does carry business interruption insurance, but due to the
current insurance market, the current policy does not cover interruption from
either windstorm or flood.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion should be read in conjunction with the consolidated
financial statements of the Company included elsewhere in this report.
President Casinos, Inc., President Riverboat Casino-Missouri, Inc., The
President Riverboat Casino-Mississippi, Inc., President Broadwater Hotel, LLC,
Broadwater Hotel, Inc., President Riverboat Casino-New York, Inc., PRC
Management, Inc., PRC Holdings Corporation, TCG/Blackhawk, Inc. and Vegas
Vegas, Inc. have each filed voluntary petitions for reorganization under
Chapter 11 of the Bankruptcy Code. See "Note 1. Bankruptcy Proceedings" of
the Notes to Condensed Consolidated Financial Statements included in Part I of
this report.
As a result of the Company's relatively high degree of leverage and the need
for significant capital expenditures at its St. Louis property, the Company
was unable to pay the regularly scheduled interest payments of $6.4 million
that were each due and payable March 15, and September 15, 2000. Under the
indentures pursuant to which the $75.0 million 13.0% Senior Exchange Notes
(the "Senior Exchange Notes") and the $25.0 million 12% Secured Notes (the
"Secured Notes" and collectively with the Senior Exchange Notes, the "Notes")
were issued, an Event of Default occurred on April 15, 2000, and is continuing
as of the date hereof. Additionally, the Company was unable to pay the $25.0
million principal payment due September 15, 2000 on the Senior Exchange Notes.
The holders of at least 25% of the Senior Exchange Notes and the Secured Notes
were notified of the defaults and instructed the Indenture Trustee to
accelerate the Notes and on August 11, 2000, the holders declared the unpaid
principal and interest to be due and payable.
On October 10, 2000, the Company sold the assets of its Davenport, Iowa
operations for aggregate consideration of $58.2 million in cash. On November
22, 2000, the Company entered into an agreement with a majority of the holders
of the Senior Exchange Notes and a majority of the holders of the Secured
Notes. The agreement provided for a proposed restructuring of the Company's
debt obligations under the Notes and the application of certain of the
proceeds received by the Company from the sale of the Company's Davenport
assets. Approximately $43.0 million of the proceeds from the sale were
deposited with a trustee. Of this amount, $12.8 million was used to pay
missed interest payments due March 15, 2000 and September 15, 2000 on the
Notes; $25.0 million was used to partially redeem the Notes; and $5.2 million
was used to pay interest due March 15, 2001 on the Notes.
Subsequently, the Company was unable to make the principal and interest
payments due September 15, 2001 and has not made any subsequent principal or
interest payments on the Notes. As of May 31, 2003, principal due on the
Senior and Secured Notes was $56.2 million and $18.8 million, respectively.
In July 2001, the Company completed the sale of its non-gaming cruise
operations in St. Louis, Missouri for $1.7 million. On May 2, 2003, the
Company consummated the sale of the M/V "Surfside Princess" under the terms of
a Section 363 sale of the Bankruptcy Code for $1.5 million. Liens on the
vessel were transferred to the proceeds from the sale, and are being held in
escrow pending the outcome of certain litigation.
Due to certain debt covenants and cross default provisions associated with
other debt agreements, the Company is also currently in default under its $2.1
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million M/V "President Casino-Mississippi" note. See Liquidity and Capital
Resources.
Management believes the Company's liquidity and capital resources will be
sufficient to maintain its normal operations at current levels and does not
anticipate any adverse impact on its operations, customers or employees.
However, costs previously incurred and which will be incurred in the future in
connection with restructuring the Company's debt obligations and the
bankruptcy proceedings have been and will continue to be substantial and, in
any event, there can be no assurance that the Company will be able to
restructure successfully its indebtedness or that its liquidity and capital
resources will be sufficient to maintain its normal operations during the
restructuring period.
The Company's ability to continue as a going concern is dependent on its
ability to restructure successfully, including refinancing its debts, and the
ability of the Company to generate sufficient cash to fund future operations.
There can be no assurance in this regard.
Overview
The Company's operating results are affected by a number of factors,
including competitive pressures, changes in regulations governing the
Company's activities, the results of pursuing various development
opportunities, the economic environment and general weather conditions.
Consequently, the Company's operating results may fluctuate from period to
period and the results for any period may not be indicative of results for
future periods. The Company's operations are not significantly affected by
seasonality.
--Competition
Intensified competition for patrons continues to occur at both of the
Company's properties.
Since gaming began in Biloxi in August 1992, there has been steadily
increasing competition along the Mississippi Gulf Coast, in nearby New Orleans
and elsewhere in Louisiana and Mississippi. Several large hotel/casino
complexes have been built in recent years with the largest single resort in
the area opening in March 1999. There are currently twelve casinos operating
on the Mississippi Gulf Coast. See "Potential Growth Opportunities" regarding
a master plan for a destination resort the Company is developing in Biloxi,
Mississippi.
