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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, 2002
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, $.06 par value
Preferred Stock Purchase Rights
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. / /
As of May 28, 2002, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $2,159,418.*
As of May 28, 2002, the number of shares outstanding of the Registrant's
Common Stock was approximately 5,033,161.
* 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 - None.
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PART I
Item 1. and Item 2. Business and Properties.
General
President Casinos, Inc. owns, operates and develops dockside gaming casinos
through its subsidiaries (collectively, the "Company"). The Company's current
gaming facilities and operations are summarized as follows:
Biloxi, Mississippi
Operating entity - The President Riverboat Casino-
Mississippi, Inc.
Vessel - "President Casino-Broadwater"
Slots - 890
Gaming tables - 38
Opening of casino - August 13, 1992
Opening of current facility - June 30, 1995
St. Louis, Missouri
Operating entity - President Riverboat Casino-
Missouri, Inc.
Vessel - "Admiral"
Slots - 1,254
Gaming tables - 48
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 casino operations in
Biloxi, Mississippi. The Company also from time to time charters certain of
its unused vessels to third parties.
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.
The Company is the successor to businesses operated in St. Louis, Missouri
since 1985 and Biloxi, Mississippi since August 1992. The Company's principal
executive offices are located in an approximately 36,000 square foot building
owned by the Company at 802 North First Street, St. Louis, Missouri 63102, of
which the Company occupies approximately 30,800 square feet and leases the
remainder to an unrelated party. The Company's telephone number is (314) 622-
3000. Information regarding the Company can be found at its web page
www.presidentcasino.com.
On October 10, 2000, the Company sold the assets of its former Davenport,
Iowa casino and hotel operations for aggregate consideration of $58.2 million
in cash. The Company recognized a gain of approximately $34.5 million on the
transaction. The Davenport casino operations were managed by the Company's
wholly-owned subsidiary, President Riverboat Casino-Iowa, Inc. ("PRC Iowa"),
which is the general partner of the 95% Company-owned operating partnership,
The Connelly Group, L.P. ("TCG"). The Blackhawk Hotel operations in
Davenport, which were also sold in the transaction, were managed by a wholly-
owned subsidiary of the Company.
On April 30, 2001, the Company executed an agreement to sell the assets of
Gateway Riverboat Cruises, the Company's non-gaming cruise operations which
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provide dinner cruise, excursion and sightseeing on two riverboats on the
Mississippi River. The transaction was consummated on July 17, 2001. The
Company recognized a gain of $0.8 million on the sale of these assets.
The Company continues to experience difficulty generating sufficient cash
flow to meet its debt obligations and sustain its operations. As a result of
the Company's relatively high degree of leverage and the need for significant
capital expenditures at its St. Louis property, the Company was unable to pay
the regularly scheduled interest payments of $6.4 million that were each due
and payable March 15, and September 15, 2000 on its $75.0 million 13% Senior
Exchange Notes (the "Senior Exchange Notes") and $25.0 million 12% Secured
Notes (the "Secured Notes," and collectively with the Senior Exchange Notes,
the "Notes"). Under the Indentures pursuant to which the Senior Exchange
Notes and the Secured Notes were issued, an Event of Default occurred on April
15, 2000, and is continuing as of the date hereof. Additionally, the Company
did not pay the $25.0 million principal payment due September 15, 2000 on the
Senior Exchange Notes. The holders of at least 25% of the Senior Exchange
Notes and the Secured Notes have been notified of the defaults and have
instructed the Indenture Trustee to accelerate the Senior Exchange Notes and
the Secured Notes and declare the unpaid principal and interest to be due and
payable.
On November 22, 2000, the Company entered into an agreement with a majority
of the holders of the Senior Exchange Notes and a majority of the holders of
the Secured Notes. The agreement provided for a proposed restructuring of the
Company's debt obligations under the Notes and the application of certain of
the proceeds received by the Company from the sale of the Company's Davenport,
Iowa assets. Approximately $43.0 million of the proceeds from the sale were
deposited with a trustee. Of this amount, $12.8 million was used to pay
missed interest payments due March 15, 2000 and September 15, 2000 on the
Senior Exchange Notes and the Secured Notes; $25.0 million was used to
partially redeem the Senior Exchange Notes and the Secured Notes; and $5.2
million was used to pay interest due March 15, 2001 on the Senior Exchange
Notes and the Secured Notes.
Subsequently, the Company was unable to make the principal and interest
payments due September 15, 2001 and interest payments due March 15, 2002, on
its Senior and Secured Notes. As of February 28, 2002, principal due on the
Senior and Secured Notes was $56.2 million and $18.8 million, respectively.
To date, the proposed restructuring has not been implemented and the Company
is continuing discussions with the Noteholders. The Company has informed the
Noteholders that the Company intends to continue with the sale of certain
properties and the pursuit of refinancing opportunities as primary sources of
retiring debt obligations. In July 2001, the Company completed the sale of
its non-gaming cruise operations in St. Louis, Missouri for $1.7 million. The
Company is continuing its efforts to identify purchasers for other assets
available for sale. Management is unable to predict whether the heretofore
given notice to accelerate the Senior Exchange Notes and Secured Notes will
result in any further action by the Noteholders or whether the Notes can be
restructured or refinanced under terms satisfactory to the Company and the
Noteholders.
In addition to the foregoing, President Broadwater Hotel, LLC ("PBLLC"), a
limited liability company in which the Company has a Class A ownership
interest, is in default under the terms of a $30.0 million promissory note and
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associated $7.0 million loan fee incurred in connection with the July 1997
purchase by PBLLC of the real estate and improvements utilized in the
Company's operations in Biloxi, Mississippi. On April 19, 2001, PBLLC filed a
voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code
in the United States Bankruptcy Court for the Southern District of Mississippi
in Biloxi, Mississippi. PBLLC continues its possession and use of its assets
as a debtor in possession and has entered into an agreement with its lender
approved by the bankruptcy court which allows PBLLC use of its cash
collateral. See "Item 3. Legal Proceedings." The bankruptcy is proceeding
and the Company anticipates that the subsidiary will ultimately emerge from
bankruptcy with restructured debt obligations. The Company is unable to offer
any assurance that this will occur or that the restructured debt, if it is
restructured, will be paid in accordance with its revised terms.
Due to certain debt covenants and cross default provisions associated with
other debt agreements, the Company is also currently in default under the
terms of its $2.2 million M/V "President Casino-Mississippi" note.
Management is pursuing various strategic financing alternatives in order to
fund its debt obligations and the Company's continuing operations. The
Company is pursuing alternatives, including the restructuring and refinancing
of outstanding debt obligations and/or the sale of all or a portion of its
assets. The Company's ability to continue as a going concern is dependent on
its ability to restructure successfully, including refinancing its debts,
selling or chartering assets on a timely basis under acceptable terms and
conditions, and the ability of the Company to generate sufficient cash to fund
future operations. There can be no assurance in this regard.
Current Operations
The Company's management views its current operations in three operating
segments: Biloxi Operations, St. Louis Operations and, to a much lesser
extent, Corporate Leasing Operations, each of which is discussed more fully
below. Prior to the sale of the Company's Davenport properties in fiscal
2001, Davenport operations were considered to be a fourth operating segment.
Revenues, results of operations and identifiable assets of each of these
segments can be found in Note 13 of the accompanying consolidated financial
statements.
St. Louis, Missouri Operations
In May 1994, the Missouri Gaming Commission licensed the Company to conduct
dockside gaming operations on the Company-owned vessel, "Admiral," in St.
Louis through its wholly-owned subsidiary, President Riverboat Casino-
Missouri, Inc. ("President Missouri"). The Company's initial license was
subsequently renewed and was last renewed in May 2002 for a period of two
years. The "Admiral" is approximately 400 feet long, continuously docked
north of the base of the Gateway Arch in Laclede's Landing, at a mooring site
subleased by the Company from the City of St. Louis Port Commission.
During July 1998, the Company and the City of St. Louis reached an agreement
for the relocation of the "Admiral" approximately 1,000 feet north from its
former location on the Mississippi River. The casino was closed at midnight
December 3, 2000 to prepare for the move and reopened on December 7, 2000.
The new location provides guests with improved parking and valet service, and
better ingress/egress including improved access from major highways into St.
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Louis. This site is also less susceptible to the negative economic impact and
to flooding than the previous mooring site.
The aggregate cost to relocate the "Admiral" and construct ancillary
facilities was approximately $8.7 million. Under the terms of the agreement,
the City funded $3.0 million of the relocation costs, $2.4 million of which
amount was financed through bank debt. The Company paid for the remaining
costs. It is anticipated that the City will repay the debt from annual
allocations of $0.6 million from the City's annual home dock city public
safety fund that is funded by admission taxes from the "Admiral." The Company
has guaranteed repayment of the bank debt if the City fails to pay the
obligation. As of February 28, 2002, the Company guaranteed balance was $1.6
million.
Rent under the terms of the new lease consists of base rent plus a percent
of adjusted gross receipts. The base rent is $27,000 annually and is subject
to rate change every five years based on the recommendation of the Port
Commission. The percentage rent is 2% of adjusted gross receipts for any
lease year equal to or less than $80.0 million, plus 3% of that portion of
adjusted gross receipts for such lease year which exceed $80.0 million but
which are equal to or less than $100.0 million, plus 4% of that portion of
adjusted gross receipts for such lease year, if any, which exceed $100.0
million.
Competition is intense in the St. Louis market area. There are presently
four other casino companies operating five casinos in the market area. Many
of these competitors have significantly greater name recognition and financial
and marketing resources than the Company. Two of these are Illinois casino
companies operating single casino vessels on the Mississippi River, one across
the Mississippi River from the "Admiral" and the second 20 miles upriver.
There are two Missouri casino companies, each of which operates casino vessels
approximately 20 miles west of St. Louis on the Missouri River. One company
operates one casino in the City of St. Charles, Missouri and the other company
operates two casinos in Maryland Heights, Missouri.
Applications were submitted to the Missouri Gaming Commission for approval
of potential new licenses at four different locations within the St. Louis
metropolitan area along the Mississippi River. Three of the locations are
within 20 miles of the "Admiral." In July 2000, the Gaming Commission
announced its decision to award an additional license to the applicant
proposing a site at the greatest distance from the "Admiral" of the proposed
four locations. The Commission's decision was being challenged by one of the
applicants whose proposal was not selected and certain other entities. In
September 2001, the applicant selected by the Gaming Commission announced it
would not proceed with the development of the project. Management believes
that the opening of one or more additional casinos in the St. Louis market
would have a negative impact on the Company's results of operations.
