Back to GetFilings.com
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 May 31, 2004
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 July 14, 2004.
==============================================================================
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 May 31 and February 29, 2004..................................1
Condensed Consolidated Statements of Operations (Unaudited)
for the Three Months Ended May 31, 2004 and 2003....................2
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Three Months Ended May 31, 2004 and 2003....................3
Notes to Condensed Consolidated Financial Statements (Unaudited)......4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................19
Item 3. Quantitative and Qualitative Disclosures About Market Risk....32
Item 4. Controls and Procedures.......................................32
Part II. Other Information
Item 1. Legal Proceedings.............................................32
Item 2. Changes in Securities.........................................32
Item 3. Defaults Upon Senior Securities...............................33
Item 4. Submission of Matters to a Vote of Security Holders...........33
Item 5. Other Information.............................................33
Item 6. Exhibits and Reports on Form 8-K..............................33
Signature................................................................35
3
Part I. Financial Information
Item 1. Financial Statements
PRESIDENT CASINOS, INC.
(DEBTORS-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share per data)
May 31, Feb. 29,
2004 2004
-------- --------
ASSETS
Current assets:
Cash and cash equivalents...................... $ 21,593 $ 22,762
Restricted cash................................ 2,029 2,322
Restricted short-term investments.............. 350 350
Accounts receivable, net of allowance for
doubtful accounts of $127 and $119........... 484 666
Other current assets........................... 6,191 4,353
--------- ---------
Total current assets....................... 30,647 30,453
--------- ---------
Property and equipment, net of accumulated
depreciation of $64,741 and $64,376............ 78,197 85,965
Assets of discontinued operations............... -- 400
--------- ---------
$108,844 $116,818
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable............................... $ 1,397 $ 1,327
Accrued payroll and benefits................... 3,526 4,425
Accrued interest............................... 244 269
Other accrued liabilities...................... 4,192 4,430
Liabilities from discontinued operations....... 3,393 3,646
--------- ---------
Total current liabilities.................. 12,752 14,097
Long-term liabilities............................ 39,038 45,429
Minority interest................................ 17,982 17,653
--------- ---------
Total liabilities not
subject to compromise.................... 69,772 77,179
Liabilities subject to compromise................ 91,971 91,988
--------- --------
Total liabilities.......................... 161,743 169,167
--------- --------
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............................ (154,930) (154,380)
--------- ---------
Total stockholders' deficit................ (52,899) (52,349)
--------- ---------
$108,844 $116,818
========= =========
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 Ended May 31,
2004 2003
------ ------
OPERATING REVENUES:
Gaming......................................... $ 29,510 $ 31,963
Food and beverage.............................. 3,283 3,504
Hotel.......................................... 1,806 2,105
Retail and other............................... 1,096 1,191
Less promotional allowances.................... (6,479) (6,664)
--------- ---------
Net operating revenues....................... 29,216 32,099
--------- ---------
OPERATING COSTS AND EXPENSES:
Gaming......................................... 16,496 17,478
Food and beverage.............................. 1,987 2,078
Hotel.......................................... 246 259
Retail and other............................... 468 563
Selling, general and administrative............ 7,143 7,091
Depreciation and amortization.................. 1,961 2,084
--------- ---------
Total operating costs and expenses........... 28,301 29,553
--------- ---------
OPERATING INCOME................................. 915 2,546
--------- ---------
OTHER INCOME (EXPENSE):
Interest expense (contractual interest of
$3,992 and $4,078)........................... (746) (1,100)
Interest income................................ 42 38
Reorganization items, net...................... (363) (506)
Gain (loss) on sale of property and equipment.. 4 (30)
Other income................................... 75 --
--------- ---------
Total other income (expense)................. (988) (1,598)
--------- ---------
INCOME (LOSS) BEFORE MINORITY INTEREST AND
DISCONTINUED OPERATIONS........................ (73) 948
Minority interest................................ 330 341
--------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS......... (403) 607
--------- ---------
LOSS FROM DISCONTINUED OPERATIONS................ (147) (247)
--------- ---------
NET INCOME (LOSS)................................ $ (550) $ 360
========= =========
Basic and diluted net income (loss)
per share from continuing operations........... $ (0.08) $ 0.12
Basic and diluted loss per share
from discontinued operations.................... $ (0.03) $ (0.05)
--------- ---------
Basic and diluted net income (loss) per share.... $ (0.11) $ 0.07
========= =========
Weighted average common and dilutive
potential shares outstanding.................... 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)
Three Months Ended May 31,
2004 2003
------ ------
Net cash provided by (used in)
operating activities............................ $ (1,029) $ 1,576
--------- ---------
Cash flows from investing activities:
Expenditures for property and equipment......... (684) (571)
Changes in restricted cash, net................. 293 3,441
Purchase of short-term investments.............. -- (2)
Proceeds from the sale of property
and equipment................................. 6,496 --
--------- ---------
Net cash provided by investing activities... 6,105 2,868
--------- ---------
Cash flows from financing activities:
Payments on notes payable....................... (6,392) (3,551)
--------- ---------
Net cash used in financing activities....... (6,392) (3,551)
--------- ---------
Net cash provided by discontinued operations...... 147 238
Net increase (decrease) in cash and
cash equivalents............................... (1,169) 1,131
Cash and cash equivalents at beginning of period.. 22,762 16,120
--------- ---------
Cash and cash equivalents at end of period........ $ 21,593 $ 17,251
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.......................... $ 740 $ --
========= =========
See Notes to Condensed Consolidated Financial Statements.
3
6
PRESIDENT CASINOS, INC.
(DEBTORS-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data and unless otherwise stated)
1. BANKRUPTCY PROCEEDINGS
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, President Casinos,
Inc. and certain of its subsidiaries are currently in bankruptcy proceedings
and certain of their assets are being realized upon by its creditors. At this
time it is not possible to predict accurately 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. As
used herein, the term "Company" refers to President Casinos, Inc., its wholly-
owned subsidiaries, a 95%-owned limited partnership and a limited liability
company in which a wholly-owned subsidiary of President Casinos, Inc. owns a
Class A ownership interest and in which an entity wholly-owned by the Chairman
of President Casinos, Inc. owns a Class B unit and has a preferred right to
certain cash flows.
The Company and its operating subsidiaries, except President Broadwater
Hotel, LLC, each continue in possession and use of their assets as debtors-in-
possession. The Company and its subsidiaries have had their Missouri
Bankruptcy Chapter 11 cases administratively consolidated under the President
Casinos, Inc. case.
Prior to any of the cases being transferred to the Missouri Bankruptcy
Court, the Mississippi Bankruptcy Court established "bar dates," all of which
have expired, by which all claimants were required to submit and characterize
claims against the Company. As part of the Company's Chapter 11
reorganization process, the Company has attempted to notify all known or
potential creditors of the filings for the purpose of identifying all pre-
petition claims. In the Company's Chapter 11 cases, substantially all of the
Company's liabilities as of the filing date are subject to adjustment under a
plan of reorganization. Generally, actions to enforce or otherwise effect
repayment of all pre-petition liabilities as well as all pending litigation
against the Company are stayed while the Company continues its business
4
7
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
property leases, service contracts and other executory pre-petition contracts
and unexpired leases, subject to Bankruptcy Court review. The Company cannot
presently determine or reasonably estimate the ultimate liability that may
result from rejecting leases or from filing of claims for any rejected
contracts, and no provisions have been made for these items.
