President Casinos, Inc.

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President Casinos, Inc.

800 North First Street
St. Louis, Missouri 63102
U.S.A.
(314) 622-3000
Fax: (314) 622-3049
Web site: http://www.presidentcasino.com

Public Company
Incorporated: 1992
Employees: 2,800
Sales: $183.6 million (1997)
Stock Exchanges: NASDAQ
SICs: 7993 Coin-Operated Amusement Devices; 7999 Amusement & Recreation; 6719 Holding Companies

President Casinos, Inc. develops, owns, and operates river-boat and/or dockside gaming casinos and related operations through its subsidiaries in Davenport, Iowa; Biloxi, Mississippi; and St. Louis, Missouri. Additionally, the company owns and manages hotel and ancillary facilities associated with its river-boat operations in Davenport, and operates two non-gaming dinner cruise, excursion, and sightseeing vessels on the Mississippi River in St. Louis, Missouri. Other of its vessels are chartered to unrelated third parties. President Casinos is the successor to businesses begun in St. Louis, Missouri, since 1985, Davenport, Iowa, since October 1990, and Biloxi, Mississippi, since August 1992. The company targets middle-income recreational gamblers.

President Casinos’ venture The President riverboat in Davenport, Iowa, opened in April 1991, becoming one of the first gaming vessels in the country. During that period the company also opened The President Casino Mississippi in Biloxi, Mississippi, while President Casino’s founder, Pittsburgh-based-entrepreneur John Connelly, rallied for gambling legalization in Missouri. Connelly had purchased The Admiral, a St. Louis-based entertainment vessel from Streckfus Steamers in 1981, then sold it to a group of investors in 1982. By 1988 Connelly was managing The Admiral as a dockside entertainment facility, and eventually repurchased the vessel in 1990.

Connelly, formerly one of the country’s 400 richest people—and President Casino’s founder, CEO, chairman, and director—has owned the Gateway Clipper fleet in Pittsburgh since 1958 and the Sheraton Hotel at Station Square in Pittsburgh since 1981. He also founded World Yacht Enterprises, a fleet of dinner cruise, sightseeing, and excursion boats in New York City in 1984, and heads J. Edward Connelly Associates, Inc., a marketing and premiums firm based in Pittsburgh. The New York Times and Fortune magazine have referred to Connelly as the “father” of incentive bank marketing.

Gambling on New Markets in the Early 1990s

In June 1992, the newly formed corporation President Casinos, Inc. prepared to make a public offering with an estimated $70 million worth of shares. The proceeds were needed to pay off debts and to prepare for expansion into gaming operations in St. Louis, Missouri—assuming that gambling would be legalized there—and to further expansion along Mississippi’s Gold Coast, since gambling had been approved there the previous year, subject to a county by county popular vote. An SEC filing stated that at least $3 million raised in the stock offering would be paid directly to Connelly to reimburse him for his personal costs in launching the Mississippi corporation.

Connelly’s Mississippi-expansion efforts were complicated by a lawsuit filed against him by Dallas, Texas hotelier and competitor Jack Pratt, whose Pratt Hotel Corporation operates hotels and casinos in the United States, Mexico, and the Caribbean. Both Pratt and Connelly, among others, had applied for gambling licenses in Harrison County, where gaming had been approved. The suit claimed that Connelly and his subsidiaries interfered with the Pratt group’s lease for the Broadwater Beach Hotel, Casino, and Resort Club in Biloxi, Mississippi, a strategically located property. The Pratt group had successfully campaigned for passage of a local gambling referendum and had already signed a lease for the property, based on unresolved contingencies. According to Patón Huntley of the Pittsburgh Business Times, “Mr. Pratt claims Mr. Connelly subsequently persuaded the resort’s owner to violate the lease so he could purchase the property for himself and establish gambling operations there—a move the suit calls an ’unlawful activity and conspiracy.’ The suit asks that Mr. Pratt’s lease be upheld and seeks unspecified damages from Mr. Connelly’s interests and the resort’s former owner, the Joe W. and Dorothy Dorsett Brown Foundation.” A temporary restraining order was filed, prohibiting the transfer of the resort to anyone refusing to honor Mr. Pratt’s lease. The Pratt Hotel Corporation was engaged in a similar ongoing legal battle in New Jersey, involving an Atlantic City casino property, against real estate developer Donald Trump and Penthouse publisher Bob Guccione, as reported by Paton Huntley. Eventually, all claims in the “Pratt Litigation” were dismissed “with prejudice.” The Pratt settlement agreement initially cost the company a hefty $1 million first installment, financed by a loan made to the Company by BH Acquisition Corporation, a company controlled by Connelly. The note funded the first of four payments to Pratt’s group.

