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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, 2003
or
/ / Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File Number: 0-20840
PRESIDENT CASINOS, INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0341200
(State or other jurisdiction of (I.R.S. Employer
incorporation or 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. / /
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act.) Yes / / No /X/
As of May 28, 2003, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was approximately $974,606.*
As of May 28, 2003, 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 - 865
Gaming tables - 42
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 - 1,369
Gaming tables - 39
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 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. Copies of the Company's filings with the Securities
Exchange Commission and other important information regarding the
Company is available free of charge on the Company's web page
www.presidentcasino.com.
The Company's business is divided into three main business segments:
St. Louis, Missouri operations, Biloxi, Mississippi operations and
leasing operations. For information concerning each of these segments,
see "Note 19. Segment Information" in the accompanying Notes to
Consolidated Financial Statements.
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"), The Connelly Group,
L.P. ("TCG"). The Blackhawk Hotel operations in
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Davenport, which were also sold in the transaction, were managed by a
wholly-which is the general partner of the 95% Company-owned operating
partnership, 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 provided 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.
Substantial Indebtedness; Bankruptcy Proceedings
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 make 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 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 were notified of the defaults and the Indenture Trustee has
accelerated the Notes and declared 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 Notes; $25.0 million was
used to partially redeem the Notes; and $5.2 million was used to pay
interest due March 15, 2001 on the Notes.
Subsequently, the Company was unable to make the principal and
interest payments due September 15, 2001 and interest payments due March
15, 2002, on its Notes. As of February 28, 2003, principal due on the
Senior and Secured Notes was $56.2 million and $18.8 million,
respectively.
On June 20, 2002, President Casinos, Inc. together with its
subsidiary, President Riverboat Casino-Missouri, Inc. ("President
Missouri"), which owns and operates the St. Louis operations, filed
voluntary petitions for reorganization under Chapter 11 of Title 11,
United States Code (the "Bankruptcy Code") in the United States
Bankruptcy Court for the Southern District of Mississippi (the
"Mississippi Bankruptcy Court"). Subsequently, on July 9, 2002,
President Casinos, Inc.'s subsidiary The President Riverboat Casino-
Mississippi, Inc. ("President Mississippi") filed a voluntary
reorganization petition in the same Court. On July 11, 2002,
substantially all of President Casinos, Inc.'s other operating
subsidiaries filed voluntary reorganization petitions under Chapter 11
in the same Mississippi Bankruptcy Court. Subsequently, orders were
entered by the Mississippi Bankruptcy Court
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transferring venue of all of the bankruptcy cases, except President
Riverboat Casino-New York, Inc. and President Broadwater Hotel, LLC, to
the United States Bankruptcy Court for the Eastern District of Missouri
(the "Missouri Bankruptcy Court") where they are now pending and being
administered.
The Company and its subsidiaries each continue in possession and use
of their assets as debtors-in-possession. The Company and its
subsidiaries have had their Missouri Chapter 11 cases administratively
consolidated under the Company's case.
Prior to any of the cases being transferred to the Missouri Bankruptcy
Court, the Mississippi Bankruptcy Court established "bar dates" all of
which have expired, by which all claimants were required to submit and
characterize claims against the Company. As part of the Company's and
its subsidiaries' Chapter 11 reorganization process, the Company has
attempted to notify all known or potential creditors of the filing for
the purpose of identifying all pre-petition claims. In the Company's
Chapter 11 case, substantially all of the Company's liabilities as of
the filing date are subject to adjustment under a plan of
reorganization. Generally, actions to enforce or otherwise effect
repayment of all pre-petition liabilities as well as all pending
litigation against the Company are stayed while the Company continues
its business operations as debtors-in-possession. Schedules have been
filed by the Company with the Bankruptcy Court setting forth the assets
and liabilities of the debtors as of the filing date as reflected in the
Company's accounting records. Differences between amounts reflected in
such schedules and claims filed by creditors will be investigated and
amicably resolved or adjudicated before the Bankruptcy Courts. The
ultimate amount and settlement terms for such liabilities are subject to
a plan of reorganization, and accordingly, are not presently
determinable. Under the Bankruptcy Code, the Company may elect to
assume or reject real estate leases, employment contracts, personal
property leases, service contracts and other executory pre-petition
contracts and unexpired leases, subject to Bankruptcy Court review. The
Company cannot presently determine or reasonably estimate the ultimate
liability that may result from rejecting leases or from filing of claims
for any rejected contracts, and no provisions have been made for these
items.
The consummation of a plan or plans of reorganization (a "Plan") is
the principal objective of the Company's Chapter 11 filings. A Plan
would, among other things, set forth the means for satisfying claims
against and interests in the Company and its subsidiaries, including
setting forth the potential distributions on account of such claims and
interests, if any. Pursuant to the Bankruptcy Code, the Company had the
exclusive right for 120 days from the filing date to file a Plan, and
for 180 days from the filing date to solicit and receive the votes
necessary to confirm a Plan. The Company was unable to have a plan
confirmed prior to the expiration of these exclusivity periods, and the
Missouri Bankruptcy Court denied the Company's motion to further extend
the exclusivity period. Accordingly, in addition to the Company, any
party-in-interest, including a creditor, an equity holder, a committee
of creditors or equity holders, or an indenture trustee, may file its
own Plan for the Company. Confirmation of a Plan is subject to certain
statutory findings by the Bankruptcy Court. Subject to certain
exceptions as set forth in the Bankruptcy Code, confirmation of a Plan
requires, among other things, a vote on the Plan by certain classes of
creditors and equity holders whose creditors or equity holders does not
vote to accept the Plan, but all of the rights or interests are
impaired under the Plan. If any impaired class of other requirements of
the Bankruptcy Code are met, the proponent of the Plan
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may seek confirmation of the Plan pursuant to the "cram down" provisions
of the Bankruptcy Code. Under these provisions, the Bankruptcy Court
may still confirm a Plan notwithstanding the non-acceptance of the Plan
by an impaired class, if, among other things, no claim or interest
receives or retains any property under the Plan until each holder of a
claim senior to such claim or interest has been paid in full. There
can be no assurance that a Plan will be confirmed by the Bankruptcy
Court, or that any such Plan will be consummated.
It is not possible to predict the length of time the Company will
operate under the protection of Chapter 11 and the supervision of the
Bankruptcy Court, the outcome of the bankruptcy proceedings in general,
or the effect of the proceedings on the business of the Company or on
the interest of the various creditors and stakeholders. Since the
filing date, the Company has operated in the ordinary course of
business. Management is in the process of evaluating their operations
as part of the development of a Plan. During the pendency of the
Chapter 11 filings, the Company may, with Bankruptcy Court approval,
sell assets and settle liabilities, including for amounts other than
those reflected in the financial statements. The administrative and
reorganization expenses resulting from the Chapter 11 filings will
unfavorably affect the Company's results of operations. In addition,
under the priority scheme established by the Bankruptcy Code, most, if
not all, post-petition liabilities must be satisfied before most other
creditors or interest holders, including stockholders, can receive any
distribution on account of such claim or interest.