Competition is intense in the St. Louis market area. There are presently
four other casino companies operating five casinos in the market area. Many
of these competitors have significantly greater name recognition and financial
and marketing resources than the Company. Two of these are Illinois casino
companies operating single casino vessels docked on the Mississippi River, one
across the Mississippi River from the "Admiral" and the second 20 miles
upriver. There are two Missouri casino companies, each of which operates
casino vessels approximately 20 miles west of St. Louis on the Missouri River.
One company operates two casinos in Maryland Heights, Missouri and the other
company operates one casino in the City of St. Charles, Missouri. The
operator of the St. Charles casino replaced its facility and reopened with
nearly double its prior gaming positions in August 2002.
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Applications were submitted to the Missouri Gaming Commission for approval
of potential new licenses at four different locations within the St. Louis
Metropolitan area along the Mississippi River, three of which were within 20
miles of the "Admiral." In July 2000, the Gaming Commission announced its
decision to award an additional license to the applicant proposing a site at
the greatest distance from the "Admiral" of the proposed locations. The
Commission's decision was challenged by one of the applicants whose proposal
was not selected and by other entities. In September 2001, the applicant
selected by the Gaming Commission announced it would not proceed with the
development of the project. The Gaming Commission announced that it will
consider licensing an additional casino in the St. Louis market. One such
application has been filed to operate a gaming facility approximately 20 miles
south of the "Admiral." The Gaming Commission has extended the period in
which applications can be filed but has not indicated a specific deadline for
such filings. The opening of a new casino in the St. Louis market would have
a material adverse impact on the St. Louis operations under most possible
scenarios.
--Regulatory Matters
Missouri regulations limit the loss per "simulated" cruise per passenger by
limiting the amount of chips or tokens a guest may purchase during each two-
hour gaming session to $500 (the "loss limit"). The company that operates
adjacent casinos is able to offer guests who reach the two-hour loss limit the
ability to move to the adjacent casino and continue to play. The lack of a
statutory loss limit on Illinois casinos allows them to attract higher stake
players. Additionally, their guests are not burdened with the administrative
requirements related to the loss limits, which includes the presentation of
government issued identification. Any easing of the loss limits in Missouri
would be expected to have a positive impact on the Company's St. Louis
operations.
--Economic Environment
The Company's business involves leisure and entertainment. During periods
of recession or economic downturn, consumers may reduce or eliminate spending
on leisure and entertainment activities. In the event that any of the
Company's demographic markets suffer adverse economic conditions, the
Company's revenues may be materially adversely affected.
--Weather Conditions
The Company's operating results are susceptible to the effects of floods,
hurricanes and adverse weather conditions. Historically, the Company has
temporarily suspended operations on various occasions as a result of such
adversities. Under less severe conditions, high river levels in St. Louis
cause reduced parking and a general public perception of diminished access to
the casino resulting in decreased revenues. Management believes the move of
the "Admiral" diminished the negative effects of high water on operations.
However, on May 13, 2002, at 4:00 a.m. the St. Louis operations were
temporarily suspended due to high water levels. The "Admiral" was reopened on
May 20, 2002 at 6:00 p.m. During the same period for the prior year, the
Company recorded $1.4 million in St. Louis gaming revenue.
On September 25, 2002, all Mississippi Gulf Coast casinos, including the
Company's Biloxi casino, were temporarily closed at 10:00 a.m. by the
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Mississippi Gaming Commission in anticipation of Tropical Storm Isidore. The
Company's Biloxi casino reopened on September 27, 2002 at 5:00 a.m. On
October 2, 2002, all Mississippi Gulf Coast casinos, including the Company's
Biloxi casino, were temporarily closed at 10:00 p.m. by the Mississippi Gaming
Commission in anticipation of Hurricane Lili. The Company's Biloxi casino
reopened on October 3, 2002 at 3:00 p.m. The Company's Biloxi hotel
operations remained open during both periods.
Potential Growth Opportunities
Biloxi, Mississippi
In July 1997, President Broadwater Hotel, LLC ("PBLLC") purchased for $40.5
million certain real estate and improvements located on the Gulf Coast in
Biloxi, Mississippi from an entity which was wholly-owned by Mr. Connelly.
The property comprises approximately 260 acres and includes two hotels, a 111-
slip marina and the adjacent 18-hole Sun Golf Course (collectively, the
"Broadwater Property"). The marina is the site of the Company's casino
operations in Biloxi and was formerly leased by the Company under a long-term
lease agreement. Broadwater Hotel, Inc. a wholly-owned subsidiary of the
Company ("BHI"), invested $5.0 million in PBLLC.
PBLLC financed the purchase of the Broadwater Property with $30.0 million of
financing from a third party lender, evidenced by a non-recourse promissory
note (the "Indebtedness") and issued a $10.0 million membership interest to
the seller. See Liquidity and Capital Resources for a discussion of the
restructuring of this obligation.