The consummation of a plan or plans of reorganization (a "Plan") is the
principal objective of the Company's Chapter 11 filings. A Plan would, among
other things, set forth the means for satisfying claims against and interests
in the Company, including setting forth the potential distributions on account
of such claims and interests, if any. Pursuant to the Bankruptcy Code, the
Company had the exclusive right for 120 days from the filing date to file a
Plan, and for 180 days from the filing date to solicit and receive the votes
necessary to confirm a Plan. The Company was unable to have a plan confirmed
prior to the expiration of these exclusivity periods, and the Missouri
Bankruptcy Court denied the Company's motion to further extend the exclusivity
period. Accordingly, in addition to the Company, any party-in-interest,
including a creditor, an equity holder, a committee of creditors or equity
holders, or an indenture trustee, may file its own Plan for the Company.
Confirmation of a Plan is subject to certain statutory findings by the
Bankruptcy Court. Subject to certain exceptions as set forth in the
Bankruptcy Code, confirmation of a Plan requires, among other things, a vote
on the Plan by certain classes of creditors and equity holders whose rights or
interests are impaired under the Plan. If any impaired class of creditors or
equity holders does not vote to accept the Plan, but all of the other
requirements of the Bankruptcy Code are met, the proponent of the Plan may
seek confirmation of the Plan pursuant to the "cram down" provisions of the
Bankruptcy Code. Under these provisions, the Bankruptcy Court may still
confirm a Plan notwithstanding the non-acceptance of the Plan by an impaired
class, if, among other things, no claim or interest receives or retains any
property under the Plan until each holder of a claim senior to such claim or
interest has been paid in full. There can be no assurance that a Plan will be
confirmed by the Bankruptcy Court, or that any such Plan will be consummated.
It is not possible to predict the length of time the Company will operate
under the protection of Chapter 11 and the supervision of the Bankruptcy
Court, the outcome of the bankruptcy proceedings in general, or the effect of
the proceedings on the business of the Company or on the interest of the
various creditors and stakeholders. Since the filing date, the Company has
operated in the ordinary course of business. Management is in the process of
evaluating their operations as part of the development of a Plan. During the
pendency of the Chapter 11 filings, the Company may, with Bankruptcy Court
approval, sell assets and settle liabilities, including for amounts other than
those reflected in the financial statements. The administrative and
reorganization expenses resulting from the Chapter 11 filings will unfavorably
affect the Company's results of operations. In addition, under the priority
scheme established by the Bankruptcy Code, most, if not all, post-petition
liabilities must be satisfied before most other creditors or interest holders,
including stockholders, can receive any distribution on account of such claim
or interest.
5
8
-- St. Louis Casino Operations
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 noteholders of the Company (the "Noteholders") 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 ("Libra") to serve as the Company's
investment banker in connection with any sale of the St. Louis operations.
The Term Sheet 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, permitted 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 Noteholders, 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. On May 4, 2004, the Company and
Isle of Capri Casinos, Inc. announced they had mutually agreed to terminate
the agreement. Libra continues to seek a buyer for the St. Louis operations.
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.
Subsequently, the Gaming Commission announced that it will consider
licensing additional casinos in the St. Louis market. In September 2003, the
City of St. Louis and St. Louis County, which are separate political and
geographic subdivisions, announced that they were both issuing Requests for
Proposals for a new casino in each jurisdiction.
A project proposed by Pinnacle Entertainment, Inc. was selected and approved
by the City of St. Louis as its recommendation before the Missouri Gaming
Commission. Its proposal includes a casino two blocks from the "Admiral."
The St. Louis County Council has approved a separate Pinnacle Entertainment
project in Lemay, Missouri. Various other gaming companies have filed
proposals. The Missouri Gaming Commission was expected to announce on July 8,
2004 which of the six casino proposals in the St. Louis area would be approved
for formal license investigations. However, on July 1, 2004, the Missouri
Gaming Commission announced that due to the complexity and volume of the
information being considered for casino expansion in the St. Louis
metropolitan area, the announcement was postponed to a later, unknown date.
6
9
Each of the proposals submitted requires significant construction of new
infrastructure for the casino and entertainment complexes. Were there to be a
new casino or casinos in metropolitan St. Louis, there would be a material
adverse effect on the Company's St. Louis operations.
-- Broadwater Hotel Operations
President Broadwater Hotel, LLC ("PBLLC"), a limited liability company in
which Broadwater Hotel, Inc., a wholly-owned subsidiary of the Company
("BHI"), has a Class A ownership interest, was in default under a $30,000
promissory note and associated $7,000 loan fee incurred in connection with the
July 1997 purchase by PBLLC of the real estate and improvements utilized in
the Company's operations in Biloxi, Mississippi. On April 19, 2001, PBLLC
filed a voluntary petition for reorganization under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the Southern
District of Mississippi. PBLLC continued in possession and use of its assets
as a debtor-in-possession and had an agreement with Lehman Brothers Holdings
Inc., its lender and largest creditor ("Lehman"), approved by the Mississippi
Bankruptcy Court, which allowed PBLLC's use of its cash collateral.
On October 16, 2001, PBLLC filed its plan of reorganization which would
permit PBLLC to restructure its debt obligations in a manner which was
designed to permit it to continue as a going concern. Subsequently, on
February 28, 2003, PBLLC filed Modifications to Debtor's Plan of
Reorganization (together with the reorganization plan, the "Modified Plan").
On May 14, 2003, the Mississippi Bankruptcy Court entered the confirmation
order confirming the Modified Plan. The Modified Plan became effective on May
28, 2003 and the Company initiated consummation of the Modified Plan at that
time. The Modified Plan provides that the unsecured creditors of PBLLC will
receive 100% of their claims. Under the Modified Plan, the obligations to
Lehman were modified with respect to the debt amount, the interest rate and
the due date. See "Note 5. Long-Term Debt and Current Portion of Long-Term
Debt."
-- Proposed Mississippi Assets Sale
An agreement has been entered into among the Company, President Mississippi;
Vegas Vegas, Inc. ("Vegas Vegas"); PBLLC; JECA, the owner of the Class B Unit
in PBLLC; John S. Aylsworth, President, Chief Operating Officer and Director
of the Company; Terrence L. Wirginis, Vice Chairman of the Board and Vice
President of Marine and Development; and SunAmerica, Inc. and McKay Shields
LLC (collectively, representing the Noteholders). It provides that various
assets owned by President Mississippi, Vegas Vegas and PBLLC (the "Assets")
will be marketed for sale, such sale to be subject to the Noteholders, who
have security interests in the Assets, approval.
Vegas Vegas owns the assets related to the Company's proposed development of
Destination Broadwater. See "Potential Opportunities." To the extent that
the sale includes the Vegas Vegas assets, the buyers shall allocate the amount
of purchase price attributable to the Vegas Vegas assets. The first $3,300 of
funds allocated to the Vegas Vegas assets shall be paid into the Vegas Vegas
bankruptcy estate and shall not be subject to the distribution priorities
provided in the agreement.
In the event of a sale of all or substantially all of the Assets, the
proceeds (gross proceeds less typical closing adjustments including brokerage
7
10
commission) from the sale, other than the amount to be paid to Vegas Vegas,
shall be allocated as follows:
(i) the first dollars shall be paid to Lehman, the secured lender to
PBLLC, to satisfy in full the indebtedness due to it;
(ii) the next $10,000 shall be allocated equally between JECA and the
Noteholders on a dollar for dollar basis. If President Mississippi
assets are sold separately and the proceeds are paid to the
Noteholders, then such dollars shall be a credit on the amount payable
to Noteholders under this provision;
(iii) the next $8,000 shall be paid to Noteholders;
(iv) the next $26,000 (twice the remaining amount owing to JECA after
payment of the $5,000 above) shall be split on a dollar for
dollar basis between the Noteholders and JECA;
(v) the next dollars shall be paid to the Noteholders until their debt is
satisfied in full;
(vi) the remaining dollars shall be paid to President Mississippi.
JECA has entered into an agreement with Messrs. Aylsworth, Wirginis and
Ralph J. Vaclavik, the Chief Financial Officer of the Company, pursuant to
which upon receipt of funds by JECA, JECA will use its best efforts to pay a
percentage of such funds to Messrs. Aylsworth, Wirginis and Vaclavik based on
the total sales proceeds to JECA.