Missouri regulations limit the loss per simulated cruise per passenger by
limiting the amount of chips or tokens a guest may purchase during each two-
hour gaming session to $500. Companies that operate adjacent casinos are able
to offer guests who reach the two-hour loss limit the ability to move to the
adjacent casino and continue to play. The lack of a statutory loss limit on
Illinois casinos allows them to attract higher stake players. Additionally,
their guests are not burdened with the administrative requirements related to
the loss limits.
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During the summer of 1998, all Missouri casinos in the St. Louis market,
except the "Admiral," migrated from a manual/paper system of regulating the
Missouri $500 loss limit to an electronic system. This paperless loss
tracking system is more accommodating to guests and allows for the use of bill
validators on slot machines, a convenience that the "manual/paper" system does
not accommodate. The slot machines offered by the "Admiral" lacked bill
validators until the end of August 2000. As a result, the Company could not
provide guests the convenience of using bill validators nor adapt to the
paperless loss tracking system, putting the "Admiral" at a significant
competitive disadvantage with the other casinos in the market. Effective
August 28, 2000, Missouri began to allow credits generated through use of the
bill validators to go directly to the slot "credit meter" for use by the
guests. Previously, a guest using a bill validator received tokens in the
tray and fed these tokens into the machine. The regulatory change provided a
significant added convenience to slot players.
Biloxi, Mississippi Operations
The Company manages its Biloxi gaming operations through its wholly-owned
subsidiary, The President Riverboat Casino-Mississippi, Inc. ("President
Mississippi"). Biloxi is located on the Gulf of Mexico 75 miles east of New
Orleans. The Mississippi Gulf Coast area has a population of approximately
300,000. The Company's Mississippi gaming license was last renewed in March
2001 for a two-year period.
Since gaming began in Mississippi in August 1992, competition has steadily
increased. There are currently twelve casinos operating in the Mississippi
Gulf Coast area. The twelfth casino opened in March 1999 and is the largest
casino in the market. The Company also faces competition from gaming
operations in the metropolitan New Orleans area and elsewhere in Louisiana and
Mississippi. The New Orleans metropolitan area currently has four casinos in
operation.
Management believes the Mississippi Gulf Coast 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. Many of these
competitors have substantially greater name recognition and financial and
marketing resources than the Company. Management believes that as newer and
larger casino complexes enter the market, it will become increasingly more
difficult to compete and maintain market share. Thus, management continues to
study strategic alternatives for its Biloxi operations. See "Potential Growth
Opportunities-Biloxi, Mississippi."
The Company began dockside gaming operations in Biloxi on August 13, 1992.
In February 1995, in order to provide the Company with the opportunity to
compete more effectively in the Mississippi Gulf Coast market, the Company
executed a charter agreement to lease a dockside casino to be utilized by its
Biloxi gaming operations. In June 1995, the Company replaced the M/V
"President Casino-Mississippi" with the chartered facility, "President Casino-
Broadwater". The chartered vessel allowed for an increase in casino square
footage and the addition of a full service buffet and a steak and seafood
restaurant. In August 1999, the Company purchased "President Casino-
Broadwater."
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Prior to July 1997, the Company was party to an operating lease with BH
Acquisition Corporation ("BHAC") for its Biloxi mooring site, parking
facilities, offices and a warehouse. BHAC was a wholly-owned entity of John
E. Connelly, Chairman, Chief Executive Officer and principal stockholder of
the Company. Rent under the operating lease agreement was approximately $3.0
million annually, on a triple net basis. In July 1997, President Broadwater
Hotel, LLC ("PBLLC"), a limited liability company in which the Company has a
Class A ownership interest, and a wholly-owned entity of Mr. Connelly which
has certain preferred rights to certain cash flows, acquired the real estate
and improvements from BHAC for $40.5 million. The property comprises
approximately 260 acres and includes a 111-slip marina which contains the
mooring site of "President Casino-Broadwater," two hotels with approximately
500 rooms and an adjacent 18-hole golf course (collectively, the "Broadwater
Property").
The marina at the Broadwater Property consists of both "tidelands" and "fast
lands" under the Mississippi Trust Tidelands Act (the "Tidelands Act"). The
Tidelands Act provides that land designated as tidelands is deemed to be owned
by the State of Mississippi in trust. Under Mississippi law, riparian owners
of land designated as tidelands or fast lands are provided the first
opportunity to negotiate with the State of Mississippi for a lease on the
property.
During August 1992, BHAC entered into a ten-year lease agreement with the
State of Mississippi for the tidelands (the "Tidelands Lease") for an annual
rental fee of $295,000, with an option for a renewal term of five years,
subject to renegotiation of the annual rent. In November 1993, the Tidelands
Lease was amended to allow a new or second vessel to be moored, among other
items, for an annual rent of $525,000. Effective in August 1995, in
conjunction with the replacement of the M/V "President Casino-Mississippi"
with the "President Casino-Broadwater," BHAC exercised its rights under the
agreement and the Company's annual rent increased to $525,000. Effective
August 1997, the state adjusted the annual rent to $598,000 in accordance with
the terms of the lease.
During December 1996, BHAC entered into a 40-year lease agreement (the "Fast
Lands Lease") with the State of Mississippi for the fast lands for an annual
rental fee of $21,000, adjustable every five years as defined in the lease
agreement. Concurrent with the purchase of PBLLC, BHAC sold its interest in
the Tidelands Lease and the Fast Lands Lease to PBLLC.
Leasing Operations
In addition to the vessels currently owned and utilized in its gaming
operations, the Company owns the M/V "President Casino-Mississippi" and the
M/V "Surfside Princess" (formerly the "New Yorker").
The M/V "President Casino-Mississippi" was previously utilized at the
Company's Biloxi and Davenport operations. The M/V "President Casino-
Mississippi" is 292-feet long and 65-feet wide, containing approximately
22,000 square feet of gaming space on three decks and formerly accommodated
620 slot machines and 43 table games. The Company is currently seeking to
sell or charter this vessel.
On March 29, 2001, the Company executed an installment sale agreement for
the M/V "Surfside Princess". Under the terms of the agreement, the Company
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would receive an aggregate of $9.0 million principal installment payments over
a period of thirty months commencing on March 29, 2001, which included a final
principal balloon payment of $4.4 million due October 2003. The note bore an
annual interest rate of 10.5%. On October 3, 2001, the Company terminated the
installment sale agreement and repossessed the M/V "Surfside Princess," due to
the inability of the purchasing party to meet the terms of the agreement.
Management intends to continue to aggressively seek another buyer or find
other uses for the vessel. See "Item 3. Legal Proceedings."
Potential Growth Opportunities
The Company continues to selectively explore gaming developments in current
gaming markets. 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 for the
development of new gaming opportunities from companies that 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
successfully other gaming opportunities or recover its investment in any such
new opportunities.
Biloxi, Mississippi Development
As discussed in "Current Operations-Biloxi, Mississippi," in July 1997, the
Company purchased the Broadwater Property in Biloxi for $40.5 million. The
property comprises approximately 260 acres and includes two hotels, an
adjacent 18-hole golf course and a 111-slip marina. The marina is the site of
the Company's Biloxi casino operations and was formerly leased by the Company
under a long-term lease agreement.
Management believes that this site is ideal for development of "Destination
Broadwater," a full-scale luxury destination resort offering an array of
entertainment attractions in addition to gaming. The plans for the resort
feature a village which will include a cluster of casinos, hotels,
restaurants, theaters and other entertainment attractions. Management
believes that with its beachfront location and contiguous golf course, the
property is the best site for such a development in the Gulf Coast market.
In January 1999, the Company received the permit from the Mississippi
Department of Marine Resources ("DMR") for development of the full-scale
destination resort. This was the first of three permit approvals required of
the Joint Permit Application submitted in August 1998 to the DMR, the U.S.
Army Corps of Engineers (the "Corps") and the Mississippi Department of
Environment Quality. The two remaining permit approvals are still pending and
awaiting the completion of the Environmental Impact Statement ("EIS"). The
Company has received the Draft EIS, the notice of which was posted in the
Federal Register in June 2000 for public comment. The comment period has been
closed and the Company is currently working with the Corps to resolve the
comments in order to facilitate the completion of the Final EIS.
In connection with the Company's proposed Destination Broadwater development
plan, to date, the Company has not identified any specific financing
alternatives or sources as the necessary regulatory approvals have not been
obtained. There can be no assurance that the Company will be able to obtain
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the regulatory approvals or the requisite financing. Should the Company fail
to raise the required capital, such failure would materially and adversely
impact the Company's business plan.
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 preferred slot player
programs, 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. The Company also
utilizes its web site at www.presidentcasino.com to enhance its marketing
programs.
Regulatory Matters
Gaming Regulations
General. The ownership and operation of gaming facilities are subject to
extensive state and local regulation. The Company's Biloxi gaming operations
are regulated by the Mississippi Gaming Commission and its St. Louis gaming
operations are regulated by the Missouri Gaming Commission. As a condition to
obtaining and maintaining a gaming license, the Company must pay fees and
taxes, observe stringent regulations on operations, submit and update
comprehensive applications and submit detailed financial, operating and other
reports to each such Commission. Each such Commission has broad powers to
suspend or revoke licenses in which event operations would be terminated or
suspended. In addition, substantially all of the Company's material
transactions are subject to prior notice to review, and in some instances,
approval by such Commission. Any person acquiring 5% or more of the Common
Stock or 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, 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. In addition, certain other fees are imposed.
The Company, its subsidiaries, its employees and other individuals or
entities having material relationships with the Company are required to obtain
and hold various licenses and approvals in 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 to have 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
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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 structure it intends to utilize. Obtaining such licenses and approvals
may be costly, time consuming and cannot be assured.
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 financial position and
results of operations of the Company.
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 (as amended, 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, and enforcement with respect to some aspects of gaming in
Missouri.
Opponents of gaming in Missouri have brought several legal challenges to
gaming in the past and may possibly bring similar challenges in the future.