The Company has developed a master plan for the Broadwater Property.
Management believes that this site is ideal for the development of
"Destination Broadwater," a full-scale luxury destination resort offering an
array of entertainment attractions in addition to gaming. The plans for the
resort feature a village which will include a cluster of casinos, hotels,
restaurants, theaters and other entertainment attractions. Management
believes that with its beachfront location and contiguous golf course, the
property is the best site for such a development in the Gulf Coast market.
In January 1999, the Company received a permit from the Mississippi
Department of Marine Resources (the "DMR") for development of the full-scale
destination resort. This is the first of three permit approvals required of
the Joint Permit Application submitted in August 1998 to the DMR, the U.S.
Army Corps of Engineers (the "Corps") and the Mississippi Department of
Environment Quality. The two remaining permit approvals are still pending and
awaiting the completion of the Final Environmental Impact Statement ("EIS").
The Draft EIS has been completed, notice of which was posted in the Federal
Register in June 2000 for public comment. The current permit application to
the Corps was cancelled on June 10, 2002 pending re-submission of a revised
project design that reflects the changes resulting from the Company's work
with the Corps. The cancellation is an administrative measure which will
allow the Corps to remove the application from the Corps' pending action list,
and should not affect future evaluation of the permit request. The Company
anticipates submitting a revised plan. At that time, a new application number
will be assigned, and the evaluation of the permit request will resume.
In connection with the Company's proposed Destination Broadwater development
plan, to date the Company has not identified any specific financing
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alternatives or sources as the necessary regulatory approvals have not been
obtained. There can be no assurance that the Company will be able to obtain
the regulatory approvals or the requisite financing. Should the Company fail
to raise the required capital, such failure would materially and adversely
impact the Company's business plan.
Results of Operations
Three-Month Period Ended May 31, 2003 Compared to the
Three-Month Period Ended May 31, 2002
The results of operations for the three-month periods ended May 31, 2003 and
2002 include the gaming results for the Company's operations in St. Louis,
Missouri and Biloxi, Mississippi and of much lesser significance, the resort
operations in Biloxi (the "Broadwater Property").
The following table highlights the results of the Company's operations.
Three Months Ended May 31,
2003 2002
------ ------
(in millions)
St. Louis Operations
Operating revenues............. $ 19.0 $ 19.9
Operating income............... 1.9 2.1
Biloxi Operations
Operating revenues............. 13.1 13.5
Operating income............... 1.4 1.2
Corporate Administrative
and Development
Operating loss................. (0.8) (1.1)
Discontinued Leasing Operations
Operating loss................. (0.2) (0.5)
The following table highlights cash flows of the Company's operations.
Three Months Ended May 31,
2003 2002
------ ------
(in millions)
Cash flows provided by
operating activities........... $ 1.5 $ 1.0
Cash flows provided by (used in)
investing activities........... 3.1 (1.5)
Cash flows used in
financing activities........... (3.6) --
Cash paid for interest........... -- 0.1
Operating revenues. The Company generated consolidated net operating
revenues of $32.1 million for the three-month period ended May 31, 2003
compared to $33.4 million for the three-month period ended May 31, 2002, a
decrease of $1.3 million, or 3.9%. The St. Louis operations experienced a
decrease in revenue of $0.9 million and the Biloxi operations experienced a
decrease in revenue of $0.4 million.
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Gaming revenues at the Company's St. Louis operations decreased $0.3 million
during the three-month period ended May 31, 2003, compared to the prior year
period. The current year decrease is primarily the result of a casino
operator in the St. Louis market replacing its facility in August 2002 and
reopening with nearly double its former gaming positions. During the prior
year three-month period, the St. Louis operations were temporarily suspended
from May 13, 2002 to May 20, 2002, due to flood conditions on the Mississippi
River. However, the seven days of lost revenues from flooding were offset by
the overall increases in revenues. The key reasons for the increased St.
Louis revenues included an increase in downtown sporting events and resulting
influx of tourists, and the continued trend of increased capture of market
share in the Downtown St. Louis market since the relocation of the St. Louis
operations. Gaming revenues at the Company's Biloxi operations decreased $0.3
million during the three-month period ended May 31, 2003 compared to the prior
year period primarily as a result of decreased volume.
The Company's revenues from food and beverage were $3.5 million for both
three-month periods ended May 31, 2003 and 2002.
The Company's revenues from hotel, retail and other were $3.3 million for
the three-month period ended May 31, 2003, compared to $2.9 million for the
three-month period ended May 31, 2002, an increase $0.4 million, or 13.8%.
The increase was primarily attributable to an increase of $0.5 million in
hotel revenue due to increased casino promotions, offset by a decrease of
retail and other revenue of $0.1 million in St. Louis as the result of
downsizing the retail operations.
