Washington, D.C. 20549
Mitchell S. Nussbaum
Securities registered or to be registered
pursuant to Section 12(b) of the Act:
Securities registered or to be registered
pursuant to Section 12(g) of the Act:
Securities for which there is a reporting
obligation pursuant to Section 15(d) of the Act:
On December 31, 2012, the issuer had 41,177,217 ordinary
shares outstanding.
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
If this report is an annual or transition report, indicate by
check mark if the registrant is required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 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.
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer”
in Rule 12b-2 of the Exchange Act.
If “Other” has been checked in response to the previous
question, indicate by check mark which financial statement item the registrant has elected to follow.
If this is an annual report, indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
In this Annual Report on Form 20-F (this
“Annual Report”), unless otherwise indicated, “we,” “us,” “our,” the “Company,”
and “Asia Entertainment” refers to Asia Entertainment & Resources Ltd., a Cayman Islands company, its subsidiaries
and the Promoter Companies (as defined below).
On February 2, 2010, CS China Acquisition
Corp., our predecessor, consummated a business combination pursuant to which it acquired all of the outstanding capital
stock of Asia Gaming & Resort Limited (“AGRL”), a Hong Kong corporation, and changed its name to “Asia Entertainment
and Resources Ltd.”
References to “Promoter Companies”
or to “AGRL’s VIP gaming promoters” refer to those VIP gaming promoters and predecessors that are affiliated
with AGRL and its subsidiaries and whose operations are included in the financial statements included in this Annual Report.
On November 10, 2010, we acquired 100% of
the profit interest in King’s Gaming Promotion Limited (“King’s Gaming”).
On September 12, 2012, we acquired 100%
of the profit interest in Bao Li Gaming Promotion Limited (“Bao Li”).
Unless otherwise indicated or the context
indicates otherwise, all references to “Macau” or “MSAR” refer to the Special Administrative Region of
Macau, and all references to “China” or “PRC” refer to the People’s Republic of China.
All references to Hong Kong Dollar
(“HKD$”) are to the legal currency of Hong Kong and all references to “U.S. dollars,” “dollars,”
“$” are to the legal currency of the United States. This Report contains translations of HKD$ amounts into U.S.
dollars at specified rates solely for the convenience of the reader. We make no representation that the HKD$ or U.S. dollar
amounts referred to in this Report could have been or could be converted into U.S. dollars or HKD$, as the case may be, at any
particular rate or at all. On March 15, 2013, the buying rate announced by the Federal Reserve Statistical Release was HKD$7.7590
to $1.00.
This Annual Report contains “forward-looking
statements” that represent our beliefs, projections and predictions about future events. All statements other than statements
of historical fact are “forward-looking statements” including any projections of earnings, revenue or other financial
items, any statements of the plans, strategies and objectives of management for future operations, any statements concerning proposed
new projects or other developments, any statements regarding future economic conditions or performance, any statements of management’s
beliefs, goals, strategies, intentions and objectives, and any statements of assumptions underlying any of the foregoing. Words
such as “may”, “will”, “should”, “could”, “would”, “predicts”,
“potential”, “continue”, “expects”, “anticipates”, “future”, “intends”,
“plans”, “believes”, “estimates” and similar expressions, as well as statements in the future
tense, identify forward-looking statements.
These statements are necessarily subjective
and involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance
or achievements, or industry results, to differ materially from any future results, performance or achievements described in or
implied by such statements. Actual results may differ materially from expected results described in our forward-looking statements,
including with respect to correct measurement and identification of factors affecting our business or the extent of their likely
impact, the accuracy and completeness of the publicly available information with respect to the factors upon which our business
strategy is based or the success of our business.
Forward-looking statements should not be
read as a guarantee of future performance or results, and will not necessarily be accurate indications of whether, or the times
by which, our performance or results may be achieved. Forward-looking statements are based on information available at the time
those statements are made and management’s belief as of that time with respect to future events, and are subject to risks
and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the
forward-looking statements. Important factors that could cause such differences include, but are not limited to, those factors
discussed under the headings “Risk Factors”, “Operating and Financial Review and Prospects,” “Information
on the Company” and elsewhere in this Annual Report.
This Annual Report should be read in conjunction
with our audited financial statements and the accompanying notes thereto, which are included in Item 18 of this Annual Report.
PART
I
|
ITEM 1.
|
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|
Not required.
|
ITEM 2.
|
OFFER STATISTICS AND EXPECTED TIMETABLE
|
Not required.
|
A.
|
Selected financial data
|
The combined balance sheet data of AGRL,
Sang Heng Gaming Promotion Company Limited, Spring Gaming Promotion Company Limited, Iao Pou Gaming Promotion Limited (beginning
in June 2009) and Doowell Limited and their predecessors (collectively, “AERL”) as of December 31, 2009 and December
31, 2008, and combined statements of operations data and cash flow data of AERL for the years ended December 31, 2009 and December
31, 2008 are derived from the audited combined financial statements of AGRL. The consolidated balance sheet data of AERL as of
December 31, 2012, December 31, 2011 and December 31, 2010 and the consolidated statement of operations data and cash flow data
for the years ended December 31, 2012, 2011 and 2010 are derived from the audited consolidated financial statements of AERL. The
audited consolidated financial statements of AERL as of December 31, 2012 and 2011 and for the years ended December 31, 2012,
December 31, 2011 and December 31, 2010 are included elsewhere in this Annual Report.
The information is only a summary and should
be read in conjunction with each of our historical financial statements and related notes and “Operating and Financial Review
and Prospects” contained elsewhere herein. The historical results included below and elsewhere in this Annual Report are
not indicative of our future performance.
ASIA ENTERTAINMENT & RESOURCES
LTD.
SELECTED HISTORICAL CONSOLIDATED AND
COMBINED FINANCIAL INFORMATION
Statement of Operations Data
|
|
For the Year
Ended
December 31,
2012
|
|
|
For the Year
Ended
December 31,
2011
|
|
|
For the Year
Ended
December 31,
2010
|
|
|
For the Year
Ended
December 31,
2009
|
|
|
For the Year
Ended
December 31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
|
|
(A)
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Revenue from VIP gaming operations
|
|
$
|
236,300,623
|
|
|
$
|
250,575,452
|
|
|
$
|
127,036,361
|
|
|
$
|
60,479,937
|
|
|
$
|
51,021,223
|
|
Total expenses
|
|
|
181,348,081
|
|
|
|
179,570,303
|
|
|
|
89,740,111
|
|
|
|
44,934,474
|
|
|
|
30,826,123
|
|
Operating income including pre-acquisition profit
|
|
|
54,952,542
|
|
|
|
71,005,149
|
|
|
|
37,296,250
|
|
|
|
15,545,463
|
|
|
|
20,195,100
|
|
Prior owners’ interest in pre-acquisition profit
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,329,385
|
)
|
|
|
(15,563,968
|
)
|
|
|
(20,195,100
|
)
|
Operating Income (Loss) Attributable to Ordinary Shareholders before change in fair value of contingent consideration
|
|
$
|
54,952,542
|
|
|
$
|
71,005,149
|
|
|
$
|
32,966,865
|
|
|
$
|
(18,505
|
)
|
|
$
|
—
|
|
Change in fair value of contingent consideration for the acquisition of King’s Gaming
|
|
|
15,166,700
|
|
|
|
6,248,361
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net Income (Loss) attributed to ordinary shareholders
|
|
|
70,119,242
|
|
|
|
77,253,510
|
|
|
|
32,996,865
|
|
|
|
(18,505
|
)
|
|
|
—
|
|
Other Comprehensive Income (Loss)
|
|
|
669,109
|
|
|
|
(64,634
|
)
|
|
|
(41,534
|
)
|
|
|
—
|
|
|
|
—
|
|
Total Comprehensive Income (Loss)
|
|
$
|
70,788,351
|
|
|
$
|
77,188,876
|
|
|
$
|
32,925,331
|
|
|
$
|
(18,505
|
)
|
|
|
—
|
|
Earnings per share attributable to ordinary shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.66
|
|
|
$
|
2.07
|
|
|
$
|
2.33
|
|
|
|
(B
|
)
|
|
|
(B
|
)
|
Diluted
|
|
$
|
1.66
|
|
|
$
|
2.00
|
|
|
$
|
1.88
|
|
|
|
(B
|
)
|
|
|
(B
|
)
|
Dividend declared per share
|
|
$
|
0.32
|
|
|
$
|
0.10
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
(A) Represents
the combined statements of operations data of AGRL, its subsidiaries and the Promoter Companies, the accounting acquirer
(B) Not a meaningful
metric prior to AERL’s acquisition of AGRL on February 2, 2010.