--St. Louis Operations
On May 15, 2003, the Missouri Bankruptcy Court issued an order
approving a joint motion filed by the Company, the unsecured creditors'
committee (the "Committee") and certain bondholders of the Company (the
"Bondholders") with respect to a timetable and process for the
Company's reorganization proceedings. Specifically, the joint motion
sought entry of an order approving a timetable and process set forth in
a Term Sheet, dated March 25, 2003 (the "Term Sheet"), with respect to
either (i) the refinancing of the Company by July 18, 2003, or (ii) a
sale of the assets related to the Company's St. Louis gaming
operations. In addition, the Court approved motions by the Company to
approve the appointment of Libra Securities LLC to serve as the
Company's investment banker in connection with any sale of the St. Louis
operations.
As set forth in the Term Sheet, the Company, the Committee and the
Bondholders have agreed that the Company shall have until July 18, 2003
to effect a recapitalization of the Company pursuant to a plan of
reorganization with qualified financing commitments under which the
unsecured creditors and bondholders would be repaid in full. The Term
Sheet also outlines a process and timetable under which the Company's
St. Louis operations would be sold in the event that a recapitalization
of the Company is not completed as set forth in the Term Sheet. As part
of such process, the Company would be required to meet certain
benchmarks which, if not met, would permit the Committee to file a
motion with the Court for the sale of the Company's St. Louis operations
and to appoint a chief restructuring officer to manage the sale process.
Such benchmarks include: (i) submission of draft marketing materials by
May 1, 2003, (ii) delivery of marketing materials to qualified
prospective purchasers within 3 days of the end of the 2003 Missouri
Legislative Session, or no later than June 1, 2003, (iii) execution of a
definitive asset purchase agreement by August 1, 2003, (iv) filing of a
motion to approve the sale by August 4, 2003,
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and (v) good faith efforts by the Company to locate a purchaser and
cooperate with the sale process. The Term Sheet also contemplates that
preliminary bids would be received by July 11, 2003, and that a
preliminary "stalking horse" bidder would be selected by July 18, 2003.
The Company believes that, as a practical matter, a refinancing can be
accomplished, if at all, only if Missouri's gaming law is changed to
eliminate current loss limits which place a $500 limit on the amount a
gaming customer can lose during a two-hour gaming session. Legislation
eliminating loss limits in Missouri was proposed during the January 2003
session of the Missouri General Assembly, but the session was adjourned
without the legislation being passed. Missouri law gives the Governor
of Missouri the ability to call a special session of the legislature.
The Missouri Governor has announced the veto of several of the bills
passed by the legislature and announced the call on June 2, 2003 of a
special session for these bills to be reconsidered where it is
anticipated that the subject of additional funding for the state will
also be addressed. The Company currently anticipates that when the
special session is convened the subject of removing the $500 loss limit
will again be presented, and that such a proposal may also be
accompanied by a proposal or proposals to increase tax revenue from
gaming companies.
If the legislature removes loss limits, and does not modify the
existing gaming tax structure such that a substantial portion of the
economic benefit of removal of the loss limits is decreased through the
imposition of new taxes, it is possible that the Company will be able to
effect a refinancing. No assurance can be given as to the achievement
of a refinancing due to the uncertainty of the scope of any potential
legislation, the actual and potential effect of the removal of loss
limits as of the date refinancing is sought as well as other inherent
difficulties and risks of obtaining financing on acceptable terms.
However, if loss limits are not removed and a refinancing cannot not be
completed, for whatever reason, then pursuant to the order of the
Missouri Bankruptcy Court, the Company will be obligated to begin a
process pursuant to which the St. Louis operations would be sold. At
the current time, in the absence of the removal of loss limits, the
Company believes that the value of revenues from operations, projected
at current rates receivable for gaming operations earning such levels,
would in all probability not produce sufficient proceeds to retire in
full all of the Bondholder indebtedness which is currently outstanding.
In such event, following the sale of the St. Louis operations the
Company would continue to owe monies to the Bondholders. While it is
not possible to predict what might happen in this event, if the proceeds
from any such sale of the St. Louis operations are insufficient to
satisfy the Company's obligations to the Bondholders the Company may be
forced to sell or otherwise liquidate its investment in its Biloxi
operations. In such event, there can be no assurance that the assets of
the Company will exceed its obligations, or that the Company would not
be dissolved without any distribution to its stockholders.
--Biloxi, Mississippi
President Broadwater Hotel, LLC ("PBLLC"), a limited liability company
in which Broadwater Hotel, Inc., a wholly-owned subsidiary of the
Company ("BHI"), has a Class A ownership interest, was in default under
a $30.0 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
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April 19, 2001, PBLLC filed a voluntary petition for reorganization
under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy
Court for the Southern District of Mississippi. PBLLC continued in
possession and use of its assets as a debtor-in-possession and had an
agreement with Lehman Brothers Holdings Inc., its lender and largest
creditor ("Lehman"), approved by the Mississippi Bankruptcy Court which
allowed PBLLC's use of its cash collateral.
On October 16, 2001, PBLLC filed its plan of reorganization which
would permit PBLLC to restructure its debt obligations in a manner which
was designed to permit it to continue as a going concern. Subsequently,
on February 28, 2003, PBLLC filed Modifications to Debtor's Plan of
Reorganization (together with the plan of reorganization, the "Modified
Plan"). On May 14, 2003, the Mississippi Bankruptcy Court entered the
confirmation order confirming the Modified Plan. The Modified Plan
became effective May 28, 2003 and the Company consummated the Modified
Plan at that time. The Modified Plan provides the unsecured creditors
of PBLLC will receive 100% of their claims. Under the Modified Plan,
the obligations to Lehman were modified with respect to the debt amount,
the interest rate and the due date. In addition, the obligation was re-
documented substantially along the lines of the original obligation. On
May 28, 2003, the Company paid $3.6 million to Lehman pursuant to the
Modified Plan. The principal amount of the restructured loan from
Lehman is $46.4 million plus interest at the rate of 12.75% per annum
from November 1, 2002 until May 28, 2003 on $30.0 million plus interest
at the rate of 8.75% per annum from November 1, 2002 until May 28, 2003
on $7.0 million, less the payment by PBLLC to Lehman of $3.6 million.
