1
==============================================================================
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 August 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.
------------------------------------------------------
(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
----------------------------------------------------
Address of principal executive offices-Zip Code
314-622-3000
----------------------------------------------------
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 October 10, 2003.
==============================================================================
2
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 August 31 and February 28, 2003...............................1
Condensed Consolidated Statements of Operations (Unaudited)
for the Three and Six Months Ended August 31, 2003
and 2002............................................................2
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Six Months Ended August 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.................16
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 and Use of Proceeds.....................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
3
Part I. Financial Information
Item 1. Financial Statements
PRESIDENT CASINOS, INC.
(DEBTORS-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share data)
Aug. 31, Feb. 28,
2003 2003
-------- --------
ASSETS
Current assets:
Cash and cash equivalents...................... $ 19,967 $ 16,120
Restricted cash................................ 2,170 5,304
Restricted short-term investments.............. 350 712
Accounts receivable, net of allowance for
doubtful accounts of $186 and $281........... 518 659
Other current assets........................... 6,185 3,960
--------- ---------
Total current assets....................... 29,190 26,755
--------- ---------
Property and equipment, net of accumulated
depreciation of $61,938 and $58,764............ 88,472 91,730
Assets of discontinued operations............... 1,926 2,349
--------- ---------
$119,588 $120,834
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable............................... $ 1,368 $ 1,340
Accrued payroll and benefits................... 3,551 3,866
Accrued interest............................... 480 9,818
Accrued loan fee............................... -- 7,000
Other accrued liabilities...................... 5,358 6,100
Liabilities from discontinued operations....... 619 305
Current maturities of long-term debt........... -- 30,000
--------- ---------
Total current liabilities.................. 11,376 58,429
Long-term liabilities............................ 45,429 --
--------- ---------
Total liabilities not
subject to compromise.................... 56,805 58,429
Liabilities subject to compromise................ 110,662 111,340
--------- --------
Total liabilities.......................... 167,467 169,769
--------- --------
Minority interest................................ 1,333 679
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............................ (151,243) (151,645)
--------- ---------
Total stockholders' deficit................ (49,212) (49,614)
--------- ---------
$119,588 $120,834
========= =========
See Notes to Condensed Consolidated Financial Statements.
1
4
PRESIDENT CASINOS, INC.
(DEBTORS-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
Three Months Six Months
Ended August 31, Ended August 31,
2003 2002 2003 2002
------ ------ ------ ------
OPERATING REVENUES:
Gaming................................... $ 30,781 $ 31,370 $ 62,744 $ 63,944
Food and beverage........................ 3,454 3,461 6,958 7,009
Hotel.................................... 2,183 1,817 4,288 3,471
Retail and other......................... 955 1,060 2,146 2,352
Less promotional allowances.............. (6,230) (5,753) (12,894) (11,440)
--------- --------- --------- ---------
Net operating revenues................. 31,143 31,955 63,242 65,336
--------- --------- --------- ---------
OPERATING COSTS AND EXPENSES:
Gaming................................... 16,923 18,073 34,401 36,127
Food and beverage........................ 2,091 2,296 4,169 4,623
Hotel.................................... 300 374 559 749
Retail and other......................... 471 611 1,034 1,275
Selling, general and administrative...... 7,322 7,517 14,413 15,133
Depreciation and amortization............ 2,011 2,019 4,095 4,108
Development costs........................ -- 63 -- 110
--------- --------- --------- ---------
Total operating costs and expenses..... 29,118 30,953 58,671 62,125
--------- --------- --------- ---------
OPERATING INCOME........................... 2,025 1,002 4,571 3,211
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense (contractual interest
of $3,880 and $3,873 for the three-
month periods and $7,981 and $7,715
for the six-month periods)............. (853) (1,749) (1,953) (5,562)
Interest income.......................... 33 61 71 114
Reorganization items, net................ (394) (468) (900) (686)
Gain (loss) on disposal of property