Promotional allowances were $6.7 million during the three-month period ended
May 31, 2003, compared to $5.7 million for the three-month period ended May
31, 2002, an increase of $1.0 million, or 17.5%. Promotional allowances in
St. Louis increased $0.4 million and increased in Biloxi $0.6 million. In St.
Louis, the increase is the result of an increase in cash back and coupon
promotions. In Biloxi, promotional allowances increased in room promotions
and food and beverage complementaries primarily in response to the competitive
environment.
Operating costs and expenses. The Company's consolidated gaming expenses
were $17.5 million during the three-month period ended May 31, 2003, compared
to $18.0 million during the three-month period ended May 31, 2002, a decrease
of $0.5 million, or 2.8%. The decrease in gaming costs was primarily
attributable to a $0.4 million decrease in gaming costs in St. Louis related
to payroll and payroll benefits. As a percentage of gaming revenues, gaming
costs decreased to 54.7% during the three-month period ended May 31, 2003 from
55.5% during the three-month period ended May 31, 2002.
The Company's consolidated food and beverage expenses were $2.1 million
during the three-month period ended May 31, 2003, compared to $2.3 million for
the three-month period ended May 31, 2002, a decrease of $0.2 million, or
8.7%. The St. Louis and Biloxi operations each contributed $0.1 million to
the decrease.
The Company's consolidated hotel, retail and other expenses were $0.8
million during the three-month period ended May 31, 2003 compared to $1.0
million during the three-month period ended May 31, 2002, a decrease of $0.2
million, or 20.0%. The St. Louis and Biloxi operations each contributed $0.1
million to the decrease. The St. Louis operations decrease in the result of
scaling back retail operations. The Biloxi operations decrease was the result
of a decrease in hotel expenses due to more rooms promotions, which resulted
in a large percent of room expense being attributed to gaming.
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The Company's consolidated selling, general and administrative expenses were
$7.1 million during the three-month period ended May 31, 2003, compared to
$7.6 million during the three-month period ended May 31, 2002, a decrease of
$0.5 million, or 6.6%. Selling, general and administrative expenses decreased
$0.2 million in St. Louis and $0.1 million in Biloxi. The decrease in St.
Louis is primarily the result of a decrease in payroll and payroll benefits
and changes made in the mix of advertising media. The Company's corporate
administration contributed a decrease of $0.2 million in selling, general and
administrative expenses as a result legal fees and settlement costs associated
with a lawsuit which was settled in May 2002 and legal costs associated with
legal fees and restructuring costs prior to the Company's filing the voluntary
petition for bankruptcy.
Depreciation and amortization expenses were $2.1 million during both three-
month periods ended May 31, 2003 and May 31, 2002.
Operating income. As a result of the foregoing items, the Company had
operating income of $2.5 million during the three-month period ended May 31,
2003, compared to operating income of $2.2 million during the three-month
period ended May 31, 2002.
Interest expense, net. The Company incurred net interest expense of $1.1
million during the three-month period ended May 31, 2003, compared to $3.8
million during the three-month period ended May 31, 2002, a decrease of $2.7
million. The decrease is the result of $2.7 million decrease in interest
expense resulting from June 20, 2002 voluntary petition under Chapter 11 of
the Bankruptcy Code, whereby the noteholders of the Senior Exchange Notes and
the Secured Notes were deemed by management to be undersecured and as a
result, interest ceased to accrue as of the date thereof.
Reorganization items, net. As a result of the bankruptcy proceedings, the
Company incurred $0.5 million of reorganization costs during the three-month
period ended May 31, 2003, compared to $0.2 million during the same period in
the prior year. The increase is the result of substantially all of the
Company's subsidiaries operating under Chapter 11 protection during the three-
month period ending May 31, 2003. During the three-month period ending May
31, 2002, the Company's Broadwater Property was the sole entity operating
under the protection of Chapter 11. The Company's Broadwater Property emerged
from Chapter 11 on May 28, 2003.
Minority interest expense. The Company incurred $0.3 million minority
interest expense for both three-month periods ended May 31, 2003 and May 31,
2002. During both periods the minority interest results from the Class B Unit
in PBLLC in which an entity wholly-owned by the Chairman of the Board of the
Company owns and has preferred rights to certain cash flows. Such amounts
were accrued but not paid. The Company incurred $0.3 million minority
interest expense for both three-month periods ended May 31, 2003 and May 31,
2002.
Discontinued operations. The Company sold one of two vessels accounted for
in its leasing segment during May 2003 and the second vessel is being
foreclosed on by the lender which holds a Preferred First Fleet Mortgage
collateralizing debt owed to the lender. With the disposal of both vessels,
representing all of the operating assets of the segment, the segment is
accounted for as discontinued operations in accordance with the Financial
Accounting Standards Board SFAS No. 144 "Accounting for the Impairment and
Disposal of Long-Lived Assets." The corporate leasing selling, general and
administrative expense decreased $0.3 million as a result of legal fees,
insurance and other maintenance costs associated with having repossessed the
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"Surfside Princess" (formerly, the "New Yorker") in October 2001.