Connelly claimed in the Securities and Exchange Filing Notes that new market expansion was required to offset threatened company revenues in Davenport, Iowa. Ebbing revenues were anticipated as a consequence of the legalization of gambling on the other side of the Mississippi River, in the state of Illinois. Connelly then sold his President Riverboat Casino-Mississippi company to the Davenport firm for 177,867 shares of stock, where Connelly already held a 72.5 percent interest. From its dockside and riverboat operations in Iowa and Mississippi, President Riverboat Casinos reported fiscal 1993 revenues of $61.3 million, showing a net profit of $3 million.

The company entered into a partnership to manage a land-based gaming casino to be owned by the St. Regis Mohawk Indian Tribe, but by 1995, due to an upheld management agreement with the Tribe, President Casinos wrote off its $4.1 million investment in the project. Elsewhere, a Gary, Indiana riverboat join-venture project was reconsidered and the company again backed out, writing off another $1.1 million. An option agreement in Philadelphia, Pennsylvania, followed suit with an investment write-off of $11 million due to the uncertainty of riverboat gaming legalization within that state. In Mississippi, the company sold its floating casino in Tunica (which had opened in 1993 and closed in 1995 as a result of competition and poor location), for approximately $15 million, freeing needed cash.

In an effort to improve its Biloxi market position, the company chartered the Gold Coast barge from American Gaming and Entertainment Ltd., with the hope of establishing a casino large enough to compete with the dozen others then operating along the Mississippi Gulf Coast. Revenues from the Gold Coast barge were at a break-even level due to competitive pressures, the strain of paying considerable rental fees on the vessel, fees to lease the mooring site, and fees for parking facilities.

In September 1993, the company had applied to the Missouri Gaming Commission for two gaming licenses, one for the $37.8 million riverboat casino, The Admiral, a five-deck, 400-foot long, 90-foot wide vessel, which had served as the largest passenger vessel on the Mississippi for 40 years. Originally christened the S.S. Albatross, the vessel operated as a dining and entertainment cruise ship since 1940. After an extensive renovation, President Casinos planned to dock it at the base of the famous Gateway Arch in St. Louis, within walking distance of Busch Stadium, the Cervantes Convention Center, the Trans World Dome, and linked to hotels, restaurants, and offices by a Metro Link light-rail system. The second license request was for a barge that would moor next to it.

The company had already canceled a second stock offering the previous June, after losing its bid for a Louisiana gaming license. The stock revenues were to finance the costs of moving into the Louisiana and Missouri markets, in addition to providing working capital. Due to the limited licensing of prime, dockside locations along designated St. Louis river fronts, and given that permanently-docked boats are less expensive to operate than cruising ones, competition for dockside positions was intense.

Fortunately for the company, in May 1994, Connelly’s efforts were rewarded and a gaming license was granted. The vessel, sporting 64 blackjack tables, 10 craps tables, 22 poker tables, and approximately 400 video poker machines commenced operations. Later in the year, Missouri voters approved a constitutional amendment permitting “games of chance,” including slot machines, which The Admiral soon added to its repertoire. The company pays leasing fees for the site, payable to the City of St. Louis. Missouri regulations do not require that dockside vessels actually cruise, but simulated cruising requirements are imposed, which allow entry on a vessel for only a 45-minute period every two hours.

Company Perspectives:

In a competitive industry dependent upon unit expansion for significant growth, growing the Company means increasing the number of sites. The Company continually and selectively explores gaming developments in current and emerging markets, including riverboat, land-based and Indian gaming opportunities.

Fleeting Fears Concern Local Officials: 1995

In 1995 President Casinos submitted a bid to open a casino complex in downtown St. Louis near Laclede’s Landing, the site of an existing gaming complex. Parking at the company’s existing site was inadequate, and Company Management considered moving The Admiral downtown. Three competing companies had also applied for licensing. According to Rob Staggenborg of the St. Louis Business Journal, at least one person on the board of aldermen feared that should the city grant a second gaming license to President Casinos, the company “would in effect have a monopoly on the downtown river front.” By this time The Admiral’s performance had proven disappointing compared to revenues of competitors in the suburbs, and financial analysts speculated that the financing of such a major project, involving infrastructure development costs, would be difficult for President Casinos to procure. The company determined that while having a second riverboat casino would allow for virtually continuous boarding for guests upon one of the two vessels, the capital outlay could not be justified. The Admiral remained positioned at the base of the Arch, and although five St. Louis-area mooring licenses have been granted President Casinos, gaming operations are limited to its original gaming vessel, and the remaining licenses permit the operation of the company’s dinner cruise, excursion, and sightseeing riverboats.