The process and time for the sale of assets shall be reflected in documents
and pleadings to be drafted and may include a sale pursuant to Section 363 of
the Bankruptcy Code and/or the confirmation of a Plan of Reorganization for
President Mississippi and/or Broadwater Hotel, Inc. and/or the Company. The
agreement binds only the parties thereto and establishes priorities between or
among the parties to the agreement and third parties and shall not be binding
on any holder of claims or interests against anyone that is not a party to the
agreement. The term of the agreement is from March 1, 2004 to March 1, 2005.
This agreement becomes effective upon its approval by the Missouri Bankruptcy
Court, provided, however that the marketing of the assets for sale commenced
immediately upon its execution.
Subsequently, the Missouri Bankruptcy Court entered an order approving the
agreement but indicating expressly that nothing therein affected the rights of
Lehman. Thereafter, an Examiner (as described below) appointed at the request
of the Noteholders filed a motion to set aside the Court's order. That motion
is currently set for hearing on July 19, 2004.
In March 2004, the Missouri Bankruptcy Court appointed an Examiner for the
purpose of investigating and issuing a report concerning whether any
prohibited direct or indirect transfers have been made from the Company or its
subsidiaries that may be avoided or which were otherwise improper or
actionable under the Bankruptcy Code or other applicable law. The examination
concerned the purchase of the Broadwater Property from an entity owned by Mr.
Connelly, Chairman and Chief Executive of the Company, the financing of the
project, the process of the purchase and the operation of the complementary
rooms program, among other items. The Examiner's report was issued on May 28,
2004 and contains various findings and recommendations to be considered by the
various parties in interest. The Noteholders and other creditors now have the
report for their use.
As a result of the Examiner's report, on June 14, 2004, the Company, along
with certain of its debtor-in-possession subsidiaries (the "Debtors"), entered
8
11
into a tolling agreement with Mr. Connelly, Mr. Aylsworth, Karl G. Andren ,
Royal P. Walker, Jr., Mr. Wirginis and J. Edward Connelly Associates, Inc.
("JECA"). Mssrs. Connelly, Aylsworth, Andren, Walker and Wirginis constitute
the Board of Directors of the Company. Under the terms of the tolling
agreement, the period of time from June 14, 2004 to and including July 31,
2004, shall not be relied upon under any statute of limitations in defense of
any lawsuit, action or proceeding that the Debtors could commence against the
Directors or JECA. No prediction is possible as to what action, if any, they
may take.
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 has entered into a
contract to sell to an unrelated party the Broadwater Property golf course.
The golf course purchase price is $13,100 before closing adjustments. The
prospective purchaser has applied for re-zoning of the property and been
rejected. It is pursuing an appeal in court. The contract has been amended
to make the obtaining of re-zoning a precondition to closing. It is not
possible to predict whether re-zoning will be obtained. 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.
During March 2004, the Company sold the 179-room Broadwater Tower Hotel for
$6,500. The President's other hotel, the 333-room President Broadwater
Resort, was not included in this transaction. The net proceeds were used to
reduce the debt of the Company's subsidiary, President Broadwater Hotel, LLC.
The Company also entered into a lease with the new owners whereby the Company
will continue to operate Broadwater Tower Hotel through September 15, 2004,
with options for additional extensions.
-- Other
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 M/V "President Casino-Mississippi" note. See "Note 9.
Discontinued Operations."
The Company's ability to continue as a going concern is dependent on its
ability to restructure successfully, including refinancing its debts, selling
assets on a timely basis under acceptable terms and conditions, and the
ability of the Company to generate sufficient cash to fund future operations.
There can be no assurance in this regard.
The descriptions of the Company's business, financial condition and
prospects contained in this Quarterly Report on Form 10-Q are qualified in
their entirety by the foregoing description of the significant risks
associated with the Company's bankruptcy proceedings.
As of May 31, 2004, the Company had $21,593 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.
9
12
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 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 condensed consolidated financial statements contained herein should be
read in conjunction with the audited consolidated financial statements and
accompanying notes to the consolidated financial statements included in the
Company's Annual Report on Form 10-K for the period ending February 29, 2004.
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.
President Broadwater Hotel, LLC, a limited liability company ("PBLLC") in
which Broadwater Hotel, Inc. ("BHI") has a Class A ownership interest, owns
approximately 240 acres in Biloxi, Mississippi, which includes a 111-slip
marina which contains the mooring site of "President Casino-Broadwater", a
10
13
hotel with approximately 333 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
On March 16, 2004, the Company sold the 179-room Broadwater Tower Hotel for
$6,500 to Ocean Beach Club at Biloxi, LLC. The Company's other hotel, the
333-room President Broadwater Resort, was not included in this transaction.
The net proceeds of the transaction were used to reduce the debt of the
Company's subsidiary, PBLLC. In connection with the transaction the Company
also entered into an initial lease through September 15, 2004, with the new
owners whereby the Company will continue to operate the Broadwater Tower Hotel
with options for additional extensions. No gain or loss was recorded on the
sale of the Broadwater Tower.
The Company has entered into a contract to sell to an unrelated party the
Broadwater Property golf course. The golf course purchase price is $13,100
before closing adjustments. The prospective purchaser has applied for re-
zoning of the property and been rejected. It is pursuing an appeal in court.
The contract was amended to make the obtaining of re-zoning a precondition to
closing and extending the closing period for a six-month period from November
1, 2003 through April 30, 2004 for an option fee of $25 for each month the
contract is extended. The agreement was further amended extending the closing
period from May 1, 2004 through August 31, 2004 for an option fee of $25 for
each month the contract is extended. Additionally, this amendment increases
the sale price by $50 for each of the first two months of the extension period
and $75 for each of the last two months of the extension period. It is not
possible to predict whether re-zoning will be obtained. 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.
5. LONG-TERM DEBT AND CURRENT PORTION OF LONG-TERM DEBT
As of May 31, 2004, 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."
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 Indebtedness were nonrecourse and 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
11
14
payments accruing 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 May 31, 2004, the principal amount of the Modified
Indebtedness was $39,038. The principal amount of the Modified Indebtedness
bears interest at a rate of 12.75% per annum until the obligation is
satisfied. The maturity date of the Modified Indebtedness is June 1, 2005.
Interest is payable during the term of the Modified Indebtedness on the
adjusted loan obligation amount. As of May 31, 2004, the adjusted loan
obligation amount was $36,621. 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.
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.
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, retained its membership interest,
but any payments by PBLLC to JECA shall be restricted until such time as all
outstanding obligations to Lehman and other creditors receiving funds under
the Modified Plan are discharged.
6. LIABILITIES SUBJECT TO COMPROMISE AND REORGANIZATION ITEMS, NET
The components of liabilities subject to compromise are as follows:
May 31, Feb. 29,
2004 2004
------ ------
Senior Exchange Notes, 13%...................... $ 56,250 $ 56,250
Secured Notes, 12%.............................. 18,750 18,750
Accrued interest................................ 13,027 13,027
Accounts payable and other accrued expenses..... 3,944 3,961
--------- ---------
Total liabilities subject to compromise...... $ 91,971 $ 91,988
========= =========
Senior Exchange Notes and Secured Notes
The Senior Exchange Notes rank equal in right of payment to all present and
12
15
future senior debt, as defined in the indenture governing the Senior Exchange
Notes (the "Note Indenture"), of the Company and its subsidiaries and are
currently due and payable. In addition, the Senior Exchange Notes are
unconditionally guaranteed, jointly and severally on a senior basis, by all of
the Company's then existing restricted 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 has been zero since fiscal year 1998. 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.
See "Note 1. Bankruptcy Proceedings" regarding default of the Senior
Exchange Notes and Secured Notes.