On November 25, 1997, the Missouri Supreme Court overturned a state lower
court and held that a portion of the Missouri Gaming Law that authorized
excursion gaming facilities in "artificial basins" up to 1,000 feet from the
Mississippi or Missouri rivers was unconstitutional. This ruling created
uncertainty as to the legal status of several excursion gaming riverboat
facilities in the state; however, as President Missouri facilities were fully
on the Mississippi River, they did not appear to be affected. On November 3,
1998, a statewide referendum was held, whereby the voters amended the
constitution to allow "artificial basins" for existing facilities, effectively
overturning the above Missouri Supreme Court decision. There can be no
assurances that any future challenges, if brought, would not further interfere
with full-scale gaming operations in Missouri, including the operations of
President Missouri.
Under the Missouri Gaming Law, the ownership and operation of riverboat
gaming facilities are subject to extensive state and local regulation. The
Company, its parent, subsidiaries and certain of its officers and employees
are subject to various regulations.
President Missouri must be licensed by the Missouri Commission in order to
conduct its operations. Licenses issued by the Missouri Commission to conduct
gaming operations are subject to two year renewals and may not be transferred
or pledged as collateral. In addition to the information required of the
operator, the operator's directors, officers and other key persons (which
include individuals and related companies designated by the Missouri
Commission) must submit applications which include detailed personal and
financial information and are subject to thorough investigations and
licensing. Also, all gaming employees must obtain an occupational license
issued by the Missouri Commission. Each applicant has an ongoing duty to
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update the information provided to the Missouri Commission in the application.
Applications filed with the Missouri Commission are continuously "pending" and
any issue may be reopened at any time. License fees are a minimum of $25,000
annually after the initial license application. In addition, each licensee
must pay the entire cost of Missouri Highway Patrol officers and gaming
enforcement agents assigned to it. President Missouri was re-licensed by the
Missouri Commission in May 2002.
The Missouri Gaming Law regulations impose restrictions on the use and
transfer of the gaming licenses as well as limitations on transactions engaged
in by licensees. The Missouri Gaming Law regulations bar a licensee from
taking any of the following actions without prior notice to, and approval by,
the Missouri Commission: any transfer or issuance of an ownership interest of
five percent or more of the issued and outstanding ownership interest, any
private incurrence of debt by the licensee or any holding company of $1.0
million or more, any public issuance of debt by a licensee or its holding
company, and certain defined "significant related party transactions." In
addition, the licensee must notify the Missouri Commission of other
transactions, including the transfer of five percent or more of an ownership
interest in the licensee or holding company, and any transaction of at least
$1.0 million. The restrictions on transfer of ownership apply to the parent
as well as the direct licensee, President Missouri. Gaming equipment and
corporate stock of some licensees may not be pledged except in narrow
circumstances and subject to some regulatory conditions.
The Missouri Gaming Law imposes operational requirements on riverboat
operators, including a charge of two dollars per gaming customer per excursion
that licensees must pay to the Missouri Commission, a 20% tax on adjusted
gross receipts (in addition to other state taxes and license fees),
requirements regarding minimum payouts, 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 of all Missouri Commission staff, including Missouri Highway Patrol
Officers, necessary to protect the public on the licensee's riverboat.
Licensees must also submit monthly and annual reports of financial and
statistical data and quarterly and annual audited financial information and
compliance reports to the Missouri Commission and pay the associated auditing
fees.
Other areas of operation which are subject to regulation under the Missouri
Gaming Law rules are the color, denomination and handling of chips and tokens;
the surveillance methods and computer monitoring of electronic games;
accounting and audit methods and procedures; and approval of an extensive
internal control system. The internal operating procedures and controls of
each facility are subject to the approval of the Missouri Commission. The
purchase and sale of slot machines and other gaming equipment is subject to
regulation, and must be purchased from a licensed supplier. The Missouri
Commission requires comprehensive safety inspections and compliance with local
ordinances and federal safety requirements. The Missouri Commission regulates
security and surveillance, and the control of cash and chips. Liquor licenses
are issued and regulated by the Missouri Commission, not local or other state
agencies.
The Missouri Commission has the authority to investigate any potential
violation of the Missouri Gaming Law. In addition, the Missouri Commission
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may take enforcement action against a licensee for the failure of that
licensee to comply with any other law.
The Missouri Commission has the power and broad discretion in exercising
this power to revoke or suspend gaming licenses and impose other penalties for
violation of the Missouri Gaming Law and the rules and regulations promulgated
thereunder. These penalties may include forfeiture of all gaming equipment
used for improper gaming and fines of up to three times a licensee's highest
daily gross adjusted receipts during the preceding twelve months.
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.
The Missouri Gaming Law provides for a loss limit of five hundred dollars per
person per each two-hour gaming session. In order to establish an excursion
schedule which allows patrons to enter and exit the gaming floor at any time
during the excursion, the licensee must prove to the Missouri Commission that
it can enforce the $500 loss limit.
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
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. The
Mississippi Commission may at any time revoke, suspend, condition, limit or
restrict a license or deny approval to own shares of stock in the Company or
President Mississippi for any cause it deems reasonable.
The Mississippi Gaming Law imposes state and local gaming taxes of
approximately 12% of gaming revenues. In addition, certain other fees are
imposed.
The Mississippi Commission has the authority to require a finding of
suitability with respect to any Company or President Mississippi stockholder
regardless of such stockholder's percentage of ownership. The stockholder is
required to pay all costs of investigation. In this regard, the Company's
Restated 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 Restated Certificate of Incorporation, regardless
of the price the stockholder paid for the shares. Mississippi law also
contains a provision which requires any Company or President Mississippi
stockholder found unsuitable by the Mississippi Commission to immediately
offer its shares to the Company/President Mississippi for purchase and the
Company/President Mississippi to purchase the shares for cash within ten days
of the offer. 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 or President
Mississippi may be required to be investigated in order to be found suitable
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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 or President Mississippi may be deemed to have such a relationship
or involvement.
In connection with President Mississippi's 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 and the Company 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 Mississippi Commission 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.
The Mississippi Commission has the authority to approve or disapprove the
Company's future operations outside of Mississippi. 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 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.
A 1998 amendment to a Mississippi Commission regulation requires as a
condition of licensure or license renewal that a gaming establishment's
development plan include a 500-car or larger parking facility in close
proximity to the casino complex and infrastructure facilities, the
expenditures for which will amount to at least 100% of the higher of the
appraised value or construction cost of the casino. The regulation formerly
required infrastructure expenditures amounting to 25% of the casino cost.
Such infrastructure facilities shall include any of the following: a 250-room
or larger hotel of at least a two-star rating as defined by the current
edition of the Mobil Travel Guide, a theme park, golf courses, marinas, tennis
complex, entertainment facilities, or any other such facility as approved by
the Mississippi Commission as infrastructure. Parking facilities, roads,
sewage and water systems, or facilities normally provided by cities and/or
counties are excluded. The Mississippi Commission may in its discretion
reduce the number of rooms required, where it is shown to the Mississippi
Commission's satisfaction that sufficient rooms are available to accommodate
the anticipated visitor load, and parking spaces may also be reduced as needed
for small casinos. Because the amended regulation "grandfathers" in existing
licensees (and applicants for a license receiving a finding of site
suitability from the Mississippi Commission) prior to February 20, 1999, the
amendment imposes no new requirement on the Company or President Mississippi.
Non-Gaming Regulations
The Company is 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,
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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.
Certain of the vessels operated by the Company must comply with U.S. Coast
Guard requirements as to safety and must hold a Certificate of Inspection.
Loss of a vessel's Certificate of Inspection would preclude its use as a
motorized carrier of passengers. Every five years the vessels which require a
Certificate of Inspection must undergo a hull inspection, which generally
requires the vessel be dry-docked. Currently neither of the vessels on which
the Company conducts gaming operations are subject to the regulations which
require a Certificate of Inspection.
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 therefore and
are permitted to act in the positions for which they were hired pending
approval of such applications.
Employees
As of February 28, 2002, the Company had approximately 1,800 employees.
In April 1999, certain gaming, service and maintenance employees of
President Missouri ratified a three-year collective bargaining agreement
setting out wages, benefits and other terms and conditions of employment. The
labor agreement covers approximately 400 of the Company's 830 St. Louis
employees.
Item 3. Legal Proceedings.
Litigation
--Whalen Litigation
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."
("Whalen III") 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 claimed in this lawsuit
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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 sought 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. In November 1998, the District Court granted the Company's motion for
summary judgment and dismissed Whalen's claim for conversion. Whalen appealed
the District Court's decision. The Supreme Court of the State of Iowa
reversed the order of the District Court, found that there had been committed
the tort of conversion and remanded the case to the District Court to
determine damages. PRC Iowa filed a Motion of Summary Judgment and Resistance
to a Cross Motion of Summary Judgment on the Issues of Damages. On May 8,
2001, the District Court determined it was compelled by the Supreme Court
decision to grant Whalen's motion and found PRC Iowa and J. Edward Connelly
Associates, Inc. liable. The Court also denied the motion for Summary
Judgment on damages of PRC Iowa. In addition, the Court denied Whalen's
motion for Summary Judgment on the issue of damages. The Court held a bench
trial on the issue of damages in December 2001, and entered an order on
February 20, 2002 determining the amount of damages. In May 2002, the
Company, its affiliates, Mr. Connelly and JECA reached a settlement with
Whalen. Under the term of the settlement, Whalen agreed to release any claims
he had against the Company, its affiliates, or Mr. Connelly or JECA with
respect to any of the matters at issue in Whalen III as well as any claims
with respect to the disposition of the remaining assets of TCG. The Company,
its affiliates, Mr. Connelly and JECA agreed to release any claims they had
against Whalen with respect to any matters at issue in the lawsuit. The
Company and its affiliates agreed that Whalen would receive his share as
limited partner of 5% of any distributions made to the partners of TCG and
that PRC Iowa would pay Whalen $0.5 million in consideration of the
settlement.
"Michael L. Whalen v. The Connelly Group, LP, President Riverboat Casino-
Iowa, Inc. and President Casinos, Inc.," No. 96350, Iowa District Court for
Scott County ("Whalen IV"). This case followed Whalen III and represented an
effort to prevent PRC Iowa as general partner of TCG from distributing the
proceeds from the sale of the Davenport operations of TCG. While a
substantial amount was distributed prior to the filing of this action,
approximately $1.5 million remained undistributed as of February 28, 2002.
Whalen IV sought injunctive relief to prevent its distribution until a
judgment was entered in Whalen III. A temporary injunction was issued. Upon
execution of the Settlement Agreement and Mutual Release in the aforementioned
case, "Whalen III," Whalen and defendants jointly filed a stipulated consent
order, releasing the injunction and dismissing the case with prejudice.
