Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/ X / Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended February 28, 1997
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 organization) Identification No.)
802 North First Street, St. Louis, Missouri 63102
Address of principal executive offices
314-622-3000
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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 if disclosure of delinquent filers pursuant to Item
405 of Registration S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or
amendment to this Form 10-K. /X/
As of May 20, 1997, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $11,522,389.*
As of May 20, 1997, the number of shares outstanding of the Registrant's
Common Stock was approximately 30,194,700.
* Calculated by excluding all shares that may be deemed to be beneficially
owned by executive officers and directors of the Registrant, without conceding
that all such persons are "affiliates" of the Registrant for purposes of the
federal securities laws.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - The Registrant's definitive Proxy Statement for its annual meeting
of stockholders scheduled to be held July 23, 1997.
PART I
Items 1. and 2. Business and Properties.
General
President Casinos, Inc. (the "Company") develops, owns and operates
riverboat and/or dockside gaming casinos and related operations through its
subsidiaries. The Company's current gaming facilities and operations are
summarized as follows:
Davenport, Iowa
Managing entity - The Connelly Group, L.P.
Vessel - "The President"
Casino square footage - 37,000
Slots - 815
Gaming tables - 44
Opening of casino - April 1, 1991
Biloxi, Mississippi
Managing entity - The President Riverboat Casino-
Mississippi, Inc.
Vessel - "The Biloxi Barge"
Casino square footage - 38,000
Slots - 957
Gaming tables - 39
Opening of casino - August 13, 1992
Opening of current facility - June 30, 1995
St. Louis, Missouri
Managing entity - President Riverboat Casino-
Missouri, Inc.
Vessel - "The Admiral"
Casino square footage - 56,000
Slots - 1,122
Gaming tables - 63
Opening of casino without slots - May 27, 1994
Opening of casino with slots - December 9, 1994
In addition to its gaming operations, the Company owns and manages certain
hotel and ancillary facilities associated with its riverboat operations in
Davenport, Iowa and operates two nongaming dinner cruise, excursion and
sightseeing vessels on the Mississippi River in St. Louis, Missouri. The
Company also charters certain of its unused vessels to unrelated third
parties. Because of the integrated nature of these operations, the Company is
considered to be engaged in one industry segment.
The Company was incorporated in the State of Delaware in June 1992 and
completed the initial public offering of its Common Stock in December 1992.
1
The Company is the successor to businesses operated in St. Louis, Missouri
since 1985, Davenport, Iowa since October 1990 and Biloxi, Mississippi since
August 1992. The Company's principal executive offices are located in an
approximately 9,500 square foot building owned by the Company at 802 North
First Street, St. Louis, Missouri 63102, and its telephone number is (314)
622-3000.
Current Operations
Davenport Operations
In April 1991, the Company began riverboat gaming operations on the
Mississippi River in Davenport, Iowa on "The President." The Company's
operating license is renewable annually at the discretion of the Iowa Racing
and Gaming Commission after receipt of a renewal application from the Company.
The license was last renewed in April 1997. Davenport, Iowa along with
Bettendorf, Iowa and Rock Island and Moline, Illinois comprise the Quad Cities
metropolitan area. The Quad Cities metropolitan area has a population of
approximately 360,000, and is approximately a three-hour drive from Chicago.
"The President," built in 1924, is a five-deck, steel-hulled passenger
vessel and is approximately 300 feet in length. During the period November
13, 1995 through April 1, 1996, "The President" underwent a $4.0 million
refurbishment and a Coast Guard mandated five-year hull inspection. During
this time "The President" was temporarily replaced with the Company-owned
vessel, "The President Casino-Mississippi." "The President," upon completion
of its hull inspection and renovations, reopened on April 3, 1996 with an
increased number of slot machines and other amenities.
Prior to May 1994, Iowa gaming legislation contained certain limitations
which provided Illinois gaming riverboats a competitive advantage over gaming
concerns in Iowa. However, in May 1994, Iowa gaming laws were amended to
remove all per passenger loss limitations (previously set at $200 per gaming
session), size of bet limitations (previously set at $5.00) and the
restriction on the percentage of space on a riverboat which may be utilized
for gaming (previously set at 30%). In addition, the Iowa Racing and Gaming
Commission was granted the authority to set cruising schedules for riverboats
and to permit dockside gaming throughout the year. The legislation has
enabled the Company to compete more effectively against Illinois riverboats
which are required to cruise during gaming sessions. The Company must
currently conduct at least 100 riverboat cruises per year, the timing of which
are set at the Company's discretion with the approval of the Iowa Racing and
Gaming Commission. Iowa riverboats can remain dockside for all other gaming
sessions. The casino is open 24 hours per day, seven days per week.
Competition for local customers continues to intensify in the Quad Cities
metropolitan area. In April 1995 a new casino commenced operations in
Bettendorf, Iowa, which is located on the Mississippi River five miles upriver
from the Davenport operations. With the addition of this casino, there are
now four casinos competing in the Quad Cities market within a 25 mile radius
of "The President." One of those casinos is located on the Illinois side of
2
the Mississippi River where the gaming laws currently require riverboat
casinos to cruise for all of their gaming sessions. A change in the Illinois
cruising laws could have an adverse effect on the Davenport operation.
The Company's other Davenport facilities are an adjunct to its gaming
operations and are not viewed as independent profit centers. The Company owns
and operates The Blackhawk Hotel in downtown Davenport, located approximately
two blocks from "The President." The Blackhawk Hotel has 189 rooms and is
connected to the RiverCenter, a 10,000 square foot convention center operated
by the City of Davenport. The hotel also features a 500-seat grand ballroom
and five additional meeting rooms to accommodate meetings and convention
activities. During fiscal 1996, a new 223-room hotel opened directly across
from "The President." While the new hotel has intensified competition for The
Blackhawk Hotel, management believes the addition of hotel rooms to the Quad
Cities market has improved the marketability of the Quad Cities for the
Company's gaming operations.
Pursuant to a development agreement with the City of Davenport, the Company
submitted to the City plans for the development of certain Company-owned
property located in close proximity to "The President." During fiscal 1996,
the Company and the City reached a mutually acceptable development plan that
included the expansion of the Company's parking areas. The Company has fully
funded its obligation under the agreement. However, the construction has not
yet been completed. The construction is scheduled to be completed in the
Summer of 1997, at which time the Company will be released from its $250,000
surety bond (see Note 11 to the Consolidated Financial Statements).
The Company leases certain levee property in Davenport, Iowa from the City
of Davenport. This lease expires in 2017. The Company is required to pay
certain boarding and docking fees and a special payment in lieu of property
taxes to the City. These fees currently aggregate to a base amount of
$814,000 plus 82 cents per passenger over 1,117,579 passengers. Both the base
amount and per passenger charges related to the docking fees are subject to an
annual 4% escalator.
Biloxi Operations
The Company conducted dockside gaming operations in Biloxi, Mississippi on
"The President Casino-Mississippi" from August 13, 1992 through June 18, 1995
through its wholly-owned subsidiary, The President Riverboat Casino-
Mississippi, Inc. ("President Mississippi"). "The President Casino-
Mississippi" was the smallest of 13 casinos operating in the Mississippi Gulf
Coast market. On June 30, 1995, the Company reopened the Biloxi gaming
operations aboard the newly renovated "The Biloxi Barge." Replacing "The
President Casino-Mississippi" with "The Biloxi Barge" increased casino square
footage from 20,500 to 38,000. In addition, "The Biloxi Barge" features a
full service 250-seat dining facility, an amenity not available on the
previous facility. Biloxi is located on the Gulf of Mexico 75 miles east of
New Orleans. The Biloxi/Gulfport/Bay St. Louis area has a population of
approximately 125,000. The Company's Mississippi gaming license was last
renewed in June 1996 for a two-year period.
3
Since gaming began in Mississippi in August 1992, competition has increased
significantly in the Mississippi Gulf Coast market. There are currently ten
casinos operating in this area. The Company's operating results have been
materially and adversely affected as a result of such increased competition.
The Company also faces competition from gaming operations in the metropolitan
New Orleans area and elsewhere in Louisiana and Mississippi. As of February
28, 1997, the New Orleans metropolitan area had four casinos in operation.
Management believes Biloxi is now moving into a new generation of casino
operations and is becoming a major destination point for gaming entertainment.
The area is becoming more widely known with many guests coming long distances
to enjoy the weather, beaches, golfing and other entertainment. During recent
years, several large gaming companies have built large hotel/casino complexes
and have captured a significant portion of the Mississippi Gulf Coast market.
This trend is continuing, with several new large projects under construction.
Many of these competitors have substantially greater name recognition and
financial and marketing resources than the Company.
In order to provide the Company with the opportunity to compete more
effectively in the Biloxi market, on February 17, 1995, President Mississippi
Charter Corporation ("Charter Corporation"), a newly formed, wholly-owned,
non-guarantor subsidiary of the Company, entered into a charter agreement (the
"Charter Agreement") with American Gaming and Entertainment, Ltd. ("AGE").
Pursuant to the Charter Agreement, Charter Corporation agreed to charter "The
Biloxi Barge" from AGE for an initial term of five years at a cost of
approximately $329,000 per month commencing on June 19, 1995 (the "Charter").
Under the Charter Agreement, Charter Corporation is responsible for all
insurance, maintenance and other operating costs relating to "The Biloxi
Barge" during the term of the Charter. The Charter Agreement provides that
Charter Corporation may, at its option, extend the term of the Charter
Agreement for two additional five-year terms at the same charter rate. In
addition, Charter Corporation has the option to purchase "The Biloxi Barge" at
any time during the term of the Charter Agreement for a purchase price equal
to the lower of the appraised value or the amortized value (as such terms are
defined in the Charter Agreement); provided, however, that AGE may refuse to
sell "The Biloxi Barge" for a purchase price of less than 90% of the amortized
value. Charter Corporation acquired approximately 600 slot machines utilized
by AGE on "The Biloxi Barge" in exchange for the assumption of certain related
indebtedness. The monthly payments of such indebtedness, which total
$121,000, began in June 1995 and end in August 1997. The Company retained
"The President Casino-Mississippi" for use at the Company's other gaming
operations (see Davenport Operations and St. Louis Operations). President
Mississippi subleases "The Biloxi Barge" from Charter Corporation for a term
of five years on substantially the same terms contained in the Charter
Agreement. AGE has filed an action against Charter Corporation and President
Mississippi with respect to certain disputed charter payments under the
Charter Agreement. See "Item 3. Legal Proceedings."
Management believes that "The Biloxi Barge" improved the Company's presence
in Biloxi and has positioned the Company to continue to capture a portion of
the remaining market. However, management believes that as newer and larger
4
casino complexes enter the Mississippi Gulf Coast market, it will become more
difficult to compete. Thus, the Company continues to study strategic
alternatives related to the Biloxi casino operation.
"The Biloxi Barge" is docked near the Broadwater Beach Hotel and Resort (the
"Resort") where the Company leases a mooring site, parking facilities and
offices from BH Acquisition Corporation ("BH"). BH is wholly-owned by John E.
Connelly, Chairman, President, Chief Executive Officer and principal
stockholder of the Company.