Net loss. The Company had net income of $0.4 million for the three-month
period ended May 31, 2003, compared to a net loss of $2.7 million for the
three-month period ended May 31, 2002.
Liquidity and Capital Resources
The Company meets its working capital requirements from a combination of
internally generated sources including cash from operations and the sale or
charter of assets no longer used in the Company's casino operations.
As discussed above, the Company and its subsidiaries, with the exception of
PBLLC, are operating their businesses as debtors-in-possession under Chapter
11 of the Bankruptcy Code. In addition to the cash requirements necessary to
fund ongoing operations, the Company has incurred and anticipates that it will
continue to incur significant professional fees and other restructuring costs
in connection with the reorganization. As a result of the uncertainty
surrounding the Company's current circumstances, it is difficult to predict
the Company's actual liquidity needs and sources at this time. However, based
upon current and anticipated levels of operations, during the pendency of the
bankruptcy, management believes that its liquidity and capital resources will
be sufficient to maintain its normal operations at current levels. Costs
previously incurred and to be incurred in the future in connection with the
reorganization have been and will continue to be substantial and, in any
event, there can be no assurance that the Company will be able to reorganize
its indebtedness or that its liquidity and capital resources will be
sufficient to maintain its normal operations during the reorganization period.
The Company's access to additional financing is, and for the foreseeable
future will likely continue to be, very limited. Additionally, any
significant interruption or decrease in the revenues derived by the Company
from its operations would have a material adverse effect on the Company's
liquidity and the ability to maintain the Company's operations as presently
conducted.
As a result of the Company's high degree of leverage and the need for
significant capital expenditures at its St. Louis property, the Company was
unable to make the regularly scheduled interest payments of $6.4 million that
were each due and payable March 15 and September 15, 2000. Under the
Indentures pursuant to which the Senior Exchange Notes and Secured Notes were
issued, an Event of Default occurred on April 15, 2000, and is continuing as
of the date hereof. Additionally the Company did not make the $25.0 million
principal payment due September 15, 2000 on the Senior Exchange Notes. The
holders of at least 25% of the Senior Exchange Notes and Secured Notes were
notified and instructed the Indenture Trustee to accelerate the Senior
Exchange Notes and Secured Notes and on August 11, 2000, the holders declared
the unpaid principal and interest to be due and payable.
The Company was unable to make the principal and interest payments due
September 15, 2001 and has not made any subsequent principal or interest
payments. As of May 31, 2003, principal due on the Senior and Secured Notes
was $56.2 million and $18.8 million, respectively.
The Company requires approximately $6.5 million of cash on hand to fund
daily operations. As of May 31, 2003, the Company had $10.8 million of non-
restricted cash in excess of the $6.5 million. The Company is heavily
dependant on cash generated from operations to continue to operate as planned
25
28
in its existing jurisdictions and to make capital expenditures. Management
anticipates that its existing available cash and cash equivalents and its
anticipated cash generated from operations will be sufficient to fund all of
its ongoing operations. The debt obligations will be stayed during the
bankruptcy proceedings. To the extent cash generated from operations is less
than anticipated, the Company may be required to curtail certain planned
expenditures or seek other sources of financing.
The Company had $3.1 million in restricted cash as of May 31, 2003, which
includes $1.2 million in assets of discontinued operations. The discontinued
leasing operation had $1.2 million escrowed from the proceeds on the sale of
the "Surfside Princess." The Broadwater Property had $1.9 million escrowed
for payment of creditors related to its emergence from bankruptcy and funding
of various reserves as defined in its loan agreement. PBLLC deposits revenues
into lockboxes that are controlled by its lender. Expenditures from the
lockboxes are limited to the operating expenses, capital improvements, debt
service and pre-petition bankruptcy claims of the Broadwater Property as
defined by its loan agreement. Revenues of PBLLC include the operations of
the hotels and golf course and $3.2 million annually of proceeds from rental
of the Biloxi casino's mooring site.
The Company had $0.7 million in restricted short-term investments as of May
31, 2003, consisting of certificates of deposit guaranteeing certain
performance obligations of the Company's casino operations.
The Company generated $1.6 million of cash from operating activities during
the three-month period ending May 31, 2003 compared to $1.0 million during the
three-month period ending May 31, 2002.
Investing activities of the Company used $1.5 million of cash during the
three-month period ending May 31, 2003. The Company expended $0.6 million on
gaming equipment and capital improvements, of which approximately $0.5 million
and $0.1 million was expended in St. Louis and Biloxi, respectively.