and equipment.......................... 25 -- (5) (23)
--------- --------- --------- ---------
Total other expense.................... (1,189) (2,156) (2,787) (6,158)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE MINORITY INTEREST
AND DISCONTINUED OPERATIONS.............. 836 (1,154) 1,784 (2,947)
Minority interest.......................... 313 324 654 639
--------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS... 523 (1,478) 1,130 (3,586)
--------- --------- --------- ---------
Loss from discontinued operations.......... (481) (478) (728) (1,053)
--------- --------- --------- ---------
NET INCOME (LOSS).......................... $ 42 $ (1,956) $ 402 $ (4,639)
========= ========= ========= =========
Basic and diluted net income (loss) per
share from continuing operations........ $ 0.10 $ (0.29) $ 0.22 $ (0.71)
Basic and diluted net loss per share
from discontinued operations............ $ (0.10) $ (0.10) $ (0.14) $ (0.21)
--------- --------- --------- ---------
Basic and diluted net loss per share....... $ -- $ (0.39) $ 0.08 $ (0.92)
========= ========= ========= =========
Weighted average common and dilutive
potential shares outstanding.............. 5,033 5,033 5,033 5,033
========= ========= ========= =========
See Notes to Condensed Consolidated Financial Statements.
2
5
PRESIDENT CASINOS, INC.
(DEBTORS-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Six Months Ended August 31,
2003 2002
------ ------
Net cash provided by continuing
operating activities........................... $ 4,774 $ 5,118
--------- ---------
Cash flows from investing activities of
continuing operations:
Expenditures for property and equipment....... (868) (2,946)
Maturity of short-term investments............ 322 63
Change in restricted cash..................... 3,133 499
Proceeds from sales of property and equipment. 27 7
--------- ---------
Net cash provided by (used in) investing
activities of continuing operations....... 2,614 (2,377)
--------- ---------
Cash flows from financing activities of
continuing operations:
Repayment of notes payable.................... (3,551) (5)
Payment of minority interest.................. -- (68)
--------- ---------
Net cash used in financing activities
of continuing operations.................. (3,551) (73)
--------- ---------
Net cash provided by (used in)
discontinued operations......................... 10 (891)
--------- ---------
Net increase in cash and cash equivalents......... 3,847 1,777
Cash and cash equivalents at beginning of period.. 16,120 10,110
--------- ---------
Cash and cash equivalents at end of period........ $ 19,967 $ 11,887
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.......................... $ 409 $ 82
========= =========
See Notes to Condensed Consolidated Financial Statements.
3
6
PRESIDENT CASINOS, INC.
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data and unless otherwise stated)
1. BANKRUPTCY PROCEEDINGS
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. As described below, the Company and
its subsidiaries are currently in bankruptcy proceedings and certain of its
assets are being realized upon by its creditors. At this time it is not
possible to accurately predict what, if any, value will remain after the
Company's creditors have realized upon the Company assets. 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. 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
to assume or reject real estate leases, employment contracts, personal
4
7
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. 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
proceedings. 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
5
8
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 agreed that the Company would 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 outlined a process
and timetable under which the Company's St. Louis operations would be sold in
the event that a recapitalization of the Company was not completed as set
forth in the Term Sheet. As part of such process, the Company was 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.
Pursuant to the Term Sheet provisions and the agreement of the Company, the
Committee and the Bondholders, on September 25, 2003, the Company entered into
an agreement with Isle of Capri Casinos, Inc. to sell the assets of its St.
Louis operations for approximately $50,000. The agreement will be submitted
to the Missouri Bankruptcy Court for approval and will be subject to higher
and better bids being submitted by qualified third parties. The closing of
the transaction is subject to satisfaction of various conditions including
approval and licensing by the Missouri Gaming Commission.
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. 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 in
Mississippi. 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 remaining assets. The Company's ability to
continue as a going concern is dependent on its ability to restructure
6
9
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 August 31, 2003, the Company had $19,967 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.