The company was soon finding it difficult to remain financially afloat. President Casinos had reported a fiscal 1994 loss of $20.2 million, largely reflecting expenses incurred in pursuing possible new business in Iowa, Louisiana, Massachusetts, Pennsylvania, and Virginia. The company announced in early 1995 that it would be more selective in pursuing opportunities in the future, and that they would be disposing under-utilized assets. President Casinos had more than competition to contend with. Floods caused the periodic closing of the Davenport operations, where The President, a 70-year-old vessel, was required to undergo an extensive five-month Coast Guard hull inspection. It was temporarily replaced by a smaller, three-deck vessel, offering one-third less gambling space. In the meantime, Lady Luck Bettendorf, a competing vessel across the river, was luring more and more of the market.

The time had come for an executive shift. Coinciding with rumors of Connelly’s ill health, in March 1995 John S. Aylesworth came on board as executive vice-president and chief operating officer of President Casinos. He had worked as a managing executive officer for Beverly Hills’ billionaire Marvin Davis’s operations, as chief financial officer of Spectra-Vision, and was previously with the Sports Club Company, an operator of premier health and fitness facilities. Connelly told Rob Staggenborg of the St. Louis Business Journal that “The realignment of responsibilities of our senior management and the addition of John Aylesworth to our management team greatly enhances our operational strength.”

By the mid-1990s the entire industry had experienced insufficient returns on investments, and President Casinos was floundering. In three years time the company amassed more than $100 million in debt. After shares had fallen more than 80 percent since January of 1995, Aylesworth reported that deep-pocketed gaming concerns had out-competed them. A stockholder proxy statement revealed that Connelly and Connelly-controlled businesses had received nearly $4.7 million from President Casinos during the 1995 fiscal year, as reported by Len Boselovic in Knight-Ridder/ Tribune Business News. Annual lease payments of $3.2 million for the Biloxi casino property were paid to a Connelly company, in addition to $883,000 “for the use of a plane owned by a Connelly affiliate, purchasing $140,000 of promotional items from a Connelly affiliate, and $45,000 to Connelly’s Drury Inn Hotel, where President Casinos executives stayed and ate while they were in St. Louis on business,” according to Boselovic. In the summer of 1997 President Casinos agreed to pay Connelly, who owned 31.8 percent of the company, approximately $40 million for the Biloxi site gaming operation, rather than to continue renting the property. President Casinos reported that the sale allowed them to concentrate on operations in St. Louis and Davenport. The company stated that “the payments were arms-length transactions at fair market prices.”

Recovery Plan for the Late 1990s

The company’s retrenchment strategy included the selling of assets—and cost cutting. In a July, 1997 interview with Frank Legato of Casino Journal, CFO Aylesworth said, “When I was approached for this job, I knew exactly what had happened here, without even being in that [this] industry. We knew what we had to do. First, President had invested a lot of money and had realized no return on it. If that happens too long, the interest you’re paying is going to eat you alive—that’s Business 101. We had to monetize as many of our assets as we could, and we had a lot of excess,” he continued. Within a year of Aylesworth’s leadership the company sold approximately $20 million worth of non-revenue-producing assets which were needed to fund interest payments and requisite capital expenditure programs. In Iowa, the company made efficient use of time and money toward refurbishing The President by adding more slots and other amenities to the vessel while it underwent the extensive close-down for the hull inspection, along with making improvements to its adjoining entry barge. Corporate overhead costs were slashed by $5 million in fiscal 1997. Virtually all of its capital expenditure program was funded through the sale of assets, and the company showed a net cash increase from investments. The original Biloxi vessel, President Casino Mississippi, and another non-revenue-producing cruising vessel, worth a combined estimated value of $45 million, remained to be sold.

In the meantime, market analysts noted the competitive challenges ahead: In St. Louis, an enormous joint venture project between Harrah’s and Player’s International at Riverport Center threatened to overshadow the smaller casinos, although the company had expressed confidence that the metropolitan area would be impacted more than the company itself. The historical significance of The Admiral set it apart from the newer casinos, some said. In Biloxi, a growing resort area, President Casinos sought a joint-venture partner to further develop a 260-acre site, which included two hotels, a 138-slip marina, a dockside casino, and an adjacent 18-hole golf course. In addition, if gambling were to be legalized in Pennsylvania, the company held a prime site on the Philadelphia waterfront, as a gamble on future casino prospects.