Balance Sheet Data
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
|
December 31,
2010
|
|
|
December 31,
2009
|
|
|
December 31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
|
|
(A)
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Current Assets
|
|
$
|
265,135,490
|
|
|
$
|
258,382,355
|
|
|
$
|
144,939,466
|
|
|
$
|
6,250,170
|
|
|
$
|
11,348,608
|
|
Total Assets
|
|
$
|
377,467,005
|
|
|
$
|
328,407,314
|
|
|
$
|
220,058,197
|
|
|
$
|
6,250,170
|
|
|
$
|
11,348,608
|
|
Current Liabilities
|
|
$
|
60,105,783
|
|
|
$
|
77,127,221
|
|
|
$
|
96,557,390
|
|
|
$
|
7,775,322
|
|
|
$
|
8,546,361
|
|
Total Liabilities
|
|
$
|
161,400,764
|
|
|
$
|
169,620,206
|
|
|
$
|
134,579,559
|
|
|
$
|
7,775,322
|
|
|
$
|
8,546,361
|
|
Total Equity (Deficit)
|
|
$
|
216,066,241
|
|
|
$
|
158,787,108
|
|
|
$
|
85,478,638
|
|
|
$
|
(1,525,152
|
)
|
|
$
|
2,802,247
|
|
(A) Represents
the combined balance sheets data of AGRL, its subsidiaries and the Promoter Companies, the accounting acquirer.
Cash Flow Data
|
|
For the Year
Ended
December 31,
2012
|
|
|
For the Year
Ended
December 31,
2011
|
|
|
For the Year
Ended
December 31,
2010
|
|
|
For the Year
Ended
December 31,
2009
|
|
|
For the Year
Ended
December 31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
|
|
(A)
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Cash flows provided by (used in) operating activities
|
|
$
|
46,428,105
|
|
|
$
|
5,280,509
|
|
|
$
|
(76,451,485
|
)
|
|
$
|
3,869,081
|
|
|
$
|
550,344
|
|
Cash flows used in investing activities
|
|
|
(15,146,032
|
)
|
|
|
(27,956
|
)
|
|
|
(9,028,590
|
)
|
|
|
—
|
|
|
|
—
|
|
Cash flows (used in) provided by financing activities
|
|
|
(27,390,634
|
)
|
|
|
(2,305,762
|
)
|
|
|
99,009,722
|
|
|
|
(4,303,213
|
)
|
|
|
(308,055
|
)
|
Net increase (decrease) in cash
|
|
$
|
3,891,439
|
|
|
$
|
2,946,791
|
|
|
$
|
13,529,647
|
|
|
$
|
(434,132
|
)
|
|
$
|
242,289
|
|
|
(A)
|
Represents the combined cash flow data of AGRL, its subsidiaries and the Promoter Companies, the accounting acquirer
|
Recent Developments
The Company’s Board of Directors authorized
a regular semi-annual cash dividend of $0.12 per outstanding ordinary share each year after the release of the Company’s
financial results for the six months ending June 30, and, for each year after the release of the Company’s year-end financial
results, an amount per outstanding ordinary share equal to (i) 15% of the Company’s non-GAAP net income for the most recently
completed fiscal year less the amount paid pursuant to the immediately previous six-month dividend, divided by (ii) the number
of ordinary shares outstanding on the record date for such dividend. The aggregate cash dividend payable after the Company’s
release of the December 31, 2012 financial results will be approximately $4.1 million.
In March 2013, the Board of Directors authorized
the establishment of a new share repurchase program for the Company to purchase up to four million of its ordinary shares on the
open market at prices to be determined by the Company’s management.
Exchange Rates
The following table sets forth information
concerning exchange rates between the HKD$ and the U.S. dollar for the periods indicated. On March 15, 2013, the buying rate
announced by Federal Reserve Statistical Release was HKD$7.7590 to $1.00.
|
|
Spot Exchange Rate
|
|
Period
|
|
Period
Ended
|
|
|
Average
(1)
|
|
|
Low
|
|
|
High
|
|
|
|
(HKD$ per US$1.00)
|
|
2008
|
|
|
7.7499
|
|
|
|
7.7814
|
|
|
|
7.7499
|
|
|
|
7.8041
|
|
2009
|
|
|
7.7536
|
|
|
|
7.7513
|
|
|
|
7.7497
|
|
|
|
7.7551
|
|
2010
|
|
|
7.7810
|
|
|
|
7.7665
|
|
|
|
7.7515
|
|
|
|
7.7865
|
|
2011
|
|
|
7.7663
|
|
|
|
7.7793
|
|
|
|
7.7641
|
|
|
|
7.7942
|
|
2012
|
|
|
7.7508
|
|
|
|
7.7571
|
|
|
|
7.7500
|
|
|
|
7.7689
|
|
September
|
|
|
7.7543
|
|
|
|
7.7542
|
|
|
|
7.7511
|
|
|
|
7.7571
|
|
October
|
|
|
7.7501
|
|
|
|
7.7515
|
|
|
|
7.7501
|
|
|
|
7.7550
|
|
November
|
|
|
7.7502
|
|
|
|
7.7508
|
|
|
|
7.7500
|
|
|
|
7.7523
|
|
December
|
|
|
7.7508
|
|
|
|
7.7503
|
|
|
|
7.7500
|
|
|
|
7.7519
|
|
2013*
|
|
|
7.7596
|
|
|
|
7.7568
|
|
|
|
7.7505
|
|
|
|
7.7584
|
|
January
|
|
|
7.7560
|
|
|
|
7.7529
|
|
|
|
7.7505
|
|
|
|
7.7586
|
|
February
|
|
|
7.7547
|
|
|
|
7.7554
|
|
|
|
7.7534
|
|
|
|
7.7584
|
|
March*
|
|
|
7.7596
|
|
|
|
7.7566
|
|
|
|
7.7547
|
|
|
|
7.7597
|
|
* Through March 15, 2013
Source: Federal Reserve Statistical Release
|
(1)
|
Annual averages, lows, and highs are calculated from month-end rates. Monthly averages, lows, and highs are calculated using
the average of the daily rates during the relevant period.
|
|
B.
|
Capitalization and Indebtedness
|
Not required.
|
C.
|
Reasons for the Offer and Use of Proceeds
|
Not required.
An investment in our securities involves
a high degree of risk. You should consider carefully the material risks described below, which we believe represent all the material
risks related to an investment in our securities, together with the other information contained in this Annual Report, before making
a decision to invest in our securities. This annual report also contains forward-looking statements that involve risks and uncertainties.
Our actual results could differ materially from those anticipated in the forward-looking statements as a result of specific factors,
including the risks described below.
Risk Factors Relating to Our Business
Our business, is entirely dependent
upon the operations of AGRL’s VIP gaming promoters, which have limited operating histories and are subject to many uncertainties
and contingencies.
Our sole source of revenue is the funds
we receive from the profit interest agreements between our subsidiaries and AGRL’s VIP gaming promoters. The VIP gaming promoters
receive their revenues from their promotion of VIP gaming rooms in casinos pursuant to gaming promoter agreements with the concessionaires
and sub-concessionaires that operate the casinos. The terms of the gaming promoter agreements between AGRL’s VIP gaming promoters
and the concessionaires or sub-concessionaires are usually short term and are tied to the term of the licenses of AGRL’s
VIP gaming promoters, which are subject to annual renewal. The renewal application consists of a good character certificate certifying
as to the absence of criminal activity and a copy of the renewed contract with the concessionaires. Although we believe that renewal
is likely, it cannot be assured. If a VIP gaming promoter’s license is not renewed, we will lose the source of a significant
part of our revenue.
The operations of AGRL’s VIP gaming
promoters are also subject to the significant business, economic, regulatory and competitive uncertainties and contingencies frequently
encountered by businesses in competitive environments, many of which are beyond their control. Although AGRL’s VIP gaming
promoters commenced operation in May 2006, there are presently only four operating VIP gaming rooms, which have limited operating
histories. If AGRL’s VIP gaming promoters are not able to manage these risks successfully, our business will be harmed.
AGRL’s VIP gaming promoters
are entirely dependent on their relatively limited number of VIP gaming rooms for all of their cash flow, which subjects AGRL’s
VIP gaming promoters to greater risks than a gaming promoter with more VIP gaming rooms. Also, their revenue is subject to significant
volatility.
Because AGRL’s VIP gaming promoters’
operations are presently conducted only at four VIP gaming rooms in Macau, they are subject to greater risks than a gaming promoter
with more VIP gaming rooms at many different geographic locations due to the limited diversification of their business and sources
of revenue. Specifically, they are more exposed to local economic and competitive conditions, changes in law, natural disasters,
infectious disease outbreaks, and declines in the number of visitors to Macau. Any of these factors could adversely affect AGRL’s
business, financial condition and results of operations.
High-end gaming at VIP gaming rooms is more
volatile than other forms of gaming. Also, large wins by one or more gaming patrons could also materially affect results in a given
period. As a consequence, VIP gaming room revenue during any specific period may not be indicative of revenue for a full year.
The profitability of AGRL’s
VIP gaming promoters’ VIP gaming room operations depends on a variety of factors, some beyond their control.
The gaming industry is characterized by
an element of chance. In addition to the element of chance, theoretical win rates and, thus, the profitability of AGRL’s
VIP gaming promoters, are also affected by other factors, including gaming patrons’ skill and experience, the mix of games
played, the financial resources of gaming patrons, the spread of table limits, the volume of bets placed by AGRL’s VIP gaming
promoters’ gaming patrons and the amount of time gaming patrons spend on gambling. As a result, VIP gaming rooms’ rolling
chip turnover and win rates may differ greatly over short time periods, such as from quarter to quarter, and could cause their
quarterly results to be volatile. These factors, alone or in combination, have the potential to negatively impact the VIP gaming
promoters’ profitability.