The financial statements contained herein should be read in conjunction with
7
10
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. See "Note 8. Commitments and
Contingent Liabilities."
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" collateralize 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."
The Company has entered into a contract to sell to an unrelated party the
Broadwater Property golf course. The golf course purchase price is $13,000
before closing adjustments. The transaction is subject to contingencies which
generally expire on October 15, 2003. The transaction is scheduled to close
October 28, 2003. It is anticipated that the net proceeds from the sale of
the golf course will be used to partially pay down the principal on the
Indebtedness of PBLLC. The ownership of the golf course is not essential to
the accomplishment of the Company's development plan.
5. LONG-TERM DEBT AND CURRENT PORTION OF LONG-TERM DEBT
As of August 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 maturities 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 is classified as long-term debt as of August 31, 2003.
8
11
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
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. 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"). On May 28, 2003, the Company paid Lehman $3,551 pursuant to
the Modified Plan. As of August 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 August 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
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
9
12
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. Currently management anticipates that it will meet these
cash flow requirements. 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:
Aug. 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........................ 2,100 2,100
Minority interest............................... 15,669 15,669
Accrued interest................................ 13,719 13,728
Accounts payable and other accrued expenses..... 4,174 4,843
--------- ---------
Total liabilities subject to compromise...... $110,662 $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 and was zero as of August 31, 2003. 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
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.
10
13
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. On September 22, 2003, the Court entered an
order in favor of the lender and ordering the vessel to be sold. 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 August 31, 2003, all reorganization items consist of professional fees
and U.S. Trustee fees.
7. STOCK-BASED COMPENSATION
As of August 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 August 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 six-month period ended
August 31, 2003 or fiscal year 2003.
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
11
14
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."
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. A motion
to stay pending the Company's bankruptcy proceedings has been filed. Although
the outcome of litigation is inherently uncertain, 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 alleged breach of the
charter. Subsequent proceedings followed in which various parties claimed
various rights with respect to the vessel and its contents.
On October 19, 2001, Southern Gaming filed suit in the United States
District of the 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 existed 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. A mutual release and settlement agreement has been
12
15
circulated among the parties and is expected to be fully executed by October
15, 2003. Included in discontinued operations is a $450 accrual to reflect
the outcome of this litigation.
--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.
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 6. Liabilities Subject to Compromise and Reorganization
Items, Net." 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 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:
Aug. 31, Feb. 28,
2003 2003
------ ------
Cash and cash equivalents.................. $ 40 $ 39
Restricted cash............................ 1,198 --
Prepaid assets............................. -- 60
Property and equipment..................... 688 2,250
-------- --------
$ 1,926 $ 2,349
======== ========
Accounts payable........................... $ 77 $ 173
Other accrued liabilities.................. 542 132
-------- --------
$ 619 $ 305
======== ========
In addition, the $2,100 M/V "President-Mississippi" note payable which is
collateralized by the vessel being foreclosed on discussed above and $62 in
other pre-petition liabilities, is included in liabilities subject to
compromise for both periods presented.
10. SEGMENT INFORMATION
The Company's reportable segments from continuing 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.
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.