On May 28, 2003, the principal amount of the loan under this calculation
was $45.4 million. The principal amount earns interest at a rate of
12.75% per annum until the obligation is satisfied. The maturity date
of the Lehman obligation is June 1, 2005. Interest is payable during
the term of the loan on the adjusted loan obligation amount of $44.0
million, less the payment by PBLLC to Lehman on May 28, 2003, or $40.4
million, plus interest at a rate of 12.75% per annum from November 30,
2002 until the effective date. On May 28, 2003, the adjusted loan
obligation amount was $43.0 million. PBLLC is required to pay interest
earned on the adjusted loan obligation payable monthly from May 28, 2003
at a rate of the greater of 7.75% per annum or LIBOR plus 4% per annum
floating. Certain interest amounts may be deferred until October 31,
2003. A discount of $3.5 million with respect to the obligation will
occur and the deferred interest amounts will be waived provided payment
of the entire adjusted loan obligation amount is made on or before
November 1, 2003. In the event that payment in full of the restructured
loan is made after November 1, 2003 but prior to June 2, 2005, interest
on the indebtedness will be calculated at a lower rate as set forth in
the Modified Plan.
Under the Modified Plan, the obligation to Lehman is accelerated in
the event the Missouri Bankruptcy Court, having jurisdiction over
President Mississippi, does not approve the base rental increase on the
marina leased to the Biloxi casino by PBLLC by November 1, 2003. This
requirement does not apply if PBLLC's aggregate net cash flow from its
operations, after receiving rental payments from President Mississippi
at the current base rental, and after certain adjustments are made,
equals or exceeds the amount of funds that would be necessary, on an
annual basis, to pay the greater of 7.75% per annum or LIBOR plus 4% per
annum floating on the adjusted loan obligation amount as of November 1,
2003. The Modified Plan contains an express waiver by PBLLC of rights
to seek future bankruptcy protection. J. Edward Connelly Associates,
Inc. ("JECA"), the holder of a Class B interest in PBLLC, retains its
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membership interest, but any payments by PBLLC to JECA shall be
restricted until such time as all outstanding obligations to Lehman and
other creditors receiving funds under the Modified Plan are discharged.
--Leasing Operations
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 $2.1 million M/V "President Casino-Mississippi"
note. The vessel and various equipment aboard the M/V "President
Casino-Mississippi" collateralize a term note payable which is also
personally guaranteed by John
E. Connelly, Chairman and Chief Executive Officer of the Company. The
Company continued to make the quarterly principal and interest payments
on the note prior to the Company's bankruptcy filing. Under the terms
of the note agreement, $2.1 million principal became due and payable in
August 2002. In November 2002, the lender brought an action against Mr.
Connelly for breach of contract under his personal guarantee. In
January 2003, the Mississippi Bankruptcy Court granted a motion to
relieve the lender from the automatic stay in order to enforce its
rights under the Preferred Fleet Ship Mortgage, including but not
limited to the right of the lender to seize and sell the vessel. In May
2003, the lender filed a motion with the United States District Court
for the Southern District of Illinois for an order directing the Clerk
of Court to issue a warrant for the arrest of the M/V "President Casino-
Mississippi" pursuant to rules of admiralty and maritime claims. On May
20, 2003, the Court executed the warrant, which will allow the vessel to
be seized and sold. To date, no further action has been taken by the
lender.
On March 29, 2001, the Company executed an installment sale agreement
for the M/V "Surfside Princess" (formerly, the "New Yorker"). Under the
terms of the agreement, the Company 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. 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. See "Item 3. Legal Proceedings."
During the forth quarter of fiscal 2003, the Company held a sealed bid
auction of the "Surfside Princess" in accordance with Section 363 of the
United States Bankruptcy Code. In February, the auction closed and the
winning bid was $1.5 million. On May 2, 2003, the purchase agreement on
the vessel was consummated, at which time the liens against the vessel
attached to the proceeds from the sale which are held in an escrow
account. The Company took a $1.2 million valuation allowance on the
vessel in February to reduce the net book value to the bid price.
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 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.
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The descriptions of the Company's business, financial condition and
prospects contained in this Annual Report on Form 10-K are qualified in
their entirety by the foregoing description of the significant risks
associated with the Company's bankruptcy proceedings.
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 19 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
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 (the "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.
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 $5.7 million of relocation 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, 2003, the Company's guaranteed balance
was $1.1 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.
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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 downtown 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. The
operator of the St. Charles casino replaced its facility and reopened
with nearly double its prior gaming positions in August 2002.
Applications were submitted to the Missouri Gaming Commission for
approval of potential new licenses at four different locations within
the St. Louis metropolitan area along the Mississippi River. Three of
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. The Gaming Commission announced it will
consider licensing an additional casino in the St. Louis market. The
Gaming Commission has extended the period in which applications can be
filed but has not indicated a specific deadline for such filings. The
opening of one or more additional casinos in the St. Louis market would
have a material adverse impact on the St. Louis operations under most
possible scenarios.
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 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 and guests who do not want to be burdened
with the administrative requirements related to the loss limits.
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.
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--Biloxi, Mississippi Operations
The Company manages its Biloxi gaming operations through its wholly-
owned subsidiary, 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 April 2001 for a three-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 has become 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. 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 have entered the market, it has 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
Development."
The Company began dockside gaming operations in Biloxi on August 13,
1992. 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
Mr. Connelly. 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 a Class B ownership
interest and 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
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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,
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.
Effective August 2002, the Company renewed its lease for a term of five
years and the state adjusted the annual rent to $670,000 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."
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 vessel and various equipment aboard the M/V "President Casino-
Mississippi" collateralizes a term note payable which is also personally
guaranteed by Mr. Connelly. The Company is in default on the term note
payable. The Company continued to make the quarterly principal and
interest payments on this note prior to the Company's bankruptcy
filings. Under the terms of the note agreement, $2.1 million principal
became due and payable in August 2002. In November 2002, the lender
brought an action against Mr. Connelly for breach of contract under his
personal guarantee. In January 2003, the Mississippi Bankruptcy Court
granted a motion to relieve the lender from the automatic stay in order
to enforce its rights under the Preferred Fleet Ship Mortgage, including
but not limited to the right of the lender to seize and sell the vessel.
In May 2003, the lender filed a motion with the United States District
Court for the Southern District of Illinois for an order directing the
Clerk of Court to issue a warrant for the arrest of the M/V "President
Casino-Mississippi" pursuant to rules of admiralty and maritime claims.
On May 20, 2003, the Court executed the warrant, which will allow the
vessel to be seized and sold. To date, no further action has been taken
by the lender.
On March 29, 2001, the Company executed an installment sale agreement
for the M/V "Surfside Princess" (formerly, the "New Yorker"). Under the
terms of the agreement, the Company 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. See "Item 3. Legal Proceedings."
During the forth quarter of fiscal 2003, the Company held a sealed bid
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auction of the "Surfside Princess" in accordance with Section 363 of the
United States Bankruptcy Code. In February, the auction closed and the
winning bid was $1.5 million. On May 2, 2003, the purchase agreement on
the vessel was consummated, at which time the liens against the vessel
attached to the proceeds from the sale which are held in an escrow
account. The Company took a $1.2 million valuation allowance on the
vessel in February to reduce the net book value to the bid price.