In conjunction with the purchase of the Broadwater Property, PBLLC borrowed
the sum of $30.0 million from a third party lender, evidenced by a non-
recourse promissory note (the "Indebtedness"). PBLLC was obligated under the
Indebtedness to make monthly payments of interest accruing under the
Indebtedness, and was obligated to repay the Indebtedness in full on July 22,
2000. In addition, PBLLC was obligated to pay to the lender a loan fee in the
amount of $7.0 million which was fully earned and non-refundable when the
Indebtedness became due. As of the default date, the PBLLC accrued, but did
not pay, interest on the unpaid loan fee at the stipulated rate. PBLLC
continued to make the monthly interest payments accruing on the $30.0 million
principal through April 19, 2001, when the Company announced that PBLLC had
filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the
United States Bankruptcy Court for the Southern District of Mississippi.
On October 16, 2001, PBLLC filed its plan of reorganization which would
permit PBLLC to restructure its debt obligations in a manner which was
designed to permit it to continue as a going concern. Subsequently, on
February 28, 2003, PBLLC filed Modifications to Debtor's Plan of
Reorganization (together with the reorganization plan, the "Modified Plan").
On May 14, 2003, the Mississippi Bankruptcy Court entered the confirmation
order confirming the Modified Plan. The Modified Plan became effective on May
28, 2003 and the Company consummated the Modified Plan at that time. The
Modified Plan provides that the unsecured creditors of PBLLC will receive 100%
of their claims. Under the Modified Plan, the obligations to Lehman were
modified with respect to the debt amount, the interest rate and the due date.
26
29
The term note payable is collateralized by the vessel M/V "President Casino-
Mississippi" and various equipment and is personally guaranteed by Mr.
Connelly. This note also contains certain covenants which, among other
things, require the Company to maintain a minimum tangible net worth of $40.0
million. The aforementioned default on the Company's Senior Exchange Notes
and Secured Notes also constituted a default under this note. Under the terms
of the term note payable, $2.1 million principal became due and payable in
August 2002. In November 2002, the lender brought an action against Mr.
Connelly for breach of contract under his personal guarantee. In January
2003, the Mississippi Bankruptcy Court granted a motion to relieve the lender
from the automatic stay in order to enforce its rights under the Preferred
Fleet Ship Mortgage, including but not limited to the right of the lender to
seize and sell the vessel. In May 2003, the lender filed a motion with the
United States District Court of Southern Illinois for an order directing the
Clerk of Court to issue a warrant for the arrest of the M/V "President Casino-
Mississippi" pursuant to rules of admiralty and maritime claims. On May 20,
2003, the Court executed the warrant, which will allow the vessel to be seized
and sold. On June 11, 2003, a United States Marshall served the warrant on
the vessel.
In connection with the Company's proposed "Destination Broadwater"
development plan, to date, the Company has not identified any particular
financing alternatives or sources as the necessary regulatory approvals have
not been obtained. There can be no assurance that the Company will be able to
obtain the regulatory approvals or the requisite financing. Should the
Company fail to raise the required capital, such failure would materially and
adversely impact the Company's business plan.
Critical Accounting Policies
--Significant Accounting Policies and Estimates
The Company prepares the consolidated financial statements in conformity
with accounting principles generally accepted in the United States. Certain
of the Company's accounting policies, including the determination of bad debt
reserves, the estimated useful lives assigned to property, plant and
equipment, asset impairment, insurance reserves and player point liability
require that management apply significant judgment in defining the appropriate
assumptions for calculating financial estimates. By their nature, these
judgments are subject to an inherent degree of uncertainty. Management's
judgments are based on historical experience, terms of existing contracts,
observance of trends in the gaming industry and information available from
other outside sources. There can be no assurance that actual results will not
differ from the Company's estimates. To provide an understanding of the
methodology applied, significant accounting policies and basis of presentation
are discussed where appropriate in this discussion and analysis and in the
notes of the consolidated financial statements.
The carrying values of the Company's assets are reviewed when events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Asset impairment is determined to exist if estimated future
cash flows, undiscounted and without interest charges, are less than the
carrying amount. If it is determined that an impairment loss has occurred,
then an impairment loss is recognized in the statement of operations. The
resulting impairment loss is measured as the amount by which the carrying
amount of the asset exceeds its fair value, estimated using quoted market
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30
prices, if available, or other acceptable valuation methodologies, including
discounted cash flows or comparable sales.
Forward Looking Statements
This Quarterly Report on Form 10-Q and certain information provided
periodically in writing and orally by the Company's designated officers and
agents contain certain statements which constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933,
as amended and Section 21E of the Securities Exchange Act of 1934, as amended.
The terms "Company," "we," "our" and "us" refer to President Casinos, Inc.