The various agreements governing the notes described above generally limit
borrowings by the Company's affiliates without the respective lenders' prior
consent.
As of May 31, 2004, all reorganization items consist of professional fees.
7. STOCK-BASED COMPENSATION
As of May 31, 2004, the Company has three stock Option Plans. The Company
applies Accounting Principles Board Opinion No. 25 and related interpretations
in accounting for its stock-based compensation plans using the intrinsic value
method. Accordingly, no compensation expense is reflected in net income for
stock options, as all options granted had an exercise price equal to the
market value of the underlying common stock on the date of grant.
Substantially all of the Company's stock options were vested as of May 31,
2004. 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 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 either the three-month period ended May
31, 2004 or fiscal year 2004.
8. COMMITMENTS AND CONTINGENT LIABILITIES
Bankruptcy Actions
On June 20, 2002, President Casinos, Inc. together with its subsidiary,
President Missouri, which owns and operates the St. Louis operations, filed
voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code
in the United States Bankruptcy Court for the Southern District of
13
16
Mississippi. On July 9, 2002, President Casinos, Inc.'s subsidiary President
Mississippi filed a voluntary reorganization petition in the same Court. On
July 11, 2002, substantially all of the Company's other operating subsidiaries
filed voluntary reorganization petitions under Chapter 11 in the same Court.
Subsequently, orders were entered by the Mississippi Bankruptcy Court
transferring venue of all of the Chapter 11 cases, except President Riverboat
Casino-New York, Inc. and PBLLC, to the United States Bankruptcy Court for the
Eastern District of Missouri, where they are now pending and being
administered. The Company and its subsidiaries each continue in possession
and use of their assets as debtors-in-possession. See "Note 1. Bankruptcy
Proceedings."
President Broadwater Hotel, LLC ("PBLLC"), a limited liability company in
which Broadwater Hotel, Inc., a wholly-owned subsidiary of the Company
("BHI"), has a Class A ownership interest, was in default under a $30,000
promissory note and associated $7,000 loan fee incurred in connection with the
July 1997 purchase by PBLLC of the real estate and improvements utilized in
the Company's operations in Biloxi, Mississippi. On April 19, 2001, PBLLC
filed a voluntary petition for reorganization under Chapter 11 of the
Bankruptcy Code in the Mississippi Bankruptcy Court. On May 28, 2003, PBLLC
emerged from its Chapter 11 protection. See "Note 1. Bankruptcy
Proceedings."
On April 27, 2003, the Missouri Bankruptcy Court granted a motion for
approval of a key employee retention plan for certain corporate and Missouri
casino employees (the "Retention Plans"). The motion does not affect any pre-
petition employment agreements as to assumption or rejection of pre-petition
executory contracts, with the exception that any claim asserted by a key
employee on account of a pre-petition employment agreement shall be reduced
dollar for dollar by the amounts paid or payable under the retention plan.
Under the terms of the Retention Plans for certain Missouri key casino
employees, certain key employees will receive 50% of their then salary which
will be due and payable on the earlier of the following dates: (i) the date on
which all or substantially all of President Missouri's assets are sold or (ii)
the date on which the Company terminates substantially all of its ordinary
Missouri business operations. Under the terms of the Retention Plans for
corporate employees, the Chief Financial Officer will receive one year of his
then salary on the date he is discharged from employment and the other named
key employees will receive 50% of their then salary. If at any time prior
thereto the corporate key employees' salaries are reduced or he or she is
required to move his or her residence from the St. Louis, Missouri
metropolitan area, he or she will also receive such payment. In the event of
the sale of the Missouri assets, an amount shall be set aside to fund such
payments.
On April 1, 2004, the Missouri Bankruptcy Court granted a motion for
approval of a key employee retention plan for certain Mississippi casino
employees. The terms and conditions are the same as the Missouri key casino
employee Retention Plan except the assets and operations refer to those of
Mississippi and one key employee receiving his then twelve month salary rather
than 50%.
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
14
17
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 in the United States District Court for the
District of Nevada. The complaint alleges that the defendants fraudulently
marketed and operated casino video poker machines and electronic slot
machines, and asserts common law fraud and deceit, unjust enrichment and
negligent misrepresentation. The plaintiffs sought 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.
--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 was foreclosed on by the lender which
holds a Preferred First Fleet Mortgage collateralizing debt owed to the
lender. With the disposal of both vessels, representing all of the operating
assets of the segment, the segment is accounted for as discontinued operations
in accordance with the Financial Accounting Standards Board SFAS No. 144
"Accounting for the Impairment and Disposal of Long-Lived Assets."
The components of assets of and liabilities from discontinued operations are
as follows:
May 31, Feb. 29,
2004 2004
------ ------
Property and equipment..................... $ -- $ 400
-------- --------
$ -- $ 400
======== ========
M/V "President Casino-Mississippi"
note payable............................. $ 1,700 $ 2,100
Accounts payable........................... 58 58
Accrued interest payable................... 772 720
Other accrued liabilities.................. 863 768
-------- --------
$ 3,393 $ 3,646
======== ========
M/V "President Casino-Mississippi" Note
The Company defaulted under the terms of its $2,100 M/V "President
Casino-Mississippi" note. The vessel and various equipment aboard the M/V
15
18
"President Casino-Mississippi" collateralize a term note payable which was
also personally guaranteed by Mr. Connelly. The Company continued to make the
quarterly principal and interest payments on the note prior to the Company's
bankruptcy filing. Under the terms of the note agreement, $2,100 principal
became due and payable in August 2002 together with interest and costs (the
"Note"). In November 2002, the lender brought an action against Mr. Connelly
for breach of contract under his personal guarantee. In December 2003, Mr.
Connelly satisfied his personal guarantee paying the lender $1,200. 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 for the Southern District of 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
allowed the vessel to be seized and sold. On April 7, 2004, the vessel was
auctioned and the lender offered the highest bid of $500.
Because the Note was also guaranteed by the Company and President
Mississippi, the payment of the personal guarantee triggered a right of
contribution to Mr. Connelly from both the Company and the President
Mississippi. In addition, Mr. Connelly became subrogated to the lender's
right under the Note to collect the payment by him from the Company's
subsidiary that issued the Note. The Note remains outstanding but has been
credited with the payment by Mr. Connelly and will be credited by the value
realized on foreclosure. Thus, while the parties responsible for payment have
shifted, a portion of Mr. Connelly's guarantee has been paid, and the
collateral has been used to satisfy a portion of the Note, the obligation
remains outstanding. It is not possible at this time to determine the amounts
that may be owed by whom or to whom with respect to the above described person
and entities.
In addition, as a part of the settlement agreement with the lender, Mr.
Connelly was assigned a one-half interest in certain claims filed by the
lender in the Missouri Bankruptcy Court. It is not possible to predict
whether these claims will be successful or the amount, if any, that will be
paid with respect to these claims.
10. SEGMENT INFORMATION
The Company's reportable segments, other than the discontinued operations,
are similar in operations, but have distinct and separate regional markets.
The Company's reportable segments are based on its two geographic gaming
operations. The Biloxi operations consist of the Biloxi casino and the
Broadwater Property and the St. Louis operations consist of the St. Louis
casino.
16 19
The Company has no inter-segment sales and accounts for transfers of
property and inventory at its net book value at the time of such transfer.