The Resort, together with its affiliated hotels, The Broadwater Tower and
Broadwater Inn (collectively, "the Resorts"), have approximately 800 rooms and
are in close proximity to the Biloxi convention center. The Company,
generally through tour operators, arranges for groups to be brought to the
Resorts in anticipation that members of these groups will utilize the
Company's gaming facilities. Room costs, at fair market value, are paid
either by group members, the tour operator, the Company or a combination
thereof.
The initial term of the lease of the mooring site, parking facilities and
offices for the Company's Biloxi operations (the "Biloxi Lease") expired July
14, 1995 and the Company exercised its right for the first of nine three-year
renewal options. The current rent under the lease is approximately $3.3
million per year and the Company is required to pay for all improvements to
the leased premises and to bear the cost of all taxes, fees, assessments and
expenses. Upon each such renewal, the rent will be increased to reflect
changes in the consumer price index or adjusted to an independent fair market
appraisal of the property.
The premises subject to the Biloxi Lease have been determined by the
Secretary of State of Mississippi to constitute tidelands under the
Mississippi Trust Tidelands Act (the "Tidelands Act"). Under the Tidelands
Act, land which falls below the mean high tide level may be determined to
constitute tidelands by the Secretary of State of Mississippi. The Tidelands
Act provides that land which is designated as tidelands is deemed to be owned
by the State of Mississippi in trust. Property owners of affected land are
provided the first opportunity to negotiate with the State of Mississippi for
a lease of the property. During December 1996, BH entered into a 40-year
lease agreement (the "Tidelands Lease") with the State of Mississippi for said
tidelands for an annual rental fee of approximately $21,000, adjustable every
five years as defined in the lease agreement. The Company has entered into a
sublease agreement from BH under the same terms as the Tidelands Lease.
On May 13, 1997 the Company announced that it has agreed in principal to
purchase for approximately $40.5 million certain real estate and improvements
located on the Gulf Coast in Biloxi, Mississippi from BH. The property
comprises approximately 260 acres and includes the Resort and the Broadwater
Tower (two hotels with over 500 rooms), the 138-slip Broadwater Marina, and
the adjacent 18-hole Sun Golf Course. The Broadwater Marina is currently the
site of the Company's casino operations in Biloxi and is leased by the Company
from BH under a long-term lease agreement. The purchase is subject to
5
finalization of financing and various other details related to the transition.
The Company anticipates investing $5.0 million in President Broadwater
Hotel, LLC, which would own and operate the new properties. This entity would
finance the purchase with $30.0 million of outside financing and $10.0 million
of purchase money preferred equity from BH. Such financing would be non-
recourse to the Company.
St. Louis Operations
On May 27, 1994, the Missouri Gaming Commission licensed the Company to
conduct dockside gaming operations on "The Admiral" in St. Louis, Missouri
through its wholly-owned subsidiary, President Riverboat Casino-Missouri, Inc.
("President Missouri"). The Company's initial license was subsequently renewed
and has been extended until June 30, 1998.
"The Admiral," an approximately 400-foot long vessel, is continuously docked
near the base of the Gateway Arch at a mooring site leased by the Company from
the City of St. Louis. The Company commenced limited gaming operations on
"The Admiral" with 64 blackjack tables, 10 craps tables, 22 poker tables and
approximately 400 video poker games. On November 8, 1994, in a statewide
referendum, Missouri voters approved a constitutional amendment permitting the
operation of "games of chance," including slot machines, on riverboat gaming
facilities in Missouri. Following such approval, the Company re-configured
"The Admiral" to include slot machines.
The Company leases five mooring sites in St. Louis, Missouri from the City
of St. Louis. The Company's leases (including the lease for "The Admiral's"
mooring site) provide that upon the use of a vessel as a gaming facility, the
rentals will increase by an amount equal to 2% of the gross receipts realized
from its riverboat gaming activities (total amount wagered less winnings paid
to wagerers). This percentage may be adjusted (higher or lower) to equal the
gaming rentals charged to other properties in the riverfront area of St. Louis
where gaming is conducted. Such an agreement may result in a substantial
increase in the Company's St. Louis lease fee. A substantial increase may
have a material adverse effect on the Company's future St. Louis gaming
operations.
The St. Louis mooring leases expire on dates ranging from 2002 to 2013,
assuming the exercise of all extension options provided therein. The lease
for "The Admiral" mooring site terminates in December 2008. The extension
options provided under two of the leases must be approved by the City, which
approval the City may not unreasonably withhold. However, the City will be
deemed to have approved each extension exercised by the Company if the Company
is in compliance with the lease terms. Each lease grants the City the right
to change or cancel the lease or to relocate the Company's mooring locations
for right-of-way, sewer or flood wall construction purposes. Each lease,
except "The Admiral" lease, allows the City to terminate the lease for any
municipal use, including the economic development of a designated portion of
the central riverfront area of St. Louis, where the lease sites are located.
The City is also permitted to terminate any lease if the Company does not
6
operate at the leased moorings for 12 consecutive months.
Competition is intense in the St. Louis market area. There are presently
five other casino companies operating in the market area and competing for
local customers. Two of these are Illinois casino companies operating single
casino vessels on the Mississippi River, one directly across the Mississippi
from the "The Admiral" and the second 20 miles upriver in Alton, Illinois.
There are three Missouri casino companies, each of which operates two casino
vessels approximately 20 miles west of St. Louis on the Missouri River, one in
the City of St. Charles, Missouri and two in Maryland Heights, Missouri. The
two in Maryland Heights opened in March 1997. Riverboats in each of the
states, Illinois and Missouri, have competitive advantages/disadvantages
resulting from gaming regulations in their respective states. While Missouri
regulations do not require the vessels to actually cruise, simulated cruising
requirements are imposed which allow entry on a vessel for only a 45 minute
period every two hours. Those competitors having two casino vessels can
alternate hourly boarding times and provide virtually continuous boarding for
guests. Thus, they have a distinct competitive advantage over the Company,
which has only one vessel, "The Admiral." Illinois casino vessels are
required to cruise, thereby limiting ingress and egress to the casinos. In
addition, Missouri regulations limit the loss per cruise per passenger by
limiting the amount of chips or tokens a guest may purchase to $500 per two-
hour gaming session. The lack of a statutory loss limit on Illinois casinos
allows them to attract higher stake gamblers; additionally, their guests are
not burdened with the administrative requirements related to the loss limits.
Any change in the legislation related to these requirements could have a
positive or negative impact on the competitive environment between Missouri
and Illinois casinos.
In April 1996, the Company applied to the Missouri Gaming Commission for a
license to operate a second riverboat casino on the St. Louis riverfront. A
second riverboat would allow for virtually continuous boarding for guests upon
one of the two vessels. While opening a second boat will remain under
consideration, the Company currently believes that the potential economic
benefits do not justify the necessary capital outlay.
On November 17, 1995, the Board of Aldermen of the City of St. Louis
approved a lease agreement with a new developer (the "Developer") for the
development of the Laclede's Landing site, a section of waterfront property
north of the present mooring site of "The Admiral". Such lease is contingent
upon various events occurring including, among others, the selection of the
Developer by the Missouri Gaming Commission for investigation for a gaming
license and a determination by the Developer that development of the Laclede's
Landing site would be economically feasible. The lease provides for up to
twenty months for completion of the above and other pre-development matters,
and for up to an additional thirty months for completion of the project. In
the event that the Developer develops the Laclede's Landing site and commences
gaming operations, "The Admiral" will face increased competition, which may
have a material adverse impact on its gaming operations. Additionally, it may
result in an increase to "The Admiral's" mooring lease fees and other
consideration payable to the City, as discussed above.
7
The Company has operated dinner cruise, excursion and sightseeing riverboats
on the Mississippi River at St. Louis since 1985. The Company currently owns
and operates two such vessels, each with a capacity of approximately 350
passengers.
Vessels Owned/Chartered
In addition to the vessels presently used in its gaming operations, the
Company owns the "Majestic Star" (formerly "The President Casino-V"). The
"Majestic Star" is a 308 foot long sea-worthy passenger boat which the Company
had intended to use in a Gary, Indiana gaming development which was
subsequently abandoned. On August 15, 1995, the Company entered into a
charter agreement with its former Indiana partner ("Barden") to lease the
"Majestic Star," without gaming equipment, for a five-year term (which term is
cancelable at any time by Barden upon 180-day advance written notice) at an
annual rental fee of $1.5 million for the first two years and for fair market
value thereafter. This charter commenced in May 1996. Barden has publicly
announced its intent to replace the "Majestic Star" with a newly constructed
vessel in October 1997. A new vessel is required under the terms of Barden's
bond indenture. The Company has not received the 180-day advance written
notice, but anticipates that the charter will end in late Fall of 1997.
The Company also owns "The President Casino-Mississippi", previously
utilized at the Company's Biloxi and Davenport operations. "The President
Casino-Mississippi" is 292-feet long and 65-feet wide, contains 22,000 square
feet of gaming space on three decks and will accommodate approximately 620
slot machines and 40 table games. Gaming can be conducted on all three of the
vessel's decks. The Company is currently seeking various alternatives,
including, but not limited to, the sale or lease of this vessel.
Potential Growth Opportunities
The Company continually and selectively explores gaming developments in
current and emerging gaming markets, including riverboat, land-based and
Indian gaming opportunities. Pursuit of such opportunities by the Company is
dependant upon a number of economic and regulatory factors including the
Company's ability to secure required federal, state and local governmental
licenses and approvals and the availability of financing for such projects on
acceptable terms. In addition, the Company is subject to intense competition
from other companies in the same industry for the development of new gaming
opportunities, many of which have significantly greater financial, marketing
and other resources than the Company. Accordingly, there can be no assurance
that the Company will be able to pursue other identified gaming opportunities
or recover its investment in any such new opportunities.
Biloxi, Mississippi
See "Current Operations - Biloxi" for details regarding the Company's
potential acquisition of 260 acres in Biloxi, Mississippi. This site, with
its beachfront location and contiguous golf course, has excellent potential
for being developed into a full-scale luxury destination resort offering an
8
array of entertainment attractions in addition to gaming. It is also uniquely
qualified to be a multi-casino facility. If the acquisition of the property
is completed, the Company would seek a joint venture partner to develop the
site.
Philadelphia, Pennsylvania
In December 1993, the Company entered into an agreement for the rights to
utilize an 18-acre riverfront site in Philadelphia, Pennsylvania (the
"Philadelphia Property") either through entering a long-term lease on the
property or, under certain conditions, to purchase the property at its
determined fair market value. The Company also acquired an option to lease a
city-owned pier which is located on property immediately contiguous to the
Philadelphia Property (the "Pier"). The Company believes that the
Philadelphia Property is a prime gaming site because it is readily accessible
from major highways and will permit adequate parking and room for additional
development. The Company entered into the lease option and the option for the
pier in anticipation of the legalization of gaming in Pennsylvania. The
agreement prohibits the Company from owning or managing any gaming facility in
Philadelphia, other than a facility to be located on the Philadelphia
Property.
The lessor of the Philadelphia Property also assigned (the "Assignment") to
the Company all of the lessor's rights, title and interest under an option
agreement with the City of Philadelphia which provides that the lessor may
enter into a 99-year lease of the Pier.
During fiscal 1996, based upon developments which indicated an uncertainty
as to the passage of riverboat gaming legislation in Pennsylvania prior to the
expiration of the initial option agreement, the Company wrote-off the
accumulated cost of the option of $11.0 million.