Subsequently, TCG made a $1.4 million distribution to its partners, inclusive
of Whalen's 5% share.
--Poulos Litigation
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
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and allowing the plaintiffs to re-file a single complaint, a complaint has
been filed containing substantially identical claims, alleging that the
defendants fraudulently marketed and operated casino video poker machines and
electronic slot machines, and asserting common law fraud and deceit, unjust
enrichment and negligent misrepresentation. Various motions were filed by the
defendants seeking to have this new complaint dismissed or otherwise limited.
On December 19, 1997, the Court, in general, ruled on all motions in favor of
the plaintiffs. The plaintiffs then filed a motion seeking class
certification and the defendants have opposed it. Briefing has been
completed. The presiding judge announced he had reached a decision on class
certification but had placed it under seal pending appointment of a new judge.
If a new judge is not appointed, he will unseal his decision. Extensive paper
discovery has occurred. Although the outcome of litigation is inherently
uncertain, management, after consultation with counsel, believes the action
will not have a material adverse effect on the Company's financial position or
results of operations.
--Mizel Shareholder Derivative Action
A shareholder derivative suit captioned "Mizel v. John E. Connelly et. al."
was filed on September 11, 1998, in the Court of Chancery of the State of
Delaware alleging that the Board of Directors of the Company failed to
exercise informed business judgment and wasted corporate assets in connection
with the July 1997 acquisition by the Company of certain real estate and
improvements in Biloxi, Mississippi, including the Broadwater Resort,
Broadwater Towers and a related golf course, from an entity controlled by Mr.
Connelly, Chairman of the Board and Chief Executive Officer of the Company.
The suit requests rescission of the transaction, a constructive trust upon all
benefits received by Mr. Connelly in the transaction, an award of damages to
the Company and attorneys' fees and costs. The Company filed a motion to
dismiss this action for failure by the plaintiff to make a demand for relief
upon the Board of Directors. The court denied the motion. The Company has
made substantial paper discovery in response to requests for production. The
Company filed a motion to dismiss for failure to join an indispensable party,
PBLLC. This motion was denied. A motion for summary judgment was also
denied. Trial is set for July 8, 2002. Based on management's evaluation of
the lawsuit, the Company believes that it has meritorious defenses to the
allegations set forth in the suit, and intends to defend this action
vigorously. The suit is covered under the Company's directors and officers
insurance policy. Because this is a derivative action, the result of a
successful judgment would be a reimbursement to the Company from the Directors
on account of their alleged breaches of their duty to exercise an informed
business judgment and because of their waste of corporate assets.
--"New Yorker" Charter Litigation
On March 29, 2001, President Riverboat Casino-New York, Inc. ("President New
York") entered into a Bareboat Charter and Purchase Agreement ("Charter") for
the M/V "New Yorker" (renamed the M/V "Surfside Princess") ("Vessel") with
Southern Gaming, LLC ("Southern Gaming") and its assignee Southern Texas
Gaming, LLC ("Southern Texas") (collectively, "the Charterers"). On October
12, 2001, President New York sued the Charterers in the United States District
Court for the Middle District of Florida ("President Riverboat Casino-New
York, Inc. v. Southern Texas Gaming, LLC et al.," No. 6:01-CV-1204-ORL-31KRS)
("Charter Action"). The Charter Action seeks compensatory damages, interest
and attorneys fees for breaches by the Charters of the Charter.
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President New York took possession of the Vessel and obtained a maritime
writ of attachment against gaming devices and money located on the Vessel.
Gaim-Ko, Inc. ("Gaim-Ko"), which claims to be the owner of the gaming devices,
contested the attachment. A Magistrate issued a report and recommendation on
November 27, 2001 recommending that the attachment be vacated. President New
York has filed objections to the recommendation and also filed a separate
motion for release and removal of the gaming devices from the Vessel. Gaim-Ko
has filed a separate motion seeking damages and attorneys fees from President
New York for its actions in previously removing the gaming devices under the
original writ of attachment. President New York also filed a motion for
summary judgment against Southern Texas and Southern Gaming on its breach of
contract claim. All of these motions, and President New York's objections to
the Magistrate's recommendation, are now pending before the District Judge.
On October 19, 2001, Southern Texas filed an action in admiralty in the
United States District Court for the Middle District of Florida ("Southern
Texas Gaming, LLC v. M/V Surfside Princess et al.," No. 6:01-CV-1228-ORL-
31KRS) ("Admiralty Action") alleging that President New York breached the
Charter by unlawfully terminating it and retaking possession of the Vessel.
Southern Texas seeks compensatory damages, arrest of the Vessel, and
appointment of a substitute custodian of the vessel. The Magistrate issued a
warrant for the arrest of the Vessel on December 3, 2001. The company that
managed the Vessel during the Charter, Sophlex Enterprises, Inc., ("Sophlex")
intervened in the case and sought to be appointed as substitute custodian, a
request which President New York supported. The Court granted that request on
January 8, 2002.
This case was consolidated with the Charter Action on January 7, 2002.
President New York has since entered into an agreement with Sophlex regarding
the payment of crew wages. Gaim-Ko has also intervened in the case with
claims against President New York for wrongful attachment.
President New York filed a separate lawsuit in the United States District
Court for the Eastern District of Missouri against the principals of Southern
Gaming who personally guaranteed the obligations of Southern Gaming under the
Charter ("President Riverboat Casino-New York v. Ferrell et al.," No.
4:01CV01982ERW) ("Guaranty Action"). The Guaranty Action remains pending.
--General
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.
Based on the advice of legal counsel, management does not believe that the
outcome of such litigation will have a material adverse effect on the Company.
Other
--Biloxi Bankruptcy Action
On April 19, 2001, PBLLC (the "Debtor") filed a voluntary petition for
relief under Chapter 11 of the Bankruptcy Code. That same day, the Bankruptcy
Court authorized the Debtor's interim use of cash collateral pursuant to a
Cash Collateral Stipulation and Agreement between the Debtor and its largest
creditor, Lehman Brothers Holdings Inc. ("Lehman"). Subsequent orders of the
Bankruptcy Court have extended the Debtor's authorized use of cash collateral
indefinitely until further order of the Court. The Debtor is operating its
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businesses and managing its properties as a debtor-in-possession, and no
trustee has been appointed in the Debtor's case. The first meeting of
creditors was held on June 21, 2001, and an official committee of unsecured
creditors (the "Creditors Committee") has been appointed in the case. The
Bankruptcy Court fixed August 20, 2001 as the final date for creditors to file
proofs of claim in the Debtor's case, except that October 16, 2001 was fixed
as the final date for governmental units to file proofs of claim. The Debtor
is current with the filings of its monthly operating reports in the case, with
the report for April 2002 having been filed on May 15, 2002. Within its
exclusive period for filing a disclosure statement and plan of reorganization
as set by the Bankruptcy Court, the Debtor filed its Debtor's Plan of
Reorganization on October 31, 2001 (the "Plan") and its First Amended
Disclosure Statement on February 7, 2002 (the "Disclosure Statement").
The Plan provides that, following the confirmation of the Plan, PBLLC and
the Company will enter into a loan agreement under which the Company will be
obligated to loan to PBLLC such amounts as shall be necessary for PBLLC to
make certain payments due under the Plan. Additionally, if the Plan is
confirmed the Class B membership interest of PBLLC held by JECA (an entity
controlled by Mr. Connelly, the Company's Chairman and Chief Executive
Officer) will, in respect of its payment right against PBLLC of approximately
$14.6 million, be entitled to receive in satisfaction thereof a cash payment
of $1.5 million and a one-year interest bearing promissory note from PBLLC in
the principal amount of $1.5 million. The Company would be required to loan
such amounts to PBLLC to the extent that PBLLC is unable to fund such amounts.
By its order dated February 20, 2002, the Bankruptcy Court approved the
adequacy of the Disclosure Statement and established the procedure for
creditors to vote to accept or reject the terms of the Plan by March 27, 2002.
All voting ballots cast by creditors impaired under the Plan voted to accept
the terms of the Plan, except that the ballot cast by Lehman as the only
creditor in Class 7 of the Plan voted to reject the Plan. Lehman has also
filed its objection to confirmation of the Plan. The Creditors Committee also
filed an objection to confirmation, but an agreement in principle has been
made by the Debtor and the Creditors Committee for resolving the Creditors
Committee's objection by agreement. The Bankruptcy Court has set September
30, 2002 for commencement of the hearing on confirmation of the Plan, and the
Debtor intends to prosecute the Plan toward confirmation under the "cram-down"
provisions of Bankruptcy Code Section 1129(b) as quickly as practicable.
There can be no assurance that PBLLC will be able to restructure its debt
obligations and emerge from bankruptcy or continue as a going concern.
By its letter dated April 19, 2002, Lehman asserted an indemnity claim
against the Company and President Mississippi (the "Indemnitors') for
"Incurred Costs" of $1.1 million through April 18, 2002, which Lehman
allegedly incurred in connection with its claims against the Debtor in the
Chapter 11 bankruptcy case of PBLLC, with such claim against the Indemnitors
being alleged by Lehman to be based on a certain Indemnity and Guaranty
Agreement dated July 22, 1997 of the Indemnitors in favor of Lehman. Such
claim by Lehman against the Indemnitors duplicates a portion of the secured
claim of Lehman against the Debtor in said Chapter 11 bankruptcy case. The
Indemnitors have not yet responded to Lehman's letter dated April 19, 2002,
but the Indemnitors presently intend to deny their obligation for the amount
claimed by Lehman and to defend vigorously against their being required to pay
same. Although the Company denies their obligation for the amount claimed by
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Lehman, as of February 28, 2002, the Company has accrued $1.0 million for said
costs.
--St. Louis Administrative Action
On May 1, 2001, the Missouri Gaming Commission issued a preliminary order of
discipline in DC-01-004 - DC-01-012 proposing that the Company be assessed
administrative penalties totaling $129,000 for numerous alleged violations of
internal gaming control standards and one alleged violation of making
political contributions prohibited by an ordinance of the City of St. Louis.
None of the alleged violations of internal control standards involve any loss
of funds or affect the integrity of gaming. The Company is contesting the
proposed discipline. Management anticipates that these matters will be
resolved with no material impact on its financial position.