If the rate of our direct business,
as opposed to the business brought to us through junket agents, declines, the amount we pay to junket agents would increase.
When junket agents bring patrons to our
VIP gaming rooms, they receive a fee based on the amount of rolling chips played by such patrons in our VIP gaming rooms. We do
not pay any fees for patrons who come to our VIP gaming rooms directly. Therefore, if the amount of rolling chip turnover of patrons
brought to us by junket agents increases, our net income would decline.
Our recent implementation of a revenue
sharing commission model may result in greater volatility in our revenues and an increased risk of decline in revenues.
Prior to September 1, 2012, we operated
our business on a fixed commission remuneration model, which was based on a fixed percentage of Rolling Chip Turnover. On September
1, 2012, we changed our remuneration model to a revenue sharing commission model for all of our VIP gaming rooms. Because substantially
all of our revenues are generated from VIP gaming patrons that typically place large individual wagers, this type of gaming is
more volatile than other forms of gaming, and variances in win-loss results attributable to high-end gaming may have a material
impact on our revenues and cash flows in a particular quarter. As a consequence, our revenues may experience significant volatility
during a particular interim period and may not be indicative of our revenues for a full year. For example, should one or more of
our VIP gaming patrons win large sums, our results of operations could be negatively impacted.
AGRL’s VIP gaming promoters
face intense competition in Macau and elsewhere in Asia.
The VIP gaming room business in Macau is
highly competitive and AGRL’s VIP gaming promoters expect to encounter increasing competition as casino operators complete
and open new projects in the coming years. Currently, AGRL’s VIP gaming promoters’ VIP gaming rooms are located at
four of approximately 35 casinos of varying sizes in Macau. AGRL’s VIP gaming promoters currently compete with approximately
235 gaming promoters in Macau.
AGRL’s VIP gaming promoters expect
competition in Macau to increase in the near future as multiple additional hotel, casino and entertainment complex projects, which
are currently under construction or development, open in 2015. These projects are expected to include internationally recognized
hotels and significant additional gaming space. Any opening of additional casinos and hotels is likely to result in a significant
increase in the number of VIP gaming rooms, intensifying competition in Macau’s VIP gaming room gaming business and among
VIP gaming promoters.
AGRL’s VIP gaming promoters’
VIP gaming rooms also face current or prospective competition from casinos located elsewhere in Asia, such as Genting Highlands,
a major gaming and resort destination located outside of Kuala Lampur, Malaysia, and casinos in the Philippines. Certain countries,
including the Republic of Korea, Singapore, Malaysia, Vietnam and Cambodia, have already legalized casino gaming while others,
such as Japan, Taiwan and Thailand, may legalize gaming in the future, which could further increase regional competition. Two large-scale
casinos in Singapore have added further competition in the region. Additional competition is provided from other major gaming centers
located around the world, including Australia and Las Vegas, as well as from cruise ships in Asia (many based in Hong Kong) that
offer gaming.
The profits assigned to the
subsidiaries under the profit interest agreements depend on AGRL’s VIP gaming promoters’ gaming volumes and revenue.
The profits to be assigned under the profit
interest agreements depend on AGRL’s VIP gaming promoters’ gaming volumes and revenue. If AGRL’s VIP gaming promoters
cease to be committed to the gaming promotion business or cease to be appointed as VIP gaming promoters by the concessionaires
or sub-concessionaires, their gaming volumes and revenues would be affected. AGRL’s VIP gaming promoters’ business,
financial condition and results of operations, and thereby the profit to be assigned to the AGRL subsidiaries, may be materially
reduced.
AGRL’s VIP gaming promoters’
business is dependent upon relationships with third parties. It must maintain satisfactory relationships with those parties and
the third parties, in turn, must maintain the relationships that are required for their businesses. These third parties include:
Casino Operators
. AGRL’s
VIP gaming promoters are dependent upon the casinos where they have operations. The concessionaires and sub-concessionaires that
operate casinos are licensed by the government agencies having jurisdiction in the areas where they are located. The failure of
a casino in which a VIP gaming promoter has operations, because of the failure of the casino operator to maintain its license or
to continue in business due to financial failure or otherwise, would curtail or close the operation of the VIP gaming promoter
in that casino, which could have a material adverse effect upon our business.
Junket Agents and Collaborators
. Virtually
all of AGRL’s VIP gaming promoters’ revenue is generated by gaming patrons introduced to them by junket agents and
collaborators. With the rise in gaming in Macau, the competition for services provided by junket agents and collaborators has increased.
AGRL’s VIP gaming promoters anticipate that this competition will further intensify as additional casinos are developed and
opened in Macau in the near future. While they believe that they currently maintain good relationships with their existing junket
agents and collaborators, there can be no assurance that these good relationships will continue in the future. If they are unable
to maintain, or develop additional, successful relationships with reputable junket agents and collaborators or lose a significant
number of their junket agents and collaborators to competitors, their ability to maintain or grow their revenue will be hampered
and they will have to seek alternative ways of developing relationships with VIP gaming patrons.
Junket agents and collaborators often provide
credit for gaming patrons and the global financial crisis may have limited their financial resources. Therefore, their ability
to offer credit to patrons may be affected, resulting in decreased gaming volume at their VIP gaming rooms. Further, credit already
extended by the junket agents and collaborators to their gaming patrons may become increasingly difficult for them to collect.
This inability to grant credit and collect amounts due can negatively affect the operations of the junket agents and collaborators
at the VIP gaming rooms and, as a result, their operations of the VIP gaming promoters could also be adversely impacted.
Gaming Patrons
. If the
junket agents and collaborators with whom AGRL’s VIP gaming promoters have relationships are unable to develop or maintain
relationships with a sufficient number of VIP gaming patrons, the ability of the VIP gaming promoters to maintain or increase their
revenue will be hampered.
Management and Service Providers
. AGRL’s
VIP gaming promoters currently obtain certain services from outsiders, including corporate support services, marketing services
and personnel supply services. A termination of these services could cause disruption of their business and could increase future
costs for such services. If, in the future, the service providers choose not to provide such services on terms acceptable to the
VIP gaming promoters, the VIP gaming promoters will have to seek alternative means of securing comparable services, which may be
on terms that are not as favorable as the current terms.
Key Personnel
. AGRL’s
VIP gaming promoters’ ability to maintain their competitive position is dependent to a large degree on the efforts, skills
and continued service of Mr. Lam Man Pou and other key management and operating personnel such as Mr. Vong Hon Kun, Mr. Mok Chi
Hung and Mr. Lou Kan Kuong. The loss of key management and operating personnel would likely have a material adverse effect on AGRL’s
VIP gaming promoters’ business since those individuals market the VIP gaming rooms to the junket agents, collaborators and
patrons. Therefore, if such persons, who are under no direct contractual obligation to continue performing such services for the
VIP gaming promoters, were to no longer perform such services for any reason, the VIP gaming promoters would generate significantly
less revenue than they currently generate. AGRL’s success also depends upon its ability to attract, hire and retain qualified
operating, marketing, financial and technical personnel in the future. Given the intense competition for qualified management personnel
in the industry, there can be no assurance that AGRL’s VIP gaming promoters will be able to continue to hire or retain the
required personnel.
AGRL faces competition for qualified
and skilled employees.
AGRL’s VIP gaming promoters’
business success depends in large part on their ability, and the ability of their service providers, to attract, train, motivate
and retain a sufficient number of qualified and skilled employees to run their operations. Macau has a relatively limited labor
pool for existing gaming operations at AGRL’s VIP gaming promoters’ VIP gaming rooms as well as for the operation of
future projects and the ability of AGRL’s VIP gaming promoters and their service providers to seek employees from other countries
to staff operations is restricted by labor quota restrictions imposed by the Macau government. In addition, many employees at the
VIP gaming rooms are required to possess certain gaming-related skills for which substantial training and experience are needed.
Given the limited pool of experienced gaming
and other personnel currently available in Macau as well as the large number of new casino resort developments and non-casino businesses
currently underway in Macau, AGRL’s VIP gaming promoters and their service providers will face significant competition in
the recruitment of the best qualified employees and cannot assure you that they will be able to successfully compete for the limited
supply of qualified gaming and other personnel and to recruit and retain a sufficient number of qualified employees for their Macau
operations.
Increasing competition for a limited number
of qualified employees could require AGRL and its service providers to raise the salaries of current employees or to pay higher
wages to attract new employees, which could cause labor costs to increase. If the VIP gaming promoters and their service providers
are unable to attract and retain a sufficient number of qualified employees, or if they encounter a significant increase in labor
costs due to salary increases, the ability of AGRL’s VIP gaming promoters to compete effectively with the other gaming promoters,
concessionaires or sub-concessionaires would be hampered.
Although we have determined
that we do not have a material weakness in our internal control over financial reporting for the year ended December 31, 2012,
if we fail to maintain an effective system of internal control over financial reporting, we may be unable to accurately report
our financial results or prevent fraud, and investor confidence and the market price of our shares may be adversely affected.