On May 7, 1996, the Company entered into a separate agreement to secure
additional lease rights with respect to the same property. As part of the
agreement, the Company paid $2.0 million to secure the right to purchase
additional options for five separate periods extending from January 1, 1997
through December 31, 1999. The first option period covers the twelve-month
period January 1 through December 31, 1997. The four remaining option periods
are for subsequent six-month intervals.
In December 1996, the Company modified and exercised its option agreement to
secure the above lease rights for the period January 1, 1997 through December
31, 1997. Pursuant to the modified option agreement, the Company remitted
$1.2 million. The modified agreement also calls for additional payments of up
to $2.1 million if an authorized state-wide voter referendum on the
legalization of full scale riverboat gaming in Philadelphia County,
Pennsylvania is placed on the ballot during calendar 1997 or a new gaming
company is obtained for the second gaming site at the location.
Each of the four remaining option periods require the Company to pay $0.3
million per month through the option period. Upon the exercise of any option,
9
the Company would begin a ten-year lease with five (5), five (5) year
extensions available. If the Company exercises this option, the Company will
be obligated to pay annual rent based upon a combination of fixed minimum
payments or a percentage of the Company's "net gaming win" (as defined in the
lease agreement), but in no event will such minimum annual rent be less than
$3.5 million. During the option period and the lease period, the Company will
be obligated to pay all maintenance costs, taxes and insurance with respect to
the property.
Massena, New York
In October 1993, the Company entered into a joint venture with an unrelated
third party to manage one of the land based gaming casinos to be owned by the
St. Regis Mohawk Indian Tribe (the "Tribe") on its reservation near Massena,
New York. Massena is located approximately 50 miles from Montreal, Canada.
The Company, through a wholly-owned subsidiary, owns a 50% interest in the
joint venture. The Tribe has entered into a Compact with the State of New
York. The Compact has been approved by the Bureau of Indian Affairs and the
management agreement was submitted to the National Indian Gaming Commission
("NIGC") for its approval. However, a new chief of the Mohawk Indian Tribe
was elected after the execution of the management agreement and the Tribe
subsequently notified the NIGC of its desire to withdraw its request for
approval of the management agreement in order to provide the members of the
Tribe an opportunity to review the agreement. Due to the uncertainty with
respect to this transaction and the Company's ability to recover its costs,
the Company wrote-off its $4.1 million investment in this project during
fiscal 1995.
On December 1, 1995, the joint venture entered into an amended and restated
management agreement with the Tribe. This agreement was later amended on
April 18, 1996. The management agreement, which is for a term of five years,
was submitted to the Bureau of Indian Affairs for approval. Such approval is
contingent upon the Company receiving project financing that is acceptable to
both the Company and the NIGC. The Tribe may terminate the management
agreement at any time prior to the receipt of such approval. There can be no
assurance that the joint venture will obtain financing on acceptable terms, if
at all, or if such financing is obtained, that the NIGC will approve the
management agreement. If the management agreement is approved, the Company
will be obligated to contribute an additional $2.3 million to the joint
venture for use primarily for licensing and related fees and to lend
approximately $15.0 million to the joint venture for use primarily for the
construction and the equipping of a 76,800 square foot gaming facility which
the Company expects to initially contain approximately 100 tables games and
1,500 bingo seats. Current New York law does not permit slot machines to be
utilized at the proposed gaming facility and a federal court has held that the
use of video pull tabs is not permitted. The Company, with the consent of the
Tribe, may make an additional investment of up to $2.3 million if such
investment is warranted. Subject to guaranteed minimum monthly payments to
the Tribe of $250,000 to $800,000 and the repayment of the Company's loan, the
joint venture will receive 25% of the net revenues generated from the gaming
facility, one-half of which will be the Company's share. In the event the
10
Company proceeds with this project, there can be no assurance that the joint
venture will be profitable.
Marketing and Sales
The Company targets its marketing efforts at middle income recreational
gaming customers. The Company relies on a mix of billboards, television,
radio and print advertisements in both the local and regional markets, to
attain a high recognition level. The Company also has its "Captain's Club"
preferred slot player program, together with electronic slot player tracking,
a table player tracking and rating system, hosts, gaming tournaments, special
events, direct mailing, telemarketing and other casino marketing techniques to
identify, recognize and cultivate frequent and better casino customers. This
effort is supported by direct marketing, a targeted trade advertising schedule
and attendance at industry trade shows and sales gatherings.
Regulatory Matters
Gaming Regulations
General. The ownership and operation of gaming facilities are subject to
extensive state and local regulation. The Company's Davenport operations are
regulated by the Iowa Racing and Gaming Commission, the Company's Biloxi
operations are regulated by the Mississippi Gaming Commission and the
Company's St. Louis gaming operations are regulated by the Missouri Gaming
Commission. As a condition to obtaining and maintaining a gaming license, the
Company must submit detailed financial, operating and other reports to each
such Commission, each of which has broad powers to suspend or revoke licenses.
In addition, substantially all of the Company's material transactions are
subject to review and/or approval by the various regulatory bodies. Any
person acquiring 5% or more of the Common Stock or of the equity securities of
any gaming entity must be found suitable by the appropriate regulatory body.
Various license fees and taxes are payable to the jurisdictions in which the
Company conducts gaming operations. These taxes are calculated in various
ways, are generally payable either weekly, monthly, quarterly or annually and
may be based upon (i) a percentage of the gross gaming revenues received by
the casino operation, (ii) the number of slot machines operated by the casino,
(iii) the number of table games operated by the casino and/or (iv) passenger
counts. A casino entertainment tax is also paid by the licensee where
entertainment is furnished in connection with the selling of food or
refreshments. The Company estimates that state and local gaming taxes for the
Company's Biloxi operation approximate 12% of net gaming win plus certain
fees. Iowa has a graduated tax of approximately 20% of net gaming win and
charges additional fees on a per customer and per boat basis. Under the
Operator's Contract, as amended, the Company is required to pay the Riverboat
Development Authority (the "Authority") $27,500 per week and $1.50 per
passenger in excess of 1,117,579 passengers during the period April 1 through
March 31 of each year. The Company also pays the Authority an amount equal to
2% of the adjusted gaming receipts in excess of $34.0 million for each of the
Authority's fiscal years commencing July 1, 1994. The Company also pays the
11
City of Davenport (i) an annual minimum boarding fee equal to the greater of
$558,790 or 50 cents per passenger, (ii) a guaranteed docking fee of $131,000
plus 11.7 cents per passenger in excess of 1,117,579 passengers during the
period April 1 through March 31 of each year and (iii) an annual lump sum
payment of $123,516 plus 20 cents per passenger in excess of 1,117,579
passengers during the period January 1 to December 31, commencing January 1,
1995. The Missouri gaming legislation imposes a tax of 20% of adjusted gross
receipts from gaming activities and a $2.00 per passenger fee.
The Company, its employees and other individuals or entities having material
relationships with the Company are required to obtain and hold various
licenses and approvals in Iowa, Mississippi and Missouri and will most likely
be required to do so in each other jurisdiction in which the Company may
conduct a gaming operation. If a gaming authority were to find a director,
officer or key employee unsuitable for licensing or unsuitable to
continue having a relationship with the Company, the Company would have to
suspend or dismiss such person. The failure of the Company or any of its key
personnel to obtain or retain a license in any jurisdiction could have a
material adverse effect on the Company and its prospects or its ability to
obtain or retain licenses in other jurisdictions. Generally, regulatory
authorities have broad discretion in granting, renewing and revoking licenses.
Moreover, any jurisdiction into which the Company may seek to expand its
gaming operations may require the Company to apply for and obtain regulatory
approvals with respect to the construction, design and operational features of
the vessel it intends to utilize. Obtaining such licenses and approvals may
be costly, time consuming and cannot be assured. Riverboat as well as certain
dockside operations are also subject to stringent regulation by the U.S. Coast
Guard and to marine insurance requirements.
The Company may be subject to substantial fines for each violation of a
gaming law or regulation. In addition, a violation of a gaming law or
regulation may subject a license to suspension or revocation. Limitation,
conditioning or suspension of a gaming license could (and revocation of any
gaming license would) materially adversely affect the operations in that
jurisdiction.
In July 1996, a bill was passed by the U.S. Congress establishing a National
Gaming Impact and Policy Commission to conduct a comprehensive study of the
social and economic impacts of gambling in the United States and make
recommendations for changes to the policies governing gambling that the
Commission may deem appropriate. While it is not possible at this time to
predict the outcome of the Commission's deliberations, any further regulation
of gaming at the federal level may result in further regulation of the
Company's gaming operations which could have a material adverse impact on the
Company's future results of operations.
Mississippi Gaming Regulations. Gaming was authorized in Mississippi in
June 1990 but gaming operations did not commence until August 1992. The
ownership and operation of casino gaming facilities in Mississippi are subject
to extensive state and local regulation. The Company is registered as a
publicly traded holding company under the Mississippi Gaming Control Act and
12
its gaming operations are subject to the licensing and regulatory control of
the Mississippi Gaming Commission (the "Mississippi Commission") and various
local, city and county regulatory agencies.
Licenses to conduct gaming operations in the State of Mississippi are not
transferable and are required to be renewed on a periodic basis. Each issuing
agency may at any time revoke, suspend, condition, limit or restrict a license
or deny approval to own shares of stock in the Company or a gaming entity for
any cause deemed reasonable by such agency.
The Mississippi Commission has the authority to require a finding of
suitability with respect to any stockholder regardless of such stockholder's
percentage of ownership. In this regard, the Company's Certificate of
Incorporation provides that the Company may redeem any shares of the Company's
capital stock held by any person or entity whose holding of shares may cause
the loss or non-reinstatement of a governmental license held by the Company.
Such redemption shall be at fair market value, as defined in the Company's
Certificate of Incorporation, regardless of the price the stockholder paid for
the shares. Mississippi law also contains a provision which requires the
Company to purchase for cash all shares of any stockholder found unsuitable by
the Mississippi Commission and requires such purchase to be made within ten
days of the finding of unsuitability. In either case, the stockholder is
required to pay all costs of investigation. In addition, any individual who
is found to have a material relationship to, or material involvement with, the
Company may be required to be investigated in order to be found suitable or to
be licensed as a business associate. Key employees, controlling persons or
others who exercise significant influence upon the management or affairs of
the Company may also be deemed to have such a relationship or involvement.
In connection with its license, the Company and President Mississippi are
required to submit detailed financial, operating and other reports to the
Mississippi Commission. Substantially all loans, leases, sales of securities
and similar financing transactions entered into by President Mississippi must
be reported to or approved by the Mississippi Commission. In addition, the
Mississippi Commission regulates the Company's ability to engage in certain
types of transactions. For example, a change in control of the Company or a
plan of reorganization (as defined in the regulations) by the Company may not
occur without the prior approval of the Mississippi Commission. Similarly,
Mississippi gaming legislation requires that each person employed by President
Mississippi as a gaming employee obtain a valid work permit issued by the
Mississippi Commission. In addition, applicable provisions of the Local
Option Alcoholic Beverage Control Law of the State of Mississippi require that
each employee of a licensed retailer who handles alcoholic beverages obtain a
valid permit issued by the Alcoholic Beverage Control Division of the
Mississippi State Tax Division. All employees of President Mississippi who
are required to obtain such permits have either obtained such permits or have
completed applications therefor and are permitted to act in the positions for
which they were hired pending approval of such applications.
