10-Q 1 p64617e10-q.txt 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2000 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ________________ Commission File No. 0-19128 --------------------- CAPITAL GAMING INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) New Jersey 22-3061189 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 3030 East Camelback Road, 85016 Suite 295 (Zip Code) Phoenix, Arizona (Address of principal executive offices)

--------------------- Registrant's telephone number, including area code: (602) 667-0670 Not applicable (Former name, former address and former fiscal year, if changed since last report) ---------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities 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 [ ] Applicable only to issuers involved in bankruptcy proceedings during the preceding five years: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ X ] No [ ] Indicate the number of shares outstanding for each of the issuer's classes of common stock as of December 31, 2000: 2,200,550 (consisting of 2,068,000 shares of Class A Common Stock and 132,550 shares of Class B Common Stock) The within Form 10-Q has not been reviewed by an independent public accountant. See Part II, Item 5 (Other Events - Part (a) Previous Independent Accountants). 2 CAPITAL GAMING INTERNATIONAL, INC. INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of December 31, 2000 (Unaudited) and June 30, 2000 (Audited) 1 Consolidated Statements of Operations for the three months And six months ended December 31, 2000 and 1999 (Unaudited) 3 Consolidated Statements of Cash Flows for the six months ended December 31, 2000 and 1999 (Unaudited) 4 Notes to Consolidated Financial Statements (Unaudited) 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosures about Market Risks 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings 12 Item 2. Changes in Securities and Use of Proceeds 12 Item 3. Default Upon First Amended Indenture 12 Item 4. Submission of Matters to a Vote of Securityholders 12 Item 5. Other Events 13 Item 6. Exhibits and Reports on Form 8-K 13 Signature Page 14

3 PART I., Item 1. CAPITAL GAMING INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS (In Thousands) ASSETS

~~PART~~December ~~I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of September 30~~31, 2000 ~~(Unaudited) and~~ June 30, 2000 ~~(Audited)~~----------------- 1------------- ~~Consolidated~~[Unaudited] ~~Statements~~CURRENT ofASSETS: ~~Operations~~Cash ~~for~~and ~~the~~cash ~~three~~equivalents ~~months~~$ ~~ended~~2,053 ~~September~~$ 302,352 ~~2000~~Restricted ~~and~~funds ~~1999~~559 ~~(Unaudited)~~9,497 3Interest ~~Consolidated~~receivable ~~Statements~~3 of172 ~~Cash~~Current ~~Flows~~portion ~~for~~- ~~the~~Native ~~three~~American ~~months~~loans ~~ended~~receivable ~~September~~703 ~~30,~~627 ~~2000~~Current ~~and~~portion ~~1999~~of ~~(Unaudited)~~direct 4financing ~~Notes~~leases to133 ~~Consolidated~~101 ~~Financial~~Prepaid ~~Statements~~expenses ~~(Unaudited)~~and 5other ~~Item~~current 2.assets ~~Management's~~208 ~~Discussion~~296 ~~and~~Income ~~Analysis~~tax ofreceivable ~~Financial~~276 ~~Condition~~780 ~~and~~----------- ~~Results~~----------- ofTOTAL ~~Operations~~CURRENT 7ASSETS ~~Item~~ 3.,935 ~~Quantitative~~13,825 ~~and~~----------- ~~Qualitative~~----------- ~~Disclosures~~FURNITURE, ~~about~~FIXTURES ~~Market~~AND ~~Risks~~EQUIPMENT, 9Net ~~PART~~21 ~~II.~~5 OTHER ~~INFORMATION~~ASSETS: ~~Item~~Native 1.American ~~Legal~~loans ~~Proceedings~~receivable 9661 ~~Item~~927 2.Direct ~~Changes~~financing inleases, ~~Securities~~net ~~and Use~~ of ~~Proceeds~~current 9portion ~~Item~~528 3.584 ~~Default~~----------- ~~Upon~~----------- ~~Senior~~TOTAL ~~Securities~~OTHER 10ASSETS ~~Item~~1,210 4.1,516 ~~Submission~~----------- of----------- ~~Matters~~TOTAL toASSETS a$ ~~Vote~~5,145 of$ ~~Securityholders~~15,341 10=========== ~~Item 6. Exhibits and Reports on Form 8-K 10 Signature Page 11~~===========

The Accompanying Notes are an Integral Part of these Consolidated Financial Statements 1 4 CAPITAL GAMING INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS (In Thousands) LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