Potential Growth Opportunities
--Biloxi, Mississippi Development
As discussed in "Current Operations-Biloxi, Mississippi," the Company
owns the Broadwater Property in Biloxi, Mississippi. 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 Final Environmental
Impact Statement ("EIS"). The Draft EIS has been completed, notice of
which was posted in the Federal Register in June 2000 for public
comment. The current permit application to the Corps was cancelled on
June 10, 2002 pending re-submission of a revised project design that
reflects the changes resulting from the Company's work with the Corps.
The cancellation is an administrative measure which will allow the Corps
to remove the application from the Corps' pending action list, and
should not affect future evaluation of the permit request. The Company
anticipates submitting a revised plan. At that time, a new application
number will be assigned, and the evaluation of the permit request will
resume.
In connection with the Company's proposed Destination Broadwater
development plan, to date, the Company has not identified any specific
financing 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.
Marketing and Sales
The Company targets its marketing efforts at middle income,
recreational gaming customers. The Company relies on a mix of
billboards, television,
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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 may also paid be 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 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.
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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
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.
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,
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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 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, quarterly 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 are 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, rather
than 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 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 or occupational
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 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
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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 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
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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 1999 amendment to a Mississippi Commission regulation requires as a
condition of site and development plan approval 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, 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
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insurance (including self-insurance) or the posting of a surety bond or
guaranty.
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, 2003, the Company had approximately 1,650
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 was renegotiated and ratified for a one
year period effective April 2002. The Company is currently in early
stages of renegotiating a new labor agreement effective April 2003. The
labor agreement covers approximately 300 of the Company's 700 St. Louis
employees.
Item 3. Legal Proceedings.
Pending Bankruptcy Proceedings
On June 20, 2002, the Company together with its subsidiary, President
Missouri, which owns and operates the St. Louis operations, filed
voluntary petitions for reorganization under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the Southern
District of Mississippi. On July 9, 2002, the Company's subsidiary
President Mississippi filed a voluntary reorganization petition in the
same Court. On July 11, 2002, substantially all of the Company's other
operating subsidiaries filed voluntary reorganization petitions under
Chapter 11 in the same Court. Subsequently, orders were entered by the
Mississippi Bankruptcy Court transferring venue of all of the Chapter 11
cases, except President Riverboat Casino-New York, Inc. and PBLLC, to
the United States Bankruptcy Court for the Eastern District of Missouri,
where they are now pending and being administered. The Company and its
subsidiaries each continue in possession and use of their assets as
debtors-in-possession. The Company and its subsidiaries have had their
Missouri Bankruptcy Chapter 11 cases administratively consolidated under
the Company's case.
On May 15, 2003, the Missouri Bankruptcy Court issued an order
approving a joint motion filed by the Company, the unsecured creditors'
committee (the "Committee") and certain bondholders of the Company (the
"Bondholders") with respect to a timetable and process for the Company's
reorganization proceedings. Specifically, the joint motion sought entry
of an order approving a timetable and process set forth in a Term Sheet,
dated March 25, 2003 (the "Term Sheet"), with respect to either (i) the
refinancing of the Company by July 18, 2003, or (ii) a sale of the
assets related to the Company's St. Louis gaming operations. In
addition, the Court approved motions by the Company to approve the
appointment of Libra Securities LLC to serve as the Company's investment
banker in connection with any sale of the
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St. Louis operations.
As set forth in the Term Sheet, the Company, the Committee and the
Bondholders have agreed that the Company shall have until July 18, 2003
to effect a recapitalization of the Company pursuant to a plan of
reorganization with qualified financing commitments under which the
unsecured creditors and bondholders would be repaid in full. The Term
Sheet also outlines a process and timetable under which the Company's
St. Louis operations would be sold in the event that a recapitalization
of the Company is not completed as set forth in the Term Sheet. As part
of such process, the Company would be required to meet certain
benchmarks which, if not met, would permit the Committee to file a
motion with the Court for the sale of the Company's St. Louis operations
and to appoint a chief restructuring officer to manage the sale process.
Such benchmarks include: (i) submission of draft marketing materials by
May 1, 2003, (ii) delivery of marketing materials to qualified
prospective purchasers within 3 days of the end of the 2003 Missouri
Legislative Session, or no later than June 1, 2003, (iii) execution of a
definitive asset purchase agreement by August 1, 2003, (iv) filing of a
motion to approve the sale by August 4, 2003, and (v) good faith efforts
by the Company to locate a purchaser and cooperate with the sale
process. The Term Sheet also contemplates that preliminary bids would
be received by July 11, 2003, and that a preliminary "stalking horse"
bidder would be selected by July 18, 2003.
PBLLC was 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. PBLLC continued in possession and use
of its assets as a debtor-in-possession and had an agreement with Lehman
Brothers Holdings Inc., its lender and largest creditor ("Lehman"),
approved by the Mississippi Bankruptcy Court which allowed PBLLC's use
of its cash collateral.
On October 16, 2001, PBLLC filed its plan of reorganization which
would permit PBLLC to restructure its debt obligations in a manner which
was designed to permit it to continue as a going concern. Subsequently,
on February 28, 2003, PBLLC filed Modifications to Debtor's Plan of
Reorganization (together with the plan of reorganization, the "Modified
Plan"). On May 14, 2003, the Mississippi Bankruptcy Court entered the
confirmation order confirming the Modified Plan. The became effective
on May 28, 2003 and the Company consummated the Modified Plan at that
time. The Modified Plan provides the unsecured creditors of PBLLC will
receive 100% of their claims. Under the Modified Plan, the obligations
to Lehman were modified with respect to the debt amount, the interest
rate and the due date. In addition, the obligation was re-documented
substantially along the lines of the original obligation. On the
effective date, $3.6 million was paid to Lehman pursuant to the Modified
Plan. The principal amount of the restructured loan from Lehman is
$46.4 million plus interest at the rate of 12.75% per annum from
November 1, 2002 until May 28, 2003 on $30.0 million plus interest at
the rate of 8.75% per annum from November 1, 2002 until May 28, 2003 on
$7.0 million, less the payment by PBLLC to Lehman $3.6 million. As of
May 28, 2003, the principal amount of the loan under this calculation is
$45.4 million. The principal amount earns interest at a rate of 12.75%
per annum until the obligation is satisfied. The maturity date of the
Lehman obligation is June 1, 2005. Interest is payable during the term
of the loan
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on an adjusted loan obligation amount of $44.0 million, less the payment
by PBLLC to Lehman on May 28, 2003, or $40.4 million, plus interest at a
rate of 12.75% per annum from November 30, 2002 until the effective
date. As of May 28, 2003, the adjusted loan obligation amount was $43.0
million. PBLLC is required to pay interest earned on the adjusted loan
obligation payable monthly from May 28, 2003 at a rate of the greater of
7.75% per annum or LIBOR plus 4% per annum floating. Certain interest
amounts may be deferred until October 31, 2003. A discount of $3.5
million with respect to the obligation will occur and the deferred
interest amounts will be waived provided payment of the entire adjusted
loan obligation amount is made on or before November 1, 2003. In the
event that payment in full of the restructured loan is made after
November 1, 2003 but prior to June 2, 2005, interest on the indebtedness
will be calculated at a lower rate as set forth in the Modified Plan.