The words "expect," "believe," "goal," "plan," "intend," "estimate," and
similar expressions and variations thereof are intended to specifically
identify forward-looking statements. Those statements appear in this
Quarterly Report on Form 10-Q and the documents incorporated herein by
reference, particularly "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and include statements regarding the
intent, belief or current expectations of the Company, its directors or its
officers with respect to, among other things: (i) our financial prospects;
(ii) our financing plans and our ability to meet our obligations under our
debt obligations and obtain satisfactory operating and working capital; (iii)
our operating and restructuring strategy; and (iv) the effect of competition
and regulatory developments on our current and expected future revenues. You
are cautioned that any such forward looking statements are not guarantees of
future performance and involve risks and uncertainties, and that actual
results may differ materially from those projected in the forward looking
statements as a result of various factors. The factors that might cause such
differences include, among others, the following: (i) continuation of future
operating and net losses by the Company; (ii) the inability of the Company to
restructure its debt obligations and facilitate its and its subsidiaries
successful emergence from bankruptcy; (iii) the inability of the Company to
obtain sufficient cash from its operations and other resources to fund ongoing
obligations and continue as a going concern; (iv) the ability of the Company
to develop, prosecute, confirm and consummate one or more plans of
reorganization with respect to the Chapter 11 case; (v) the ability of the
Company to obtain trade credit, and shipments and terms with vendors and
service providers; (vi) the Company's ability to maintain contracts that are
critical to its operations; (vii) potential adverse developments with respect
to the Company's liquidity and results of operations; (viii) developments or
new initiatives by our competitors in the markets in which we compete; (ix)
our stock price; (x) adverse governmental or regulatory changes or actions
which could negatively impact our operations; and (xi) other factors including
those identified in the Company's filings made from time-to-time with the
Securities and Exchange Commission. The Company undertakes no obligation to
publicly update or revise forward looking statements to reflect events or
circumstances after the date of this Quarterly Report on Form 10-Q or to
reflect the occurrence of unanticipated events.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As of May 31, 2003, the Company had $122.5 million of debt. Of this amount
$75.0 million bears interest at fixed rates. The remaining $47.5 million
bears interest at variable rates. The $45.4 million Broadwater Property note
payable bears interest at a stipulated variable rate of 12.75% per annum until
the obligation is satisfied. The maturity date is June 1, 2005. Interest is
payable during the term of the loan on the adjusted loan amount of $40.4
million at a rate of the greater of 7.75% or LIBOR plus 4% per annum floating.
The M/V "President Casino-Mississippi" note payable of $2.1 million bears
interest at 2.0% over the prime rate of J.P. Morgan Chase & Company. As of
May 31, 2003, the average interest rate applicable to the debt carrying
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31
variable rates was 7.63%. An increase of one percentage point in the average
interest rate applicable to the variable rate debt outstanding as of May 31,
2003, would increase the Company's annual interest costs by approximately $0.4
million. The Company continues to monitor interest rate markets, but has not
engaged in any hedging transactions with respect to such risks.
Although the Company manages its short-term cash assets to maximize return
with minimal risk, the Company does not invest in market rate sensitive
instruments for trading or other purposes and the Company is not exposed to
foreign currency exchange risks or commodity price risks in its transactions.
Item 4. Controls and Procedures
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and participation of the Company's
management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to
be included in the Company's periodic filings with the United States
Securities and Exchange Commission.
Part II. Other Information
Item 1. Legal Proceedings
Information with respect to legal proceedings to which the Company is a
party is disclosed in Note 8 of Notes to Condensed Consolidated Financial
Statements included in Part I of this report and is incorporated herein by
reference.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
The Company has 13.0% Senior Exchange Notes and 12.0% Secured Notes. The
Company did not pay the regularly scheduled interest payments of $6.4 million
that were each due and payable March 15 and September 15, 2000. Under the
Indentures pursuant to which the Senior Exchange Notes and Secured Notes were
issued, an Event of Default occurred on April 15, 2000, and is continuing as
of the date hereof. Additionally, the Company did not pay the $25.0 million
principal payment due September 15, 2000 on the Senior Exchange Notes. In
November 2000, the Company paid (i) $12.8 million interest and (ii) $18.75
million and $6.25 million principal on the Senior Exchange Notes and Secured
Notes, respectively. The Company did not make the interest payments due
September 15, 2001 and March 15, 2002. On June 20, 2002, the Company filed a
voluntary petition for reorganization under Chapter 11 of the bankruptcy code.
The noteholders of the Senior Exchange Notes and the Secured Notes were deemed
by management to be undersecured and as a result, interest ceased to accrue as
of the date of thereof. Total arrearage as of June 20, 2002, was $56.25
million of principal and $9.3 million of interest on the Senior Exchange Notes
and $18.75 million of principal and $2.8 million of interest on the Secured
Notes.
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Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits filed as part of this report are listed on Index to
Exhibits accompanying this report.
(b) Reports on Form 8-K
On May 30, 2003, the Company filed a Current Report on Form 8-K
dated May 29, 2003, reporting under Item 9 the Company issued a
press release on May 29, 2003 reporting the Company's financial
results for the fourth quarter and year ended February 28, 2003.
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SIGNATURE
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.
President Casinos, Inc.