13
16
Three Months Six Months
Ended August 31, Ended August 31,
2003 2002 2003 2002
------ ------ ------ ------
OPERATING REVENUES:
St. Louis operations................... $ 18,168 $ 18,612 $ 37,212 $ 38,507
Biloxi operations...................... 12,975 13,343 26,030 26,829
--------- --------- --------- ---------
Net operating revenues............... $ 31,143 $ 31,955 $ 63,242 $ 65,336
========= ========= ========= =========
Three Months Six Months
Ended August 31, Ended August 31,
2003 2002 2003 2002
------ ------ ------ ------
OPERATING INCOME (LOSS):
St. Louis operations................... $ 1,609 $ 810 $ 3,463 $ 2,835
Biloxi operations...................... 1,146 1,398 2,592 2,643
--------- --------- --------- ---------
Gaming and ancillary operations...... 2,755 2,208 6,055 5,478
Corporate administration............... (730) (1,143) (1,484) (2,157)
Corporate development.................. -- (63) -- (110)
--------- --------- --------- ---------
OPERATING INCOME....................... $ 2,025 $ 1,002 $ 4,571 $ 3,211
========= ========= ========= =========
A summary of assets by segment, is as follows:
Aug. 31, Feb. 28,
2003 2003
------ ------
St. Louis operations.................... $ 50,440 $ 47,917
Biloxi operations....................... 61,194 63,562
--------- ---------
Gaming and ancillary operations....... 111,634 111,479
Corporate assets........................ 2,769 3,747
Development assets...................... 3,259 3,259
Discontinued operations................. 1,926 2,349
--------- ---------
Net assets.......................... $119,588 $120,834
========= =========
14
17
A summary of net property and equipment and additions to property and
equipment, by segment, is as follows:
Aug. 31, Feb. 28,
2003 2003
------ ------
Property and Equipment:
St. Louis operations.................. $ 34,111 $ 36,540
Biloxi operations..................... 51,092 51,919
--------- ---------
Gaming and ancillary operations.... 85,203 88,459
Corporate assets...................... 10 12
Development assets.................... 3,259 3,259
--------- ---------
Net Property and Equipment........ $ 88,472 $ 91,730
========= =========
Six Months Ended Aug. 31,
2003 2002
------ ------
Additions to Property and Equipment:
St. Louis operations.................. $ 636 $ 2,324
Biloxi operations..................... 211 601
--------- ---------
Gaming and ancillary operations..... 847 2,925
Corporate assets...................... -- --
Development assets.................... -- 21
--------- ---------
$ 847 $ 2,946
========= =========
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 August 31, 2003, the Company's guarantee was $524.
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.
15
18
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., 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 August 31, 2003, principal due on the
Senior and Secured Notes was $56.2 million and $18.8 million, respectively.
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.
Pursuant to the Term Sheet provisions and the agreement of the Company, the
Committee and the Bondholders, on September 25, 2003, the Company entered into
an agreement with Isle of Capri Casinos, Inc. to sell the assets of its St.
Louis operations for approximately $50.0 million. The agreement will be
submitted to the Missouri Bankruptcy Court for approval and will be subject to
higher and better bids being submitted by qualified third parties. The
closing of the transaction is subject to satisfaction of various conditions
16
19
including approval and licensing by the Missouri Gaming Commission.
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
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.
17
20
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. In September 2003, the City and the County of St. Louis, which
are separate political and geographic subdivisions, announced that they were
both issuing Requests for Proposals for a new casino in both jurisdictions.
At this time, it is not possible to predict what impact this may have on the
St. Louis operation, but Management believes that any new casino would be
opened substantially after the time the Company anticipates the St. Louis
operation will be sold.
--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
18
21
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 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 canceled 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
alternatives or sources as the necessary regulatory approvals have not been
19
22
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.
The Company has entered into a contract to sell to an unrelated party the
golf course. The golf course purchase price is $13.0 million before closing
adjustments. The transaction is subject to contingencies which generally
expire on October 15, 2003. The transaction is scheduled to close October 28,
2003. It is anticipated that the net proceeds from the sale of the golf
course will be used to partially pay down the principal on the Indebtedness of
PBLLC. The ownership of the golf course is not essential to the
accomplishment of the Company's development plan.
Results of Operations
The results of operations for the three-month and six-month periods ended
August 31, 2003 and 2002 include the gaming results for the Company's
operations in Biloxi, Mississippi and St. Louis, Missouri and of a lesser
significance, the hotel operations in Biloxi (the Broadwater Property).
The following table highlights the results of the Company's operations.