Under the Modified Plan, the obligation to Lehman is accelerated in
the event the Missouri Bankruptcy Court, having jurisdiction over
President Mississippi, does not approve the base rental increase on a
portion of the land leased to the Biloxi casino by PBLLC by November 1,
2003. This requirement does not apply if PBLLC's aggregate net cash
flow from its operations, after receiving rental payments from President
Mississippi, at the current base rental, and after certain adjustments
are made, equals or exceeds the amount of funds that would be necessary,
on an annual basis, to pay the greater of 7.75% per annum or LIBOR plus
4% per annum floating on the adjusted loan obligation amount as of
November 1, 2003. The Modified Plan contains an express waiver by PBLLC
of rights to seek future bankruptcy protection. J. Edward Connelly
Associates, Inc. ("JECA"), the holder of a Class B interest in PBLLC,
retains its membership interest, but any payments by PBLLC to JECA shall
be restricted until such time as all outstanding obligations to Lehman
and other creditors receiving funds under the Modified Plan are
discharged.
Litigation
--Poulos, McElmore and Shreier, et al. v. Caesar's World, Inc. et al.
In 1994, William H. Poulos filed a class-action lawsuit in the United
States District Court for the Middle District of Florida against over
thirty-eight (38) casino operators, including the Company, and certain
suppliers and distributors of video poker and electronic slot machines.
This lawsuit was followed by several additional lawsuits of the same
nature against the same, as well as additional defendants, all of which
have now been consolidated into a single class-action pending in the
United States District Court for the District of Nevada. Following a
court order dismissing all pending pleadings and allowing the plaintiffs
to re-file a single complaint, a complaint has been filed containing
substantially 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 opposed it. On
June 21, 2002, the Court entered an order denying class certification,
and the plaintiffs have appealed this order to the 9th Circuit Court of
Appeals. The last briefs are scheduled to be filed July 14, 2003.
Extensive paper discovery has occurred. A motion to stay pending the
Company's bankruptcy proceedings has been filed. Although the outcome
of litigation is inherently uncertain, management, after
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consultation with counsel, believes the action will not have a material
adverse effect on the Company's financial position or results of
operations.
--"Surfside Princess"
On October 12, 2001, the Company's subsidiary which owned the M/V
"Surfside Princess," formerly known as the M/V "New Yorker," initiated
an action in the United States District Court for the Middle District of
Florida against Southern Gaming, LLC and its assignee for breach of a
Bareboat Charter and
Purchase Agreement dated March 29, 2001 pursuant to which the M/V
"Surfside Princess" was chartered from the Company. Subsequent
proceedings followed in which various parties claimed various rights
with respect to the vessel and its contents. The matter is currently
pending before the Court.
On October 19, 2001, Southern Gaming filed suit in the United States
District for Middle District of Florida seeking damages in connection
with the charter of the "Surfside Princess." Subsequently this
proceeding was consolidated with the prior proceeding involving Southern
Gaming. Other suits and claims exist with respect to the vessel. The
Mississippi Bankruptcy Court granted a motion for the M/V "Surfside
Princess" to be sold outside a plan of reorganization. On May 2, 2003 a
purchase agreement on the vessel was consummated, at which time the
liens against the vessel attached to the proceeds from the sale which
are held in escrow. The Company is unable at this time to predict the
outcome of this matter with certainty.
--Other
The Company is from time to time a party to litigation, which may or
may not be covered by insurance, arising in the ordinary course of its
business. The Company does not believe that the outcome of any such
litigation will have a material adverse effect on the Company's
financial condition or results of operations, or which would have any
material adverse impact upon the gaming licenses of the Company's
subsidiaries.
Missouri Gaming Commission
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 $104,000 for numerous
alleged violations of internal gaming control standards and $25,000 for
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 involved any loss of funds or affect the
integrity of gaming. In August 2002, the Company settled the alleged
internal control standard violations for $55,000. The Company filed a
declaratory judgment action regarding the validity of the city ordinance
prohibiting political contributions. In March 2003, the court declared
the ordinance to be invalid, unenforceable and void.
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
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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 of 2001 and expires in 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 2003.
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 2003
First Quarter................ $ 1.0500 $ 0.7000
Second Quarter............... $ 0.8400 $ 0.2000
Third Quarter................ $ 0.5100 $ 0.2000
Fourth Quarter............... $ 0.4000 $ 0.2600
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
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 28, 2003, there were approximately 1,393 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. See "Management's Discussion and Analysis of
Financial Position and Results of Operations."
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The following table reflects information about the Company's equity
compensation plans as of February 28, 2003.
Number of securities
Number of securities remaining available for
to be issued upon Weighted average exercise future issuance under
exercise of price of outstanding equity compensation
Plan category outstanding options options plans
- ------------- ------------------ ------------------ ------------------
Equity compensation
plans approved by
shareholders 787,293 $ 0.87 104,042
Equity compensation
plans not approved
by shareholders -- -- --
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 which are included elsewhere herein.
Years Ended February 28/29,
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
(in thousands, except share data)
Consolidated Statement of Operations Data:
Total operating revenues (1).............. $123,721 $129,184 $152,098 $188,516 $192,185
Operating income (loss)
before (gain)/loss on disposal
of property and equipment (2).......... $ 1,542 $ (4,736) $(12,219) $ 7,623 $ 5,871
Gain/(loss) on disposal of property
and equipment (3)...................... $ (117) $ 771 $ 33,985 $ (99) $ (14)
Net loss.................................. $ (9,079) $(20,748) $ (206) $(13,373) $(14,892)
Basic and dilutive loss per share......... $ (1.80) $ (4.12) $ (0.04) $ (2.66) $ (2.69)
Consolidated Balance Sheet Data:
Total assets.............................. $120,834 $120,450 $135,744 $165,394 $172,744
Current liabilities....................... $ 58,429 $145,237 $141,657 $171,755 $ 27,109
Long-term liabilities..................... $ -- $ -- $ -- $ -- $139,379
Liabilities subject to compromise (4)..... $111,340 $ 646 -- -- --
Stockholders' deficit..................... $(49,614) $(40,535) $(19,787) $(19,581) $ (6,208)
(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
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(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 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 $1,167, $7,068 and $12,709,
respectively, during fiscal years 2003, 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 the marina in which the Company operates its Biloxi casino
operations barge. On April 19, 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.