-----------------------------
(Registrant)
Date: July 14, 2002 /s/ Ralph J. Vaclavik
-----------------------------
Ralph J. Vaclavik
Senior Vice President and
Chief Financial Officer
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34
CERTIFICATION
I, John E. Connelly, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of President Casinos,
Inc.;
(2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
in order to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report; and
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period for which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Effective Date;
(5) The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
(6) The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
32
35
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: July 14, 2003 /s/ John E. Connelly
-------------------------------------------
John E. Connelly
Chief Executive Officer of
President Casinos, Inc.
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36
CERTIFICATION
I, Ralph J. Vaclavik, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of President Casinos,
Inc.;
(2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
in order to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report; and
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period for which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Effective Date;
(5) The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
(6) The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
34
37
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: July 14, 2003 /s/ Ralph J. Vaclavik
-------------------------------------------
Ralph J. Vaclavik
Chief Financial Officer of
President Casinos, Inc.
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INDEX TO EXHIBITS
-----------------
EXHIBIT NO.
3.1 Restated Articles of Incorporation of the Company. (8)
3.2 By-Laws of the Company, as amended. (4)
4.1 Indenture dated as of August 26, 1994, by and among the Company,
the Guarantors and United States Trust Company of New York ("U.S.
Trust"). (3)
4.1.1 Form of Senior Exchange Note issued pursuant to Indenture. (2)
4.1.2 Warrant Agreement dated as of September 23, 1993, by and between
the Company and U.S. Trust, as Warrant agent. (1)
4.1.3 Warrant Agreement dated as of August 26, 1994, by and between the
Company and U.S. Trust. (3)
4.1.4 Subsidiary Stock Pledge and Collateral Assignment Agreement dated
as of August 26, 1994, by the Company and Subsidiary Pledgors in
favor of U.S. Trust, as collateral agent. (3)
4.2 Rights Agreement, dated as of November 20, 1997, between the
Company and ChaseMellon Shareholder Services, LLC. (5)
4.3 Agreement to Exchange Securities, dated December 3, 1998 by and
among the Company, President Riverboat Casino-Iowa, Inc.
("President Iowa"), President Riverboat Casino-Missouri, Inc.
("President Missouri"), The President Riverboat Casino-
Mississippi, Inc. ("President Mississippi"), Blackhawk, P.R.C.-
Louisiana, Inc., President Riverboat Casino-New York, Inc.
("President New York"), President Casino New Yorker, Inc., PRC
Holdings Corporation, PRC Management, Inc. ("PRC Management"),
PRCX Corporation, President Riverboat Casino-Philadelphia, Inc.
("President Philadelphia"), Vegas Vegas, Inc., and TCG and each
holder of the Company's 13% Senior Exchange Notes due 2001. (6)
4.3.1 Indenture dated as of December 3, 1998, among The Company,
President Iowa, President Missouri, President Mississippi,
Blackhawk, P.R.C.-Louisiana, Inc., President New York, President
Casino New Yorker, Inc., PRC Holdings Corporation, PRC Management,
PRCX Corporation, President Philadelphia, Vegas Vegas, Inc. and
TCG and U.S. Trust Company of Texas, N.A. (6)
4.4.2 President Casinos, Inc. Supplemental Indenture with respect to
$25,000,000 12% Notes due September 15, 2001. (7)
4.4.3 President Casinos, Inc. Supplemental Indenture with respect to
$75,000,000 13% Senior Notes due September 15, 2001. (7)
10.1 Amended and Restated Promissory Note dated as of May 28, 2003 by
and between President Broadwater Hotel, LLC and Lehman Brothers
Holdings Inc.
10.2 Amended and Restated Deed of Trust, Security Agreement and
Fixture Filing made as of the 28th day of May, 2003, by
President Broadwater Hotel, LLC for the benefit of Lehman
Brothers Holdings Inc.
10.3 Amended and Restated Security Agreement and Lockbox Agreement
dated as of May 28,2003 by and among President Broadwater Hotel,
LLC, Lehman Brothers Holdings Inc. and TriMont Real Estate
Advisors.
10.4 Amended and Restated Security Agreement and Assignment of
Contractual Agreements Affecting Real Estate made as of May 28,
2003, by President Broadwater Hotel, LLC in favor of Lehman
Brothers Holdings Inc.
99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
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99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
(1) Incorporated by reference from the Company's Registration Statement on
Form S-4 (File No. 33-71332) filed November 5, 1993.
(2) Incorporated by reference from the Company's Registration Statement on
Form S-8 dated June 8, 1994.
(3) Incorporated by reference from the Company's Registration Statement on
Form S-4 (File No. 33-86386) filed November 15, 1994.
(4) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the quarterly period ended August 31, 1997 filed October 10,
1997.
(5) Incorporated by reference from the Company's Registration Statement on
Form 8-A dated December 5, 1997.
(6) Incorporated by reference from the Company's Report on Form 8-K
dated December 15, 1998.
(7) Incorporated by reference from the Company's Report on Form 8-K dated
November 22, 2000.
(8) Incorporated by reference from the Company's Registration Statement on
Form S-8 dated October 10, 2001.
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