~~September~~December ~~30,~~31 2000 June 30, 2000 ------------------ ------------- [Unaudited] CURRENT ~~ASSETS~~LIABILITIES: ~~Cash~~Accounts payable and ~~cash~~accrued ~~equivalents~~expenses $ ~~2,676~~863 $ ~~2,352~~112 ~~Restricted~~Due ~~funds~~to ~~9,589~~related ~~9,497~~party ~~Interest~~19 ~~receivable~~9 56----------- ~~172 Current portion~~ ----------- ~~Native~~TOTAL ~~American~~CURRENT ~~loans~~LIABILITIES ~~receivable~~882 ~~573~~121 ~~627~~LIABILITIES ~~Current~~SUBJECT ~~portion~~TO ofCOMPROMISE ~~direct~~-- ~~financing~~24,778 ~~leases 100 101 Prepaid expenses and other current assets 292 296 Income tax receivable 276 780~~ ----------- ----------- TOTAL ~~CURRENT~~LIABILITIES ~~ASSETS~~882 1324,~~562~~899 ~~13,825~~ ----------- ----------- ~~FURNITURE,~~COMMITMENT ~~FIXTURES~~ AND ~~EQUIPMENT~~CONTINGENCIES STOCKHOLDERS' EQUITY (DEFICIT) Common stock, ~~Net~~no 12par value, authorized 5,000,000 ~~OTHER~~shares; ~~ASSETS:~~issued ~~Native~~and ~~American~~outstanding ~~loans~~December ~~receivable~~31, ~~791~~2000 ~~927~~0 ~~Direct~~shares ~~financing~~and ~~leases~~June 30, ~~net~~2000 of1,999,745 ~~current~~shares ~~portion~~-- ~~560~~400 ~~584~~Common stock, Class A, no par value, authorized 3,000,000 shares; issued and outstanding 2,068,000 shares 4,013 -- Common stock, Class B, no par value, authorized 2,000,000 shares; issued and outstanding 132,550 shares 257 -- Additional paid in capital -- 300 Accumulated equity (deficit) 135 (10,258) Unearned stock compensation (142) -- ----------- ----------- TOTAL ~~OTHER~~STOCKHOLDERS' ~~ASSETS~~EQUITY 1(DEFICIT) 4,~~363~~263 1(9,~~516~~558) ----------- ----------- TOTAL ~~ASSETS~~LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $14 5,~~925~~145 $ 15,341 =========== ===========

The Accompanying Notes are an Integral Part of these Consolidated Financial Statements 2 5 CAPITAL GAMING INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS [UNAUDITED] (In Thousands except Share Data)

~~September~~Three 30Months Ended Six months Ended Three Months Ended Six Months Ended December 31, 2000 ~~June~~December 3031, 2000 December 31, 1999 December 31, 1999 ------------------ ----------------- ~~[Unaudited]~~------------------ ~~CURRENT~~----------------- ~~LIABILITIES~~REVENUES: ~~Accounts~~Native ~~payable~~American ~~and~~casino ~~accrued~~management ~~expenses~~fees $ ~~286~~- $ ~~112~~- ~~Due~~$ to1,548 ~~related~~$ ~~party~~3,524 ---------- 9---------- ---------- ---------- ~~TOTAL~~COSTS ~~CURRENT~~AND ~~LIABILITIES~~EXPENSES: ~~286~~Salaries ~~121~~and ~~LIABILITIES~~related ~~SUBJECT~~costs TO1,088 ~~COMPROMISE 24~~1,~~711~~273 24214 427 Native American gaming development costs 168 211 39 91 Professional fees 52 249 222 362 General and administrative 124 199 77 159 Depreciation and amortization 2 4 554 1,~~778~~107 ---------- ---------- ---------- ---------- TOTAL ~~LIABILITIES~~COSTS 24AND EXPENSES 1,~~997~~434 241,~~899~~936 1,106 2,146 ---------- ---------- ~~COMMITMENT~~---------- ~~AND~~---------- ~~CONTINGENCIES~~INCOME ~~STOCKHOLDERS'~~(LOSS) ~~DEFICIT:~~FROM ~~Common~~OPERATIONS ~~stock~~(1,434) no(1,936) ~~par~~442 ~~value~~1,378 ~~authorized~~---------- ~~5,000,000~~---------- ~~shares;~~---------- ~~issued~~---------- ~~and~~OTHER ~~outstanding~~INCOME (EXPENSE): Interest income 109 247 115 233 Interest expense - - (684) (1,~~999,745~~368) ~~shares~~---------- ~~400~~---------- ~~400~~---------- ~~Additional~~---------- ~~paid~~TOTAL inOTHER ~~capital~~INCOME ~~300~~(EXPENSE) ~~300~~109 ~~Accumulated~~247 ~~deficit~~(569) (~~since~~1,135) ~~May~~---------- 29---------- ---------- ---------- INCOME (LOSS) BEFORE REORGANIZATION ITEMS, ~~1997~~INCOME TAXES AND EXTRAORDINARY ITEMS (1,325) ~~date~~(1,689) of(569) ~~reorganization~~(1,135) REORGANIZATION ITEMS: Professional fees (1078) (312) - - Interest income 16 103 - - ---------- ---------- ---------- ---------- INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEMS (1,~~772~~387) (101,~~258~~898) (127) 243 INCOME TAXES - 3 81 162 ---------- ---------- ~~TOTAL~~---------- ~~STOCKHOLDERS'~~---------- ~~DEFICIT~~NET INCOME (10LOSS) BEFORE EXTRAORDINARY ITEMS (1,~~072~~387) (91,~~558~~901) (208) 81 EXTRAORDINARY ITEMS (12,294) (12,294) - - ---------- ---------- ~~TOTAL~~---------- ~~LIABILITIES~~---------- ~~AND~~NET ~~STOCKHOLDERS'~~INCOME ~~DEFICIT~~(LOSS) $ 1410,~~925~~907 $ 1510,~~341~~393 $ (208) $ 81 ========== ========== ========== ========== BASIC AND DILUTED NET INCOME (LOSS) PER SHARE BEFORE EXTRAORDINARY ITEM $ (.64) $ (.92) $ (0.10) $ .04 ========== ========== ========== ========== BASIC AND DILUTED NET INCOME (LOSS) PER SHARE $ 5.07 $ 5.01 $ (0.10) $ .04 ========== ========== ========== ========== WEIGHTED AVERAGE BASIC AND DILUTIVE COMMON AND EQUIVALENT SHARES OUTSTANDING 2,152,531 2,076,138 1,999,745 1,999,745 ========== ========== ========== ==========

