|By Timothy Boone, The Sun Herald, Biloxi, Miss.|
Knight Ridder/Tribune Business News
Jun. 8, 2004 - A report prepared for the U.S. Bankruptcy Court in St. Louis accuses the top two officials of President Casinos Inc. of failing to protect shareholders by approving the $40.5 million purchase of the Broadwater Hotel, marina and golf course, a deal that helped lead the casino company into bankruptcy.
David Sosne, an examiner who studied the President's 1997 purchase of the Broadwater at bondholders' request, said the deal was a windfall for John Connelly, the company's chief executive who had controlling interest in the hotel. The deal was not in the best interest of the President Casino Biloxi or the Broadwater, Sosne said.
"There is evidence that Connelly was able to structure a transaction whereby he was able to receive $30 million, while leveraging the remaining assets with a risky loan that ultimately helped push those enterprises toward bankruptcy," Sosne said.
Sosne said John Aylsworth, the President's chief operating officer, breached his duties by taking the lead in securing costly financing and not questioning the purchase of the Broadwater. But the statute of limitations in Mississippi, Missouri, where the President's headquarters are, and Pennsylvania, where Connelly lives, may not allow for any lawsuit against Connelly or Aylsworth, Sosne said.
"We're pleased that the examiner has finished his work," said a brief statement from Jon Sloane, a spokesman for President Casinos in St. Louis. "Based on the report and all the circumstances surrounding it, we believe that no further action will be taken."
President Casinos decided to buy the Broadwater after Connelly received an offer from Paulson Enterprises Inc. to buy the resort.
According to the report and depositions, Connelly told Aylsworth the President had to buy the Broadwater to protect its Mississippi gambling license and the millions it had invested in the casino. Paulson planned to put a casino in the Broadwater marina, in front of the President Casino.
Sosne's report shows Connelly lost millions on the Broadwater Hotel and spent $7.85 million to bail the property out. At the same time, President Casino Biloxi was losing money, posting losses of $5 million in 1996, $2.9 million in 1997 and $2.3 million in 1998.
President Casinos Inc. paid Connelly $30.5 million in cash and $10 million in equity for the Broadwater property in July 1997. Financing was provided by Lehman Brothers, at an interest rate of more than 17 percent.
"The purchase required costly financing at a time when President Casinos Inc. and its subsidiaries should have been wary about taking on the credit obligation," Sosne said.
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