On June 20, 2002, President Casinos, Inc. together with its subsidiary,
President Riverboat Casino-Missouri, Inc. filed voluntary petitions for
reorganization under Chapter 11 of Title 11, United States Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the
Southern District of Mississippi (the "Mississippi Bankruptcy Court").
Subsequently, on July 9, 2002, President Casinos, Inc.'s subsidiary The
President Riverboat Casino-Mississippi, Inc. filed a voluntary
reorganization petition in the same Court. On July 11, 2002,
substantially all of President Casinos, Inc.'s other operating
subsidiaries filed voluntary reorganization petitions under Chapter 11
in the same Mississippi Bankruptcy Court. Subsequently, orders were
entered by the Mississippi Bankruptcy Court transferring venue of all
of the bankruptcy cases, except President Riverboat Casino-New York,
Inc. and President Broadwater Hotel, LLC, to the United States
Bankruptcy Court for the Eastern District of Missouri where they are
now pending and being administered. See Item 1. "Substantial
Indebtedness; Bankruptcy 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.
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion, which covers fiscal years 2001 through 2003,
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.
President Casinos, Inc., President Riverboat Casino-Missouri, Inc.,
The President Riverboat Casino-Mississippi, Inc., President Broadwater
Hotel, LLC, Broadwater Hotel, Inc., President Riverboat Casino-New York,
Inc., PRC Management, Inc., PRC Holdings Corporation, TCG/Blackhawk,
Inc. and Vegas Vegas, Inc. have each filed voluntary petitions for
reorganization under Chapter 11 of the Bankruptcy Code. See "Note 1.
Bankruptcy Proceedings" of the Notes to Condensed Consolidated Financial
Statements.
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 make 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 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 were notified of the defaults and the Indenture Trustee has
accelerated the Notes and declared 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.
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,
2003, principal due on the Senior and Secured Notes was $56.2 million
and $18.8 million, respectively.
In July 2001, the Company completed the sale of its non-gaming cruise
operations in St. Louis, Missouri for $1.7 million. On March 29, 2001,
the Company executed an installment sale agreement for the M/V "Surfside
Princess"
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(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. The
Mississippi Bankruptcy Court granted a motion to auction the "Surfside
Princess" under the terms of Section 363 of the Bankruptcy Code. The
auction was completed in February 2003 and the purchase agreement was
consummated in May 2003.
Due to certain debt covenants and cross default provisions associated
with
other debt agreements, the Company is also currently in default under
its $2.1 million M/V "President Casino-Mississippi" note. See Liquidity
and Capital Resources.
Management believes the Company's liquidity and capital resources will
be sufficient to maintain its normal operations at current levels and
does not anticipate any adverse impact on its operations, customers or
employees. However, costs previously incurred and which will be
incurred in the future in connection with restructuring the Company's
debt obligations and the bankruptcy proceedings have been and will
continue to be substantial and, in any event, there can be no assurance
that the Company will be able to restructure successfully its
indebtedness or that its liquidity and capital resources will be
sufficient to maintain its normal operations during the restructuring
period.
The Company's ability to continue as a going concern is dependent on
its ability to restructure successfully, including refinancing its
debts, and the ability of the Company to generate sufficient cash to
fund future operations. There can be no assurance in this regard.
Overview
The Company's operating results are affected by a number of factors,
including competitive pressures, changes in regulations governing the
Company's activities, the results of pursuing various development
opportunities, the economic environment and general weather conditions.
Consequently, the Company's operating results may fluctuate from period
to period and the results for any period may not be indicative of
results for future periods. The Company's operations are not
significantly affected by seasonality.
--Competition
Intensified competition for patrons continues to occur at both of the
Company's properties.
Since gaming began in Biloxi in August 1992, there has been steadily
increasing competition along the Mississippi Gulf Coast, in nearby New
Orleans and elsewhere in Louisiana and Mississippi. Several large
hotel/casino complexes have been built in recent years with the largest
single resort in the area opening in March 1999. There are currently
twelve casinos operating on the Mississippi Gulf Coast. See "Potential
Growth Opportunities" regarding a master plan for a destination resort
the Company is developing in Biloxi, Mississippi.
Competition is intense in the St. Louis market area. There are
presently four other casino companies operating five casinos in the
market area. Many of these competitors have significantly greater name
recognition and financial
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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 two casinos in
Maryland Heights, Missouri and the other company operates one casino in
the City of St. Charles, Missouri. The operator of the St. Charles
casino replaced its facility and reopened with nearly double its prior
gaming positions in August 2002.
Applications were submitted to the Missouri Gaming Commission for
approval of potential new licenses at four different locations within
the St. Louis Metropolitan area along the Mississippi River, three of
which were within 20 miles of the "Admiral." In July 2000, the Gaming
Commission announced its decision to award an additional license to the
applicant proposing a site at the greatest distance from the "Admiral"
of the proposed locations. The Commission's decision was challenged by
one of the applicants whose proposal was not selected and by other
entities. In September 2001, the applicant selected by the Gaming
Commission announced it would not proceed with the development of the
project. The Gaming Commission announced that it will consider
licensing an additional casino in the St. Louis market. One such
application has been filed to operate a gaming facility approximately 20
miles south of the "Admiral." The Gaming Commission has extended the
period in which applications can be filed but has not indicated a
specific deadline for such filings. The opening of a new casino in the
St. Louis market would have a material adverse impact on the St. Louis
operations under most possible scenarios.
--Regulatory Matters
Missouri regulations limit the loss per "simulated" cruise per
passenger by limiting the amount of chips or tokens a guest may purchase
during each two-hour gaming session to $500 (the "loss limit"). The
company that operates adjacent casinos is able to offer guests who reach
the two-hour loss limit the ability to move to the adjacent casino and
continue to play. The lack of a statutory loss limit on Illinois
casinos allows them to attract higher stake players. Additionally,
their guests are not burdened with the administrative requirements
related to the loss limits, which includes the presentation of
government issued identification. Any easing of the loss limits in
Missouri would be expected to have a positive impact on the Company's
St. Louis operations.
--Economic Environment
The Company's business involves leisure and entertainment. During
periods of recession or economic downturn, consumers may reduce or
eliminate spending on leisure and entertainment activities. In the
event that any of the Company's demographic markets suffer adverse
economic conditions, the Company's revenues may be materially adversely
affected.
--Weather Conditions
The Company's operating results are susceptible to the effects of
floods, hurricanes and adverse weather conditions. Historically, the
Company has temporarily suspended operations on various occasions as a
result of such adversities. Under less severe conditions, high river
levels in St. Louis
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cause reduced parking and a general public perception of diminished
access to the casino resulting in decreased revenues. Management
believes the move of the "Admiral" diminished the negative effects of
high water on operations. However, on May 13, 2002, at 4:00 a.m. the
St. Louis operations were temporarily suspended due to high water
levels. The "Admiral" was reopened on May 20, 2002 at 6:00 p.m. During
the same period for the prior year, the Company recorded $1.4 million in
St. Louis gaming revenue.