The Accompanying Notes are an Integral Part of these Consolidated Financial Statements 3 6 CAPITAL GAMING INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS [UNAUDITED] (In Thousands)

~~Three~~Six ~~Months~~months Ended ~~Three~~Six ~~months~~Months Ended ~~September~~December 3031, 2000 ~~September~~December 3031, 1999 ------------------ ------------------ ~~REVENUES:~~CASH ~~Native~~FLOWS ~~American~~FROM ~~casino~~OPERATING ~~management~~ACTIVITIES: ~~fees~~Net income $ 10,393 $ 81 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary item (12,294) -- $Depreciation and amortization 4 1,~~976~~107 Stock Compensation 114 --~~---------~~ Payments on Muckleshoot settlement --~~---------~~ ~~COSTS~~575 ~~AND~~Changes ~~EXPENSES:~~in ~~Salaries~~assets and ~~related~~liabilities: ~~costs~~Interest ~~185~~receivable ~~212~~169 (10) Native American ~~gaming~~management ~~development~~fees ~~costs~~and ~~105~~expenses 52receivable ~~Professional~~-- ~~fees~~285 ~~135~~Prepaid ~~139~~expenses ~~General~~ and ~~administrative~~other 75current 83assets ~~Depreciation~~89 ~~and~~(40) ~~amortization~~Income 2tax ~~554~~receivable 504 -- Accounts payable and accrued expenses 751 (73) Accrued interest -- (16) Federal income taxes payable -- (72) State income taxes payable -- (257) Related party payable 10 --- ----------- ~~TOTAL COSTS AND EXPENSES 502 1,040~~ ---- ------- --------~~---~~ ~~INCOME~~NET CASH (~~LOSS~~USED IN) ~~FROM~~PROVIDED ~~OPERATIONS~~BY OPERATING ACTIVITIES (~~502~~260) ~~936~~1,580 --------------- --------------- ~~OTHER~~CASH ~~INCOME~~FLOWS ~~(EXPENSE)~~FROM INVESTING ACTIVITIES: ~~Interest~~Repayments ~~income~~of ~~138~~Native ~~118~~American ~~Interest~~loans ~~expense~~receivable 190 852 Decrease (~~not~~increase) ~~including~~in ~~$693~~restricted funds 8,~~000~~938 as(3,414) a(Increase) ~~result~~in ofdeferred ~~the~~charges ~~2000~~-- ~~Reorganization~~(1,699) Payments received on direct financing lease 24 -- Purchase of furniture, fixtures and equipment (~~684~~20) -- --------------- --------------- ~~TOTAL~~NET ~~OTHER~~CASH ~~INCOME~~PROVIDED BY (~~EXPENSE~~USED IN) ~~138~~INVESTING ~~(566)~~ACTIVITIES ~~INCOME~~9,132 (~~LOSS~~4,261) ~~BEFORE~~--------------- ~~REORGANIZATION~~--------------- ~~ITEMS~~CASH ~~(364)~~FLOWS ~~370~~FROM ~~REORGANIZATION~~FINANCING ~~ITEMS~~ACTIVITIES: ~~Professional~~Principal ~~fees~~payments on prepetition debt Authorized by Bankruptcy Court (~~234~~9,171) -- ~~Interest~~--------------- ~~income~~--------------- 87NET CASH USED IN FINANCING ACTIVITIES (9,171) -- --------------- --------------- ~~INCOME~~NET ~~(LOSS)~~DECREASE ~~BEFORE~~IN ~~INCOME~~CASH ~~TAXES~~AND CASH EQUIVALENTS (~~511~~299) ~~370~~(2,681) ~~INCOME~~CASH ~~TAXES~~AND 3CASH 81EQUIVALENTS - BEGINNING OF PERIODS 2,352 4,440 --------------- --------------- ~~NET~~CASH ~~INCOME~~AND ~~(LOSS)~~CASH EQUIVALENTS - END OF PERIODS $ ~~(514)~~2,053 $ ~~289~~1,759 =============== =============== ~~BASIC~~SUPPLEMENTAL ~~AND~~DISCLOSURES ~~DILUTED~~OF ~~NET~~CASH ~~INCOME~~FLOW ~~(LOSS)~~INFORMATION: ~~PER~~Cash ~~SHARE~~Paid During the Periods for: Interest $ ~~(.26)~~-- $ ~~.14~~1,385 ~~===========~~Income ~~===========~~Taxes ~~WEIGHTED~~$ ~~AVERAGE~~3 ~~BASIC~~$ ~~AND~~499 ~~DILUTIVE~~Professional ~~COMMON~~Fees ~~AND~~paid ~~EQUIVALENT~~for ~~SHARES~~services ~~OUTSTANDING~~rendered ~~1,999,745~~in ~~1,999,745~~connection ~~===========~~with ~~===========~~the Chapter 11 filing $ 281 $ --