--General
The ownership and operation of casino gaming facilities are subject to
extensive state and local regulation. As a condition to obtaining and
maintaining a gaming license, the Company must submit detailed financial,
operating and other reports to state gaming commissions, all of which have
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. The Biloxi license was last renewed in
April 2001 and expires April 2004. The St. Louis license was last renewed in
May of 2002 and expires in May of 2004.
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 2002.
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PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
The Company's Common Stock was delisted from the Nasdaq National Market
effective the close of business November 19, 1998, because the Company no
longer met certain listing requirements. The stock continues to trade on the
OTC Bulletin Board under the symbol "PREZ.OB." The following table sets
forth, for the fiscal quarters indicated, the high and low sale or bid prices
for the Common Stock, as reported by the OTC Bulletin Board:
High Low
------ -----
Fiscal 2002
First Quarter................ $ 0.5400 $ 0.3000
Second Quarter............... $ 1.0000 $ 0.3100
Third Quarter................ $ 0.8400 $ 0.5500
Fourth Quarter............... $ 1.2000 $ 0.6000
Fiscal 2001
First Quarter................ $ 1.0625 $ 0.1875
Second Quarter............... $ 1.0000 $ 0.6250
Third Quarter................ $ 0.7500 $ 0.2500
Fourth Quarter............... $ 0.5469 $ 0.1875
The market bid quotations reflect inter-dealer prices, without retail mark-
up, mark-down or commission and may not necessarily represent actual
transactions. Bid quotations are derived from Commodity Systems, Inc. through
Yahoo.com Historical Quotes.
On May 27, 2002, there were approximately 1,390 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 used
for the repayment of debt or retained for the operations and expansion of its
business. Accordingly, the 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
Exchange Notes due 2001. See "Management's Discussion and Analysis of
Financial Position and Results of Operations."
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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 Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
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.
Years Ended February 28/29,
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(in thousands, except share data)
Consolidated Statement of Operations Data:
Total operating revenues (1).............. $129,184 $152,098 $188,516 $192,185 $177,636
Operating income (loss)
before (gain)/loss on disposal
of property and equipment (2).......... $ (4,736) $(12,219) $ 7,623 $ 5,871 $ 2,101
Gain/(loss) on disposal of property
and equipment (3)...................... $ 771 $ 33,985 $ (99) $ (14) $ (726)
Net loss.................................. $(20,748) $ (206) $(13,373) $(14,892) $(15,037)
Basic and dilutive loss per share......... $ (4.12) $ (0.04) $ (2.66) $ (2.69) $ (2.99)
Consolidated Balance Sheet Data:
Total assets.............................. $120,450 $135,744 $165,394 $172,744 $187,256
Current liabilities (4)................... $145,883 $141,657 $171,755 $ 27,109 $ 31,510
Long-term liabilities..................... $ -- $ -- $ -- $139,379 $135,084
Stockholders' equity (deficit)............ $(40,535) $(19,787) $(19,581) $ (6,208) $ 8,684
(1) Accounting guidance issued in and effective for fiscal year 2001 (EITF
00-22) requires that the cost of the cash-back component of the Company's
players' programs be treated as a reduction of revenue. Further guidance
(EITF 00-25), which the Company elected during fiscal 2001, requires that
coupons which are redeemed for tokens be similarly classified as a
reduction of revenue. This guidance impacts only the income statement
classification of these costs. The prior years' results have been
restated to reflect the impact of implementing this new guidance.
(2) Management's evaluation of the net realizable value of its assets, based
on their intended future use and current market conditions, resulted in
impairments of long-lived assets of $7,068 and $12,709, respectively,
during fiscal years 2002 and 2001, on two casino vessels held for sale.
The assets are accounted for in the Company's leasing segment.
(3) On October 10, 2000, the assets of the Company's Davenport hotel and
casino operations were sold. A gain of $34,465 was recognized on the
transaction. On July 17, 2001, the assets of Gateway Riverboat Cruises,
the Company's non-gaming cruise operations in St. Louis were sold. A
gain of $778 was recognized on the transaction.
(4) PBLLC did not pay the $30,000 note and the associated $7,000 loan fee due
July 22, 2000 related to the Broadwater Property. PBLLC is the owner of
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the marina in which the Company operates its Biloxi casino operations
barge. On April 15, 2001, PBLLC filed for reorganization under Chapter
11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for
the Southern District of Mississippi. See "Item 3. Legal Proceedings."
Gaming operations commenced in Davenport, Iowa on April 1, 1991, in Biloxi,
Mississippi on August 13, 1992 and in St. Louis, Missouri on May 27, 1994.
Hotel operations commenced in Davenport, Iowa on October 30, 1990 and in
Biloxi, Mississippi on July 27, 1997. The assets of the Davenport operations
were sold on October 10, 2000. The assets of Gateway Riverboat Cruises, the
Company's non-gaming cruise operations in St. Louis, were sold on July 17,
2001.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion, which covers fiscal years 2000 through 2002,
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 the notes thereto included elsewhere in this report.
The Company continues to experience difficulty generating sufficient cash
flow to meet its debt obligations and sustain its operations. During fiscal
2000, as a result of the Company's relatively high degree of leverage and the
need for significant capital expenditures at its St. Louis property,
management determined that, pending a restructuring of its indebtedness, the
Company was unable to pay the regularly scheduled interest payments on its
$75.0 million 13.0% Senior Exchange Notes (the "Senior Exchange Notes") and
the $25.0 million 12% Secured Notes (the "Secured Notes" and collectively with
the Senior Exchange Notes, the "Notes"). Accordingly, the Company was unable
to pay the regularly scheduled interest payments of $6.4 million that were
each due and payable March 15, and September 15, 2000. Under the indenture
pursuant to which the Senior Exchange Notes and Secured Notes were issued, an
Event of Default occurred on April 15, 2000, and is continuing as of the date
hereof. Additionally, the Company was unable to pay the $25.0 million
principal payment due September 15, 2000 on the Senior Exchange Notes. The
holders of at least 25% of the Senior Exchange Notes and the Secured Notes
were notified of the defaults and instructed the Indenture Trustee to
accelerate the Senior Exchange Notes and the Secured Notes and declare the
unpaid principal and interest to be due and payable.
On October 10, 2000, the Company sold the assets of its Davenport operations
for aggregate consideration of $58.2 million in cash. On November 22, 2000,
the Company entered into an agreement with a majority of the holders of the
Senior Exchange Notes and a majority of the holders of the Secured Notes. The
agreement provided for a proposed restructuring of the Company's debt
obligations under the Notes and the application of certain of the proceeds
received by the Company from the sale of the Company's Davenport, Iowa assets.
Approximately $43.0 million of the proceeds from the sale were deposited with
a trustee. Of this amount, $12.8 million was used to pay missed interest
payments due March 15, 2000 and September 15, 2000 on the Senior Exchange
Notes and the Secured Notes; $25.0 million was used to partially redeem the
Senior Exchange Notes and the Secured Notes; and $5.2 million was used to pay
interest due March 15, 2001 on the Senior Exchange Notes and the Secured
Notes.
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Subsequently, the Company was unable to make the principal and interest
payments due September 15, 2001 and its interest payment due March 15, 2002,
on its Senior and Secured Notes. As of February 28, 2002, principal due on
the Senior and Secured Notes was $56.2 million and $18.8 million,
respectively.
To date, the proposed restructuring has not been implemented and the Company
is continuing discussions with the Noteholders. In November 2001, the
majority of the holders of both the Senior Exchange Notes and the Secured
Notes expressed increasing concern over the inability to reach a consensual
agreement with the Company.
The Company has informed the Noteholders that the Company intends to
continue with the sale of certain properties and the pursuit of refinancing
opportunities as primary sources of retiring debt obligations. In July 2001,
the Company completed the sale of its non-gaming cruise operations in St.
Louis, Missouri for $1.7 million. The Company is continuing its efforts to
identify purchasers for other assets for sale. Management is unable to
predict whether the heretofore given notice to accelerate the Senior Exchange
Notes and Secured Notes will result in any further action by the Noteholders
or whether the Notes can be restructured or refinanced under terms
satisfactory to the Company and the Noteholders.
On March 29, 2001, the Company executed an installment sale agreement for
the M/V "Surfside Princess" (formerly, the "New Yorker"). On October 3, 2001,
as a result of the purchasing party's inability to comply with the terms of
the agreement, the Company terminated the agreement and repossessed the
vessel. Management intends to continue to aggressively seek another buyer or
find other uses for the vessel. Until the Company is able to do so, the
Company will continue to incur legal fees, insurance and maintenance costs on
the vessel.
In addition to the foregoing, President Broadwater Hotel, LLC ("PBLLC"), a
limited liability company in which a wholly-owned subsidiary of the Company
has a Class A ownership interest, is in default under a $30.0 million
promissory note and associated $7.0 million loan fee incurred in connection
with the July 1997 purchase by PBLLC of the real estate and improvements
utilized in the Company's operations in Biloxi, Mississippi. On April 19,
2001, PBLLC filed a voluntary petition for reorganization under Chapter 11 of
the Bankruptcy Code in the United States Bankruptcy Court for the Southern
District of Mississippi in Biloxi, Mississippi. PBLLC continues its
possession and use of its assets as a debtor in possession and has entered
into an agreement with its lender approved by the Bankruptcy Court which
allows PBLLC use of its cash collateral. On October 31, 2001, PBLLC filed a
Debtors' Plan of Reorganization (the "Plan") which will permit PBLLC to
restructure its debt obligations in a manner which will permit it to continue
as a going concern. The Bankruptcy Court has set September 30, 2002 for
commencement of the hearing on confirmation of the Plan.
The Plan provides that, following the confirmation of the Plan, PBLLC and
the Company will enter into a loan agreement under which the Company will be
obligated to loan to PBLLC such amounts as shall be necessary for PBLLC to
make certain payments due under the Plan. Additionally, if the Plan is
confirmed the Class B membership interest of PBLLC held by JECA (an entity
controlled by John E. Connelly, the Company's Chairman and Chief Executive
Officer) will, in respect of its payment right against PBLLC of approximately
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$14.6 million, be entitled to receive in satisfaction thereof a cash payment
of $1.5 million and a one-year interest bearing promissory note from PBLLC in
the principal amount of $1.5 million. The Company would be required to loan
such amounts to PBLLC to the extent that PBLLC is unable to fund such amounts.
There can be no assurance that PBLLC will be able to restructure its debt
obligations and emerge from bankruptcy or continue as a going concern.