We and our independent registered public
accounting firm, in connection with the audit of the consolidated financial statements for the fiscal year ended December 31, 2010,
identified a material weaknesses in our internal control over financial reporting. A “material weakness” is a deficiency,
or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that
a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely
basis.
We and our independent registered public
accounting firm have determined that we do not have a material weakness in our internal control over financial reporting for the
year ended December 31, 2012 and 2011 as a result of measures we have taken to remediate these deficiencies, such as additional
training undertaken by our chief financial officer in dealing with U.S. GAAP and disclosure requirements, hiring a consulting firm
to assist us with U.S. GAAP compliance and financial reporting and adopting and following a number of accounting and internal control
manuals and installing process changes. However, we may in the future determine that we have a material weakness in our internal
control over financial reporting. Our failure to address any control deficiency could result in inaccuracies in our financial statements
and could also impair our ability to comply with applicable financial reporting requirements and related regulatory filings on
a timely basis. Moreover, effective internal control over financial reporting is important to prevent fraud. As a result, our business,
financial condition, results of operations and prospects, as well as the trading price of our shares, may be negatively impacted
by a failure to accurately report financial results.
Fulfilling our obligations incident
to being a public company will be expensive and time consuming and we may not have adequate staff to do so, which may in the future
result in a material weakness in our internal control over financial reporting in accordance with U.S. GAAP.
Under the Sarbanes-Oxley Act of 2002 and
the related rules and regulations of the SEC, we are required to maintain corporate governance practices and adhere to a variety
of reporting requirements and complex accounting rules. Compliance with these obligations have required and will require significant
management time, place significant demands on our finance and accounting staff and on our financial, accounting and information
systems, and resulted in significant insurance, legal and financial compliance costs. Our failure to meet these requirements led
to our having a material weakness in our internal control over financial reporting in accordance with U.S. GAAP
for
the year ended December 31, 2010. Although we and our independent registered public accounting firm have determined that we do
not have a material weakness in our internal control over financial reporting for the year ended December 31, 2012 and 2011, if
we are not able to fulfill our obligations incident to being a public company we may in the future determine that we have a material
weakness.
AGRL’s VIP gaming promoters
need to maintain effective policies and systems of internal controls. If they do not do so, it may result in a material weakness
in our internal control in financial reporting in accordance with U.S. GAAP which could result in their being unable to accurately
report their financial results or detect and prevent fraud and criminality.
AGRL’s VIP gaming promoters dedicate
a significant amount of management, operational and financial resources to enhance and maintain their internal controls. This has
increased their administrative and other operating expenses. Although they review their internal control policies and procedures
on an ongoing or material weakness basis, we cannot assure you that they will be able to successfully enhance and maintain their
internal controls, which may result in our having a material weakness in our internal controls over financial reporting in the
future. Any deficiency in internal controls could adversely affect management’s ability to monitor, evaluate and manage their
business and operations, or lead to substantial business or operational risk or inaccurate financial reporting. AGRL’s VIP
gaming promoters are also subject to the risk that they may have a material weakness regarding their ability to prepare financial
statements in accordance with U.S. GAAP.
Money Laundering and Corruption
. AGRL’s
VIP gaming promoters and their casino operators have implemented anti-money laundering policies in compliance with all applicable
laws and regulations in Macau. However, we cannot assure you that such policies will be effective to prevent their VIP gaming room
operations from being exploited for money laundering purposes. Any incidents of money laundering, accusations of money laundering
or regulatory investigations into possible money laundering activities involving them, the casino operators, the casino operators’
employees, AGRL’s VIP gaming promoters’ employees, their service providers, their junket agents and collaborators or
their gaming patrons could harm their reputation, relationship with their casino operators and the gaming regulators, business,
cash flows, financial condition, prospects and results of operations. Any serious incident of money laundering or regulatory investigation
into money laundering activities could also cause a revocation or suspension of AGRL’s VIP gaming promoters’ licenses
and termination of agreements with their casino operators. We are not aware of any cases of corruption occurring in Macau gaming
rooms in recent years.
Counterfeiting and Cheating
. All
gaming activities at VIP gaming room table games are conducted exclusively with gaming chips which, like real currency, are subject
to the risk of alteration and counterfeiting. Although the casino operators incorporate a variety of security and anti-counterfeit
features to detect altered or counterfeit gaming chips, unauthorized parties may try to copy the gaming chips and introduce, use
and cash in altered or counterfeit gaming chips in the gaming areas. Any negative publicity arising from such incidents could also
tarnish AGRL’s VIP gaming promoters’ reputation and may result in a decline in their business, financial condition
and results of operation. Thus far, no counterfeit or altered chips have been detected in AGRL’s VIP gaming promoters’
VIP gaming rooms and we are not aware of counterfeiting occurring in any of AGRL’s VIP gaming room.
Although the casino operators have in place
surveillance and security systems designed to detect cheating at the casinos, those systems may not be able to detect all such
cheating in time or at all. There is also a possibility that gaming patrons may seek to cheat at their VIP gaming room casino games,
particularly if gaming patrons collude with the casino operators’ employees. In addition, their junket agents or other persons
could, without their knowledge, enter into betting arrangements with their gaming patrons on the outcomes of their VIP gaming room
games of chance, thus depriving them of revenues. Failure to discover such schemes in a timely manner could result in losses in
VIP gaming room operations where the VIP gaming promoter shares in losses with the concessionaire or sub-concessionaire. In addition,
negative publicity related to such schemes could harm AGRL’s VIP gaming promoters’ reputation, thereby adversely affecting
their business, cash flow, financial condition, results of operations and prospects.
Integrity
. The reputation
and integrity of the parties with whom AGRL’s VIP gaming promoters engage in business activities, in particular the junket
agents and collaborators with whom they deal, are important to AGRL’s VIP gaming promoters’ own reputation and ability
to continue to operate in compliance with their licenses, and Macau gaming laws. While they endeavor, through contractual protections
and otherwise, to ensure that their junket agents and collaborators comply with the high standards of probity and integrity required
by Macau gaming laws, AGRL’s VIP gaming promoters cannot assure you that the junket agents and collaborators will always
maintain these high standards. In addition, if AGRL’s VIP gaming promoters enter into a business relationship with a junket
agent or collaborator whose probity was in doubt, this may be considered by regulators or investors to reflect negatively on AGRL’s
VIP gaming promoters’ own probity. If any of their junket agents or collaborators violates the Macau gaming laws, the Macau
government may, in its discretion, take enforcement action against AGRL’s VIP gaming promoter, the junket agent, the collaborator
or each concurrently and they may be sanctioned and their reputation harmed. We are not aware of the government taking action against
VIP gaming room promoters relating to the activities of junket agents or collaborators in recent years.
If our goodwill or other intangible
assets become impaired, then our profits and shareholder equity may be significantly reduced.
Because we have acquired a significant number
of companies, goodwill and other intangible assets represent a substantial portion of our assets. As of December 31, 2012, our
goodwill was $17,037,761 and other intangible assets were $94,451,063, together comprising approximately 51.6% of our shareholders’
equity balance. We will perform a goodwill impairment test for potential impairment at least on an annual basis. This process requires
us to make significant judgments and estimates, including assumptions about our strategic plans with regard to our operations,
as well as the interpretation of current economic indicators and market valuations. To the extent economic conditions that would
affect the future operations of our reporting units change, our goodwill and other intangible assets may be deemed to be impaired
and an impairment charge could result in a significant reduction in our shareholders’ equity. A significant impairment
charge would have a material adverse impact upon our financial condition and results of operations.
AGRL’s VIP gaming promoters
may require new or additional debt or equity financing to expand their business and fund future projects but may not be able to
obtain such financing on satisfactory terms or at all.
Apart from equity financing, AGRL’s
VIP gaming promoters have financed their operations primarily through borrowings from their shareholders, lines of credit from
casinos, and cash generated from their operations. They may require new or additional debt or equity financing in the future to
expand their business and fund future projects. Their ability to obtain new or additional financing will depend on a variety of
factors, many of which are beyond their control, including their financial performance, conditions of the U.S., Hong Kong, Macau
and other capital markets in which they may seek to raise funds, credit availability, interest rates, the conditions of the economy
in general, other gaming companies that may also seek funding, and investors’ and lenders’ perceptions of, and demand
for, debt and equity securities of gaming companies. As a result, AGRL’s VIP gaming promoters cannot assure you that they
will be able to access capital from external sources on satisfactory terms and conditions, or at all. If they are unable to obtain
new or additional financing, they may not be able to expand their business as anticipated or to fund future projects, and their
business, financial condition and results of operations could be materially and adversely affected.
Compliance with the Foreign
Corrupt Practices Act could subject us to penalties and other adverse consequences.
We are subject to the United States Foreign
Corrupt Practices Act, which generally prohibits United States public companies from engaging in bribery of or other prohibited
payments to foreign officials to obtain or retain business. We have adopted a Code of Ethics which applies to our directors, officers
and employees. While we take precautions to educate our directors, officers and employees about the Foreign Corrupt Practices Act,
our directors, officers and employees may engage in such conduct without our knowledge, for which we might be held responsible.