The Mississippi Commission has the authority to approve or disapprove the
Company's future operations outside of Mississippi. The Company's Davenport
13
operations were reviewed and approved during its Biloxi licensing process. On
May 24, 1993, the Company received all requisite approvals from the
Mississippi Commission to conduct gaming operations in the jurisdictions in
which it was then operating or proposing to operate without further action by
the Mississippi Commission. The Company's current non-Mississippi gaming
operations do not require re-approval by the Mississippi Commission except as
part of the Company's application for renewal of its license. The Mississippi
regulations require that the Company notify the Mississippi Commission prior
to conducting gaming operations in any additional jurisdictions and provide
certain documentation to the Mississippi Commission relating to proposed
gaming operations.
Iowa Gaming Regulations. In 1989, the State of Iowa enacted The Excursion
Gambling Act which legalized riverboat gaming on the Mississippi and Missouri
Rivers and certain other waterways located in Iowa. Pursuant to The Excursion
Gambling Act, the Iowa Racing and Gaming Commission (the "Iowa Commission")
was established with jurisdiction to regulate all gaming operations in Iowa.
In May 1994, the Iowa gaming laws were amended to remove all per passenger
loss limitations, size of bet limitations and restrictions on the percentage
of space on a riverboat which may be utilized for gaming and authorized the
Iowa Commission to set cruising schedules for riverboats and to permit
dockside gaming throughout the year.
The ownership and operation of gaming facilities in Iowa are subject to
extensive state laws, regulations of the Iowa Commission and various county
and municipal ordinances concerning, among other things, the responsibility,
financial stability and character of gaming operators and persons financially
interested or involved in gaming operations. All gaming operators must be
approved and licensed by the Iowa Commission. Gaming licenses are issued for
not more than three years and are subject to annual renewals thereafter. The
Iowa Commission has broad discretion with respect to such renewals. Licenses
issued by the Iowa Commission may not be transferred to another person or
entity. The Company is required to submit detailed financial and operating
reports to the Iowa Commission. Contracts in excess of $50,000 must be
submitted to and approved by the Iowa Commission.
Gaming is permitted only on riverboats which recreate, as nearly as
practicable, Iowa's riverboat history and have a capacity for at least 250
persons. In addition, the licensee must utilize Iowa resources, goods and
services in the operation of the riverboat. An excursion gambling boat must
operate at least one excursion each day for 100 days during the excursion
season from April 1 through October 31. Excursions consist of a minimum of
two hours. While an excursion gaming boat is docked, passengers may embark or
disembark at any time.
Pursuant to its rule-making authority, the Iowa Commission requires
officers, directors and certain key employees of the Company to be licensed by
the Iowa Commission. In addition, anyone having a material relationship or
involvement with the Company may be required to be found suitable or to be
licensed. The Iowa Commission has jurisdiction to disapprove a change in
position by such officers or key employees and the power to require the
14
Company to suspend or dismiss officers, directors or key employees or sever
relationships with other persons who refuse to file appropriate applications
or whom the Iowa Commission finds unsuitable to act in such capacities.
The Iowa Commission may also require any individual who has a material
relationship with the Company to be investigated and licensed or found
suitable. Any person who acquires 5% or more of the Company's equity
securities must be approved by the Iowa Commission prior to such acquisition.
The applicant stockholder is required to pay all costs of such investigation.
Missouri Gaming Regulations. Gaming on the Missouri and Mississippi Rivers
in the State of Missouri was originally authorized pursuant to a statewide
referendum on November 3, 1992. On April 29, 1993, Missouri enacted revised
legislation (the "Missouri Gaming Law") which amended the existing
legislation. The Missouri Gaming Law also established the Missouri Gaming
Commission (the "Missouri Commission"), which is responsible for the licensing
and regulation of gaming in Missouri and has the discretion to approve license
applications for both permanently moored ("dockside") riverboat casinos and
powered ("excursion") riverboat casinos.
On January 25, 1994, the Missouri Supreme Court held that games of chance,
including certain games authorized under the Missouri Gaming Law such as bingo
and keno, constituted "lotteries" and were therefore prohibited under the
Missouri Constitution. On April 5, 1994, Missouri voters narrowly defeated
the adoption of a constitutional amendment which would have exempted excursion
boats and floating facilities from such constitutional prohibition on
lotteries. In a statewide election on November 8, 1994, Missouri voters
approved the adoption of an amendment to the Missouri Constitution which
authorizes both games of skill and games of chance, a measure virtually
identical to the one which was defeated in April 1994.
Under the Missouri Gaming Law, the ownership and operation of riverboat
gaming facilities are subject to extensive state and local regulation. The
Missouri Commission has broad discretion to revoke or suspend gaming licenses
and impose other penalties for violation of the Missouri Gaming Law and the
rules and regulations promulgated thereunder. Licenses issued by the Missouri
Commission to conduct gaming operations are subject to periodic renewals and
may not be transferred or pledged as collateral. The Company, its
subsidiaries and certain of its officers and employees are subject to various
regulations. The Company is prohibited from making a public issuance of debt
or equity or engaging in various other financial transactions without first
notifying the Missouri Commission at least 60 days prior to consummation of
such a transaction. The Missouri Commission may disapprove such issuance or
require such issuance to be delayed pending further investigation.
The Missouri Gaming Law imposes operational requirements on riverboat
operators, including a charge of two dollars per gaming customer that
licensees must pay to the Missouri Commission, a minimum payout requirement of
80% for slot machines, prohibitions against providing credit to gaming
customers (except for the use of credit cards and cashing checks) and a
requirement that each licensee reimburse the Missouri Commission for all costs
15
of any Missouri Commission staff necessary to protect the public on the
licensee's riverboat. Licensees must also submit audited quarterly financial
reports to the Missouri Commission and pay the associated auditing fees. The
Missouri Gaming Law provides for a loss limit of $500 per person per
excursion. Although the Missouri Gaming Law does not limit the amount of
riverboat space that may be used for gaming, the Missouri Commission is
empowered to impose such space limitations through the adoption of rules and
regulations.
With respect to the availability of dockside gaming, which may be more
profitable than excursion gaming, the Missouri Commission is empowered to
determine on a site by site basis where such gaming is appropriate and shall
be permitted.
Nongaming Regulations
The Company and its gaming subsidiaries are subject to certain federal,
state and local safety and health laws, regulations and ordinances that apply
to non-gaming businesses generally, such as the Americans with Disabilities
Act, the Clean Air Act, Clean Water Act, Occupational Safety and Health Act,
Resource and Conservation Recovery Act and the Comprehensive Environmental
Response, Compensation and Liability Act. The Company has not made material
expenditures with respect to such laws and regulations. However, the coverage
and attendant compliance costs associated with such laws, regulations and
ordinances may result in future additional costs to the Company's operations.
For example, in 1990 the U.S. Congress enacted the Oil Pollution Act to
consolidate and rationalize mechanisms under various oil spill response laws.
The Department of Transportation has proposed regulations requiring owners and
operators of certain vessels to establish through the U.S. Coast Guard
evidence of financial responsibility in the amount of $5.5 million for
clean-up of oil pollution. This requirement would be satisfied by either
proof of adequate insurance (including self-insurance) or the posting of a
surety bond or guaranty.
Additionally, the Environmental Protection Agency (the "EPA") has requested
certain information regarding compliance by President Missouri with federal
environment laws in connection with the operation of "The Admiral" in St.
Louis. See "Legal Proceedings."
All vessels operated by the Company must comply with U.S. Coast Guard
requirements as to safety and must hold a Certificate of Inspection. These
requirements set limits on the operation of the vessels and require that each
vessel be operated by a minimum complement of licensed personnel. Loss of the
vessel's Certificate of Inspection would preclude its use as a riverboat.
Every five years, excursion vessels must be drydocked for an inspection of the
outside of the hull resulting in a loss of service which may have an adverse
effect on the Company. Less stringent rules apply permanently moored vessels.
16
Employees
As of February 28, 1997, the Company had approximately 2,800 employees.
Hotel Employees and Restaurant Employees Local 74 and Service Employees
International Union, AFL-CIO (the "Unions") have been engaged since July 1995
in an effort to organize certain service and maintenance employees of PRC-
Missouri. The Unions failed to receive a majority of the votes cast in the
first election, and ultimately withdrew the petition. Following a second
election, conducted in November 1996, both the Company and the Unions filed
objections to the election. The National Labor Relations Board (the "NLRB")
has ruled that the Unions interfered with the election and recommended that a
third election be held. Also pending before the NLRB are certain charges
filed by the Unions stemming from the November 1996 election alleging the
Company interfered with employee rights under the National Labor Relations
Act. Such charges are presently under investigation by the NLRB Regional
Director, and the Company is seeking a settlement with respect to such
charges.
Item 3. Legal Proceedings.
On January 16, 1997 a case entitled "Whalen v. John E. Connelly, J. Edward
Connelly and Associates, Inc., President Casinos, Inc. and PRC-Iowa, Inc." was
filed in the Iowa District Court for Scott County by Michael L. Whalen
("Whalen"), who is a five percent limited partner in TCG. Whalen filed this
lawsuit after accepting from Della III, Inc., the former general partner,
shares of Common Stock and cash to which he was determined to be entitled
pursuant to a previous judgment. Whalen claims in this lawsuit that because
he asked for the stock and cash while he was appealing the judgment in a
previous lawsuit and was not given the stock or cash until after the judgment
was affirmed, the named defendants committed the tort of conversion. Whalen
seeks as damages the difference in the value of the stock on the date of its
"highest valuation" and the date he accepted the stock in 1996. The Company,
after consultation with legal counsel, believes this lawsuit is without merit
and intends to defend this action vigorously. Although the results of
litigation are inherently uncertain, the Company does not believe this matter
will have a material adverse effect on the Company's financial condition or
results of operations.
In 1994, William H. Poulos filed a class-action lawsuit in the United States
District Court for the Middle District of Florida against over thirty-eight
(38) casino operators, including the Company, and certain suppliers and
distributors of video poker and electronic slot machines. This lawsuit was
followed by several additional lawsuits of the same nature against the same,
as well as additional, defendants, all of which have now been consolidated
into a single class-action pending in the United States District Court for the
District of Nevada. Following a court order dismissing all pending pleadings
and allowing the plaintiffs to re-file a single complaint, a complaint has
been filed containing substantially the same claims, alleging that the
defendants fraudulently marketed and operated casino video poker machines and
electronic slot machines, and asserting common law fraud and deceit, unjust
17
enrichment and negligent misrepresentation. Various motions have now been
filed by the defendants seeking to have this new complaint dismissed or
otherwise limited, and the plaintiffs are responding to these motions. To
date, the court has not entered any order concerning the merits of the
complaint. Although the outcome of litigation is inherently uncertain,
management, after consultation with legal counsel, believes the action is
without merit and does not expect the lawsuit will have a material adverse
effect on the Company's financial position or results of operations.