On September 25, 2002, all Mississippi Gulf Coast casinos, including
the Company's Biloxi casino, were temporarily closed at 10:00 a.m. by
the Mississippi Gaming Commission in anticipation of Tropical Storm
Isidore. The Company's Biloxi casino reopened on September 27, 2002 at
5:00 a.m. On October 2, 2002, all Mississippi Gulf Coast casinos,
including the Company's Biloxi casino, were temporarily closed at 10:00
p.m. by the Mississippi Gaming Commission in anticipation of Hurricane
Lili. The Company's Biloxi casino reopened on October 3, 2002 at 3:00
p.m. The Company's Biloxi hotel operations remained open during both
periods.
Potential Growth Opportunities
Biloxi, Mississippi
In July 1997, PBLLC purchased for $40.5 million certain real estate
and improvements located on the Gulf Coast in Biloxi, Mississippi from
an entity which was wholly-owned by Mr. Connelly. The property
comprises approximately 260 acres and includes two hotels, a 111-slip
marina and the adjacent 18-hole Sun Golf Course (collectively, the
"Broadwater Property"). The marina is the site of the Company's casino
operations in Biloxi and was formerly leased by the Company under a
long-term lease agreement. Broadwater Hotel, Inc. a wholly-owned
subsidiary of the Company ("BHI"), invested $5.0 million in PBLLC.
PBLLC financed the purchase of the Broadwater Property with $30.0
million of financing from a third party lender, evidenced by a non-
recourse promissory note (the "Indebtedness") and issued a $10.0 million
membership interest to the seller. PBLLC is 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 became fully earned and nonrefundable when the
Indebtedness was due. See Liquidity and Capital Resources for a
discussion of the default on this obligation.
The Company has developed a master plan for the Broadwater Property.
Management believes that this site is ideal for the development of
"Destination Broadwater," a full-scale luxury destination resort
offering an array of entertainment attractions in addition to gaming.
The plans for the resort feature a village which will include a cluster
of casinos, hotels, restaurants, theaters and other entertainment
attractions. Management believes that with its beachfront location and
contiguous golf course, the property is the best site for such a
development in the Gulf Coast market.
In January 1999, the Company received a permit from the Mississippi
Department of Marine Resources (the "DMR") for development of the full-
scale destination resort. This is the first of three permit approvals
required of the Joint Permit Application submitted in August 1998 to the
DMR, the U.S. Army Corps of Engineers (the "Corps") and the Mississippi
Department of
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Environment Quality. The two remaining permit approvals are still
pending and awaiting the completion of the Final Environmental Impact
Statement ("EIS"). The Draft EIS has been completed, notice of which
was posted in the Federal Register in June 2000 for public comment. The
current permit application to the Corps was cancelled on June 10, 2002
pending re-submission of a revised project design that reflects the
changes resulting from the Company's work with the Corps. The
cancellation is an administrative measure which will allow the Corps to
remove the application from the Corps' pending action list, and should
not affect future evaluation of the permit request. The Company
anticipates submitting a revised plan. At that time, a new application
number will be assigned, and the evaluation of the permit request will
resume.
In connection with the Company's proposed Destination Broadwater
development plan, to date, the Company has not identified any specific
financing alternatives or sources as the necessary regulatory approvals
have not been obtained. There can be no assurance that the Company will
be able to obtain the regulatory approvals or the requisite financing.
Should the Company fail to raise the required capital, such failure
would materially and adversely impact the Company's business plan.
Results of Operations
The results of operations for the years ended February 28, 2003, 2002
and 2001 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.
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The following table highlights the results of the Company's operations
during the periods presented.
Twelve Months Ended February 28,
2003 2002 2001
------ ------ ------
(in millions)
St. Louis, Missouri Operations
Operating revenues $ 73.9 $ 79.1 $ 62.4
Operating income (loss) 4.9 6.1 (0.7)
Biloxi, Mississippi Operations
Operating revenues 49.8 50.1 50.2
Operating income 2.9 1.9 2.7
Davenport, Iowa Operations
Operating revenues -- -- 39.5
Operating income (loss) (1) -- (0.5) 5.8
Corporate Leasing Operations
Operating loss (2.8) (8.1) (15.1)
Corporate Administration
and Development
Operating loss (3.5) (4.1) (4.9)
St. Louis operating margin 6.6% 7.7% (1.1)%
Biloxi operating margin 5.8% 3.8% 5.4%
(1) During fiscal 2002, the Company's Davenport operations reflect a net loss
of $0.5 million, of which, $0.7 million related to attorneys fees and
settlement of certain 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,
2003 2002 2001
------ ------ ------
(in millions)
Cash flows provided by (used in)
operating activities $ 10.1 $ 3.8 $ (8.5)
Cash flows provided by (used in)
investing activities (4.0) 0.5 39.8
Cash flows used in
financing activities (0.1) (2.7) (35.2)
Cash paid for interest 0.1 6.4 17.1
Fiscal 2003 Compared to Fiscal 2002
Operating revenues. The Company generated consolidated operating revenues
of $123.7 million during fiscal 2003 compared to $129.2 million during fiscal
2002, a decrease of $5.5 million. The St. Louis operations experienced a
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decrease in revenue of $5.2 million and the Biloxi operations experienced a
decrease in revenue of $0.3 million. Excluding the Gateway operations, St.
Louis revenues decreased $4.5 million.
Gaming revenues in the Company's St. Louis operations decreased $3.6
million, or 4.6%, during fiscal 2003, compared to fiscal 2002. The St. Louis
market share decreased to approximately 9.2% during fiscal 2003 from
approximately 10.1% in fiscal 2002. Management believes this decrease is
primarily attributable to increased competition resulting from expansion by a
competitor in the St. Louis market, high water on the Mississippi River that
caused the casino to be closed for a week, and customer apprehension following
the Company's reorganization filing. Gaming revenues at the Company's Biloxi
operations increased $0.5 million, or 1.0%, during 2003 compared to prior
year, primarily as a result of increased volume.
The Company's revenues from food and beverage were $13.3 million during
fiscal 2003, compared to $14.4 million during fiscal 2002, a decrease of $1.1
million. Excluding the Gateway operations, revenues from food and beverage
decreased $0.8 million, or 5.6%, during fiscal year 2003. The decrease was
primarily the result of a decrease in St. Louis revenue due to a decrease in
patron volume, a change in the direct mail program which results in a decrease
in food and beverage promotional revenue and the buffet closing one week due
to high water and 11 days for remodeling.