If that were to occur, we could suffer penalties that may have a material adverse effect on our business, financial condition and
results of operations.
Our business depends on our
continued access to lines of credit granted by casino license holders. Any inability to obtain credit from casino license holders
in the future may negatively impact our business.
We
rely on lines of credit granted by casino license holders for our ability to purchase non-negotiable chips from the concessionaires/sub-concessionaires
and provide them to VIP gaming patrons either directly or indirectly through their junket agents. We have available lines of credit
of approximately $59,349,000 from casino license holders, of which $34,779,982 was outstanding at December 31, 2012. If we are
unable to obtain such credit in the future, our ability to purchase non-negotiable chips will be impaired, which may negatively
impact our business.
AGRL is subject to junket agent
and collaborator credit risk.
Prior to the acquisition of AGRL by AERL,
AGRL’s VIP gaming promoters did not extend credit to junket agents and collaborators, although such credit was extended personally
by certain present members of our management team. However, in order to attract the most desirable gaming patrons and retain the
services of key junket agents and collaborators, the VIP gaming promoters are currently extending credit to junket agents and collaborators,
potentially exposing themselves and, hence, AGRL, to substantial collaborator and junket agent credit risk. The average loan amount
is $300,000, with a typical duration of 15–30 days. Historically, there have been no defaults. Credit extended through junket
agents and collaborators in Macau is typically unsecured and the collectability of receivables from junket agents and collaborators
could be negatively affected by economic trends or conditions in the countries where they reside. Additionally, we may not have
access to a forum in which we will be able to collect receivables because, among other reasons, courts of many jurisdictions do
not enforce gaming debts and we may encounter forums that will refuse to enforce such debts. Our inability to collect gaming debts
could have a significant negative impact on our operating results. Although certain members of our management team guarantee these
extensions of credit, it is also possible that such persons would be unable to honor their guarantees in a timely fashion or at
all. The members of our management team do not currently make personal loans to or through junket agents and collaborators. In
addition, while regulated gaming debts are generally enforceable in Macau, other jurisdictions may determine that direct or indirect
enforcement of gaming debts is against public policy.
Extensions of credit to junket agents and
collaborators may be made with limited information or credit analysis and are often based primarily on historical gaming chip purchases.
The VIP gaming promoters’ limited operating history may put them at a disadvantage compared to its competitors when evaluating
credit risk. Any inability to collect receivables from junket agents and collaborators could have a material adverse impact on
AGRL’s business, cash flows, financial condition, results of operations and prospects.
Local taxation may increase
and current tax exemptions may not be extended.
AGRL benefits from the following:
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AGRL is not subject to Hong Kong profits tax because all operations are performed outside Hong Kong and it is an investment
holding company. All subsidiaries of AGRL are incorporated under the BVI Business Companies Act, 2004 (No. 16 of 2004) and exempted
from payment of BVI taxes.
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AGRL’s VIP gaming promoters in Macau are not subject to Macau Complimentary Tax, because pursuant to the VIP room gaming
promoter agreements with the casino operators, the gaming revenue is received net of taxes collected by the Macau government paid
directly by the casino operator on a monthly basis. No provision for Macau Complimentary Tax has been made. As a VIP room gaming
promoter, AGRL’s VIP gaming promoters are subject to a tax on the amount of non-negotiable chips played by their gaming patrons
in the VIP gaming rooms (“rolling chip turnover”), which is referred to as a “rolling tax”. The rolling
tax is deducted and paid by the casino operator on a monthly basis. The rate of rolling tax is 0.01% on the rolling chip turnover
of the VIP gaming room and the rolling tax is deducted as a cost of revenue.
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A loss of any of these exemptions or increases
in tax rates or imposition of additional taxes will likely have a material adverse effect on AGRL’s earnings.
Gaming promoters are jointly
liable for the activities of their employees and collaborators within the casino premises of concessionaires and sub-concessionaires
and could be held responsible if such persons violated the law.
Gaming promoters are jointly liable for
the activities of their employees and collaborators within the casino premises of concessionaires and sub-concessionaires and for
their compliance with applicable laws and regulations. Failure by the gaming promoters to fulfill their major obligations under
the Gaming Promoters Regulation may result in the following consequences:
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the issue of a non-suitability report;
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refusal to grant a new gaming promotion license or to renew an existing license;
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upon notice by the concessionaire or sub-concessionaire to the DICJ, suspension of the gaming promotion activities of gaming
promoters; or
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administrative liability arising out of violation of the Gaming Promoters Regulation without prejudice of contractual liability
of the gaming promoter towards the concessionaire.
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Probable weakening in economic
and credit market conditions may adversely affect tourism and the profitability of AGRL’s VIP gaming promoters’ business.
There can be no assurance that the recent
difficult financial conditions will improve or that government responses to these conditions will successfully address fundamental
weakness in the markets, restore consumer confidence or increase market liquidity. Weakness in the global economy or in the economy
of China, where a significant number of the gaming patrons reside and/or generate their income, may result in a reduction of the
number of gaming patrons, including VIP gaming patrons, visiting the VIP gaming rooms or a reduction in the frequency of visits
by these gaming patrons. In particular, the economies in China’s Guangdong province, where most visitors to Macau come from,
are either export-driven or remain weak. Any reduction in demand for the gaming activities that AGRL’s VIP gaming promoters
promote would reduce gaming revenue.
The level of visitor arrivals
to Macau from China and elsewhere may decline or travel to Macau may be disrupted by natural disasters, outbreaks of disease, terrorist
attacks, security alerts, military conflicts or other factors.
Macau’s subtropical climate and location
on the South China Sea subject it to extreme weather conditions, including typhoons and heavy rainstorms. For example, in 2012,
there were 5 typhoons. Unfavorable weather conditions or other natural disasters such as earthquakes, tsunamis or major typhoons
could severely disrupt transportation to Macau and prevent gaming patrons from traveling to Macau. Similarly, outbreaks of infectious
diseases, such as the H1N1, terrorist attacks, security alerts or military conflicts could have a negative impact on travel and
leisure expenditures, including lodging, gaming and tourism. Any of these, or other factors such as riots or demonstrations, could
have a negative impact on visitor arrivals to Macau from China and elsewhere.
Consolidation of junket agents
in recent years has led to increased bargaining power of junket agents, which could reduce profits for VIP gaming promoters.
Over the past several years Macau has experienced
a consolidation of junket agents. As a consequence, certain junket agents are recognizing enhanced leverage and bargaining power
when negotiating terms with gaming promoters. Although there is some uncertainty as to whether such consolidation will become a
trend in Macau, any consolidation in the market may provide junket agents with significant negotiating leverage, which could result
in negative changes in their terms with the junket agents, including higher commissions, the loss of business to a competitor or
the loss of AGRL’s VIP gaming promoters’ exclusive relationships with their junket agents. While AGRL’s VIP gaming
promoters have not had to materially adjust their compensation arrangements with junket agents thus far, AGRL’s VIP gaming
promoters understand that there have been recent instances of increased commission rates paid by other gaming promoters to junket
agents in the Macau market. If AGRL’s VIP gaming promoters need to increase junket agent commission rates, their profits
would be reduced.
If we become directly subject
to the recent scrutiny involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and/or
defend the matter, which could harm our business operations, stock price and reputation and could result in a complete loss of
your investment in us.
U.S. public companies that have substantially
all of their operations in China have been the subject of intense scrutiny by investors, financial commentators and regulatory
agencies. Much of the scrutiny has centered around financial and accounting irregularities and mistakes, a lack of effective internal
controls over financial reporting and, in many cases, allegations of fraud. As a result of the scrutiny, the publicly traded stock
of many U.S. listed China-based companies that have been the subject of such scrutiny has sharply decreased in value. Many of these
companies have been subject to shareholder lawsuits and/or SEC enforcement actions that are conducting internal and/or external
investigations into the allegations. If we become the subject of any such scrutiny, whether any allegations are true or not, we
may have to expend significant resources to investigate such allegations and/or defend our company. Such investigations or allegations
will be costly and time-consuming and distract our management from our business plan and could result in our reputation being
harmed and our stock price could decline as a result of such allegations, regardless of the truthfulness of the allegations.
Risks Relating to the Gaming Industry in Macau
Gaming is a highly regulated
industry in Macau and the gaming and licensing authorities may exercise significant control over AGRL’s VIP gaming promoters’
operations.
Gaming is a highly regulated industry in
Macau. AGRL’s VIP gaming promoters’ operations are contingent upon their maintaining all regulatory licenses, permits,
approvals, registrations, findings of suitability, orders and authorizations pursuant to Macau law.
In addition, the casinos’ activities
in Macau are subject to administrative review and approval by various agencies of the Macau government, including the Gaming Inspection
and Coordination Bureau (“DICJ”), Health Department, Labor Bureau, Public Works Bureau, Fire Department, Financial
Services Bureau (including the Tax Department), Macau Monetary Authority, Financial Intelligence Bureau and Macau Government Tourism
Office. AGRL’s VIP gaming promoters cannot assure you that the casino operators and they will be able to obtain all necessary
approvals and licenses, and their failure to do so may materially affect their business and operations. Macau law permits redress
to the courts with respect to administrative actions; such redress is, however, largely untested in relation to gaming regulatory
issues.