On April 11, 1997, an action captioned "American Gaming & Entertainment,
Ltd. v. President Mississippi Charter Corporation and President Riverboat
Casino-Mississippi, Inc." was filed in the Chancery Court of Harrison County,
Mississippi by American Gaming & Entertainment, Ltd. ("AGE"). AGE is the
owner of "The Biloxi Barge" which is utilized in connection with the Company's
Biloxi, Mississippi operations pursuant to a Charter Agreement between AGE and
Charter Corporation. The action filed by AGE alleges that President
Mississippi and Charter Corporation have not complied with their respective
obligations under the Charter Agreement, and requests the Court to require
President Mississippi and Charter Corporation to perform the Charter Agreement
and to pay all sums due thereunder with interests and costs. In the
alternative, AGE requests a judgement for the sum of $23.4 million with
interests and costs or such other relief as the Court may deem just and
proper. The Company believes that AGE has breached its obligations under the
Charter Agreement in a number of respects and, in connection therewith, the
Company has withheld a portion of the charter payments due to AGE under the
Charter Agreement. The Company has continued to accrue the full amount of
such payments due under the Charter Agreement. The Company believes that is
has meritorious defenses to the claims of AGE, and is in the process of
evaluating and formulating a response to this action.
The Company has been notified that the Environmental Protection Agency and
the U.S. Attorney's Office for the Eastern District of Missouri are conducting
a federal criminal investigation with respect to compliance by President
Missouri with federal environmental laws in connection with the operation of
"The Admiral" in St. Louis. The Company is cooperating fully with the
investigation and has provided certain information regarding "The Admiral"'s
operations to the Environmental Protection Agency and the U.S. Attorney's
Office. In the event that the Company is charged with violating federal
environmental laws, the Company may be subject to substantial civil and
criminal penalties, including monetary fines. Based upon the Company's
preliminary discussions with the U.S. Attorney's Office and the results of the
Company's internal investigation of this matter, management does not believe
that the investigation will result in any monetary or other penalties which
would 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 or its subsidiaries.
The Company serves alcoholic beverages at its gaming facilities and has from
time to time been the subject of claims related thereto. Although the Company
believes it maintains adequate insurance to cover these types of claims, it is
often difficult to predict the outcome of such litigation and the amount of
18
damages which may be awarded in these types of cases. The Company does not
believe that the outcome of any pending litigation related to the Company's
serving of alcoholic beverages will have a material adverse effect on its
financial position or results of operations.
The Company is also from time to time party to litigation, which may or may
not be covered by insurance, arising in the ordinary course of its business.
The Company does not believe that the outcome of such litigation will have a
material adverse effect on the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal 1997.
Item A.
Executive Officers of the Company.
The executive officers of the Company, together with their respective ages
and positions with the Company, are set forth below.
Name Age Positions with the Company
---- --- --------------------------
John E. Connelly 71 Chairman of the Board, Chief Executive
Officer and President
John S. Aylsworth 46 Executive Vice President, Chief
Operating Officer and Director
Terrence L. Wirginis 45 Vice President-Marine and
Development and Director
James A. Zweifel 51 Vice President and Chief
Financial Officer
- ----------------
Mr. Connelly has served as Chairman and a director of the Company and its
predecessors since their inception. Mr. Connelly also served as Chief
Executive Officer of the Company from its inception until March 1995 and from
July 1995 through the present. Entities controlled by Mr. Connelly have owned
and operated the Gateway Clipper Fleet in Pittsburgh since 1958, the Station
Square Sheraton Hotel in Pittsburgh since 1981 and the Broadwater Beach Hotel
and Resort since 1992. In 1984, Mr. Connelly founded World Yacht Enterprises,
a fleet of dinner cruise, sightseeing and excursion boats in New York City.
In 1985, he started Gateway Riverboat Cruises in St. Louis. Mr. Connelly is
also the founder, owner and Chief Executive Officer of J. Edward Connelly
Associates, Inc., a marketing firm based in Pittsburgh, Pennsylvania. Mr.
Connelly is Mr. Wirginis's grandfather.
Mr. Aylsworth has been Executive Vice President and Chief Operating Officer
of the Company since March 1995. From 1977 until March 1995, Mr. Aylsworth
was associated with the Davis Companies, most recently as Managing Executive
Officer. Previously, he served the Davis Companies as Chief Executive Officer
19
of the Sports Club Company, an operator of premier health and fitness
facilities, and as Chief Financial Officer of Spectra Vision, a provider of
in-room entertainment and interactive information systems to the lodging
industry.
Mr. Wirginis has been Vice President of Marine and Development since August,
1995. He also has served as President of the Gateway Clipper Fleet in
Pittsburgh, which is wholly-owned by Mr. Connelly, since January 1987, and has
had primary responsibility for the marine operations of the Connelly-related
riverboat and sightseeing cruises in Pittsburgh, St. Louis and Davenport. Mr.
Wirginis is the grandson of Mr. Connelly.
Mr. Zweifel has been Vice President and Chief Financial Officer of the
Company since November 1995. Prior to joining the Company, Mr. Zweifel was
Executive Director of FANS, Inc., the organization formed to bring the Los
Angeles Rams to St. Louis. From July 1992 to November 1994, Mr. Zweifel was
Vice President and Controller of Clark Refining and Marketing. From July 1988
to July 1992, Mr. Zweifel was Vice President, Chief Financial Officer and
Secretary for Engineered Support Systems, a manufacturer of ground support
systems.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
The Company's Common Stock has been traded in the over-the-counter market
and listed on The NASDAQ National Market under the symbol "PREZ" since
December 11, 1992. Prior thereto, there was no established public trading
market for the Common Stock. The following table sets forth, for the fiscal
quarters indicated, the high and low sale prices for the Common Stock, as
reported by The NASDAQ National Market:
High Low
------ -----
Fiscal 1997
First Quarter................ $ 2.6875 $ 1.375
Second Quarter............... $ 2.25 $ 1.375
Third Quarter................ $ 1.5625 $ 0.71875
Fourth Quarter............... $ 0.9375 $ 0.5625
Fiscal 1996
First Quarter................ $ 6.875 $ 4.00
Second Quarter............... $ 5.625 $ 3.50
Third Quarter................ $ 4.625 $ 2.0625
Fourth Quarter............... $ 2.50 $ 1.125
On May 19, 1997, there were approximately 1,782 holders of record of the
Company's Common Stock.
The Company has never paid any dividends on its Common Stock. The Company
anticipates that for the foreseeable future all earnings, if any, will be
retained for the operation and expansion of its business. Accordingly, the
20
Company does not anticipate paying any cash dividends in the foreseeable
future. The payment of dividends by the Company is restricted under the terms
of the indenture governing the Company's Senior Notes due 2001. See
"Management's Discussion and Analysis of Financial Position and Results of
Operations-Liquidity and Capital Resources."
Item 6. Selected Consolidated Financial Data.
The following selected financial data of the Company is qualified by
reference to and should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere herein. The selected
consolidated statement of operations and balance sheet data are derived from
the Company's consolidated financial statements certain of which are included
elsewhere herein. Certain reclassifications have been made to the prior
years' financial data to conform with the presentation of the fiscal 1997
data.
Years Ended February 28/29, (1)
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(in thousands, except share data)
Consolidated Statement of Operations Data:
Total operating revenues.................. $187,027 $192,685 $160,350 $107,099 $102,700
Operating income (loss)................... $ 3,784 $(21,471) $(13,224) $ 11,593 $ 17,055
Income (loss) before extraordinary item
and cumulative effect of a change
in accounting principle (2)............. $ (8,785) $(58,150) $(16,179) $ 10,089 $ 12,608
Net income (loss)......................... $ (8,785) $(58,150) $(20,232) $ 10,691 $ 12,608
Pro forma net income (3).................. $ 8,651
Earnings (loss) per common and
common equivalent share................. $ (0.29) $ (1.93) $ (0.67) $ 0.35
Pro forma earnings per common and
common equivalent share................. $ 0.39
Consolidated Balance Sheet Data:
Total assets.............................. $155,904 $168,024 $234,275 $258,615 $131,213
Long-term liabilities..................... $104,862 $106,082 $112,917 $ 67,822 $ 22,010
Stockholders' equity...................... $ 23,721 $ 32,506 $ 90,656 $108,924 $ 84,479
(1) Gaming operations commenced in Davenport, Iowa on April 1, 1991, in
Biloxi, Mississippi on August 13, 1992, in Tunica, Mississippi on December 6,
1993 and in St. Louis, Missouri on May 27, 1994. On July 8, 1994, the
Company's Tunica, Mississippi operations were terminated.
(2) During fiscal year 1995, the Company realized a $4,053 extraordinary loss
on the exchange of subordinated notes. During fiscal year 1994, the Company
recognized the cumulative effect of changing to a different method of
accounting for income taxes of $602.
21
(3) The Company was formed in June 1992 to acquire the operations of five
entities controlled by affiliates of John E. Connelly and International Game
Technology, Inc. ("IGT"). At the closing of the Company's initial public
offering of its Common Stock on December 18, 1992, affiliates of Mr. Connelly
and IGT contributed their equity interests in exchange for shares of the
Company's Common Stock and certain other consideration (the "Reorganization").
Prior to the Reorganization, the Company generally was not subject to income
taxes. A pro forma income tax adjustment was made to reflect the effect of
income taxes had the Reorganization taken place at the beginning of fiscal
1992.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion, which covers the fiscal years 1995 through 1997,
should be read in conjunction with the consolidated financial statements of
the Company and the separate financial statements of The Connelly Group, L.P.
and PRC Holdings Corporation and the notes thereto included elsewhere in the
report.
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 seasonal nature of its business, the timing of the
commencement of its proposed gaming operations, the amount of pre-opening
expenses incurred by the Company and general weather conditions.
Consequently, the Company's operating results may fluctuate from period to
period and the results for any period may not be indicative of results for
future periods.
Competition has had a significant impact on the results of operations at
each of the Company's three casino properties. Since gaming began in Biloxi
in August 1992, steadily increasing competition along the Mississippi Gulf
Coast, including New Orleans and elsewhere in Louisiana and Mississippi, has
had an adverse effect on the results of operations in Biloxi. Several large
hotel/casino complexes have been built in recent years and several new large
projects are under construction. The replacement of the smaller M/V
"President Casino-Mississippi" by "The Biloxi Barge", in July 1995, improved
the Company's presence in Biloxi. However, it is apparent that it will
continue to be more difficult to compete as larger casino complexes enter the
Biloxi market, many being built by competitors having substantially greater
name recognition and financial and marketing resources than the Company.
In May 1994, legislation became effective in Iowa which enabled the
Davenport operation to compete more effectively against Illinois riverboat
casinos. This legislation removed all per passenger loss and bet limitations
and essentially allowed for dockside gaming throughout the year, except for a
required 100 cruises per year. The Davenport operating results improved
substantially after the implementation of this legislation. However, in April
1995 a new casino commenced operations in Bettendorf, Iowa, which is located
22
on the Mississippi River five miles from the Davenport operations. The new
casino captured a portion of the market and, as a result, the Davenport
operations were negatively impacted. Davenport's operating revenues were also
negatively impacted from the period November 12, 1995 through April 3, 1996
while "The President" was removed from service for a U.S. Coast Guard mandated
five-year hull inspection and a smaller vessel was substituted.