Three Months Ended May 31,
2004 2003
------ ------
OPERATING REVENUES:
St. Louis operations................... $ 17,540 $ 19,044
Biloxi operations...................... 11,676 13,055
--------- ---------
Net operating revenues............. $ 29,216 $ 32,099
========= =========
Three Months Ended May 31,
2004 2003
------ ------
OPERATING INCOME (LOSS):
St. Louis operations................... $ 1,202 $ 1,854
Biloxi operations...................... 349 1,446
--------- ---------
Gaming and ancillary operations...... 1,551 3,300
Corporate administration............... (636) (754)
--------- ---------
Operating income.................. $ 915 $ 2,546
========= =========
A summary of assets by segment, is as follows:
May 31, Feb. 29,
2004 2004
------ ------
St. Louis operations.................... $ 50,690 $ 50,970
Biloxi operations....................... 52,615 59,559
--------- ---------
Gaming and ancillary operations....... 103,305 110,529
Corporate assets........................ 2,280 2,630
Development assets...................... 3,259 3,259
Discontinued operations................. -- 400
--------- ---------
Net assets.......................... $108,844 $116,818
========= =========
17 20
A summary of net property and equipment and additions to property and
equipment, by segment, is as follows:
May 31, Feb. 29,
2004 2004
------ ------
Property and Equipment:
St. Louis operations.................. $ 31,101 $ 32,238
Biloxi operations..................... 43,829 50,461
--------- ---------
Gaming and ancillary operations.... 74,930 82,699
Corporate assets...................... 8 7
Development assets.................... 3,259 3,259
--------- ---------
Net Property and Equipment........ $ 78,197 $ 85,965
========= =========
Three Months Ended May 31,
2004 2003
------ ------
Additions to Property and Equipment:
St. Louis operations.................. $ 420 $ 454
Biloxi operations..................... 262 117
--------- ---------
Gaming and ancillary operations..... 682 571
Corporate assets...................... 2 --
--------- ---------
$ 684 $ 571
========= =========
11. GUARANTEE OF CITY OBLIGATION
During 1998, the Company and the City of St. Louis reached an agreement for
the relocation of the "Admiral" approximately 1,000 feet north from its former
location on the Mississippi River. Under the terms of an agreement, the City
funded $3,000 of the relocation costs, $2,400 of which was financed through
bank debt. It is anticipated that the City will repay the debt from annual
allocations of $600 from the City's annual home dock city public safety fund
that is funded by admission taxes from the "Admiral." The Company has
guaranteed repayment of the bank debt if the City fails to pay the obligation.
As of May 31, 2004, the Company's guarantee was $564.
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.
18
21
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion should be read in conjunction with the condensed
consolidated financial statements of the Company and the notes thereto
included elsewhere in this report.
President Casinos, Inc., President Riverboat Casino-Missouri, Inc., The
President Riverboat Casino-Mississippi, Inc., Broadwater Hotel, Inc., PRC
Management, Inc., PRC Holdings Corporation, TCG/Blackhawk, Inc. and Vegas
Vegas, Inc. have each filed voluntary petitions for reorganization under
Chapter 11 of the Bankruptcy Code. See "Note 1. Bankruptcy Proceedings" of
the Notes to Condensed Consolidated Financial Statements included in Part I of
this report.
As a result of the Company's relatively high degree of leverage and the need
for significant capital expenditures at its St. Louis property, the Company
was unable to pay the regularly scheduled interest payments of $6.4 million
that were each due and payable March 15, and September 15, 2000. Under the
indentures pursuant to which the $75.0 million 13.0% Senior Exchange Notes
(the "Senior Exchange Notes") and the $25.0 million 12% Secured Notes (the
"Secured Notes" and collectively with the Senior Exchange Notes, the "Notes")
were issued, an Event of Default occurred on April 15, 2000, and is continuing
as of the date hereof. Additionally, the Company was unable to pay the $25.0
million principal payment due September 15, 2000 on the Senior Exchange Notes.
The holders of at least 25% of the Senior Exchange Notes and the Secured Notes
were notified of the defaults and instructed the Indenture Trustee to
accelerate the Notes and on August 11, 2000, the holders declared the unpaid
principal and interest to be due and payable.
On October 10, 2000, the Company sold the assets of its Davenport, Iowa
operations for aggregate consideration of $58.2 million in cash. On November
22, 2000, the Company entered into an agreement with a majority of the holders
of the Senior Exchange Notes and a majority of the holders of the Secured
Notes. The agreement provided for a proposed restructuring of the Company's
debt obligations under the Notes and the application of certain of the
proceeds received by the Company from the sale of the Company's Davenport
assets. Approximately $43.0 million of the proceeds from the sale were
deposited with a trustee. Of this amount, $12.8 million was used to pay
missed interest payments due March 15, 2000 and September 15, 2000 on the
Notes; $25.0 million was used to partially redeem the Notes; and $5.2 million
was used to pay interest due March 15, 2001 on the Notes.
Subsequently, the Company was unable to make the principal and interest
payments due September 15, 2001 and has not made any subsequent principal or
interest payments on the Notes. As of May 31, 2004, principal due on the
Senior and Secured Notes was $56.2 million and $18.8 million, respectively.
Due to certain debt covenants and cross default provisions associated with
other debt agreements, the Company is also currently in default under its M/V
"President Casino-Mississippi" note. See Liquidity and Capital Resources.
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, which were distributed after the settlement of certain litigation.
19
22
Pursuant to the Term Sheet provisions and the agreement of the Company, the
Committee and the Noteholders, 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 was
terminated by mutual consent on May 4, 2004. The Company continues to seek a
buyer for the St. Louis operations.
The Company has entered into a contract to sell to an unrelated party the
Broadwater Property golf course. The golf course purchase price is $13.1
million before closing adjustments. The prospective purchaser has applied for
re-zoning of the property and been rejected. It is pursuing an appeal in
court. The contract was amended to make the obtaining of re-zoning a
precondition to closing and extending the closing period for a six-month
period from November 1, 2003 through April 30, 2004 for an option fee of
$25,000 for each month the contract is extended. The agreement was further
amended extending the closing period from May 1, 2004 through August 31, 2004
for an option fee of $25,000 for each month the contract is extended.
Additionally, this amendment increases the sale price by $50,000 for each of
the first two months of the extension period and $75,000 for each of the last
two months of the extension period. It is not possible to predict whether re-
zoning will be obtained. 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.
On March 16, 2004, the Company sold the 179-room Broadwater Tower Hotel for
$6.5 million to Ocean Beach Club at Biloxi, LLC. The Company's other hotel,
the 333-room President Broadwater Resort, was not included in this
transaction. The net proceeds of the transaction were used to reduce the debt
of the Company's subsidiary, PBLLC. In connection with the transaction the
Company also entered into an initial lease through September 15, 2004, with
the new owners whereby the Company will continue to operate the Broadwater
Tower Hotel with options for additional extensions.
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 during
the ongoing bankruptcy proceedings. 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
20
23
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. A thirteenth casino and hotel complex is
expected to open in late Summer 2005 on the Gulf Coast and an additional
casino operator has obtained necessary licenses and approval to open an
additional casino facility, although an opening date has not been announced.
See "Potential 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.
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.
Subsequently, the Gaming Commission announced that it will consider
licensing an additional casino in the St. Louis market. In September 2003,
the City of St. Louis and St. Louis County, which are separate political and
geographic subdivisions, announced that they were both issuing Requests for
Proposals for a new casino in each jurisdiction.
A project proposed by Pinnacle Entertainment, Inc. was selected and approved
by the City of St. Louis as its recommendation before the Missouri Gaming
Commission. Its proposal includes a casino two blocks from the "Admiral."
The St. Louis County Council has approved a separate Pinnacle Entertainment
project in Lemay, Missouri. Various other gaming companies have filed
proposals. The Missouri Gaming Commission was expected to announce on July 8,
21
24
2004 which of the six casino proposals in the St. Louis area would be approved
for formal license investigations. However, on July 1, 2004, the Missouri
Gaming Commission announced that due to the complexity and volume of the
information being considered for casino expansion in the St. Louis
metropolitan area, the announcement was postponed to a later, unknown date.