Due to certain debt covenants and cross default provisions associated with
other debt agreements, the Company is also currently in default under its $2.2
million M/V "President Casino-Mississippi" note. See Liquidity and Capital
Resources.
Management believes that unless the holders of the Company's various debt
obligations take further action with respect to the Company's defaults, the
Company's liquidity and capital resources will be sufficient to maintain its
normal operations at current levels and does not anticipate any adverse impact
on its operations, customers or employees. However, costs previously incurred
and which will be incurred in the future in connection with restructuring the
Company's debt obligations have been and will continue to be substantial and,
in any event, there can be no assurance that the Company will be able to
restructure successfully its indebtedness or that its liquidity and capital
resources will be sufficient to maintain its normal operations during the
restructuring period.
The Company's ability to continue as a going concern is dependent on its
ability to restructure successfully, including refinancing its debts, selling
or chartering its assets on a timely basis under acceptable terms and
conditions, and the ability of the Company to generate sufficient cash to fund
future operations. There can be no assurance in this regard. Management
believes that the long-term viability of the Company is dependent on either
the lifting or eliminating of loss limits in Missouri and/or the obtaining of
required environmental permits and securing of new financing for the Biloxi
destination resort. The 2002 Missouri legislature adjourned before voting on
proposed legislation to repeal loss limits. No assurance is possible that any
subsequent legislative session will vote favorably to lift such limits nor can
there be assurance that the Company will be able to obtain regulatory
approvals or the requisite financing for the Biloxi destination resort.
Overview
The Company's operating results are affected by a number of factors,
including competitive pressures, changes in regulations governing the
Company's activities, the results of pursuing various development
opportunities and general weather conditions. Consequently, the Company's
operating results may fluctuate from period to period and the results for any
period may not be indicative of results for future periods. The Company's
operations in St. Louis, Missouri were temporarily suspended from May 13 to
May 20, 2002 as a result of flooding on the Mississippi River. The Company's
operations are not significantly affected by seasonality.
--Competition
Intensified competition for patrons continues to occur at each of the
Company's properties.
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Since gaming began in Biloxi in August 1992, there has been steadily
increasing competition along the Mississippi Gulf Coast, in nearby New Orleans
and elsewhere in Louisiana and Mississippi. Several large hotel/casino
complexes have been built in recent years with the largest single resort in
the area opening in March 1999. There are currently twelve casinos operating
on the Mississippi Gulf Coast. See "Potential Growth Opportunities" regarding
a master plan for a destination resort the Company is developing in Biloxi,
Mississippi.
Competition is intense in the St. Louis market area. Management believes
the significant increase in EBITDA in St. Louis is directly attributable to
(i) the change in Missouri gaming regulations in August 2000, which allows for
use of bill validators on slot machines, (ii) the move of the "Admiral," which
greatly increases its visibility and affords substantially more adjacent
parking, and, (iii) the updating of the slot machines. In addition,
substantial attention and resources have been devoted to staffing, marketing
and refurbishing the vessel. There are presently four other casino companies
operating five casinos in the market area. Many of these competitors have
significantly greater name recognition and financial and marketing resources
than the Company. Two of these are Illinois casino companies operating single
casino vessels on the Mississippi River, one across the Mississippi River from
the "Admiral" and the second 20 miles upriver. There are two Missouri casino
companies, each of which operates casino vessels approximately 20 miles west
of St. Louis on the Missouri River. One company operates one casino in the
City of St. Charles, Missouri and the other company operates two casinos in
Maryland Heights, Missouri.
Applications were submitted to the Missouri Gaming Commission for approval
of potential new licenses at four different locations within the St. Louis
Metropolitan Area along the Mississippi River, three of which were within 20
miles of the "Admiral." In July 2000, the Gaming Commission announced its
decision to award an additional license to the applicant proposing a site at
the greatest distance from the "Admiral" of the proposed locations. The
Commission's decision was being challenged by one of the applicants whose
proposal was not selected and by other entities. In September 2001, the
applicant selected by the Gaming Commission announced it would not proceed
with the development of the project. Management believes that the opening of
one or more additional casinos in the St. Louis market would have a negative
impact on the revenues and the results of operations of the Company.
--Regulatory Matters
Missouri regulations limit the loss per "simulated" cruise per passenger by
limiting the amount of chips or tokens a guest may purchase during each two-
hour gaming session to $500 (the "loss limit"). The company that operates
adjacent casinos is able to offer guests who reach the two-hour loss limit the
ability to move to the adjacent casino and continue to play. The lack of a
statutory loss limit on Illinois casinos allows them to attract higher stake
players. Additionally, their guests are not burdened with the administrative
requirements related to the loss limits. Any easing of the loss limits in
Missouri would be expected to have a positive impact on the Company's St.
Louis operations.
--Weather Conditions
The Company's operating results are susceptible to the effects of floods,
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hurricanes and adverse weather conditions. Historically, the Company has
temporarily suspended operations on various occasions as a result of such
adversities. In St. Louis, high river levels have historically reduced
parking and caused a general public perception of diminished access to the
casino resulting in decreased revenues. Management believes the move of the
"Admiral" diminished the negative effects of high water on operations.
However, on May 13, 2002, at 4:00 a.m. the St. Louis operations were
temporarily suspended due to high water levels. The "Admiral" was reopened on
May 20, 2002 at 6:00 p.m. During the same period for the prior year, the
Company recorded $1.4 million in St. Louis gaming revenue.
--Potential Growth Opportunities
Biloxi, Mississippi
In July 1997, the Company, through a newly created subsidiary, President
Broadwater Hotel, LLC ("PBLLC"), purchased for $40.5 million certain real
estate and improvements located on the Gulf Coast in Biloxi, Mississippi from
an entity which was wholly-owned by John E. Connelly, Chairman, Chief
Executive Officer and principal stockholder of the Company. The property
comprises approximately 260 acres and includes two hotels, a 111-slip marina
and the adjacent 18-hole Sun Golf Course (collectively, the "Broadwater
Property"). The marina is the site of the Company's casino operations in
Biloxi and was formerly leased by the Company under a long-term lease
agreement. Broadwater Hotel, Inc., a wholly-owned subsidiary of the Company
("BHI"), invested $5.0 million in PBLLC.
PBLLC financed the purchase of the Broadwater Property with $30.0 million of
financing from a third party lender, evidenced by a non-recourse promissory
note (the "Indebtedness") and issued a $10.0 million membership interest to
the seller. Except as set forth in the promissory note and related security
documents, PBLLC's obligations under the Indebtedness are non-recourse and are
secured by the Broadwater Property, its improvements and leases thereon. The
Indebtedness bears interest at a variable rate per annum equal to the greater
of (i) 8.75%, or (ii) 4% plus the LIBOR 30-day rate. The membership interest
grows at the same rate. The accrued balance of the membership account and
unpaid growth as of February 28, 2002 was $15.0 million and is included on the
balance sheet in minority interest. Cash payments relating to this membership
interest have totaled $0.2 million since its inception.
PBLLC was obligated to make monthly payments of interest accruing under the
Indebtedness, and was obligated to repay the Indebtedness in full on July 22,
2000. In addition, PBLLC was obligated to pay to the lender a loan fee in the
amount of $7.0 million which was fully earned and nonrefundable when the
Indebtedness was due. See Liquidity and Capital Resources for a discussion of
the repayment of this obligation.
The Company has developed a master plan for the Broadwater Property.
Management believes that this site is ideal for the development of
"Destination Broadwater," a full-scale luxury destination resort offering an
array of entertainment attractions in addition to gaming. The plans for the
resort feature a village which will include a cluster of casinos, hotels,
restaurants, theaters and other entertainment attractions. Management
believes that with its beachfront location and contiguous golf course, the
property is the best site for such a development in the Gulf Coast market.
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In January 1999, the Company received the permit from the Mississippi
Department of Marine Resources (the "DMR") for development of the full-scale
destination resort. This is the first of three permit approvals required of
the Joint Permit Application submitted in August 1998 to the DMR, the U.S.
Army Corps of Engineers (the "Corps") and the Mississippi Department of
Environment Quality. The two remaining permit approvals are still pending and
awaiting the completion of the Environmental Impact Statement ("EIS"). The
Draft EIS has been completed, notice of which was posted in the Federal
Register in June 2000 for public comment. The comment period has been closed
and the Company is currently working with the Corps to resolve the comments in
order to facilitate the completion of the Final EIS.
In connection with the Company's proposed Destination Broadwater development
plan, to date, the Company has not identified any specific financing
alternatives or sources as the necessary regulatory approvals have not been
obtained. There can be no assurance that the Company will be able to obtain
the regulatory approvals or the requisite financing. Should the Company fail
to raise the required capital, such failure would materially and adversely
impact the Company's business plan.
St. Louis, Missouri
Slot Machine Upgrade and Loss Limit Card Tracking System
During the summer of 1998, all Missouri casinos in the St. Louis market,
except the "Admiral," migrated from a manual/paper system of regulating the
Missouri $500 loss limit to an electronic system. This electronic loss
tracking system is more accommodating to guests and allows for the use of bill
validators on slot machines, a convenience that the "manual/paper" system does
not accommodate.
The slot machines offered by the "Admiral" until the end of August 2000
lacked bill validators. As a result, the Company could not previously provide
guests the convenience of bill validators nor adapt to the electronic loss
tracking system, putting the "Admiral" at a significant competitive
disadvantage with the other casinos in the market.
Effective August 28, 2000, Missouri began to allow credits generated through
use of the bill validators to go directly to the slot "credit meter" for use
by the guests. Previously in Missouri, a guest using a bill validator
received tokens in the tray and fed these tokens into the machine. The
regulatory change provided a significant added convenience to slot players.
In March 2000, the Company purchased 850 slot machines that are equipped
with bill validators and are fitted to operate with an electronic loss limit
system. Effective August 28, 2000, approximately 700 of these machines were
installed on the "Admiral," all of which are currently operational with the
electronic loss limit system. Management has continued to update and upgrade
its slot floor to provide its guests with a superior gaming experience.
Approximately 90% of the 1,254 slot machines are currently equipped with bill
validators. Management believes the Company is better positioned to compete
in the St. Louis market with these additions.