In May, 1994, the Company commenced limited gaming operations in St. Louis,
Missouri aboard "The Admiral". At such time, Missouri law did not permit the
operation of "games of chance," including slot machines. In December 1994,
after the Missouri State Constitution was amended, the Company was permitted
to add games of chance to its casino.
Competition is intense in the St. Louis market area. There are presently
five other casino companies operating in the market area and competing for
local customers. Two of these are Illinois casino companies operating single
casino vessels on the Mississippi River, one directly across the Mississippi
from the "The Admiral" and the second 20 miles upriver in Alton, Illinois.
There are three Missouri casino companies, each of which operates two casino
vessels approximately 20 miles west of St. Louis on the Missouri River, one in
the City of St. Charles, Missouri and two in Maryland Heights, Missouri. The
two in Maryland Heights opened in March 1997. Riverboats in each of the
states, Illinois and Missouri, have competitive advantages/disadvantages
resulting from gaming regulations in their respective states. While Missouri
regulations do not require the vessels to actually cruise, simulated cruising
requirements are imposed which allow entry on a vessel for only a 45 minute
period every two hours. Those competitors having two casino vessels can
alternate hourly boarding times and provide virtually continuous boarding for
guests. Thus, they have a distinct competitive advantage over the Company,
which has only one vessel, "The Admiral". Illinois casino vessels are
required to cruise, thereby limiting ingress and egress to the casinos. In
addition, Missouri regulations limit the loss per cruise per passenger by
limiting the amount of chips or tokens a guest may purchase to $500 per two-
hour gaming session. The lack of a statutory loss limit on Illinois casinos
allows them to attract higher stake gamblers; additionally, their guests are
not burdened with the administrative requirements related to the loss limits.
Any change in the legislation related to these requirements could have a
positive or negative impact on the competitive environment between Missouri
and Illinois casinos.
In previous years, the Company pursued various unsuccessful development
opportunities, the results of which negatively impacted operations, including
the impact these investment decisions had on the ultimate recoverability of
various assets. Specifically, the Company began operations in Tunica,
Mississippi in December 1993 and as a result of competition, poor location and
various other factors, closed this facility in July 1994. The Company
incurred net losses of $2.7 million related to Tunica in fiscal year 1995. In
October 1993 the Company entered into a joint venture with an unrelated third
party to manage a land-based gaming casino to be owned by the St. Regis Mohawk
Indian Tribe (the "Tribe"). In fiscal year 1995, due to uncertainty related
to various matters, including the execution of a management agreement with the
23
Tribe, the Company wrote-off its $4.1 million investment in this project. In
December 1994 the Company entered into a joint venture to develop a riverboat
casino operation in Gary, Indiana. As a result of a number of events and as
part of the Company's strategy to concentrate its resources and capital on its
existing operations, the Company reexamined its participation in this joint
venture, and on June 30, 1995, transferred its entire interest in the venture
to its partner. The Company wrote-off $1.1 million in fiscal 1996 as a result
of the decision to withdraw from the Gary, Indiana development. In December
1993, the Company entered into a lease/purchase option agreement covering an
18-acre riverfront site and a city-owned pier located immediately contiguous
to this property in Philadelphia, Pennsylvania. This option agreement expired
December 31, 1996. In fiscal year 1996, the Company wrote-off its $11.0
million investment in this option due to the uncertainty as to the timely
passage of Pennsylvania riverboat gaming legislation prior to the expiration
of the option.
In December 1996, the Company modified and exercised a new option agreement
to secure the above Pennsylvania lease rights for the period January 1, 1997
through December 31, 1997. Pursuant to the modified option agreement, the
Company remitted $1.2 million. The modified agreement also calls for
contingent payments, not to exceed $2.1 million, based on the status of
certain Pennsylvania gaming legislation during calendar year 1997. During the
option period and the lease period, the Company will be obligated to pay all
maintenance costs, taxes and insurance with respect to the property.
The Company's operations are seasonal in nature, with the heaviest activity
occurring during the period from May through September. In addition, all of
the Company's operations are susceptible to the adverse effects of flooding
and weather conditions. On various occasions the Company has temporarily
suspended operations in Davenport and St. Louis as a result of flooding and
the Biloxi operation has been temporarily closed on occasion as a result of
hurricanes.
Results of Operations
The results of operations for fiscal years 1995 through 1997 include the
gaming results for Davenport, Iowa and Biloxi, Mississippi for the entire
period and St. Louis, Missouri for only a portion of that period. St. Louis
commenced limited gaming operations in May 1994, which operations were
expanded to include "games of chance" in December 1994. Gaming operations
were also conducted in Tunica, Mississippi from December 1993 through July
1994. Of much lesser significance, the non-gaming operations for Davenport
(The Blackhawk Hotel) and St. Louis (Gateway Riverboat Cruises) are included
during all three years.
The following table highlights the results of operations for the Company's
gaming and non-gaming cruise operating subsidiaries. The table does not
include results of operations for the Company's corporate subsidiaries or The
Blackhawk Hotel. Certain reclassifications have been made to fiscal years
1995 and 1996 to conform to fiscal 1997 presentation (dollars in millions).
24
Twelve Months Ended
February 28/29,
1997 1996 1995
------ ------ ------
Davenport, Iowa
Operating revenues $ 65.1 $ 70.3 $ 70.9
Operating income $ 10.1 $ 15.8 $ 18.8
EBITDA (a) $ 14.1 $ 20.4 $ 22.7
Operating margin 15.5% 22.5% 26.5%
Biloxi, Mississippi
Operating revenues $ 43.8 $ 38.7 $ 42.9
Operating income (loss) $ (2.9) $ (5.0) $ 1.1
EBITDA (a) $ -- $ (2.0) $ 3.7
Operating margin (deficit) (6.6)% (12.9)% 2.6%
St. Louis, Missouri
Operating revenues $ 70.9 $ 76.8 $ 42.6
Operating income (loss) $ 2.0 $ 4.1 $ (13.3)
EBITDA (a) $ 7.0 $ 9.4 $ (9.0)
Operating margin (deficit) 2.8% 5.3% (31.2)%
(a) "EBITDA" consists of earnings from operations before income taxes,
depreciation and amortization for each of the operating subsidiaries.
However, it does not include corporate operating expenses. EBITDA should not
be construed as an alternative to operating income as an indicator of the
Company's operating performance, or as an alternative to cash flows from
operational activities as a measure of liquidity. The Company has presented
EBITDA solely as a supplemental disclosure to facilitate a more complete
analysis of the Company's financial position. The Company believes that this
disclosure enhances the understanding of the financial performance of a
company with substantial depreciation and amortization.
Fiscal 1997 Compared to Fiscal 1996
Operating revenues. The Company generated consolidated operating revenues
of $187.0 million during fiscal 1997 compared to $192.7 million in fiscal
1996, a decrease of $5.7 million or 3.0%. Operating revenue increases from
the Company's Biloxi property were offset by decreases at the Davenport and
St. Louis properties. The Davenport property experienced a decrease in
operating revenue primarily as the result of two factors. Steadily increasing
competition for patrons in the Davenport market began with the addition of a
third casino in April 1995. Additionally, construction activity during fiscal
1997 relating to road access and parking negatively impacted customer access
to the casino.
The increase in revenues from the Biloxi property was primarily attributable
to a full year of gaming operations aboard "The Biloxi Barge", which was
placed in service on June 30, 1995. This barge has provided the Company with
increased casino square footage, more slot machines and more table games than
the previous facility. In addition, "The Biloxi Barge" features a full
25
service 250-seat dining facility, not available in the previous casino.
During both years, operating revenues from the Company's St. Louis
operations were adversely affected by high water and flooding conditions on
the Mississippi River. High water and flooding conditions adversely affected
parking availability for casino patrons and caused the Company to close its
gaming operations in both years. However, business interruption insurance
proceeds of $2.8 million were included in St. Louis's fiscal 1996 operating
revenues with no comparable proceeds in fiscal 1997.
The Company's revenues from food and beverage, hotel, retail and other
nongaming activities (net of promotional allowances) decreased to $16.1
million during fiscal 1997, from $18.1 million in fiscal 1996, a decrease of
$2.0 million or 11.0%. This decrease was primarily attributable to the
inclusion of $3.3 million of business interruption and other insurance
proceeds during fiscal 1996 offset by an increase of $0.6 million from the
charter of certain vessels and an increase in the Biloxi operation's food and
beverage revenue as the result of a full year of expanded food service
discussed above.
Operating costs and expenses. The Company's consolidated gaming and gaming
cruise operating costs and expenses were $100.8 million during fiscal 1997,
compared to $100.9 million in fiscal 1996, a decrease of $0.1 million. As a
percentage of gaming revenues, gaming and gaming cruise costs increased to
59.0% during fiscal 1997 from 57.8% in fiscal 1996. This decrease in gaming
margin was attributable to the decrease in gaming revenues at the Davenport
and St. Louis operations and their related contributions towards the fixed
portion of gaming costs.
The Company's consolidated selling, general and administrative expenses were
$51.8 million during fiscal 1997, compared to $56.7 million in fiscal 1996, a
decrease of $4.9 million or 8.6%. Such decrease was primarily attributable to
a decrease in corporate overhead and development costs, offset by three and a
half months of additional lease payments during fiscal 1997 for "The Biloxi
Barge", which commenced in June 1995. As a percentage of consolidated
revenues, selling, general and administrative expenses decreased to 27.7%
during fiscal 1997 from 29.4% in fiscal 1996.
During fiscal 1997, the Company recognized a net gain on the sale and
disposal of assets of $1.5 million. This gain was primarily related to the
exercise of a purchase option by the charterer of the Company's casino vessel,
the "Diamond Jo." During fiscal 1996, the Company recognized a net loss on
the disposal of assets of $0.4 million, primarily due to the sale of non-
income producing gaming equipment.
During fiscal 1997, the Company recognized an impairment of long-lived
assets of $0.7 million primarily related to assets being refurbished for use
with the implementation of a proposed second vessel in St. Louis. See "Fiscal
1996 Compared to Fiscal 1995 -- Significant Charges Against Income" for
discussion of fiscal 1996 impairments of long-lived assets.
26
Depreciation and amortization expenses were $15.3 million during fiscal
1997, compared to $16.5 million in fiscal 1996, a decrease of $1.2 million or
7.2%. This decrease was primarily attributable to the sale of various assets
partially offset by the additional depreciation expense related to placing the
"Majestic Star" in service at the beginning of its charter in May 1996.
The Company incurred a $1.2 million loss in unconsolidated entities during
fiscal 1996, primarily related to the write-off of the Company's Gary, Indiana
investment. There was no comparable expense in during fiscal 1997.
During fiscal 1997, the Company incurred pre-opening costs of $0.3 million
related to the application and proposed implementation of a second vessel in
St. Louis.
Operating income (loss). As a result of the items discussed above, the
Company had operating income of $3.8 during fiscal 1997, compared to an
operating loss of $21.5 million during fiscal 1996.
Interest expense, net. The Company incurred net interest expense of $13.7
million during fiscal 1997, compared to $14.7 million in fiscal 1996, a
decrease of $1.0 million or 6.8%. Such decrease was primarily attributable to
the early extinguishment of various debt instruments in fiscal 1996.