Each of the proposals submitted requires significant construction of new
infrastructure for the casino and entertainment complexes. Were there to be a
new casino or casinos in metropolitan St. Louis, there would be a material
adverse effect on the Company's St. Louis operations.
--Regulatory Matters
The Company's Missouri gaming license was renewed on July 8, 2004 for a
period through May 2006. The Company's Mississippi gaming license was renewed
in April 2004 for a period through April 2007.
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 its St. Louis
operations.
Potential Opportunities
Biloxi, Mississippi
President Broadwater Hotel, LLC ("PBLLC") owns approximately 240 acres which
includes a hotel, a 111-slip marina and the adjacent 18-hole Sun Golf Course
(collectively, the "Broadwater Property"). A second hotel previously ownced
by PBLLC was sold in March 2004. The marina is the site of the Company's
casino operations in Biloxi and was formerly leased by the Company under a
22
25
long-term lease agreement.
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.
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 allows
the Corps to remove the application from the Corps' pending action list, and
should not affect future evaluation of the permit request. A revised plan may
be submitted to the Corps, at which time a new application number would be
assigned, and the evaluation of the permit request would resume. The assets
related to the development of Destination Broadwater are included in the
Company's plan to market its assets in Mississippi. See "Liquidity and
Capital Resources."
Results of Operations
Three-Month Period Ended May 31, 2004 Compared to the
Three-Month Period Ended May 31, 2003
The results of operations for the three-month periods ended May 31, 2004 and
2003 include the gaming results for the Company's operations in St. Louis,
Missouri and Biloxi, Mississippi and of much lesser significance, the resort
operations in Biloxi (the "Broadwater Property").
23
26
The following table highlights the results of the Company's operations.
Three Months Ended May 31,
2004 2003
------ ------
(in millions)
St. Louis Operations
Operating revenues............. $ 17.5 $ 19.0
Operating income............... 1.2 1.9
Biloxi Operations
Operating revenues............. 11.7 13.1
Operating income............... 0.3 1.4
Corporate Administrative
and Development
Operating loss................. (0.6) (0.8)
Discontinued Leasing Operations
Operating loss................. (0.1) (0.2)
The following table highlights cash flows of the Company's operations.
Three Months Ended May 31,
2004 2003
------ ------
(in millions)
Cash flows provided by (used in)
operating activities........... $ (1.0) $ 1.6
Cash flows provided by
investing activities........... 6.1 2.9
Cash flows used in
financing activities........... (6.4) (3.6)
Cash provided by discontinued
operations..................... 0.1 0.2
Cash paid for interest........... 0.7 --
Operating revenues. The Company generated consolidated net operating
revenues of $29.2 million for the three-month period ended May 31, 2004
compared to $32.1 million for the three-month period ended May 31, 2003, a
decrease of $2.9 million, or 9.0%. The St. Louis operations experienced a
decrease in revenue of $1.5 million and the Biloxi operations experienced a
decrease in revenue of $1.4 million.
Gaming revenues at the Company's St. Louis operations decreased $1.1 million
during the three-month period ended May 31, 2004, compared to the prior year
period. The current year decrease is primarily the result of continued strong
advertising and promotions by two competitors in the St. Louis market which
have significantly greater name recognition and financial resources. Gaming
revenues at the Company's Biloxi operations decreased $1.3 million during the
three-month period ended May 31, 2004 compared to the prior year three-month
period. The Biloxi property is under capital expenditure constraints. Gaming
revenues have been negatively impacted by competitors' slot product upgrades,
specifically multi-denominational games and ticket-in-ticket-out systems which
management believes has resulted in a decrease in number of guests.
24
27
The Company's revenues from hotel, retail and other were $2.9 million for
the three-month period ended May 31, 2004, compared to $3.3 million for the
three-month period ended May 31, 2003, a decrease $0.4 million, or 12.1%. The
decrease was primarily attributable to a decrease of $0.3 million in hotel
revenue. Management believes that the sale of the Broadwater Tower Hotel on
March 16, 2004 resulted in initial uncertainty regarding the terms of the
Company's leaseback that lead to fewer group and tour packages being booked.
Promotional allowances were $6.5 million during the three-month period ended
May 31, 2004, compared to $6.7 million for the three-month period ended May
31, 2003, a decrease of $0.2 million, or 3.0%. Promotional allowances in St.
Louis increased $0.3 million and decreased in Biloxi $0.5 million. In St.
Louis, the increase is the result of an increase in cash back promotions. In
Biloxi, promotional allowances, consisting of cash coupons, cash back
promotions and complimentary rooms, decreased as a result of a decrease in
guest volume.
Operating costs and expenses. The Company's consolidated gaming expenses
were $16.5 million during the three-month period ended May 31, 2004, compared
to $17.5 million during the three-month period ended May 31, 2003, a decrease
of $1.0 million, or 5.7%. The decrease was primarily attributable to a $0.7
million decrease in gaming costs in St. Louis related to a $0.4 million
reduction in gaming and admissions taxes, a $0.1 million reduction in payroll
and payroll benefits and a $0.2 million reduction in costs associated with
leased and progressive slot machines. Biloxi generated a $0.3 million
decrease in gaming costs as a result of reductions in gaming taxes and
payroll. At both properties a reduction in gaming revenue resulted in
decreased gaming taxes and reductions in personnel resulted in decreases in
payroll. As a percentage of gaming revenues, gaming costs increased to 55.9%
during the three-month period ended May 31, 2004 from 54.7% during the three-
month period ended May 31, 2003.
The Company's consolidated hotel, retail and other expenses were $0.7
million during the three-month period ended May 31, 2004 compared to $0.8
million during the three-month period ended May 31, 2003, a decrease of $0.1
million, or 12.5%. The St. Louis operations began operating valet service
internally in July 2003 which contributed to a $0.1 million decrease in costs.
The Company's consolidated selling, general and administrative expenses were
$7.1 million during both three-month periods ended May 31, 2004 and 2003.
Included in the three-month period ended May 31, 2004, was $0.1 million of
costs arising from the leaseback of the Broadwater Tower Hotel which was sold
in March 2004. The increase in selling, general and administrative costs
related to the leaseback are offset by a reduction in corporate payroll.
The leaseback costs are offset by a reduction in interest expense as a result
of the net proceeds from the sale being used to pay down the principal on the
debt of PBLLC.
Operating income. As a result of the foregoing items, the Company had
operating income of $0.9 million during the three-month period ended May 31,
2004, compared to operating income of $2.5 million during the three-month
period ended May 31, 2003. Casino properties have significant fixed costs.
Accordingly, contribution to operating income at various revenue levels
increases as revenues increase. The higher the revenue, the greater the
operating margin.
25
28
Interest expense, net. The Company incurred net interest expense of $0.7
million during the three-month period ended May 31, 2004, compared to $1.1
million during the three-month period ended May 31, 2003, a decrease of $0.4
million, or 36.4%. The decrease is the result of PBLLC refinancing its debt
effective May 28, 2003, which reduced the interest rate. Additionally, PBLLC
paid its lender $3.6 million principal on May 28, 2003 and $6.3 million on
March 15, 2004.
Reorganization items, net. As a result of the bankruptcy proceedings, the
Company incurred $0.4 million of reorganization costs during the three-month
period ended May 31, 2004, compared to $0.5 million during the same period in
the prior year. The decrease is primarily the result of timing of costs
associated with professionals providing services to reorganize the Company.
In the prior year three-month period, the Company incurred more consulting
costs.
Minority interest expense. The Company incurred $0.3 million minority
interest expense for both three-month periods ended May 31, 2004 and May 31,
2003. During both periods the minority interest results from the Class B Unit
in PBLLC in which an entity wholly-owned by the Chairman of the Board of the
Company owns and has preferred rights to certain cash flows. Such amounts
were accrued but not paid.