Three Months Six Months
Ended August 31, Ended August 31,
2003 2002 2003 2002
------ ------ ------ ------
(in millions)
St. Louis, Missouri Operations
Operating revenues $ 18.2 $ 18.6 $ 37.2 $ 38.5
Operating income 1.6 0.8 3.5 2.8
Biloxi, Mississippi Operations
Operating revenues $ 12.9 $ 13.3 $ 26.0 $ 26.8
Operating income 1.1 1.4 2.5 2.7
Corporate Administrative and
Development operating loss $ (0.7) $ (1.2) $ (1.5) $ (2.3)
The following table highlights cash flows of the Company's operations.
Six Months
Ended August 31,
2003 2002
------ ------
(in millions)
Cash flows provided by
operating activities $ 4.5 $ 4.3
Cash flows provided by (used in)
investing activities 2.9 (2.4)
Cash flows used in
financing activities (3.6) (0.1)
Cash paid for interest 0.4 0.1
20
23
Three-Month Period Ended August 31, 2003 Compared to the
Three-Month Period Ended August 31, 2002
Net operating revenues. The Company generated consolidated net operating
revenues of $31.1 million during the three-month period ended August 31, 2003
compared to $32.0 million during the three-month period ended August 31, 2002.
The St. Louis operations experienced a decrease in revenue of $0.5 million and
the Biloxi operations experienced a decrease in revenue of $0.4 million.
Gaming revenues from the Company's St. Louis operations decreased $0.3
million, or 1.3%, during the three-month period ended August 31, 2003,
compared to the same period of the prior year. Gaming revenues at the
Company's Biloxi operations decreased $0.3 million, or 2.7%, during the three-
month period ended August 31, 2003 compared to the three-month period ended
August 31, 2002.
The Company's revenues from food and beverage were $3.5 million during both
three-month periods ended August 31, 2003 and 2002.
The Company's revenues from hotel, retail and other were $3.1 million during
the three-month period ended August 31, 2003, compared to $2.9 million during
the three-month period ended August 31, 2002. The increase was primarily
attributable to an increase of hotel revenue of approximately $0.4 million as
a result of an increase in hotel promotions offered by the casino.
Promotional allowances were $6.2 million during the three-month period ended
August 31, 2003, compared to $5.7 million during the three-month period ended
August 31, 2002, an increase of $0.5 million, or 8.8%. The increase in
promotional allowances was primarily attributable to Biloxi responding to the
competitive pressures in the market.
Operating costs and expenses. The Company's consolidated gaming costs and
expenses were $16.9 million during the three-month period ended August 31,
2003 compared to $18.1 million during the three-month period ended August 31,
2002. The decrease in gaming costs was primarily attributable to a $1.1
million decrease in St. Louis in gaming costs as a result of a $0.6 million
decrease in payroll and benefit costs, $0.2 million reduction in repairs and
maintenance and costs associated with the prior year high water levels, $0.1
million reduction in slot machine lease expense and a $0.1 million decrease in
gaming and admissions taxes resulting from decreased gaming revenues. Biloxi
operations had a $0.1 million decrease in gaming costs primarily attributable
to a decrease in gaming taxes resulting from a decrease in gaming revenues and
a decrease in lease expense related slot machines. As a percentage of gaming
revenues, gaming costs decreased to 54.9% during the three-month period ended
August 31, 2003 from 61.8% during the three-month period ended August 31, 2002
due primarily to these changes.
The Company's consolidated food and beverage expenses were $2.1 million
during the three-month period ended August 31, 2003, compared to $2.3 million
during the three-month period ended August 31, 2002, a decrease of $0.2
million, or 8.7%. The decrease is attributable to a decrease in payroll and
benefit costs at the Company's St. Louis operations.
The Company's consolidated hotel, retail and other expenses were $0.8
million during the three-month period ended August 31, 2003, compared to $1.0
million during the three-month period ended August 31, 2002, a decrease of
21
24
$0.2 million, or 20.0%. The decrease is attributable to scaling back retail
operations in St. Louis.