The Accompanying Notes are an Integral Part of these Consolidated Financial Statements 4 7 PART I., Item 1. CAPITAL GAMING INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [UNAUDITED] [1] ORGANIZATION Capital Gaming International, Inc., a New Jersey corporation (the "Company"), together with its subsidiaries, is a multi-jurisdictional gaming company. The management and development of Native American gaming facilities is conducted through Capital Gaming Management, Inc. ("CGMI"), a wholly-owned subsidiary of the Company. CGMI developed and currently manages the Dancing Eagle Casino for the Pueblo of Laguna in Casa Blanca, New Mexico. Capital Development Gaming Corporation ("CDGC"), a wholly owned subsidiary of the Company, also has a contract to develop and manage the Narragansett casino project in Rhode Island ("Rhode Island Project"). Currently the contract faces several regulatory issues and a disputed termination by the Tribe, and there can be no assurance that the project will be successfully launched. [2] BASIS OF PRESENTATION The Consolidated Balance Sheet as of December 31, 2000, the Consolidated Statements of Operations for the three-month and six-month periods ended December 31, 2000 and 1999, and the Consolidated Statement of Cash Flows for the six-month periods ended December 31, 2000 and 1999 are unaudited. The June 30, 2000 Balance Sheet data was derived from audited consolidated financial statements. These consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the financial position of the Company at December 31, 2000, and the results of its operations and cash flows for the three-month and six-month periods ended December 31, 2000 and 1999. The results of operations for interim periods are not necessarily indicative of a full year of operations. It is suggested that these financial statements be read in conjunction with the consolidated financial statements and notes included in the Capital Gaming International, Inc. Form 10-K for the fiscal year ended June 30, 2000 as filed with the Securities and Exchange Commission. The Consolidated Financial Statements include the accounts of the Company and all of its wholly-owned subsidiaries. Inter-company transactions and balances have been eliminated in consolidation. 5 8 [3] REORGANIZATION UNDER CHAPTER 11 Reorganization In late 1999, management determined that the Company's capital structure was impairing its ability to win new management contracts. While the Company's operations were expected to generate sufficient revenue to make debt service payments through the calendar year 2000, the Company anticipated that it might not have sufficient revenue to make the final principal and interest payment on the Senior Notes when they become due in May 2001. After extensive meetings and negotiations with certain of the Senior Noteholders and the Indenture Trustee, those Senior Noteholders and the Indenture Trustee, with the concurrence of the Company, concluded that the best way to maximize recovery to the Senior Noteholders and preserve the Company as a going concern was to "de-leverage" the Company by converting the Senior Notes to equity. Although the long-term success of the Company remained dependent upon its ability to obtain new management contracts and gaming opportunities, the reorganization (i) eliminated the uncertainty created by the existing debt structure; (ii) provided the Company needed flexibility to finance future operations; and (iii) provided the Company more flexibility to compete with better financed competitors. Accordingly, on May 15, 2000 (the "Petition Date") the Company filed a voluntary petition for reorganization of the Company under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court, Case No. 00-14052 (JHW). The Company remained in possession of its property and assets and maintained and operated its business as debtor-in-possession pursuant to the provisions of the Bankruptcy Code. Additionally no trustee or receiver was appointed. The Company's two operating subsidiaries were not included in the filing. In connection with the filing of the petition, the Company and the Indenture Trustee jointly submitted a Disclosure Statement and Plan of Reorganization (the "Plan") for the Company. The Plan is the result of extensive negotiations among the Company, the Indenture Trustee, and holders of approximately eighty-four (84%) percent of the Company's then outstanding Senior Notes and holders of approximately seventy (70%) percent of the Company's then outstanding stock. A copy of the Plan is attached as Exhibit 10.181 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2000. The Plan provided that holders of the Senior Notes, as payment in full for their claims, will receive a distribution on account of their annual secured claims equal to their pro rata share of (a) the greater of (i) $9,000,000 or (ii) the Distributable Cash (hereinafter defined) after payment of Indenture Trustee fees and expenses, and (b) two million sixty-eight thousand (2,068,000) shares of New Class A Common Stock, representing ninety-four (94%) percent of the aggregate voting securities of the Company, as reorganized. "Distributable Cash" means all cash of the Company, whether held by the Indenture Trustee or the Company, in excess of $2,900,000, determined after payment of all Plan distributions to creditors and equity security holders, other than holders of Senior Notes. General unsecured creditors, including holders of deficiency claims would receive a pro rata share of $100,000 and certain holders of the Company's equity interests would receive their pro rata share of 550 shares of New Class B Common Stock. The Company intends to use its post-confirmation cash balance primarily to seek new gaming opportunities in order to create new sources of cash flow for the Company. On September 26, 2000 the Bankruptcy Court conducted a hearing regarding Confirmation of the Plan and, on October 4, 2000, entered an order confirming the Plan. In connection with creditor approval of the Plan, 99.9770% of holders of the Senior Notes who voted approved the Plan. The Effective Date of the Plan is October 23, 2000, at which time distribution commenced. The effect of the reorganization was an extraordinary gain of $12,294,000. This gain is comprised of total liabilities subject to compromise of $24,778,000 and cancellation of all existing common stock of $700,000 which was reduced by cash payments of $9,171,000 and the value of new stock issued of $4,013,000. 