Discontinued operations. Discontinued operations consists of the Company's
former vessel leasing segment, operated by President Riverboat Casino-New
York, Inc., a wholly-owned subsidiary of the Company. Of the two vessels
owned by this segment, the "Surfside Princess" was sold in May 2003. The
second vessel, M/V "President Casino-Mississippi," was the original vessel
utilized at its Biloxi casino operations and subsequently utilized as an
auxiliary vessel in other Company operations after it was replaced in Biloxi
by the current larger barge facility. See "Liquidity and Capital Resources"
regarding disposition of the vessel.
Net loss. The Company had a net loss of $0.6 million for the three-month
period ended May 31, 2004, compared to net income of $0.4 million for the
three-month period ended May 31, 2003.
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 of
assets no longer used in the Company's casino operations.
As discussed above, the Company and its subsidiaries, with the exception of
PBLLC and President Riverboat Casino-New York, Inc., 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 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
26
29
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. As of May 31, 2004,
principal due on the Senior and Secured Notes was $56.2 million and $18.8
million, respectively.
The Company requires approximately $6.5 million of cash on hand to fund
daily operations. As of May 31, 2004, the Company had $15.1 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
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 $2.0 million in restricted cash as of May 31, 2004, which
related to PBLLC. PBLLC deposits revenues into lockboxes that are controlled
by its lender. Expenditures from the lockboxes are limited to the operating
expenses, capital improvements and debt service of PBLLC as defined by its
loan agreement. PBLLC operates under a cash collateral stipulation and
agreement, which allows PBLLC to use its cash collateral for normal operations
in accordance with certain terms as defined by the cash collateral agreement.
Revenues of PBLLC include the operations of the hotel 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 May
31, 2004, consisting of a certificate of deposit guaranteeing a certain
performance obligation required by the Mississippi Gaming Commission.
The Company used $1.0 million of cash in operating activities during the
three-month period ending May 31, 2004, compared to $1.6 million provided by
operating activities during the three-month period ending May 31, 2003.
During the three-month period ended May 31, 2004, the Company's operating
income decreased $1.6 million from the prior year three-month period, which
was the primary factor resulting in the use of cash.
27
30
Investing activities of the Company generated $6.1 million of cash during
the three-month period ending May 31, 2004. The Company generated net cash of
$6.4 million from the sale of the Broadwater Tower. The Company expended $0.7
million on gaming equipment and capital improvements, of which approximately
$0.4 million and $0.3 million was expended in St. Louis and Biloxi,
respectively.
In conjunction with the purchase of the Broadwater Property, PBLLC borrowed
the sum of $30.0 million from a third party lender, evidenced by a non-
recourse promissory note (the "Indebtedness"). PBLLC was obligated under the
Indebtedness to make monthly payments of interest accruing under the
Indebtedness, and was obligated to repay the Indebtedness in full on July 22,
2000. In addition, PBLLC was obligated to pay to the lender a loan fee in the
amount of $7.0 million which was fully earned and non-refundable when the
Indebtedness became due. PBLLC continued to make the monthly interest
payments of interest payments on the $30.0 million principal through April 19,
2001, when the Company announced that PBLLC had filed for reorganization under
Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court
for the Southern District of Mississippi.
On October 16, 2001, PBLLC filed its plan of reorganization which would
permit PBLLC to restructure its debt obligations in a manner which was
designed to permit it to continue as a going concern. Subsequently, on
February 28, 2003, PBLLC filed Modifications to Debtor's Plan of
Reorganization (together with the reorganization plan, the "Modified Plan").
On May 14, 2003, the Mississippi Bankruptcy Court entered the confirmation
order confirming the Modified Plan. The Modified Plan became effective on May
28, 2003 and the Company consummated the Modified Plan at that time. The
Modified Plan provides that the unsecured creditors of PBLLC will receive 100%
of their claims. Under the Modified Plan, the obligations to Lehman were
modified with respect to the debt amount, the interest rate and the due date.
An agreement has been entered into among the Company, President Mississippi;
Vegas Vegas, Inc. ("Vegas Vegas"); PBLLC; JECA, the owner of the Class B Unit
in PBLLC; John S. Aylsworth, President, Chief Operating Officer and Director
of the Company; Terrence L. Wirginis, Vice Chairman of the Board and Vice
President of Marine and Development; and SunAmerica, Inc. and McKay Shields
LLC (collectively, representing the Noteholders). It provides that various
assets owned by President Mississippi, Vegas Vegas and PBLLC (the "Assets")
will be marketed for sale, such sale to be subject to the Noteholders, who
have security interests in the Assets, approval.
Vegas Vegas owns the assets related to the Company's proposed development of
Destination Broadwater. See "Potential Opportunities." To the extent that
the sale includes the Vegas Vegas assets, the buyers shall allocate the amount
of purchase price attributable to the Vegas Vegas assets. The first $3.3
million of funds allocated to the Vegas Vegas assets shall be paid into the
Vegas Vegas bankruptcy estate and shall not be subject to the distribution
priorities provided in the agreement.
In the event of a sale of all or substantially all of the Assets, the
proceeds (gross proceeds less typical closing adjustments including brokerage
commission) from the sale, other than the amount to be paid to Vegas Vegas,
shall be allocated as follows:
(i) the first dollars shall be paid to Lehman, the secured lender to
PBLLC, to satisfy in full the indebtedness due to it;
(ii) the next $10.0 million shall be allocated equally between JECA and the
28
31
Noteholders on a dollar for dollar basis. If President Mississippi
assets are sold separately and the proceeds are paid to the
Noteholders, then such dollars shall be a credit on the amount payable
to Noteholders under this provision;
(iii) the next $8.0 million shall be paid to Noteholders;
(iv) the next $26.0 million (twice the remaining amount owing to JECA after
payment of the $5.0 million above) shall be split on a dollar for
dollar basis between the Noteholders and JECA;
(v) the next dollars shall be paid to the Noteholders until their debt is
satisfied in full;
(vi) the remaining dollars shall be paid to President Mississippi.
JECA has entered into an agreement with Messrs. Aylsworth, Wirginis and
Ralph J. Vaclavik, the Chief Financial Officer of the Company, pursuant to
which upon receipt of funds by JECA, JECA will use its best efforts to pay a
percentage of such funds to Messrs. Aylsworth, Wirginis and Vaclavik based on
the total sales proceeds to JECA.
The process and time for the sale of assets shall be reflected in documents
and pleadings to be drafted and may include a sale pursuant to Section 363 of
the Bankruptcy Code and/or the confirmation of a Plan of Reorganization for
President Mississippi and/or Broadwater Hotel, Inc. and/or the Company. The
agreement binds only the parties thereto and establishes priorities between or
among the parties to the agreement and third parties and shall not be binding
on any holder of claims or interests against anyone that is not a party to the
agreement. The term of the agreement is from March 1, 2004 to March 1, 2005.
This agreement becomes effective upon its approval by the Missouri Bankruptcy
Court, provided, however that the marketing of the assets for sale commenced
immediately upon its execution.
Subsequently, the Missouri Bankruptcy Court entered an order approving the
agreement but indicating expressly that nothing therein affected the rights of
Lehman. Thereafter, an Examiner, as described below, appointed at the request
of the Noteholders filed a motion to set aside the Court's order. That motion
is currently set for hearing on July 19, 2004.
In March 2004, the Missouri Bankruptcy Court appointed an Examiner for the
purpose of investigating and issuing a report concerning whether any
prohibited direct or indirect transfers have been made from the Company or its
subsidiaries that may be avoided or which were otherwise improper or
actionable under the Bankruptcy Code or other applicable law. The examination
concerned the purchase of the Broadwater Property from an entity owned by Mr.
Connelly, Chairman and Chief Executive of the Company, the financing of the
project, the process of the purchase and the operation of the complementary
rooms program, among other items. The Examiner's report was issued on May 28,
2004 and contains various findings and recommendations to be considered by the
various parties in interest. The Noteholders and other creditors now have the
report for their use.