The Company's consolidated selling, general and administrative expenses were
$7.3 million during the three-month period ended August 31, 2003, compared to
$7.5 million during the three-month period ended August 31, 2002, a decrease
of $0.2 million, or 2.7%. The St. Louis casino operations and the Biloxi
operations each contributed a $0.1 million increase in selling, general and
administrative expenses. These increases were offset by a decrease of $0.4
million in corporate overhead. Corporate overhead decreased primarily as a
result of a $0.3 million severance agreement with a former executive recorded
during the three-month period ended August 31, 2002.
Depreciation and amortization expenses were $2.0 million during both three-
month periods ended August 31, 2003 and 2002.
Operating income. As a result of the foregoing items, the Company had
operating income of $2.0 million for the three-month period ended August 31,
2003, compared $1.0 million for the three-month period ended August 31, 2002.
Interest expense, net. The Company incurred net interest expense of $0.8
million during the three-month period ended August 31, 2003, compared to $1.7
million during the three-month period ended August 31, 2002, a decrease of
$0.9 million. The decrease is the result of $0.6 million decrease in interest
expense resulting from the 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. Additionally, there
was a $0.3 million decrease in interest expense related to the restructuring
of the PBLLC debt and the corresponding reduction in the interest rate.
Reorganization items, net. The Company incurred reorganization costs of
$0.4 million during the three-month period ended August 31, 2003, compared to
$0.5 million during the three-month period ended August 31, 2002. On April
19, 2001, PBLLC filed a voluntary bankruptcy petition for bankruptcy and began
incurring costs associated with its reorganization. On June 20, 2002, the
Company's parent company and PRC-Missouri filed voluntary petitions and in
July 2002, substantially all of the Company's other operating subsidiaries
filed voluntary petitions. On May 28, 2003, PBLLC emerged from bankruptcy.
Costs associated with the reorganizations consist of professional fees and
U.S. Trustee fees.
Minority interest expense. The Company incurred $0.3 million minority
interest expense for both three-month periods ended August 31, 2003 and 2002.
During both periods the minority interest results from the priority return on
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.
Net income/loss. The Company recognized no net income or loss during the
three-month period ended August 31, 2003, compared to a net loss of $2.0
million during the three-month period ended August 31, 2002.
22
25
Six-Month Period Ended August 31, 2003 Compared to the
Six-Month Period Ended August 31, 2002
Net operating revenues. The Company generated net consolidated operating
revenues of $63.2 million during the six-month period ended August 31, 2003
compared to $65.3 million during the six-month period ended August 31, 2002.
The St. Louis and Biloxi operations experienced decreases in operating
revenues of $1.3 million and $0.8 million, respectively.
Gaming revenues from the Company's St. Louis casino operations decreased
$0.6 million during the six-month period ended August 31, 2003, compared to
the six-month period ended August 31, 2002. Management believes this decrease
is attributable to increased competition resulting from expansion by a
competitor in the St. Louis market during August 2002. The decrease in
revenue due to the increased competition is offset to some extent by the St.
Louis operations being closed due to high water on the Mississippi River for
one week during the prior year six-month period. Gaming revenues at the
Company's Biloxi operations decreased $0.6 million during the six-month period
ended August 31, 2002 compared to the prior year period due to a decrease in
volume.
The Company's revenues from food and beverage were $7.0 million during both
six-month periods ended August 31, 2003 and 2002.
The Company's revenues from hotel, retail and other were $6.4 million during
the six-month period ended August 31, 2003, compared to $5.8 million during
the six-month period ended August 31, 2002, an increase of $0.6 million, or
10.3%. The increase was primarily attributable to an increase in hotel
revenue of $0.8 million resulting from increased room promotions in response
to the competitive environment in Biloxi.
Promotional allowances were $12.9 million during the six-month period ended
August 31, 2003, compared to $11.4 million during the six-month period ended
August 31, 2002, an increase of $1.5 million, or 13.2%. Promotional
allowances in St. Louis increased $0.5 million and Biloxi increased $1.0
million. In both St. Louis and Biloxi, promotional allowances increased
primarily as a result of responding to the competitive pressures in the
market.