6 9 [4] SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies of the Company are set forth in the Company's form 10-K, as amended, for the fiscal year ended June 30, 2000 as filed with the Securities and Exchange Commission. Recent Accounting Developments: In December 1999, the staff of the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements". SAB No. 101 summarizes some of the staff's interpretations of the application of generally accepted accounting principles to revenue recognition. The Company adopted SAB No. 101 during the quarter with no effect on the financial statements. [5] LEGAL PROCEEDINGS There was no material litigation involving or pending against the Company on December 31, 2000. The Company is or may become a defendant in pending or threatened legal proceedings in the ordinary course of business although it is not aware of the existence of any such pending or threatened legal proceedings at this time. See the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2000, section entitled "Risk Factors - Accounting Disagreement" for a description of a disagreement with the Laguna Development Corporation concerning accounting treatment of pre-opening expenses under the Laguna Management Contract, which disagreement may result in arbitration in the fiscal year ending June 30, 2001. During the quarter the Company continued to manage the Dancing Eagle Casino for the Pueblo of Laguna. Because of the above described disagreement and in accordance with generally accepted accounting principles the Company has not recognized revenue from the Laguna Management Contract for the quarter and year ended December 31, 2000. The Laguna Development Corporation paid approximately $57,000 to the Company during the second quarter of fiscal 2000. The Company is presently in settlement discussions with the Laguna Development Corporation which could result in cash or term payments in exchange for cancellation of all contracts between the parties. In such event, the Company will consider all of its options, including (i) investing its cash in other gaming or non-gaming businesses or (ii) adopting a plan of liquidation of the Company. 7 10 PART I., Item 2. CAPITAL GAMING INTERNATIONAL, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements as of December 31, 2000 (unaudited) and June 30, 2000 (audited) and for the three-month and six-month periods ended December 31, 2000 and 1999 (unaudited) contained herein and the Company's audited Consolidated Financial Statements and the related notes thereto appearing in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2000 filed with the Securities and Exchange Commission. Notice Regarding Forward-Looking Statements To the extent the information contained in this management discussion and analysis of consolidated financial condition as of December 31, 2000 (unaudited) and June 30, 2000 (audited) and results of operations for the three-month and six-month periods ended December 31, 2000 and 1999 (unaudited) are viewed as forward-looking statements, the reader is cautioned that various risks and uncertainties exist that could cause the actual future results to differ materially from those inferred by the forward-looking statements. Words such as "expects", "anticipates", "intends", "potential", "believes" and similar expressions are intended to identify forward-looking statements, which speak only as of the date the statements were made. Those statements may include projections of revenues, income or loss, capital expenditures, plans for future operations or strategies, and financing needs or plans, as well as assumptions relating to the foregoing. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Additional risk factors that could cause actual results to differ materially from those expressed in such forward-looking statements are set forth in Exhibit 99, which is attached hereto and incorporated by reference into this Quarterly Report on Form 10-Q. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. The following management discussion and analysis should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2000. Liquidity and Capital Resources Sources and Uses of Cash For the six months ended December 31, 2000, the Company had a net decrease in cash and cash equivalents of $299,000, of which $260,000 was used by Company operating activities, $9,132,000 was provided by Company investing activities, and $9,171,000 was used by Company Financing activities. Operating Activities: Cash flows from operating activities for the six months ended December 31, 2000 were provided by interest income of approximately $350,000. Significant operating activity balances required to reconcile the Company's GAAP accrual net income of $10,393,000 for the six months ended December 31, 2000 to net cash flows used by operating activities include (i) a decrease in interest receivable of $169,000, (ii) a decrease in prepaid expenses and other current assets of $89,000, (iii) a decrease in income tax receivable of $504,000, (iv) an increase in accounts payable and accrued expenses of $751,000. Additionally, non-cash items of extraordinary gain of $12,294,000 and stock compensation expense of $114,000 were used in the reconciliation. Investing Activities: Cash flows from investing activities for the six month period ended December 31, 2000 were provided by an decrease in restricted funds of $8,938,000, a $190,000 collection of Native American loans receivable and a $24,000 decrease in direct financing leases, and used by an increase in furniture, fixtures and equipment of $20,000. Financing Activities: Cash flows from financing activities for the six month period ended December 31, 2000 were used by principal payments on prepetition debt of $9,171,000. 8 11 The Company's source of cash for the next twelve months is expected to be derived from the receipt of management fees from the Dancing Eagle Casino (Pueblo of Laguna), the receipt of debt service payments on the Native American loans receivable from the Dancing Eagle Casino and the receipt of lease payments in relation with the Dancing Eagle Casino, contingent upon current settlement discussions. Capital Requirements: The Company will continue to operate, through CGMI, on the management fees, principal and interest loan repayments, and lease payments from the Dancing Eagle Casino as well as with its post-Plan cash reserves. The development, management and operation of Native American gaming, other gaming establishments and ancillary and complimentary businesses is time consuming and capital intensive. Substantial capital is needed to finance the licensing, development, construction, architectural, engineering, equipping, legal and accounting fees and operating expenses associated with the management, development and operation of casino gaming establishments. It is anticipated that the Company will require significant additional capital in order to fund future projects. There can be no assurance that such financing will be available or, if available, that the terms thereof will be attractive to the Company. Results of Operations Overview The following discussion about the Company's results of operations includes the Company and its subsidiaries, CGMI, and CDGC. Three-month Period Ended December 31, 2000 as Compared to the Three-month Period Ended December 31, 1999 Income From Operations Loss from operations for the three-month period ended December 31, 2000 totaled approximately $1,512,000 as compared to income of $442,000 for the three-month period ended December 31, 1999, representing a decrease in income from operations of $1,954,000. This decrease in income is due to the combination of two factors, (i) a decrease in revenues of $1,548,000, and (ii) an increase in operating expenses of $406,000. Revenues The following table outlines the Company's revenues for the three months ended December 31, 2000 and 1999:

~~Three~~3 ~~months~~Months ~~Ended~~3 ~~Three~~ Months Ended ~~September~~Ended ~~30,~~12/31/00 ~~2000~~12/31/99 ~~September~~Inc. ~~30, 1999 ------------------- ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income~~ (~~loss~~Dec.) $% ~~(514)~~Change ~~$ 289 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 2 554 Payments on Muckleshoot settlement~~ -- ~~287 Changes in assets and liabilities: Interest receivable 116 (5) Native American management fees and expenses receivable~~ -- ~~63 Prepaid expenses and other current assets 4 25 Income tax receivable 504~~ -- ~~Accounts payable and accrued expenses 174 (32) Accrued interest~~ -- ~~684 Federal income taxes payable~~ -- ~~(72) State income taxes payable~~ -- ~~78 Related party payable (9)~~ -- ~~Liabilities subject to compromise (67)~~ -- ------- ----~~---~~ ~~NET CASH PROVIDED BY OPERATING ACTIVITIES 210 1,871~~ ------- -~~------~~ ~~CASH~~Umatilla ~~FLOWS~~$ ~~FROM~~- ~~INVESTING~~$1,139 ~~ACTIVITIES: Repayments of Native American loans receivable 190 421~~ $(~~Increase) in restricted funds (92) (~~1,~~588~~139) ~~(Increase) in deferred charges~~ --100.0% ~~(373)~~Tonto ~~Payments~~Apache ~~received on direct financing leases 25~~ -- ~~Purchase~~409 ~~of furniture, fixtures and equipment~~ (9409) --100.0% ------- ------- ~~NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 114 (1,540)~~ ------- ------- ~~NET~~$ ~~INCREASE IN CASH AND CASH EQUIVALENTS 324 331 CASH AND CASH EQUIVALENTS~~ - ~~BEGINNING OF PERIODS 2~~$1,~~352~~548 4$1,~~440~~548 -~~------~~100.0% ~~-------~~====== ~~CASH~~====== ~~AND CASH EQUIVALENTS - END OF PERIODS $ 2,676 $ 4,771~~ ======= ======= ~~SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash Paid During the Periods for: Income Taxes $ 3 $ 72 Professional Fees paid for services rendered in connection with the Chapter 11 filing $ 47 --~~