Current laws, such as licensing requirements,
tax rates and other regulatory obligations, could change or become more stringent, resulting in additional regulations being imposed
upon the gaming operations or an increase in competition in the gaming industry. For example, in September 2009, the Macau government
set a cap on commission payments to gaming promoters of 1.25% of net rolling chips. This policy, which has been enforced since
December 2009, may limit our ability to develop successful relationships with gaming agents and collaborators and attract rolling
chip patrons. Any failure to comply with these regulations may result in the imposition of liabilities, fines and other penalties
and may materially and adversely affect our gaming promotion license.
The Macau government has recently raised
the minimum age required for the entrance in casinos in Macau from 18 to 21. This measure allows casino employees to maintain their
positions while in the process of reaching the minimum required age. Nevertheless, this could adversely affect our ability and
the ability of our business associates to engage sufficient staff for the operation of our projects. The number of gaming tables
operated in Macau was 5,485 in he fourth quarter of 2012, and the Macau government has announced that the number of gaming tables
operating in Macau should not exceed 5,500 by the end of 2012, which may adversely affect the future expansion of our business.
There is limited precedent interpreting
and applying the laws of Macau and regulations concerning gaming. These laws and regulations are complex and a court or administrative
or regulatory body may in the future render an interpretation of these laws and regulations or issue new or modified regulations
that differ from AGRL’s VIP gaming promoters’ interpretation, which could have a material adverse effect on their business,
financial condition and results of operations.
Conducting business in Macau
involves certain economic and political risks.
Conducting business in Macau involves certain
risks such as risks relating to changes in Macau’s and China’s political, economic and social conditions, changes in
Macau governmental policies, changes in Macau laws or regulations or their interpretation, changes in exchange control regulations,
potential restrictions on foreign investment and repatriation of capital, measures that may be introduced to control inflation,
such as interest rate increases, and changes in the rates or method of taxation. In addition, AGRL’s VIP gaming promoters’
operations in Macau are exposed to the risk of changes in laws and policies that govern operations of Macau-based companies.
Agreements for concessions and
sub-concessions to operate casinos in Macau are for specific periods of time and might not be renewed upon their expiration. Also,
the Macau government has the right to unilaterally terminate the concession or sub-concessions in certain circumstances. Because
the VIP gaming promoters derive their rights from agreements with the concessionaires and sub-concessionaires, a termination of
a license of a concessionaire or sub-concessionaire to operate a casino will cause a termination of the VIP gaming promoter’s
business at that casino.
The concession of Galaxy Casino, S.A., the
sub-concession of Venetian Macau, S.A., the concession of Wynn Resorts Macau and the sub-concession of Melco Crown Gaming (Macau)
Limited which expire on June 26, 2022, unless extended pursuant to certain provisions of Macau law. Upon expiration of these agreements,
all casinos, gaming assets and equipment and ownership rights to the casino properties in Macau will revert to the Macau government
without compensation to the casinos. Moreover, beginning on December 26, 2017, the fifteenth year of the concession of Galaxy Casino,
S.A., sub-concession of Venetian Macau, S.A., the concession of Wynn Resorts Macau and the sub-concession of Melco Crown Gaming
(Macau) Limited, the Macau government may exercise its right to redeem the concession or sub-concession agreements by providing
the concessionaires or sub-concessionaires with at least one-year prior written notice. AGRL’s VIP gaming promoters cannot
assure you that the concessionaires or sub-concessionaires will be able to renew or extend their concession or sub-concession agreements
on terms favorable to them or at all. If the concession or sub-concession agreements are not renewed or extended upon their stated
expiration date, or if the Macau government exercises its early redemption right, AGRL’s VIP gaming promoters in Macau will
cease to generate any revenue.
The Macau government has the right to unilaterally
terminate the concession or sub-concession agreements upon the occurrence of certain events of default. The concession and sub-concession
agreements contain various general covenants and other provisions with which the concessionaires or sub-concessionaires are required
to comply. These include the obligations to submit periodic information to the Macau government, operate casinos in a fair and
honest manner and maintain certain levels of insurance. Failure to comply with the terms and conditions of the concession or sub-concession
agreements in a manner satisfactory to the Macau government could ultimately result in the termination of the concession or sub-concession
agreements. The occurrence of any event of default may, and any termination of the concession or sub-concession agreements will,
cause all of the casinos, gaming assets and equipment and ownership rights to the casino properties in Macau to be automatically
transferred to the Macau government. If this occurs, AGRL’s VIP gaming promoters will cease to generate any revenue from
their operations.
Since May 2008, China has imposed
government restrictions on Chinese citizens traveling from mainland China to Macau. If China or other countries impose additional
government restrictions on travel, the number of visitors to Macau could decline.
AGRL’s VIP gaming promoters have increased
the number of tables and intend to take part in the promotion of additional VIP gaming rooms, based, in part, on their expectation
of future visitor arrivals in Macau, particularly from China. In 2008, 2009, 2010, 2011, and 2012, tourists from mainland China
accounted for approximately 50.6%, 50.5%, 53.0%, 57.7%, and 60.2%, respectively, of all visitors to Macau. If visitors from China
and elsewhere fail to increase as anticipated or decrease further, AGRL’s VIP gaming promoters would not be as profitable
as they currently are.
Since May 2008, the Chinese government has
imposed restrictions on travel to Macau and may impose further restrictions in the future. In May and July 2008, the Chinese government
readjusted its visa policy toward Macau and limited the number of visits that some mainland Chinese citizens may make to Macau
in a given time period. In September 2008, it was publicly announced that mainland Chinese citizens with only a Hong Kong visa
and not a Macau visa could no longer enter Macau from Hong Kong. In addition, in May 2009, China also began to restrict the operation
of “below-cost” tour groups involving low up-front payments and compulsory shopping. Further restrictions on travel
from China or other countries to Macau or any increase in prices of tours to Macau as a result of new regulations on travel agencies
or otherwise may reduce the number of visitors to Macau.
Macau’s infrastructure
may limit the development of its gaming industry.
According to data from the Gaming Inspection
and Coordination Bureau of Macau, the year over year gaming revenue of Macau grew at 44% in 2004, 8% in 2005, 22% in 2006, 46%
in 2007, 31% in 2008, 10% in 2009, 57% in 2010, 42% in 2011, and 13.5% in 2012. Accordingly, demands on the capacity of Macau’s
transportation infrastructure have also increased. To improve Macau’s existing transportation infrastructure, the Macau government
has announced a number of infrastructure projects to facilitate travel to and within Macau. These projects, which are in various
stages of planning or development, include a further expansion of the Macau International Airport, construction of a light rail
transit system, construction of two new tunnels linking the Macau peninsula and Taipa, construction of the Hong Kong-Zhuhai-Macau
bridge and improved pedestrian walkways and border crossings. However, these projects may not be approved or completed in a timely
fashion or at all and, if completed, may not be able to alleviate the growing transportation demand associated with the rapid expansion
of Macau’s gaming industry and the related recent increase in visitor levels to Macau. If Macau fails to adequately address
the growing transportation demand, transportation infrastructure problems could limit the number of visitors arriving in Macau,
which, in turn, could have a material and adverse effect on AGRL’s VIP gaming promoters’ business, financial condition
and results of operations.
Unfavorable changes in currency
exchange rates may cause fluctuations in the value of AGRL’s VIP gaming promoters’ investment in Macau.
The vast majority of AGRL’s VIP gaming
promoters’ revenues are expressed in Hong Kong dollars, and a portion of their revenues are denominated in Patacas, the Macau
currency. The Hong Kong dollar is linked to the U.S. dollar and the exchange rate between these two currencies has remained relatively
stable over the past several years. The Pataca, which is not a freely convertible currency, is linked to the Hong Kong dollar,
and in many cases the two are used interchangeably in Macau. The exchange linkages of the Hong Kong dollar and Pataca, and the
Hong Kong dollar and the U.S. dollar, are subject to potential changes due to, among other things, Chinese, Hong Kong and Macau
governmental policies and international economic and political developments.
In the event of unfavorable Hong Kong dollar
or Pataca exchange rate changes as against the U.S. dollar, AGRL’s or AGRL’s VIP gaming promoters’ obligations
that are denominated in U.S. dollars would increase in Hong Kong dollar and/or Pataca terms. Also, depreciation of the Hong Kong
dollar or Pataca in relation to the U.S. dollar could adversely affect AGRL’s VIP gaming promoters’ ability to service
debt.
Risks Related to Our Business Structure and Securities
As a result of our status as
a foreign private issuer, publicly disseminated information about us may be limited.
In accordance with the rules applicable
to foreign private issuers, we are exempt from certain requirements under the Securities and Exchange Act of 1934, as amended (“Exchange
Act”) relating to the furnishing and content of proxy statements and certain periodic reports. As a result, the publicly
disseminated information available to our shareholders and others may not be as extensive as would be required if we did not have
such status.