As a result of the Examiner's report, on June 14, 2004, the Company, along
with certain of its debtor-in-possession subsidiaries (the "Debtors"), entered
into a tolling agreement with Mr. Connelly, Mr. Aylsworth, Karl G. Andren,
Royal P. Walker, Jr., Mr. Wirginis and J. Edward Connelly Associates, Inc.
("JECA"). Mssrs. Connelly, Aylsworth, Andren, Walker and Wirginis constitute
the Board of Directors of the Company. Under the terms of the tolling
agreement, the period of time from June 14, 2004 to and including July 31,
2004, shall not be relied upon under any statute of limitations in defense of
any lawsuit, action or proceeding that the Debtors could commence against the
Directors or JECA. No prediction is possible as to what, if any, action they
may take.
29
32
The Company defaulted under the terms of its "M/V "President Casino-
Mississippi" note. The M/V "President Casino-Mississippi" is the vessel
previously operated as a casino in Biloxi, Mississippi and Davenport, Iowa.
The vessel and various equipment aboard the M/V "President Casino-Mississippi"
collateralize a term note payable which was also personally guaranteed by John
E. Connelly, Chairman and Chief Executive Officer of the Company. The Company
continued to make the quarterly principal and interest payments on the note
prior to the Company's bankruptcy filing. Under the terms of the note
agreement, $2.1 million principal became due and payable in August 2002
together with interest and costs (the "Note"). In November 2002, the lender
brought an action against Mr. Connelly for breach of contract under his
personal guarantee. In December 2003, Mr. Connelly satisfied his personal
guarantee paying the lender $1.2 million. 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 for the Southern District of 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 allowed the vessel to be
seized and sold. On April 7, 2004, the vessel was auctioned and the lender
offered the highest bid of $0.5 million.
Because the Note was also guaranteed by the Company and President
Mississippi, the payment of the personal guarantee triggered a right of
contribution to Mr. Connelly from both the Company and the President
Mississippi. In addition, Mr. Connelly became subrogated to the lender's
right under the Note to collect the payment by him from the Company's
subsidiary that issued the Note. The Note remains outstanding but has been
credited with the payment by Mr. Connelly and will be credited by the value
realized on foreclosure. Thus, while the parties responsible for payment have
shifted, a portion of Mr. Connelly's guarantee has been paid, and the
collateral has been used to satisfy a portion of the Note, the obligation
remains outstanding. It is not possible at this time to determine the amounts
that may be owed by whom or to whom with respect to the above described person
and entities.
In addition, as a part of the settlement agreement with the lender, Mr.
Connelly was assigned a one-half interest in certain claims filed by the
lender in the Missouri Bankruptcy Court. It is not possible to predict
whether these claims will be successful or the amount, if any, that will be
paid with respect to these claims.
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
30
33
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.
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.
31
34
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
As of May 31, 2004, the Company had $115.7 million of debt. Of this amount
$75.0 million bears contractual interest at fixed rates and is classified as
liabilities subject to compromise and $1.7 million bears contractual interest
at a fixed rate and is classified as liabilities of discontinued operations.
The remaining $39.0 million bears contractual interest at a variable rate.
The $39.0 million Broadwater Property debt bears interest at a stipulated
variable rate at the greater of (i) 7.75% or (ii) 4.0% plus the LIBOR 30-day
rate. As of May 31, 2004, the interest rate applicable to the debt a carrying
variable rate was 7.75%. An increase of one percentage point in the average
interest rate applicable to the variable rate debt outstanding as of May 31,
2004, would increase the Company's annual interest costs by approximately $0.4
million. The Company continues to monitor interest rate markets, but has not
engaged in any hedging transactions with respect to such risks.
Although the Company manages its short-term cash assets to maximize return
with minimal risk, the Company does not invest in market rate sensitive
instruments for trading or other purposes and the Company is not exposed to
foreign currency exchange risks or commodity price risks in its transactions.
Item 4. Controls and Procedures
(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
Not applicable.
32
35
Item 3. Defaults Upon Senior Securities
The Company has 13.0% Senior Exchange Notes and 12.0% Secured Notes. The
Company did not pay the regularly scheduled interest payments of $6.4 million
that were each due and payable March 15 and September 15, 2000. Under the
Indentures pursuant to which the Senior Exchange Notes and Secured Notes were
issued, an Event of Default occurred on April 15, 2000, and is continuing as
of the date hereof. Additionally, the Company did not pay the $25.0 million
principal payment due September 15, 2000 on the Senior Exchange Notes. In
November 2000, the Company paid (i) $12.8 million interest and (ii) $18.75
million and $6.25 million principal on the Senior Exchange Notes and Secured
Notes, respectively. The Company did not make the interest payments due
September 15, 2001 and March 15, 2002. On June 20, 2002, the Company filed a
voluntary petition for reorganization under Chapter 11 of the bankruptcy code.
The noteholders of the Senior Exchange Notes and the Secured Notes were deemed
by management to be undersecured and as a result, interest ceased to accrue as
of the date of thereof. Total arrearage as of June 20, 2002, was $56.25
million of principal and $9.3 million of interest on the Senior Exchange Notes
and $18.75 million of principal and $2.8 million of interest on the Secured
Notes.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits filed as part of this report are listed on Index to
Exhibits accompanying this report.
(b) Reports on Form 8-K
On March 12, 2004, the Company filed a Current Report on Form
8-K dated March 11, 2004, reporting under Item 5 that the
Company entered into a consensual agreement with certain
Noteholders and filed the necessary papers with the Bankruptcy
Court whereby it will undertake a process to evaluate the
strategic alternatives for its Biloxi subsidiaries, President
Broadwater Hotel, LLC, President Riverboat Casino-Mississippi,
Inc. and Vegas Vegas, Inc. (collectively, the "Biloxi
Subsidiaries") which may include a sale, joint venture or
refinancing. Pursuant to this process, the Biloxi Subsidiaries
have retained Innovation Capital Holding, LLC to assist the
Company in reviewing its alternatives and evaluating prospective
transaction proposals.
On March 17, 2004, the Company filed a Current Report on Form
8-K dated March 16, 2004, reporting under Item 5 that the
Company had sold the 179-room Broadwater Tower Hotel for $6.5
million to Ocean Beach Club at Biloxi, LLC, Michael Mayer and
Drake Leddy, managing partners. The President's other hotel,
the 333-room President Broadwater Resort, was not included in
33
36
this transaction. The net proceeds were be used to reduce the
debt of the Company's subsidiary, President Broadwater Hotel,
LLC. The Company also entered into an initial lease through
September 15, 2004, with the new owners whereby the Company will
continue to operate Broadwater Tower Hotel with options for
additional extensions.
On May 5, 2004, the Company filed a Current Report on Form 8-K
dated May 3, 2004, reporting under Item 5 that the agreement to
sell the assets of its St. Louis casino operations on the
"Admiral" to Isle of Capri Casinos, Inc. was terminated by
mutual agreement of both parties.
34
37
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
President Casinos, Inc.
-----------------------------
(Registrant)
Date: July 14, 2004 /s/ Ralph J. Vaclavik
-----------------------------
Ralph J. Vaclavik
Senior Vice President and
Chief Financial Officer
35
38
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 Purchase and Sale of President Broadwater Tower
by and between President Broadwater Hotel, LLC and Site Realty
Inc., a subsidiary of Morgan Niko, Inc.
31.1 Certification of Chief Executive Officer Pursuant to 18 Rule
131-14(a) under the Securities Exchange Act of 1934, as amended.
31.2 Certification of Chief Financial Officer Pursuant to 18 Rule
131-14(a) under the Securities Exchange Act of 1934, as amended.
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
36
39
(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.
37