Relocation of the "Admiral"
During 1998, the Company and the City of St. Louis reached an agreement for
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the relocation of the "Admiral" approximately 1,000 feet north from its former
location on the Mississippi River, to the Laclede's Landing District. The
casino was closed at midnight December 3, 2000 to prepare for the move and
reopened December 7, 2000. Management believes the Company has experienced
increased revenues as a result of this move, which in turn results in
increased rent and tax revenues for the City of St. Louis. The City funded
the first $3.0 million in costs to relocate and improve the "Admiral." Of the
$3.0 million City-funded relocation costs, $2.4 million was financed through
bank debt. The Company paid for the remaining $5.7 million costs associated
with the relocation. It is anticipated that the City will repay the debt from
gaming taxes it receives based upon gaming revenues of the "Admiral." The
Company has guaranteed repayment of the bank debt if the City fails to pay it.
As of February 28, 2002, the Company guaranteed balance was $1.6 million.
The benefits of relocating the "Admiral" include:
o Traffic ingress to and egress from the casino, at its former location,
was difficult. Significant improvements in exit and entrance ramps to
the Laclede's Landing area from the main highway and road improvements
within the Laclede's Landing area have been completed. Four roads to and
from the main highway provide improved ingress to and egress from the
new location.
o Parking in the former location was limited and not controlled by the
Company. All parking facilities, including the valet parking areas,
were operated by third parties. Guests had to either use the parking
garages in the proximity of the casino and walk considerable distances
or park on the levee. The new location provides the potential for
significantly improved parking facilities with parking garages and lots
conveniently located, and the potential to expand and control the
parking.
o Flooding and high water on the Mississippi River negatively impacted the
financial results of the "Admiral" every year since it opened prior to
the move. The impact first occurs as the river rises and reduces or
totally eliminates parking on the levee, which formerly was the closest
parking to the casino. Periodically the river level has reached levels
that made the construction of costly scaffolding necessary to keep
access to the casino open. The new location is four feet higher and is
less susceptible to the negative economic impact of flooding, although
the casino was closed from May 13 to May 20, 2002 due to high water.
o Laclede's Landing is a historic area located north of the Arch on the
Mississippi River and is an entertainment destination. The "Admiral"
was formerly located south of Laclede's Landing. The casino was not
visible from the downtown area, major highways or the Laclede's Landing
entertainment area due to a flood wall and other infrastructure. The
relocated "Admiral" is centrally positioned in the entertainment district
and readily visible to those coming to the Laclede's Landing area.
o There has been significant commercial development in recent years in
Laclede's Landing. The number of conventions and entertainment at the
nearby convention center and Edward D. Jones Dome continues to be a
catalyst for business in the area. Management believes that the
relocated "Admiral" will serve as a catalyst for further commercial and
entertainment growth in Laclede's Landing.
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Management believes the results of the move, the slot upgrade and the change
of the Missouri gaming regulation allowing credits to go directly to the meter
have resulted in increased operating results. Gaming revenues have increased
31% compared to the prior year. In addition, EBITDA before impairment of
long-lived assets and gain/loss on disposal of property and equipment has
increased a combined 198% compared to the prior fiscal year.
Results of Operations
The results of operations for the years ended February 28/29, 2002, 2001 and
2000 include the gaming results for the Company's operations in St. Louis,
Missouri and Biloxi, Mississippi and, of much lesser significance, the hotel
operations in Biloxi (the Broadwater Property) and the non-gaming cruise
operations in St. Louis (Gateway Riverboat Cruises) through the date of sale.
The results of operations also include the Company's gaming operations in
Davenport, Iowa and, to a much lesser significance, the non-gaming operations
in Davenport (the Blackhawk Hotel) through the date of sale. The assets of
the Davenport operations were sold on October 10, 2000 and the assets of
Gateway Riverboat Cruises ("Gateway") were sold July 17, 2001.
The following table highlights the results of the Company's operations.
Twelve Months Ended February 28/29,
2002 2001 2000
------ ------ ------
(in millions)
St. Louis, Missouri Operations
Operating revenues (1) $ 79.1 $ 62.4 $ 63.8
Operating income (loss) 6.1 (0.7) 1.6
Biloxi, Mississippi Operations
Operating revenues (1) 50.1 50.2 54.8
Operating income 1.9 2.7 4.6
Davenport, Iowa Operations
Operating revenues (1) -- 39.5 68.1
Operating income (loss) (2) (0.5) 5.8 8.0
Corporate Leasing Operations
Operating revenues -- -- 1.8
Operating loss (8.1) (15.1) (1.6)
Corporate Administration
and Development
Operating loss (4.1) (4.9) (5.0)
(1) Accounting guidance issued in and effective for fiscal year 2001 (EITF
00-22) requires that the cost of the cash-back component of the Company's
players' programs be treated as a reduction of revenue. Further guidance
(EITF 00-25), which the Company elected during fiscal 2001, requires that
coupons which are redeemed for tokens be similarly classified as a
reduction of revenue. This guidance impacts only the income statement
classification of these costs. The prior year's results have been
restated to reflect the impact of implementing this new guidance.
(2) During fiscal 2002, the Company's Davenport operations reflect a net loss
of $0.5 million, of which, $0.7 million relates to attorneys fees and
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settlement of the "Whalen" legal proceedings which were incurred by PRC
Iowa, the general partner of the 95% Company-owned operating partnership,
TCG. TCG managed the Company's Davenport casino operations until the
sale of the Davenport operations in fiscal 2001. The $0.7 million legal
costs and settlement were offset by a net reduction of expense of $0.2
million primarily related to an adjustment to estimated accrued
liabilities.
The following table highlights cash flows of the Company's operations.
Twelve Months Ended February 28/29,
2002 2001 2000
------ ------ ------
(in millions)
Cash flows provided by (used in)
operating activities $ 3,766 $(8,540) $ 7,471
Cash flows provided by (used in)
investing activities 449 39,847 (8,954)
Cash flows used in
financing activities (2,664) (35,156) (3,219)
Cash paid for interest 6,377 17,089 15,993
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The following table provides a reconciliation of operations EBITDA (before
development and impairment expenses and gain/loss on sale of property and
equipment) to net income:
Twelve Months Ended February 28/29,
2002 2001 2000
------ ------ ------
(in millions)
OPERATIONS EBITDA:
St. Louis operations................ $ 11.9 $ 4.2 $ 6.4
Biloxi operations................... 4.5 5.3 7.0
Davenport operations................ (0.5) 7.3 12.4
--------- --------- ---------
Gaming and ancillary operations..... 15.9 16.8 25.8
Leasing operations.................. (1.1) (1.1) 0.7
--------- --------- ---------
Operations EBITDA................. 14.8 15.7 26.5
CORPORATE EBITDA:
Corporate administration............ (3.7) (4.6) (4.7)
Corporate development............... (0.4) (0.3) (0.2)
--------- --------- ---------
Total EBITDA..................... 10.7 10.8 21.6
--------- --------- ---------
OTHER COSTS AND EXPENSES:
Depreciation and amortization....... 8.4 10.3 14.0
Loss on impairment.................. 7.0 12.7 --
--------- --------- ---------
Total other costs and expenses... 15.4 23.0 14.0
--------- --------- ---------
OPERATING INCOME (LOSS).......... (4.7) (12.2) 7.6
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest, net....................... (14.1) (18.6) (19.6)
Reorganization costs................ (1.4) -- --
Gain on sale of assets.............. 0.7 34.0 (0.1)
--------- --------- ---------
Total other income (expense)..... (14.8) 15.4 (19.7)
--------- --------- ---------
INCOME (LOSS) BEFORE
MINORITY INTEREST.................. (19.5) 3.2 (12.1)
Minority interest................... 1.2 3.4 1.3
--------- --------- ---------
NET INCOME (LOSS)................... $ (20.7) $ (0.2) $ (13.4)
========= ========= =========
St. Louis EBITDA margin............. 15.0% 6.7% 10.0%
Biloxi EBITDA margin................ 9.0% 10.6% 12.8%
* "EBITDA" consists of earnings from operations before interest, income
taxes, depreciation and amortization and gain (loss) on disposal of
property and equipment. For the purposes of this presentation,
EBITDA margin is calculated as EBITDA divided by operating revenue.
EBITDA and EBITDA margin are not determined in accordance with
generally accepted accounting principles. Since not all companies
calculate these measures in the same manner, the Company's EBITDA
measures may not be comparable to similarly titled measures reported
by other companies.
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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 performance. The Company believes that this disclosure
enhances the understanding of the financial performance of a company
with substantial interest, depreciation and amortization.
Fiscal 2002 Compared to Fiscal 2001
Operating revenues. The Company generated consolidated operating revenues
of $129.2 million during fiscal 2002 compared to $152.1 million during fiscal
2001, a decrease of $22.9 million. The St. Louis casino operations
experienced an increase in revenue of $17.7 million and the Biloxi combined
operations experienced a decrease in revenue of $0.1 million. Excluding the
Davenport and Gateway operations, revenues increased $17.6 million, or 15.9%.
Gaming revenues in the Company's St. Louis operations increased $18.7
million, or 31.4%, during fiscal 2002, compared to fiscal 2001. The St. Louis
operations experienced an increase in market share to approximately 10.1% in
fiscal 2002 from approximately 8.6% for the prior year. Management believes
this increase is primarily attributable to the relocation of the "Admiral" and
an improved slot product which takes advantage of the August 2000 change in
the Missouri gaming regulations, improving the ease of playing multiple coin
slot machines. Additionally, the St. Louis casino operations increased
staffing levels, focusing on providing a heightened level of quality guest
service. Gaming revenues at the Company's Biloxi operations increased $0.1
million, or less than 1.0%, during 2002 compared to prior year.
The Company's revenues from food and beverage, hotel, retail and other were
$25.5 million during fiscal 2002, compared to $31.3 million during fiscal
2001, a decrease of $5.8 million, or 18.5%. Excluding the Davenport and
Gateway operations, revenues from food and beverage, hotel, retail and other
increased $2.1 million, or 9.2%. The increase was primarily attributable to
an increase of food and beverage, retail and other revenue of approximately
$1.0 million in St. Louis as a result of the increase in the number of guests
as a result of the "Admiral" relocation and improved slot product, and an
increase of $1.1 million in Biloxi primarily as a result of an increase in the
number of patrons resulting from increased promotions.
Promotional allowances were $22.6 million during fiscal 2002 compared to
$27.0 million during fiscal 2001. Excluding the Davenport operations,
promotional allowances were $22.6 million during fiscal 2002 compared to $19.4
million during fiscal 2001, an increase of $3.2 million, or 16.5%.