We are a holding company and
our subsidiaries’ ability to pay dividends is dependent upon the earnings of AGRL’s VIP gaming promoters and distributions
by its subsidiaries.
We are a holding company incorporated under
the laws of the Cayman Islands. AGRL incorporated under the laws of the Hong Kong Special Administrative Region. All of our business
operations are conducted through AGRL’s subsidiaries and its VIP gaming promoters. They are currently engaged in the promotion
of four major VIP gaming rooms and are entirely dependent upon their VIP gaming rooms for all of their cash flow. AGRL’s
ability to pay dividends to us is dependent upon the earnings of AGRL’s VIP gaming promoters and the distributions of funds
to AGRL by its subsidiaries, primarily in the form of dividends. The ability of AGRL’s subsidiaries to make distributions
to AGRL depends upon, among other things, the profits interest assigned to them. There are currently no withholding taxes levied
on dividends in Hong Kong or the Cayman Islands. Other factors such as cash flow conditions, restrictions on distributions contained
in our subsidiaries’ articles of association, withholding tax and other arrangements will also affect AGRL’s subsidiaries’
ability to make distributions to it. These restrictions could reduce the amount of distributions that AGRL will receive from its
subsidiaries, which in turn would restrict AGRL’s ability to fund operations and pay dividends on the shares to us, as AGRL’s
parent company.
As our subsidiaries are located
outside of the United States, we will be subject to a variety of additional risks that may negatively impact our operations. In
addition, the laws applicable to AGRL will likely govern all of our material agreements and we may not be able to enforce our legal
rights.
Because AGRL is a Hong Kong company that
operates through subsidiaries and VIP gaming promotions in Macau, we are subject to special considerations or risks associated
with companies operating outside of the United States, including some or all of the following:
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·
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rules and regulations or currency conversion or corporate withholding taxes on individuals;
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·
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tax issues, such as tax law changes and variations in tax laws as compared to the United States;
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·
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currency fluctuations and exchange controls;
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·
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challenges in collecting accounts receivable;
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·
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cultural and language differences; and
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·
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employment regulations.
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If we are unable to adequately address these
additional risks, our operations might suffer.
In addition, the laws of Hong Kong or Macau
will likely govern almost all of the material agreements relating to our operations. We cannot assure you that AGRL will be able
to enforce any of its material agreements or that remedies will be available in such jurisdictions. The systems of laws and the
enforcement of existing laws in such jurisdictions may not be as certain in implementation and interpretation as in the United
States. The inability to enforce or obtain a remedy under any of our future agreements could result in a significant loss of business,
business opportunities or capital. Also, substantially all of our assets will be located outside of the United States and most
of our officers and directors reside outside of the United States. As a result, it may not be possible for investors in the United
States to enforce their legal rights, to effect service of process upon our directors or officers or to enforce judgments of United
States courts predicated upon civil liabilities and criminal penalties of our directors and officers under U.S. federal securities
laws.
If our outstanding unit purchase
option (and the warrants included in the unit purchase option) are exercised, the underlying ordinary shares will be eligible for
future resale in the public market. “Market overhang” from the warrants results in dilution and could reduce the market
price of the ordinary shares. Similarly, the registration of the Founder’s Shares and the shares issued in connection with
the acquisition of AGRL, King’s Gaming and Bao Li Gaming will increase the number of shares that will be available for resale
in the public market.
Up to 1,440,000 ordinary shares are issuable
upon exercise of the unit purchase option granted to the representative of the underwriters of our IPO and the ordinary shares
issuable upon exercise of the warrants included in such option. If such warrants and unit purchase option are exercised, a substantial
number of additional shares of our ordinary shares will be eligible for resale in the public market, which may reduce the market
price. Further, the registration of our founders’ shares, the ordinary shares issuable in connection with our acquisition
of King’s Gaming upon the achievement of future incentive targets, the ordinary shares issuable in connection with our acquisition
of Bao Li Gaming upon the achievement of future incentive targets, and the issuance of 60,610 ordinary shares to our officers and
directors as compensation for 2012 will increase the number of shares available for resale and could have an adverse effect upon
the market price of the ordinary shares.
We believe that affiliates of
Spring Fortune currently own approximately 71.0% of the issued and outstanding ordinary shares of the Company, and the interests
of Spring Fortune and its affiliates could increase as a result of the issuance of additional shares to Spring Fortune giving the
affiliates of Spring Fortune the ability to substantially control our operations.
In connection with the Company’s acquisition
of AGRL, on February 2, 2010, 9,729,000 shares were issued to Spring Fortune and an aggregate of 621,000 ordinary shares were issued
to consultants of Spring Fortune who are not affiliates of Spring Fortune. On May 13, 2010, Spring Fortune distributed all of the
9,729,000 ordinary shares to its shareholder and its shareholder’s designees, all of which are affiliates of Spring Fortune.
In addition, following the filing of our Annual Report for the year ended December 31, 2010, Spring Fortune received an additional
16,260,000 ordinary shares, of which 252,600 ordinary shares were issued to non-affiliate consultants of Spring Fortune, and the
remaining 16,007,400 ordinary shares were issued to Spring Fortune’s shareholder and designees of Spring Fortune’s
shareholder. In addition, following the filing of our Annual Report for the year ended December 31, 2011, Spring Fortune received
an additional 3,103,000 ordinary shares, of which 125,300 ordinary shares were issued to non-affiliated consultants of Spring Fortune,
and the remaining 2,977,800 ordinary shares were issued to Spring Fortune’s shareholder and its shareholder’s designees.
Therefore, assuming that none of the ordinary shares have been transferred, it is currently expected that Spring Fortune and/or
its affiliates will be the holders of 28,714,100 ordinary shares, or approximately 71.0% of the outstanding ordinary shares
of the Company, giving the affiliates of Spring Fortune the ability to substantially control our operations. For example, such
a block of securities effectively insures that the affiliates of Spring Fortune have the ability to elect our directors.
We may be classified as a passive
foreign investment company (“PFIC”), which could result in adverse U.S. federal income tax consequences to U.S. investors.
In general, we will be treated as a PFIC
for any taxable year in which either (1) at least 75% of our gross income (including our pro rata share of the gross income of
certain 25% or more-owned corporate subsidiaries) is passive income or (2) at least 50% of the average value of our assets (including
our pro rata share of the assets of certain 25% or more-owned corporate subsidiaries) is attributable to assets that produce, or
are held for the production of, passive income. Passive income generally includes, without limitation, dividends, interest, rents,
royalties, and gains from the disposition of passive assets. If we are determined to be a PFIC for any taxable year (or portion
thereof) that is included in the holding period of a U.S. Holder (as defined in the section of this Annual Report captioned “Taxation—United
States Federal Income Taxation—General” under Item 10.E.) of our ordinary shares, the U.S. Holder may be subject to
increased U.S. federal income tax liability and may be subject to additional reporting requirements. Based on the composition (and
estimated values) of the assets and the nature of our income and our subsidiaries during our 2012 taxable year, we do not believe
that we will be treated as a PFIC for such year. However, because we have not performed a definitive analysis as to our PFIC status
for our 2012 taxable year, there can be no assurance in respect to our PFIC status for our 2012 taxable year. There also can be
no assurance in respect to our status as a PFIC for our current (2013) taxable year or any future taxable year. U.S. Holders of
our ordinary shares are urged to consult their own tax advisors regarding the possible application of the PFIC rules. See the discussion
in the section of this Annual Report under Item 10.E entitled “Taxation—United States Federal Income Taxation—U.S.
Holders—Passive Foreign Investment Company Rules.”
The Macau government may decide
that the practice of our promoters to issue credits to gaming patrons is in violation of the Gaming Credit Law.
Macau Law No. 5/2004, enacted on June 14,
2004 (the “Gaming Credit Law”) governs the granting of gaming credits in the MSAR, and forbids the assignment or transfer
in any form of the power to grant gaming credits. For the past 20 years, it has been customary practice in Macau that casinos issue
credits to VIP gaming promoters in the form of nonnegotiable chips that can only be used by patrons in that gaming promoter’s
VIP gaming room. The chips may not be redeemed for cash or exchanged for negotiable chips or other goods or services. The VIP gaming
promoters then issue such credits, or their own credits, to gaming patrons either directly or through junket agents and collaborators
who in turn extend the credits to gaming patrons. The junket agents and collaborators act as a customer representative between
the VIP gaming promoters and the patrons, and are representatives of the gaming patrons. Therefore, the credits extended by VIP
gaming promoters to junket agents and collaborators are actually credits issued to gaming patrons under the Gaming Credit Laws.
However, if the Macau government in the future imposes a law governing junket agents in extending credits to gaming patrons, then
we will be required to change our operations to comply with such law, which may result in a decrease in revenue.
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ITEM 4.
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INFORMATION ON THE COMPANY
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A.