Operating costs and expenses. The Company's consolidated gaming costs and
expenses were $34.4 million during the six-month period ended August 31, 2003,
compared to $36.1 million during the six-month period ended August 31, 2002, a
decrease of $1.7 million, or 4.7%. Gaming costs and expenses at the St. Louis
operations decreased $1.5 million as a result of a decrease in payroll and
payroll benefits of $0.9 million, a combined decrease in equipment rental and
gaming taxes of $0.3 million and a combined decrease in repairs and expenses
related to high water conditions in the prior year of $0.2 million. Biloxi
gaming costs and expenses decreased $0.2 million as a result of a decrease of
$0.1 million in employee benefits and a combined decrease in equipment rental
and gaming taxes of $0.1 million.
The Company's consolidated food and beverage expenses were $4.2 million
during the six-month period ended August 31, 2003, compared to $4.6 million
during the six-month period ended August 31, 2002, a decrease of $0.4 million,
or 8.7%. Food and beverage expense at the St. Louis operations decreased $0.3
million primarily as a result of a reduction in payroll and payroll benefits.
23
26
Food and beverage expense at the Biloxi operations decreased primarily as the
result of more strategic purchasing of product.
The Company's consolidated hotel, retail and other expenses were $1.6
million during the six-month period ended August 31, 2003, compared to $2.0
million during the six-month period ended August 31, 2002, a decrease of $0.4
million, or 20.0%. The decrease is attributable to scaling back retail
operations in St. Louis.
The Company's consolidated selling, general and administrative expenses were
$14.4 million during the six-month period ended August 31, 2003, compared to
$15.1 million during the six-month period ended August 31, 2002, a decrease of
$0.7 million, or 4.6%. The Company's St. Louis casino operations and Biloxi
operations maintained relatively the same selling, general and administrative
expense during both six-month periods. The Company's corporate overhead
decreased $0.6 million as a result of a $0.2 million reduction in legal fees
and settlement costs associated with a lawsuit which was settled in May 2002
and legal fees associated with bondholder debt which has been classified as
reorganization costs since June 20, 2002, the date of filing the voluntary
petition for bankruptcy. Additionally, there was a $0.3 million one-time
charge in the prior six-month period for severance accrued for a former
executive.
Depreciation and amortization expense was $4.1 million during both six-month
periods ended August 31, 2003 and 2002.
Operating (loss) income. As a result of the foregoing items, the Company
had operating income of $4.6 million during the six-month period ended August
31, 2003 compared to $3.2 million during the six-month period ended August 31,
2002.
Interest expense, net. The Company incurred net interest expense of $1.9
million during the six-month period ended August 31, 2003, compared to $5.4
million during the six-month period ended August 31, 2002, a decrease of $3.5
million. The decrease is the result of $3.3 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. Additionally, there
was a $0.3 million decrease in interest expense related to the restructuring
of the PBLLC debt and the corresponding reduction in the interest rate.
Restructuring items, net. The Company incurred restructuring costs of $0.9
million during the six-month period ended August 31, 2003, compared to $0.7
million during the six-month period ended August 31, 2002. On April 19, 2001,
PBLLC filed a voluntary bankruptcy petition for bankruptcy and began incurring
costs associated with its reorganization. On June 20, 2002, the Company's
parent company and PRC-Missouri filed voluntary petitions and in July 2002,
substantially all of the Company's other operating subsidiaries filed
voluntary petitions. On May 28, 2003, PBLLC emerged from bankruptcy. Costs
associated with the reorganizations consist of professional fees and U.S.
Trustee fees.
Minority interest expense. The Company incurred $0.6 million minority
interest expense during both six-month periods ended August 31, 2003 and 2002.