Revenues decreased $1,548,000, or 100.0% from $1,548,000 to $0 for the three-month period ended December 31, 2000 as compared to the three-month period ended December 31, 1999. The decreased revenue from the Umatilla Casino of $1,139,000 resulted from the expiration of the management agreement in February 2000. The decreased revenue from the Tonto Apache Casino of $409,000 resulted from the expiration of the management agreement in March 2000. 9 12 Costs and Expenses Salaries and wages increased to $1,088,000 from $214,000, a $874,000 or 408.4% increase in the second quarter of fiscal 2001 as compared to the second quarter of fiscal 2000. This increase in salaries and related expenses is primarily attributable to severance and stock compensation expense. See Part II, Item 5 (Other Events - Part (b) Agreements with Management). Company development costs increased $129,000 or 330.8% to $168,000 for the three months ended December 31, 2000 as compared to the three months ended December 31, 1999. This increase is primarily due to South American development activity. Professional fees decreased to $52,000 from $222,000, a 76.6% or $170,000 decrease in the second quarter of fiscal 2001 as compared to the second quarter of fiscal 2000. This decrease is primarily due to management's continued efforts to reduce expenses. General and administrative expenses increased $47,000 or 61.0% to $124,000 for the three months ended December 31, 2000. This increase is primarily attributable to automobile lease terminations of $23,000 and increased printing and copying costs of $11,000. Depreciation and amortization expense for the second quarter of fiscal year 2001 decreased $552,000 to $2,000, a decrease of 99.6% over the second quarter of fiscal year 2000. The decrease is primarily due to no amortization of deferred charges. Other Income and Expenses Interest income decreased $6,000 or 5.2% to $109,000 for the three months ended December 31, 2000. This decrease is the result of a decrease in restricted funds. Interest expense decreased $684,000 or 100.0% to $0 for the second quarter of fiscal 2001 due to the Chapter 11 reorganization. Reorganization Items The effect of the reorganization was an extraordinary gain of $12,294,000. This gain is comprised of total liabilities subject to compromise of $24,778,000 and cancellation of all existing common stock of $700,000 which was reduced by cash payments of $9,171,000 and the value of new stock issued of $4,013,000. In addition, the Company earned interest of $16,000 on funds that would have been used to make the May 15, 2000 payment on the Senior Secured Notes that was not made due to the bankruptcy filing. Also, the Company incurred $78,000 in professional fees related to the Reorganization during the second quarter of fiscal 2001. 10 13 Six-month Period Ended December 31, 2000 as Compared to the Six-month Period Ended December 31, 1999 Income From Operations Loss from operations for the six-month period ended December 31, 2000 totaled approximately $2,248,000 as compared to income of $1,378,000 for the six-month period ended December 31, 1999, representing a decrease in income from operations of $3,626,000. This decrease in income is due to the combination of two factors, (i) a decrease in revenues of $3,524,000, and (ii) an increase in operating expenses of $102,000. Revenues The following table outlines the Company's revenues for the six months ended December 31, 2000 and 1999:

36 Months 36 Months Ended Ended 912/3031/00 912/3031/99 Inc. (Dec.) % Change -------- -------- ---------- -------- Umatilla $ -- $ 12,~~290~~430 $(12,~~290~~430) -100.0% Tonto Apache -- ~~686~~1,094 (~~686~~1,094) -100.0% ------- ------- ------- ------- $ -- $ 13,~~976~~524 $ 1(3,~~865~~524) -94100.40% ======= ======= ======= =======

Revenues decreased $3,524,000, or 100.0% from $3,524,000 to $0 for the six-month period ended December 31, 2000 as compared to the six-month period ended December 31, 1999. The decreased revenue from the Umatilla Casino of $2,430,000 resulted from the expiration of the management agreement in February 2000. The decreased revenue from the Tonto Apache Casino of $1,094,000 resulted from the expiration of the management agreement in March 2000. Costs and Expenses Salaries and wages increased to $1,273,000 from $427,000, a $846,000 or 198.1% increase in the first six months of fiscal 2001 as compared to the first six months of fiscal 2000. This increase in salaries and related expenses is primarily attributable to severance and stock compensation expense. See Part II, Item 5 (Other Events - Part (b) Agreements with Management). Company development costs increased $120,000 or 131.9% to $211,000 for the six months ended December 31, 2000 as compared to the six months ended December 31, 1999. This increase is primarily due to South American development activity. Professional fees decreased to $249,000 from $362,000, a 31.2% or $113,000 decrease in the first six months of fiscal 2001 as compared to the first six months of fiscal 2000. This decrease is primarily due to management's continued efforts to reduce expenses. General and administrative expenses increased $40,000 or 25.2% to $199,000 for the six months ended December 31, 2000. This increase is primarily attributable to automobile lease terminations of $23,000 and increased printing and copying costs of $11,000. Depreciation and amortization expense for the first six months of fiscal year 2001 decreased $1,103,000 to $4,000, a decrease of 99.6% over the first six months of fiscal year 2000. The decrease is primarily due to no amortization of deferred charges. Other Income and Expenses Interest income increased $14,000 or 60.1% to $247,000 for the six months ended December 31, 2000. This increase is the result of an increase in restricted funds, direct financing leases and Native American loans receivable. Interest expense decreased $1,368,000 or 100.0% to $0 for the first six months of fiscal 2001 due to the Chapter 11 reorganization. Reorganization Items The effect of the reorganization was an extraordinary gain of $12,294,000. This gain included total liabilities subject to compromise of $24,778,000 and cancellation of all existing common stock of $700,000 which was reduced by cash payments of $9,171,000 and the value of new stock issued of $4,013,000. In addition, the Company earned interest of $103,000 on funds that would have been used to make the May 15, 2000 payment on the Senior Secured Notes that was not made due to the bankruptcy filing. Also, the Company incurred $312,000 in professional fees related to the Reorganization for the first six month ended December 31, 2000. 11 14 PART I., Item 3. Quantitative and Qualitative Disclosures about Market Risks Not applicable. PART II., Item 1. CAPITAL GAMING INTERNATIONAL, INC. LEGAL PROCEEDINGS There was no material litigation involving or pending against the Company on December 31, 2000. The Company is or may become a defendant in pending or threatened legal proceedings in the ordinary course of business although it is not aware of the existence of any such pending or threatened legal proceedings at this time. See the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2000, section entitled "Risk Factors - Accounting Disagreement" for a description of a disagreement with the Laguna Development Corporation concerning accounting treatment of pre-opening expenses under the Laguna Management Contract, which disagreement may result in arbitration in the fiscal year ending June 30, 2001. During the quarter the Company continued to manage the Dancing Eagle Casino for the Pueblo of Laguna. Because of the above described disagreement and in accordance with generally accepted accounting principles the Company has not recognized revenue from the Laguna Management Contract for the quarter and year ended December 31, 2000. The Laguna Development Corporation paid approximately $57,000 to the Company during the second quarter of fiscal 2000. The Company is presently in settlement discussions with the Laguna Development Corporation which could result in cash or term payments in exchange for cancellation of all contracts between the parties. In such event, the Company will consider all of its options, including (i) investing its cash in other gaming or non-gaming businesses or (ii) adopting a plan of liquidation of the Company. Part II., Item 2. Changes in Securities and Use of Proceeds See note [3] to the unaudited financial statements contained herein and the Reorganization section in the Company's Annual Report filed on form 10-K for the fiscal year ended June 30, 2000, filed with the Securities and Exchange Commission. PART II., Item 3. Default Under First Amended Indenture See note [3] to the unaudited financial statements contained herein and the Reorganization section in the Company's Annual Report filed on form 10-K for the fiscal year ended June 30, 2000, filed with the Securities and Exchange Commission. Part II., Item 4. Submission of Matters to a Vote of Securityholders There were no matters required to be brought to a vote of the securityholders during the three months ended December 31, 2000. 12 15 Part II., Item 5. Other Events (a) Previous Independent Accountants (i) On February 14, 2001 the independent accountants for the Company, McGladrey & Pullen, LLP, resigned as the Company's auditors. (ii) The reports of McGladrey & Pullen, LLP on the financial statements of the Company for the past two fiscal years contain no adverse opinion or disclaimer of opinion, and such reports were not qualified or modified as to uncertainty, audit scope or accounting principles, with the exception of the auditors' report covering the Company's financial statements included in the Company's Form 10-K for the fiscal year ended June 30, 2000 which contained an assumption that the Company would continue as a going concern. (iii) In connection with the audits for the two most recent fiscal years and through and including February 14, 2001 there have been no disagreements with McGladrey & Pullen, LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure of the nature presented in Item 304(a)(1)(iv) of the Securities and Exchange Commission Regulation S-K, which disagreements if not resolved to the satisfaction of McGladrey & Pullen, LLP would have caused them to make reference thereto in their report on the financial statements for such years. (iv) During the two most recent fiscal years and through and including February 14, 2001, there have been no reportable events as defined in Item 304(a)(1)(v) of Securities and Exchange Commission Regulation S-K. (v) Due to the resignation of McGladrey & Pullen, LLP on February 14, 2001, the Company has not been afforded sufficient time to engage a new independent auditor. Accordingly, this Form 10-Q has not been reviewed by an independent public accountant. Upon the engagement of a new independent auditor, the Company will endeavor to have this Form 10-Q reviewed by such independent auditor and the fact of such review will be reported on Form 10-Q/A. (b) Agreements with Management Certain majority shareholders of the Company have informally expressed to Chairman Charles B. Brewer an interest in having the Company seek ways to maximize value with respect to the Laguna contract by effecting a settlement or similar transaction, as well as disposing of certain other material assets of the Company. Chairman Brewer has requested, and management (consisting of Michael W. Barozzi and William S. Papazian) have agreed to, certain voluntary agreements related to the termination of their employment agreements. Such agreements with management include the following material terms: (i) management has resigned its director and officer positions with parent company Capital Gaming International, Inc., but remain in such positions with subsidiary Capital Gaming Management, Inc., (ii) in addition to January 2001 salary, management each received salary of $137,500 on January 2, 2001 in lieu of other salary or termination payments previously provided for pursuant to their employment agreements, (iii) management is providing services to Capital Gaming International, Inc. in relation to the ongoing management and possible disposition of the Laguna contract and other matters, (iv) additional severance of $137,500 for Mr. Barozzi and $137,500 for Mr. Papazian has been placed into escrow to be released to such individuals upon the completion of certain services, (v) benefits for management will continue during the transitional period and, (vi) the vesting of management's shares of stock pursuant to the Plan has been contractually amended to provide that in lieu of the vesting provisions pursuant to the Plan all of the management shares shall fully vest on January 2, 2001 and (vii) mutual general releases. PART II., Item 6. CAPITAL GAMING INTERNATIONAL, INC. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit Number ------------ # Filed herewith 99 Safe Harbor Compliance Statement for Forward-Looking Statements (b) Reports on Form 8-K 13 16 Signature Page CAPITAL GAMING INTERNATIONAL, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: February 15, 2001 By: /s/ William S. Papazian --------------------------------------------- William S. Papazian, Executive Vice President Capital Gaming Management, Inc. (Authorized Representative) Dated: February 15, 2001 By: /s/ William S. Papazian ------------------------------------------ William S. Papazian, Executive Vice President Capital Gaming Management, Inc. (Authorized Representative -- Principal Accounting Officer) 14 17 Exhibits Index Exhibit Number Description -------------- ----------- 99 Safe Harbor Compliance Statement for Forward-Looking Statements

Exhibit Number ------- # Filed herewith 27 Financial Data Schedule (b) Reports on Form 8-K 99 Private Securities Litigation Reform Act of 1995 Safe Harbor Compliance Statement for Forward-Looking Statements

Filing Compare · CAPITAL GAMING INTERNATIONAL INC /NJ/