Promotional allowances in St. Louis and Biloxi increased $2.0 million and $1.2
million, respectively, in fiscal 2002 primarily as a result of (i) increased
cash back and coupon promotions in both locations, (ii) an increase in valet
and buffet complementaries in St. Louis and (iii) an increase in room and food
and beverage complementaries in Biloxi.
Operating costs and expenses. The Company's consolidated gaming costs and
expenses were $72.8 million during fiscal 2002, compared to $83.1 million
during fiscal 2001. Excluding the Davenport operations, gaming costs
increased $8.7 million, or 13.6%. The increase in gaming costs was primarily
attributable to a $8.2 million increase in gaming costs in St. Louis as a
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result of (i) a $5.0 million increase in gaming and admissions taxes which was
attributable to increased gaming revenues, (ii) a $2.3 million increase in
payroll and benefit costs, and (iii) $0.9 million in other costs associated
with increased revenues. Gaming costs increased $0.5 million in Biloxi
primarily as a result an increase in rooms provided to casino patrons and an
increase in player development events. Excluding the Davenport operations, as
a percentage of gaming revenues, gaming and gaming cruise costs decreased to
57.7% during fiscal 2002 from 59.6% during fiscal 2001.
The Company's costs and expenses for food and beverage, hotel, retail and
other were $12.9 million during fiscal 2002, compared to $17.1 million during
fiscal 2001. Excluding the Davenport and Gateway operations, these costs were
$12.5 million during fiscal 2002 compared to $12.2 million during fiscal 2001,
an increase of $0.3 million, or 2.5%.
The Company's consolidated selling, general and administrative expenses were
$32.3 million during fiscal 2002, compared to $40.7 million during fiscal
2001, a decrease of $8.4 million. Excluding the Davenport and Gateway
operations, selling, general and administrative expenses increased to $31.6
million during fiscal 2002 from $31.0 million during fiscal 2001, an increase
of $0.6 million, or 1.9%. The St Louis casino operations experienced an
increase in selling, general and administrative costs of $1.3 million
primarily due to $0.9 million related to increased revenue and $0.4 million
due to increased payroll and payroll benefits. Biloxi combined operations
experienced an increase of $0.3 million primarily as a result of increased
insurance costs. These increases were offset by decreases in corporate and
leasing operations' selling, general and administration costs of $0.9 million
and $0.1 million, respectively. Corporate expenses decreased primarily as a
result in a reduction in legal fees associated with the negotiations with the
Company's Noteholders and reduction in payroll expenses. Leasing operations
experienced a decrease in selling, general and administrative expenses as a
result of the vessel M/V "Surfside Princess" (formerly the "New Yorker") being
under contract for an installment sale for six months during fiscal 2002,
during which time the purchaser incurred the ongoing costs to maintain the
vessel, offset by the legal fees incurred after the vessel was repossessed.
Excluding the Davenport and Gateway operations, as a percentage of
consolidated revenues, selling, general and administrative expenses decreased
to 24.6% during fiscal 2002, from 27.8% during fiscal 2001.
Depreciation and amortization expenses were $8.4 million during fiscal 2002
compared to $10.4 million during fiscal 2001, a decrease of $2.0 million, or
19.2%. The sale of Davenport assets contributed to $1.5 million of the
decrease and the decision to sell the assets of the leasing operations
contributed $1.3 million to the decrease. These decreases were offset by an
increase in depreciation expense of $1.0 million as a result of placing assets
associated with the relocation of the "Admiral" into service in December 2000.
The Company incurred development costs of $0.4 million during fiscal 2002,
compared to $0.3 million during fiscal 2001. During both fiscal years, the
costs were incurred for the Destination Broadwater project.
During fiscal 2002 and 2001, management's ongoing evaluation of the net
realizable value of its assets, based on their intended future use and current
market conditions, resulted in the recognition of an impairments of long-lived
assets of $7.1 million and $12.7 million, respectively, on two casino vessels
not used in the Company's gaming operations and accounted for in the Company's
leasing segment.
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Operating income. As a result of the foregoing items, the Company had an
operating loss of $4.7 million during fiscal 2002, compared to an operating
loss of $12.2 million during fiscal 2001.
Interest expense, net. The Company incurred net interest expense of $14.1
million during fiscal 2002, compared to $18.6 million during fiscal 2001, a
decrease of $4.5 million or 24.2%. Decreased principal balances and decreased
variable interest rates primarily contributed to the decrease.
Reorganization costs. The Company incurred reorganization costs resulting
from the bankruptcy proceedings of PBLLC of $1.4 million during fiscal 2002.
There were no comparable costs in the prior year.
Gain/loss on disposal of fixed assets. As previously discussed, during
fiscal 2002, the Company sold the assets of its St. Louis-based non-gaming
cruise riverboats and recognized a gain of $0.8 million. During fiscal 2001,
the Company sold the assets of its Davenport operations resulting in a gain of
$34.5 million. This was partially offset by a loss of $0.5 million resulting
from the disposal of certain assets that were not suitable for the new
location in conjunction with the relocation of the "Admiral."
Minority interest expense. The Company incurred $1.2 million in minority
interest expense during fiscal 2002, compared to $3.4 million during fiscal
2001, a decrease of $2.2 million. The decrease is the result of selling the
assets of the Company's 95% owned partnership in Davenport and a decreased
interest rate on the redeemable priority return on the PBLLC minority
interest.
Net loss. The Company incurred a net loss of $20.7 million during fiscal
2002, compared to a net loss of $0.2 million during fiscal 2001.
Fiscal 2001 Compared to Fiscal 2000
On October 10, 2000, the Company sold the assets of its Davenport operations
for aggregate consideration of $58.2 million in cash. The Company recognized
a gain of $34.5 million on the transaction.
Operating revenues. The Company generated consolidated operating revenues
of $152.1 million during fiscal 2001 compared to $188.5 million during fiscal
2000, a decrease of $36.4 million. The St. Louis and Biloxi operations
experienced decreases in revenues of $1.4 million and $4.6 million,
respectively. Additionally, the corporate leasing operation experienced a
$1.8 million decrease in operating revenues as a result of a charter agreement
with a third party terminating in July 1999. Excluding the Davenport
operations, revenues decreased $7.8 million, or 6.4%.
Gaming revenues from the Company's St. Louis and Biloxi operations decreased
$1.0 and $2.0 million, respectively, during fiscal 2001, compared to fiscal
2000. In St. Louis, the disruption to the slot floor resulting from the swap
out of 850 slot machines, the addition of bill validators, the implementation
of the new accompanying electronic loss limit slot tracking system and
preparation and delays on the move of the Admiral contributed to the $1.0
million reduction of gaming revenues over the prior year. During the last
quarter of the fiscal year that included five days during which the casino was
closed for its relocation and two and one half months of post move results,
St. Louis gaming revenues were $1.1 million over the prior years ending
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quarter. In Biloxi, changes in marketing campaigns of competitors negatively
impacted gaming revenues and market share.
The Company's revenues from food and beverage, hotel, retail and other were
$31.3 million during fiscal 2001, compared to $40.2 million during fiscal
2000, a decrease of $8.9 million. Excluding the Davenport operations,
revenues from these sources were $24.5 million during fiscal 2001 compared to
$28.9 million during fiscal 2000, a decrease $4.4 million or 15.2%. The
decrease was primarily attributable to: (i) a decrease of food and beverage
revenue of $0.6 million as a result of changes in the buffet coupon policy in
St. Louis, (ii) a decrease of food and beverage revenue of $0.8 million in
Biloxi as a result of the increased competition resulting in fewer guests,
(iii) a decrease of $1.8 million in charter revenue as previously discussed,
and (iv) insurance proceeds of $0.9 million recognized in fiscal 2000.
Promotional allowances were $27.0 million during fiscal 2001 compared to
$33.4 million during fiscal 2000. Excluding the Davenport operations,
promotional allowances were $19.4 million during fiscal 2001 compared to $18.9
million during fiscal 2000, an increase of $0.5 million or 2.6%. Promotional
allowances in St. Louis decreased $0.7 million as a result of increased
promotions in the prior year primarily related to the change to "continuous
boarding." In Biloxi, promotional allowances increased $1.2 million primarily
as a result of response to the competitive pressures in the market.
Operating costs and expenses. The Company's consolidated gaming and gaming
cruise operating costs and expenses were $83.1 million during fiscal 2001,
compared to $99.1 million during fiscal 2000, a decrease of $16.0 million.
Excluding the Davenport operations, gaming and gaming cruise operating costs
and expenses decreased $1.0 million, or 1.0%. Excluding the Davenport
operations, as a percentage of gaming revenues, gaming and gaming cruise costs
increased to 59.6% in fiscal 2001 from 58.9% during fiscal 2000. The decrease
in gaming expense is primarily the result of decreased gaming revenues
resulting in lower gaming taxes. The increase as a percent of revenue is
primarily the result of the fixed cost components of operations.
The Company's costs and expenses for food and beverage, hotel, retail and
other were $17.1 million during fiscal 2001, compared to $20.2 million during
fiscal 2000, a decrease of $3.1 million. Excluding the Davenport operations,
these costs were $13.1 million during fiscal 2001 compared to $13.4 million
during fiscal 2000, a decrease of $0.3 million or 2.2%.
The Company's consolidated selling, general and administrative expenses were
$40.7 million during fiscal 2001, compared to $47.4 million during fiscal
2000, a decrease of $6.7 million. Excluding the Davenport operations,
selling, general and administrative expenses decreased to $31.6 million during
fiscal 2001 from $32.5 million during fiscal 2000, a decrease of $0.9 million
or 2.8%. St Louis experienced an increase in selling, general and
administrative costs of $0.9 million primarily due to a prior year adjustment
which resulted in a reduction of property taxes of $0.8 million related to a
successful tax protest of prior years' assessments. Biloxi experienced a
decrease of $1.7 million primarily as a result of (i) reduced lease expense of
$0.9 million and reduced property tax of $0.3 million as a result of
purchasing the casino barge in August 1999, and (ii) labor efficiencies of
$0.5 million. Excluding the Davenport operations, as a percentage of
consolidated revenues, selling, general and administrative expenses increased
to 28.0% during fiscal 2001, from 26.4% during fiscal 2000.
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Depreciation and amortization expenses were $10.4 million during fiscal 2001
compared to $14.0 million during fiscal 2000, a decrease of $3.6 million. The
sale of Davenport assets contributed to $2.9 million of the decrease and the
decision to sell the assets of the leasing