24
27
Net income/loss. The Company recognized net income of $0.4 million during
the six-month period ended August 31, 2003, compared to a net loss of $4.6
million during the six-month period ended August 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 August 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 August 31, 2003, the Company had $13.5 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
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
25
28
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 $3.4 million in restricted cash as of August 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 $2.2 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 $0.4 million in restricted short-term investments as of
August 31, 2003, consisting of a certificate of deposit guaranteeing certain
performance obligations of the Company's Biloxi operations.
The Company generated $4.5 million of cash from operating activities during
the six-month period ending August 31, 2003 compared to $4.3 million during
the six-month period ending August 31, 2002.
Investing activities of the Company generated $2.9 million of cash during
the six-month period ending August 31, 2003. The Company expended $0.8
million on gaming equipment and capital improvements, of which approximately
$0.6 million and $0.2 million was expended in St. Louis and Biloxi,
respectively. The Company received proceeds from the sale of the "Surfside
Princess" of $1.5 million. Additionally there was a net change in short-term
investments and restricted cash of $2.2 million.
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 provided for the unsecured creditors of PBLLC to 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.
The term note payable is collateralized by the vessel M/V "President Casino-
26
29
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. On September 22, 2003, the Court entered an order in favor of the
lender and ordering the vessel be sold.
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
prices, if available, or other acceptable valuation methodologies, including
discounted cash flows or comparable sales.
27
30
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 August 31, 2003, the Company had $122.5 million of debt, $77.1 million
of which is classified as liabilities subject to compromise. Of this amount
$75.0 million bears contractual interest at fixed rates and is classified as
liabilities subject to compromise. The remaining $47.5 million bears
contractual interest at variable rates. Of this amount, $2.1 million is
classified as liabilities subject to compromise. The $45.4 million Broadwater
Property note payable bears interest at a stipulated variable rate at the
greater of (i) 7.75% or (ii) 4.0% plus the LIBOR 30-day rate. 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 August 31,
2003, the average interest rate applicable to the debt carrying variable rates
was 7.63%. An increase of one percentage point in the average interest rate
28
31
applicable to the variable rate debt outstanding as of August 31, 2003, would
increase the Company's annual interest costs by approximately $0.5 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
(a) Evaluation of Disclosure Controls and Procedures
The Company carried out an evaluation, under the supervision and with the
participation of management, including the Chief Executive Officer and the
Chief Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures as of the end of the period
covered by this Quarterly Report pursuant to Rule 13a-15e of the Securities
Exchange Act of 1934, as amended. Based upon that evaluation, the Chief
Executive Officer and the Chief Financial Officer concluded that the
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 Securities and Exchange Commission.
(b) Changes in Internal Control Over Financial Reporting
No changes in the Company's internal control over financial reporting have
come to management's attention during the last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
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 and Use of Proceeds
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
29
32
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.
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
See Exhibit Index.
(b) Reports on Form 8-K
On July 15, 2003, the Company filed a Current Report on Form 8-K
dated July 14, 2003, reporting under Item 9 that the Company
issued a press release on July 14, 2003 reporting the Company's
financial results for the first quarter ended May 31, 2003.
30
33
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: October 10, 2003 /s/ Ralph J. Vaclavik
-----------------------------
Ralph J. Vaclavik
Senior Vice President and
Chief Financial Officer
31
34
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 Agreement for Sale and Purchase of Real and Personal Property,
Dated June 2, 2003, between President Broadwater Hotel, LLC and
A.D. Julden Enterprises, LLC.
10.2 Amendment to Agreement for Sale and Purchase of Real and
Personal Property, dated August 29, 2003, between President
Broadwater Hotel, LLC and A.D. Julden Enterprises, LLC.
10.3 Second Amendment to Agreement for Sale and Purchase of Real and
Personal Property, dated October 8, 2003, between President
Broadwater Hotel, LLC and A.D. Julden Enterprises, LLC.
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a)under the Securities Exchange Act of 1934, as amended.
31.2 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a)under the Securities Exchange Act of 1934, as amended.
32.1 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.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
32
35
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.