During fiscal 1997, the Company recognized a $1.4 million tax benefit as the
result of a state income tax refund. During fiscal 1996, the Company
recognized a $21.9 million tax charge to income as the result of the income
tax valuation allowance discussed in "Fiscal 1996 Compared to Fiscal 1995-
Significant Charges Against Income".
Net loss. As a result of the items discussed above, the Company incurred a
net loss of $8.8 million during fiscal 1997, compared to a net loss of $58.2
million in fiscal 1996.
Fiscal 1996 Compared to Fiscal 1995
Significant Charges Against Income
The financial results for fiscal year 1996 were negatively impacted by
significant charges against income of $24.8 million for impairment of long-
lived assets and $21.9 million for income tax expense, as discussed below.
Impairment of Long-Lived Assets
The 1996 charge of $24.8 million included the following:
-An $11.0 million charge against earnings related to the write-down of two
vessels, specifically $7.0 million and $4.0 million on the "Majestic Star" and
"The President Casino-IV," respectively.
As a result of the occurrence of certain events during fiscal 1996, the
Company transferred its interest, including all financial and other
27
obligations related thereto, in its Gary, Indiana joint venture (the "Gary
Joint Venture") to Barden Development, Inc. ("Barden") and revised its
estimate of the net realizable value of certain of its other assets. On June
30, 1995, the Indiana Gaming Commission approved the transfer of the Company's
interest in the Gary Joint Venture. As a result of the Company's decision to
withdraw from Gary, Indiana, the resulting uncertainty as to the future use of
the "Majestic Star" and the then current market conditions, the Company wrote-
off its $1.1 million investment in its Gary, Indiana subsidiary (included in
equity loss in unconsolidated entity) and reduced the carrying value of the
"Majestic Star" by $7.0 million to its estimated market value. The Company
was in negotiation to sell "The President Casino-IV" and based on such
negotiations, the Company wrote down the value of "The President Casino-IV" by
$4.0 million.
-An $11.0 million charge against earnings in the fourth quarter to write-off
the accumulated costs incurred in connection with an agreement that provided
the Company the option to either enter into a long-term lease or purchase
certain property in Philadelphia, Pennsylvania. Management deemed the charge
appropriate based on the likelihood that the option would not be exercised
within the time period set forth in the option agreement or before the timely
passage of riverboat gaming legislation in Pennsylvania.
-A $2.8 million charge against earnings for various write-downs including
write-downs of other vessels, investments and various gaming and nongaming
equipment not in use.
During the fourth quarter of fiscal 1995 the Company wrote-down $5.0 million
of long-lived assets which consisted of the following: 1) $2.3 million for
certain non-gaming cruise boats and barges that were not used in operations or
planned to be used in future developments; 2) $1.2 million for an office
building and related machinery and equipment for the Davenport operations
which the Company offered to the City of Davenport in connection with an
agreement to establish a mutually acceptable development plan which would
satisfy the Company's development commitment (see Note 11 to Consolidated
Financial Statements); and 3) $1.5 million for a barge, based upon the
discounted cash flows under a lease agreement with a non-affiliated gaming
company.
Income Taxes
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes," requires the recognition of deferred tax assets related to
certain temporary differences between the Company's tax and accounting records
and net operating loss carryforwards to the extent that realization of such
benefit is "more likely than not." In fiscal year 1995, management believed
that the Company would return to profitability and that it was more likely
than not that the Company would be able to generate sufficient taxable income
to recognize fully these assets over the carryforward period. This belief was
based upon the Company's history of prior earnings, the fact that the 1995
losses suffered by the Company were attributable, in large part, to certain
unprofitable operations which were terminated and recent regulatory changes
28
which enhanced the Company's earnings prospects. The Company's fiscal year
1995 losses were attributable in large part to operating losses incurred by
the Company's St. Louis gaming operations, the extraordinary loss recognized
by the Company as a result of the exchange of its Senior Subordinated Notes
and investment losses associated with both the Company's Tunica operations and
its Massena project. Moreover, regulatory changes in both Missouri (allowing
the utilization of "games of chance", including slot machines, at the
Company's St. Louis gaming operations) and in Iowa (eliminating the per
passenger loss and per bet limitations and permitting the Company to operate
primarily dockside) enhanced the Company's prospects of generating earnings.
In early fiscal 1996, the Company continued its strategic focus on existing
income-generating properties and in connection with this strategy directed
investments to existing properties while pursuing efforts to find alternative
uses for existing non-income producing assets either through lease or sale.
In furtherance of this strategy, the Company decided not to pursue the joint
venture in Gary, Indiana. Efforts by the Company to return to profitability
in 1996, though enhanced by the aforementioned regulatory changes in Iowa and
Missouri, were hampered by flooding in Missouri and increased competition in
all of the Company's jurisdictions. Disruptions in Biloxi from the changes in
completing the switch to "The Biloxi Barge" (eventually fully completed in
December) and in Iowa for the mandatory Coast Guard hull inspection further
impacted 1996 profitability. In the fourth quarter of 1996, additional write
offs related to the Company's lease option on property in Philadelphia and
other vessels and gaming equipment were incurred. Furthermore, the Company
incurred further losses in the fourth quarter from its core operations. Given
the current level of operations, the increased competition and the overall
uncertainty as to the Company's ability to return to profitability, management
believed that the deferred tax benefits do not continue to satisfy the
recognition requirements of SFAS No. 109. Accordingly, based on the
uncertainty regarding the Company's ability to generate future taxable income,
the Company established a valuation allowance of $36.3 million for the
deferred tax asset resulting in net income tax expense of $21.9 million in
fiscal year 1996.
Operating revenues. The Company generated consolidated operating revenues
of $192.7 million during fiscal 1996 compared to $160.3 million in fiscal
1995, an increase of $32.4 million or 20.2%. This increase was attributable
to an increase in operating revenues generated by the Company's St. Louis
operations. Fiscal year 1996 included full scale gaming operations for the
entire year. St. Louis began gaming operations in May 1994 but was limited to
"games of skill" until December 1994 when "games of chance" (slot machines)
were added. Also, during fiscal 1996, operating revenues in St. Louis were
adversely affected by flood conditions on the Mississippi River. These flood
conditions caused the Company to suspend its gaming operations for a 41-day
period from May 10 to June 20. The Company's business interruption insurance
policy provided the Company with $2.8 million of proceeds for the period
operations were impaired, which proceeds are included in St. Louis' operating
revenues.
The increase in operating revenues generated by St. Louis gaming operations
29
was offset, in part, by the decrease in operating revenues from the Company's
Biloxi gaming operations. Revenues were down the first four months of fiscal
1996 versus 1995 in Biloxi due to increased competition in the market and the
fact that the new competition has newer and larger casinos and are able to
offer casino guests more amenities. To offset this competitive disadvantage,
"The Biloxi Barge" was placed in service on June 30, 1995, however, it was not
fully renovated until December 1995. This provided the Company with the sixth
largest casino on the Mississippi Gulf Coast, increased casino square footage
and provided more slot machines and more table games. In addition, "The
Biloxi Barge" features a full service 250-seat dining facility, not available
in the previous casino. Revenues for the eight months subsequent to opening
"The Biloxi Barge" trended slightly above the prior year, but were not
sufficient to offset the increased cost related to "The Biloxi Barge" lease.
Revenues for Davenport during fiscal year 1996 were flat as compared to the
previous year. Revenues in early fiscal 1996 (March and April) were
significantly higher than the previous comparable period due to the fact that
until May, 1994, Iowa gaming laws included passenger-bet and loss limitations
and did not allow for continuous access due to cruising requirements.
Revenues during fiscal year 1996 were negatively impacted as compared to
fiscal year 1995 due to increased competition when a new casino commenced
operations in late April 1995 in Bettendorf, Iowa, five miles from the
Davenport operations. Also, 1996 revenues were negatively impacted from
November 13, 1995 through year end while "The President" was undergoing its
Coast Guard mandated five-year hull inspection and was replaced with a much
smaller vessel.
The Company's revenues from food and beverage, hotel, retail and other
nongaming activities (net of promotional allowances) increased to $18.1
million during fiscal 1996, from $12.1 million in fiscal 1995, an increase of
$6.0 million or 49.6%. This increase was primarily attributable to the
inclusion of $3.3 million of business interruption and other insurance
proceeds and $3.3 million of fees from the charter of certain vessels.
Operating costs and expenses. The Company's consolidated gaming and gaming
cruise operating costs and expenses were $100.9 million during fiscal 1996,
compared to $83.9 million in fiscal 1995, an increase of $17.0 million or
20.3%. This increase was primarily attributable to increased operating costs
associated with the Company's St. Louis gaming operations and additional
gaming taxes incurred by the Company as a result of increased revenues. As a
percentage of gaming revenues, gaming and gaming cruise costs increased to
57.8% during fiscal 1996 from 56.6% in fiscal 1995. This increase was
primarily attributable to low operating margins experienced by the Company's
St. Louis gaming operations, which operations were adversely affected by the
flooding in May and June of 1995.
The Company's consolidated selling, general and administrative expenses were
$56.7 million during fiscal 1996, compared to $48.4 million in fiscal 1995, an
increase of $8.3 million or 17.1%. This increase was primarily attributable
to increased marketing and promotion costs in Davenport, increased lease costs
associated with the new Biloxi facility and the inclusion of a full year of
30
gaming operations in St. Louis during fiscal 1996. As a percentage of
consolidated revenues, selling, general and administrative expenses decreased
to 29.4% during fiscal 1996 from 30.2% in fiscal 1995.
Depreciation and amortization expenses were $16.5 million during fiscal
1996, compared to $12.7 million in fiscal 1995, an increase of $3.8 million or
29.9%. This increase was primarily attributable to depreciation expense
related to "The Admiral", gaming equipment thereon and additions relating to
the new Biloxi casino. The Company did not incur any depreciation related to
slot machines in St. Louis until their placement on "The Admiral" in December
1994.
The Company incurred no pre-opening expenses during fiscal 1996, compared to
$3.2 million in fiscal 1995, which expenses related primarily to the opening
of the Company's St. Louis gaming operations in May 1994.
The Company incurred a $1.2 million loss in unconsolidated entities during
fiscal 1996, primarily related to the write-off of the Company's Gary, Indiana
investment. The Company incurred a $6.8 million loss in unconsolidated
entities during fiscal 1995, primarily related to the Company's Tunica
operations, which operations were terminated in such period, and its
investment in Massena, New York.
Operating loss. As a result of the items discussed above, the Company had
an operating loss of $21.5 million during fiscal 1996, compared to $13.2
million during fiscal 1995.
Interest expense, net. The Company incurred net interest expense of $14.7
million during fiscal 1996, compared to $8.7 million in fiscal 1995, an
increase of $6.0 million or 69.0%. This increase was attributable, in large
part, to the capitalization of $5.4 million of interest in fiscal 1995. No
interest was capitalized by the Company during fiscal 1996.
Extraordinary loss on the exchange of Senior Subordinated Notes. In fiscal
1995, the Company recognized a $4.1 million extraordinary loss, net of income
taxes, in connection with the exchange of its then outstanding 11.75% Senior
Subordinated Notes due 2001 for its currently outstanding 13% Senior Notes due
2001 ("Senior Notes") and certain other consideration. The Company had no
such costs during fiscal 1996.