The Company's revenues from hotel, retail and other were $10.4 million
during fiscal 2003, compared to $11.0 million during fiscal 2002, a decrease
of $0.6 million. Excluding the Gateway operations, revenues from hotel,
retail and other decreased $0.3 million, or 2.6% during fiscal year 2003. St.
Louis retail and other revenue decreased $0.3 million primarily as a result of
decrease volume.
Promotional allowances were $23.1 million during fiscal 2003 compared to
$22.6 million during fiscal 2002, an increase of $0.5 million, or 2.2%.
Promotional allowances in St. Louis decreased $0.3 million and promotional
allowances in Biloxi increased $0.8 million in fiscal 2003. The decrease in
St. Louis is primarily the result of changes made in the direct mail program.
The increase in Biloxi is the result of an increase in room promotions and
food and beverage complementaries in Biloxi in response to the competitive
environment.
Operating costs and expenses. The Company's consolidated gaming costs and
expenses were $70.4 million during fiscal 2003, compared to $72.8 million
during fiscal 2002, a decrease $2.4 million, or 3.3%. The decrease in gaming
costs was primarily attributable to a $2.1 million decrease in gaming costs in
St. Louis as a result of a (i) $1.7 million decrease in gaming and admissions
taxes which was attributable to decreased gaming revenues, (ii) $0.3 million
decrease in payroll and benefit costs, and (iii) $0.6 million decrease in the
cost of complimentaries offset by an increase slot machine lease expense and
an increase in repairs and maintenance. Gaming costs decreased $0.3 million
in Biloxi primarily as a result of a decrease in payroll and payroll benefit
costs offset by an increase in rooms provided to casino patrons and an
increase in player development events.
The Company's costs and expenses for food and beverage were $8.7 million
during fiscal 2003, compared to $9.6 million during fiscal 2002, a decrease of
$0.9 million. Excluding the Gateway operations, food and beverage expenses
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decreased $0.6 million, or 6.3%, during fiscal year 2003. Decreases at both
casino properties are primarily due to more efficient purchasing and reduced
volume.
The Company's costs and expenses for hotel, retail and other were $2.8
million during fiscal 2003, compared to $3.3 million during fiscal 2002, a
decrease of $0.5 million. Excluding the Gateway operations, expenses from
hotel, retail and other decreased $0.1 million, or 3.0%, during fiscal year
2003. The decrease is primarily due to the St. Louis operations change in
product mix and subsequent downsizing of the gift shop in December 2002.
The Company's consolidated selling, general and administrative expenses were
$30.1 million during fiscal 2003, compared to $32.3 million during fiscal
2002, a decrease of $2.2 million. Excluding the Gateway operations, selling,
general and administrative expenses decreased $2.0 million, or 6.2%. The St
Louis casino operations experienced a decrease in selling, general and
administrative costs of $1.2 million primarily due to (i) a reduction of
payroll and payroll benefits of $0.5 million, (ii) a decrease in professional
fees of $0.3 million, and (iii) a decrease in parking related expenses of $0.4
million as a result of the new guest parking lot, changes made in the valet
parking and reduced shuttle bus repairs and maintenance resulting from the
retirement and replacement of the older busses. Biloxi combined operations
experienced an increase of $0.1 million primarily as a result of increased bus
subsidy in response to the competitive environment. Corporate leasing
operations' selling, general and administration costs decreased $0.1 million
and Corporate administration selling, general and administration costs
decreased $0.4 million. Corporate leasing expenses decreased primarily as a
result of the costs associated with repossessing the vessel in fiscal 2002.
Corporate expenses decreased primarily as a result of a reduction in legal
fees charged to selling, general and administration expense associated with
the negotiations with the Company's Noteholders. Since the filing of the
bankruptcy petitions in the current year, these costs have been charged to
reorganization expense. Excluding the Gateway operations, as a percentage of
consolidated revenues, selling, general and administrative expenses decreased
to 24.3% during fiscal 2003, from 24.8% during fiscal 2002.
Depreciation expense was $8.9 million during fiscal 2003 compared to $8.4
million during fiscal 2002, an increase of $0.5 million, or 6.0%. The leasing
operations ceased depreciating assets as of August 31, 2000 based on
management's decision to sell the assets and resumed depreciation in March of
2002 as a result of the adoption of newly issued accounting guidance. The
leasing operations contributed depreciation expense of $0.6 million for the
year ended February 28, 2003.
During fiscal 2003 and 2002, 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 $1.2 million and $7.1 million, respectively, on two casino vessels
not used in the Company's gaming operations and accounted for in the Company's
leasing segment. The $1.2 million impairment recorded in February 2003, was
the result of an auction held on the "Surfside Princess" under the terms of
Section 363 of the United States Bankruptcy Code. The net book value of the
vessel was written down to the winning bid of $1.5 million.
The Company incurred development costs of $0.1 million during fiscal 2003,
compared to $0.4 million during fiscal 2002. During both fiscal years, the
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costs were incurred for the Destination Broadwater project.
Operating income. As a result of the foregoing items, the Company had
operating income of $1.5 million during fiscal 2003, compared to an operating
loss of $4.7 million during fiscal 2002.
Interest expense, net. The Company incurred net interest expense of $7.6
million during fiscal 2003, compared to $14.1 million during fiscal 2002, a
decrease of $6.5 million. The decrease is the result of $6.7 million decrease
in interest expense resulting from June 20, 2002 voluntary petition under
Chapter 11 of the Bankruptcy Code, whereby the noteholders of the Senior
Exchange Notes and the Secured Notes were deemed by management to be under-
secured and as a result, interest ceased to accrue as of the date thereof.
Additionally, there was $0.5 million of interest income in the prior year
which resulted from the installment sale agreement, with no comparable income
in the current year.
Reorganization items. The Company incurred reorganization items of $1.5
million during the year ended February 28, 2003, compared to $1.4 million
during the year ended February 28, 2002. On April 19, 2001, PBLLC filed a
voluntary bankruptcy petition for bankruptcy and began incurring costs
associated with its reorganization. On June 20, 2002, the Company's parent
company and PRC-Missouri filed voluntary petitions and in July 2002,
substantially all of the Company's other operating subsidiaries filed
voluntary petitions. Costs associated with the reorganizations consist of
professional fees and U.S. Bankruptcy Trustee fees.
Gain/loss on disposal of fixed assets. The Company recorded a loss of $0.1
million during the year ended February 28, 2003, primarily as a result of the
sale of certain gaming equipment in St. Louis. 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.
Minority interest expense. The Company incurred $1.3 million in minority
interest expense during fiscal 2003, compared to $1.2 million during fiscal
2002. During both periods the minority interest relates to Mr. Connelly's
Class B Unit of the Broadwater Property.
Net loss. As a result of foregoing items, the Company incurred a net loss
of $9.1 million during fiscal 2003, compared to a net loss of $20.7 million
during fiscal 2002.
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
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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