Net loss. As a result of the items discussed above, the Company incurred a
net loss of $58.2 million during fiscal 1996, compared to a net loss of $20.2
million in fiscal 1995.
Liquidity and Capital Resources.
The Company meets its working capital requirements from a combination of
internally generated sources including cash from operations and the sale or
charter of assets no longer utilized in the Company's operations.
The Company requires approximately $9.0 million of cash in order to fund
31
daily operations. At February 28, 1997, the Company had approximately $16.7
million in cash and short-term investments in excess of $9.0 million. The
Company is heavily dependant on cash generated from operations to continue to
operate as planned in its existing jurisdictions and for capital expenditures.
The Company 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. To the extent cash generated from operations
is less than anticipated, the Company may be required to curtail certain
planned 1998 expenditures or seek other sources of financing. The Company may
be limited in its ability to raise additional financing.
The Company generated cash flow from operating activities of $5.5 million
during fiscal 1997, compared to $7.2 million in fiscal 1996.
The Company experienced a net cash increase from investing activities of
$0.9 million during fiscal 1997, compared to $1.5 million in fiscal 1996. The
net cash increase from investing activities during fiscal 1997 resulted
primarily from the receipt of $14.2 million from the sale of assets offset by
$10.6 million of expenditures in property and equipment. Such capital
expenditures included $4.3 million in Davenport (including the construction of
improved access and parking facilities) and $3.8 million in St. Louis
(including the construction of a new 250-seat capacity buffet and certain
other improvements). The net cash increase from investing activities in
fiscal 1996 resulted primarily from the receipt of $19.9 million from the sale
of assets ($18.0 million from the sale of "The President Casino-IV") offset by
$16.8 million of expenditures in property and equipment. Additionally, in
1997, the Company invested $3.4 million to purchase certain lease options in
Philadelphia, Pennsylvania.
The Company expended $1.1 million in connection with financing activities in
fiscal 1997, compared to $13.7 million in fiscal 1996. These expenditures
consisted of principal payments on capital lease and notes payable
obligations. In addition to the scheduled fiscal 1996 debt payments, such
payments included the early extinguishment of various debt instruments from
the net cash proceeds from the sale of "The President Casino-IV". During
fiscal 1997, there were no early extinguishments.
The Indenture governing the Company's Senior Notes due 2001 (the
"Indenture"), restricts the Company's ability, among other things, to dispose
of or create liens on certain assets, to make certain investments and to pay
dividends. Under the Indenture, the Company has the ability to seek to borrow
additional funds of $15.0 million. The Indenture also provides that the
Company must use cash proceeds from the sale of certain assets within 180 days
to either (i) permanently reduce certain indebtedness or (ii) contract with an
unrelated third party to make investments or capital expenditures or to
acquire long-term tangible assets, in each case, in gaming and related
businesses (provided any such investment is substantially complete in 270
days). The Company intends to utilize all of such cash proceeds in accordance
with the Indenture. In the event such cash proceeds are not so utilized, the
Company must make an offer to all holders of Senior Notes to repurchase at par
an aggregate principal amount of Senior Notes equal to the amount by which
32
such cash proceeds exceeds $5.0 million. The Company does not believe that
the unutilized proceeds will exceed $5.0 million.
During fiscal 1998, the Company intends to make investments in property,
plant and equipment at its current operations approximating $5.0 million. The
completion and timing of such investments will be dependant upon cash
availability.
The Company has a $4.2 million outstanding term note payable that is
collateralized by a boat and various equipment with a net book value of $8.6
million. Currently the note contains a covenant whereby the Company must
maintain a minimum net worth of $20.0 million during fiscal 1998. Management
believes that during fiscal 1998 the Company's net worth will fall below
$20,000 and that the loan will be subject to call. However, the fair market
value of the vessel is in excess of the outstanding note balance and
management believes that the Company will renegotiate the terms, buy down a
portion of the note or refinance the loan.
On May 13, 1997 the Company announced that it has agreed in principal to
purchase for approximately $40.5 million certain real estate and improvements
located on the Gulf Coast in Biloxi, Mississippi from BH. The property
comprises approximately 260 acres and includes the Broadwater Resort and the
Broadwater Tower (two hotels with over 500 rooms), the 138-slip Broadwater
Marina, and the adjacent 18-hole Sun Golf Course. The Broadwater Marina is
currently the site of the Company's casino operations in Biloxi and is leased
by the Company from BH under a long-term lease agreement. BH is wholly-owned
by John E. Connelly, the Chairman and principal stockholder of the Company.
The purchase is subject to finalization of financing and various other details
related to the transition.
The Company anticipates investing $5.0 million in President Broadwater
Hotel, LLC, which would own the Broadwater properties. The $5.0 million
investment would consist of $3.0 million in cash from the Company and $2.0
million in the form of a reduction of debt owed to the Company by BH. This
entity would finance the purchase with $30.0 million of outside financing and
$10.0 million of purchase money preferred equity from BH. Such financing
would be non-recourse to the Company.
Forward Looking Statements
The statements contained herein include forward-looking statements based on
management's current expectations of the Company's future performance.
Predictions relating to future performance are inherently uncertain and
subject to a number of risks. Consequently, the Company's actual results
could differ materially from the expectations expressed in the preceding
paragraphs. Factors that could cause the Company's actual results to differ
materially from the expected results include, among other things: the
intensely competitive nature of the riverboat and dockside casino gaming
industry; increases in the number of competitors in the markets in which the
Company operates; the seasonality of the riverboat and dockside casino gaming
industry in certain markets in which the Company operates; the susceptibility
33
of the Company's operating results to floods, adverse weather conditions and
natural disasters; the risk that jurisdictions in which the Company proposes
to operate do not enact legislation permitting riverboat or dockside casino
gaming or do not enact such legislation in a timely manner; changes in
governmental regulations governing the Company's activities and other risks
detailed in the Company's filings with the Securities and Exchange Commission.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 8. Financial Statements and Supplementary Data.
Reference is made to the Index to Financial Statements and Schedules on Page
F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
Part III
Item 10. Directors and Executive Officers Registrant
Information regarding the directors of the Company is contained in "Security
Ownership of Certain Beneficial Owners and Management" and "Election of
Directors" included in the Company's Proxy Statement for the 1997 Annual
Meeting of Stockholders, which information is incorporated herein by
reference.
Information regarding executive officers of the Company is contained in Part
I hereof under the caption "Executive Officers of the Company."
Item 11. Executive Compensation
Information regarding executive compensation is contained in "Compensation
of Executive Officers" included in the Company's Proxy Statement for the 1997
Annual Meeting of Stockholders, which information is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of certain beneficial owners and
management is contained in "Security Ownership of Certain Beneficial Owners
and Management" included in the Company's Proxy Statement for the 1997 Annual
Meeting of Stockholders, which information is incorporated herein by
reference.
34
Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions is
contained in "Certain Transactions" included in the Company's Proxy Statement
for the 1997 Annual Meeting of Stockholders, which information is incorporated
herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. Financial Statements.
See the Index to Financial Statements and Schedules on page F-1.
2. Financial Statement Schedules.
See the Index to Financial Statements and Schedules on page F-1.
3. Exhibits.
See Exhibit Index on page F-68.
(b) Reports on Form 8-K.
None.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PRESIDENT CASINOS, INC.
By: /s/ James A. Zweifel
---------------------------
Name: James A. Zweifel
Title: Vice President and Chief Financial Officer
Date: May 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on this 28th day of May, 1997 by the following persons
on behalf of the registrant in the capacities indicated.
Signature Capacity
- --------- --------
/s/ John E. Connelly President, Chief Executive Officer,
- -------------------------- Chairman and Director
John E. Connelly
/s/ John S. Aylsworth Executive Vice President,
- -------------------------- Chief Operating Officer and Director
John S. Aylsworth
/s/ Karl G. Andren Director
--------------------------
Karl G. Andren
/s/ Royal P. Walker, Jr. Director
--------------------------
Royal P. Walker, Jr.
/s/ Terrence L. Wirginis Vice President and Director
- --------------------------
Terrence L. Wirginis
/s/ James A. Zweifel Vice President and Chief Financial Officer
- --------------------------
James A. Zweifel
36
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
I. PRESIDENT CASINOS, INC.
Consolidated Financial Statements:
Independent Auditors' Report ......................................F-1
Consolidated Balance Sheets as of February 28/29, 1997 and 1996....F-2
Consolidated Statements of Operations for the Years
Ended February 28/29, 1997, 1996 and 1995........................F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended February 28/29, 1997, 1996 and 1995........................F-6
Consolidated Statements of Cash Flows for the Years
Ended February 28/29, 1997, 1996 and 1995........................F-7
Notes to Consolidated Financial Statements.........................F-9
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts................... F-41
All other schedules are omitted as the required information is
inapplicable or is presented in the Company's Consolidated
Financial Statements or Notes thereto.
II. THE CONNELLY GROUP, L.P.
Financial Statements:
Independent Auditors' Report.......................................F-42
Balance Sheets as of February 28/29, 1997 and 1996.................F-43
Statements of Operations for the Years
Ended February 28/29, 1997, 1996 and 1995........................F-45
Statements of Partners' Preferred Redeemable Capital and
General Capital (Deficiency) for the Years
Ended February 28/29, 1997, 1996 and 1995........................F-46
Statements of Cash Flows for the Years
Ended February 28/29, 1997, 1996 and 1995........................F-47
Notes to Financial Statements......................................F-49
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts....................F-590
All other schedules are omitted as the required information is
inapplicable or is presented in the Company's Financial Statements
or Notes thereto.
III. PRC HOLDINGS CORPORATION
Financial Statements:
Independent Auditors' Report.......................................F-60
Balance Sheets as of February 28/29, 1997 and 1996.................F-61
Statements of Operations for the Years
Ended February 28/29, 1997, 1996 and 1995........................F-62
Statements of Stockholder's Equity for the Years
Ended February 28/29, 1997, 1996 and 1995........................F-63
Statements of Cash Flows for the Years
Ended February 28/29, 1997, 1996 and 1995........................F-64
Notes to Financial Statements......................................F-65
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts....................F-67
All other schedules are omitted as the required information is
inapplicable or is presented in the Company's Financial Statements
or Notes thereto.
INDEPENDENT AUDITORS' REPORT
President Casinos, Inc.:
We have audited the accompanying consolidated balance sheets of President
Casinos, Inc. and affiliates as of February 28, 1997 and February 29, 1996,
and the related consolidated statements of operations, stockholders' equity,
and cash flows for each of the three years in the period ended February 28,
1997. Our audits also include the financial statement schedule listed in the
Index at Item 14(a)2. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of President Casinos, Inc. and
affiliates as of February 28, 1997 and February 29, 1996, and the results of
their operations and their cash flows for each of the three years in the
period ended February 28, 1997, in conformity with generally accepted
accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Deloitte & Touche LLP
- -------------------------
May 13, 1997
F-1
PRESIDENT CASINOS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
Feb. 28, Feb. 29,
Notes 1997 1996
----- -------- --------
ASSETS
Current Assets:
Cash and cash equivalents...................... $ 25,115 $ 19,756
Short-term investments......................... 600 1,008
Receivables, net of allowance for doubtful
accounts of $393 and $423 as of February