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History and Development of the Company
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Our legal and commercial name is “Asia
Entertainment & Resources Ltd.” We are a Cayman Islands exempted company. Our principal place of business is located
at Unit 605, East Town Building, 16 Fenwick Street, Wanchai, Hong Kong, telephone number 852-2111-9220. On February 2, 2010, we
acquired all of the outstanding capital stock of AGRL, a Hong Kong company that, through “profit interest agreements”
between its subsidiaries and affiliated companies known as VIP gaming promoters, receive the profit streams from gaming operations
conducted by the VIP gaming promoters. In connection with the acquisition, we changed our name from “CS China Acquisition
Corp.” to “Asia Entertainment & Resources Ltd.” Prior to our acquisition of AGRL, we had no operating business.
Initial Public Offering
On August 15, 2008, we consummated our IPO
of 4,800,000 units at $6.00 per unit. On August 21, 2008, we consummated the closing of an additional 720,000 units that were subject
to the underwriters’ over-allotment option. Each unit consisted of one ordinary share and two warrants, each entitling the
holder to purchase one ordinary share at an exercise price of $5.00 until August 10, 2013. Simultaneously with the consummation
of IPO, we sold an aggregate of the 3,608,000 warrants at $0.50 per warrant (for an aggregate purchase price of $1,804,000) in
a private placement to our founders. Gross proceeds from the IPO (including from the private placement of warrants and exercise
of the underwriters’ over-allotment option) were $34,924,000. We paid a total of $1,324,800 in underwriting discounts and
commissions (after deferring $993,600 that was paid to the underwriters upon the consummation of our acquisition of AGRL) and for
costs and expenses related to the IPO. After deducting the underwriting discounts and commissions and offering expenses, the total
net proceeds to us from the IPO (including the over-allotment option and the private sale) were $33,280,880, of which $32,899,200
was deposited into the trust account and the remaining proceeds became available to be used to provide for business, legal and
accounting due diligence on prospective business combinations and continuing general and administrative expenses.
Pursuant to the Warrant Agreement between
the Company and Continental Stock Transfer and Trust Company, our ordinary share purchase warrants were redeemed for cash at the
redemption price of $0.01 per warrant on October 28, 2010. Management did not exercise its option to require the holders of the
Warrants to exercise warrants on a “cashless basis.” Accordingly, after 5:00 p.m. New York time on October 28, 2010,
the Warrants not exercised were no longer exercisable for ordinary shares and the holders only have the right to receive the redemption
price.
The Acquisition
On October 6, 2009, we entered into a Stock
Purchase Agreement (the “Purchase Agreement”) with AGRL and Spring Fortune, a British Virgin Islands company, that
provided for the purchase by us from Spring Fortune of all of the outstanding capital stock of AGRL. The Purchase Agreement was
subsequently amended on November 10, 2009, December 9, 2009, January 11, 2010, and April 18, 2011 and we acquired all of the outstanding
capital stock of AGRL on February 2, 2010.
Pursuant to the Purchase Agreement, as amended,
the aggregate consideration paid by us to Spring Fortune for the shares of AGRL stock was (a) 10,350,000 ordinary shares that were
issued upon the closing of the acquisition to Spring Fortune, Kenworth Capital, Inc., a consultant of Spring Fortune, and Blum
& Co., Inc. and Nuero International Company Limited, each a designee of Kenworth Capital, Inc. and (b) 4,210,000 ordinary shares
that were issued upon the filing of the Annual Report on Form 20-F for the 2010 fiscal year. Of the upfront shares, 9,729,000 shares
were issued to Spring Fortune and subsequently distributed to its shareholder and its shareholder’s designees and an aggregate
of 621,000 shares were issued to Kenworth Capital, Inc., Blum & Co., Inc. and Nuero International Limited.
In addition to the ordinary shares described
above, Spring Fortune was entitled to receive ordinary shares for each of the years 2009, 2010, 2011, and 2012 in which AGRL has
net after tax income that equals or exceeds the target specified for such year in the Purchase Agreement, as amended (the
“Incentive Target”), as follows:
Year
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Incentive Target
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Incentive Share
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2009
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$16,000,000 to $16,999,999
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1,150,000
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$17,000,000 to $17,999,999
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2,464,000
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$18,000,000 to $18,999,999
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3,981,000
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$19,000,000 to $19,999,999
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5,750,000
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$20,000,000 and above
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7,841,000
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2010
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$36,800,000 to $37,799,999
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4,210,000
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$37,800,000 to $38,799,999
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6,300,000
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$38,800,000 to $39,799,999
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8,069,000
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$39,800,000 to $40,799,999
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9,586,000
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$40,800,000 to $41,799,999
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10,900,000
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$41,800,000 and above
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12,050,000
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2011
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$65,000,000 and above
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2,573,000
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2012
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$78,000,000 and above
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2,573,000
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Also, for each of the years 2010, 2011 and
2012, Spring Fortune was entitled to receive 530,000 ordinary shares if AGRL has adjusted net income equal to or greater than $60
million, $78 million, and $94 million, respectively.
AGRL’s net income after taxes for
2009 was $15,545,463. Accordingly, the Incentive Targets for 2009 were not met and no additional shares were issued with respect
to that year. AGRL’s net income after taxes for 2010 was $41,810,004. Accordingly, the Incentive Targets for 2010 were met,
and Spring Fortune and its affiliates were issued an aggregate of 12,050,000 ordinary shares with respect to that year; however,
Spring Fortune did not earn the additional 530,000 ordinary shares for the year ended December 31, 2010. AGRL’s net income
after taxes for 2011 was $80,144,002. Accordingly, the Incentive Targets for 2011 were met, and Spring Fortune and its affiliates
were issued an aggregate of 2,573,000 ordinary shares with respect to that year; Spring Fortune also earned the additional 530,000
ordinary shares for the year ended December 31, 2011, so an aggregate of an additional 3,103,000 ordinary shares were a issued
to Spring Fortune and its affiliates. AGRL did not achieve the performance targets for the year ended December 31, 2012 and, as
a result, no incentive shares will be issued to AGRL.
Acquisition of King’s Gaming Promotion Limited
On November 15, 2010, we consummated the
transactions contemplated by that certain Profit Interest Purchase Agreement dated as of November 10, 2010 (the “King’s
Gaming Purchase Agreement”) among us, King’s Gaming, Mr. Mok and Mr. Wong (collectively, the “King’s Gaming
Seller”), whom collectively own 100% of the equity interests of King’s Gaming, pursuant to which the Company acquired
100% of the profit interest in King’s Gaming (the “King’s Gaming Acquisition”). Mr. Wong is the brother
of Vong Hon Kun, our Chief Operating Officer, and owned 4% of King’s Gaming immediately prior to the acquisition.
Pursuant to the King’s Gaming Purchase
Agreement, King’s Gaming sold to us the King’s Gaming Profit Interest (as defined below) pursuant to a separate Profit
Interest Agreement entered into between King’s Gaming and Billion Boom International Limited, a company incorporated in the
British Virgin Islands and our wholly owned subsidiary. The King’s Gaming Profit Interest was assigned to us at the closing
as of November 1, 2010. Following the closing, we have the right to restructure the management and organizational structure of
King’s Gaming. For purposes of the King’s Gaming Purchase Agreement, “King’s Gaming Profit Interest”
means the right, title, interest and benefits in and to 100% of the net operating profit generated by King’s Gaming at the
VIP gaming room located at the Venetian Macao-Resort-Hotel located in Taipa, Macao. King’s Gaming moved its VIP gaming room
to Sands Cotai Central in February 2013
We purchased the King’s Gaming Profit
Interest for an aggregate amount of up to (i) US$36,000,000, of which US$9,000,000 was paid at the closing, and (ii) 1,500,000
ordinary shares (the “King’s Gaming Purchase Price”). The balance of up to US$27,000,000 of the King’s
Gaming Purchase Price will be maintained as working capital at the cage of King’s Gaming (and shall be the sole property
of us until paid to the King’s Gaming Seller in accordance with the terms of the King’s Gaming Purchase Agreement)
and shall be paid to the King’s Gaming Seller in installments of US$9,000,000 (each, an “Installment Payment”),
subject to meeting a minimum Gross Profit (as defined below) requirement equal to US$6,150,000 (the “Minimum Gross Profit
Requirement”) for each of the three fiscal years following the closing date commencing with fiscal year 2011, which shall
be evidenced by the management prepared financial statements of King’s Gaming approved by our audit committee. In the event
King’s Gaming fails to achieve the Minimum Gross Profit Requirement in any of the three fiscal years following the closing
date, the Installment Payment shall be reduced by an amount equal to the product of (x) US$9,000,000 and (y) the quotient obtained
by dividing (A) the actual Gross Profit for such year, by (B) the Minimum Gross Profit Requirement.
In addition, as more fully set forth below,
we were required to issue to the King’s Gaming Seller (i) up to an aggregate of 1,500,000 ordinary shares in the event certain
Gross Profit targets are achieved for each of the three years following the closing date (the “Earnout Shares”), (ii)
up to an aggregate of 700,000 ordinary shares in the event certain Gross Profit targets are achieved for each of the seven years
following the third anniversary of the closing date (the “Incentive Shares”), and (iii) additional ordinary shares
in the event the Gross Profit targets for each of the ten years following the closing date are exceeded by at least US$1,000,000
(the “Additional Incentive Shares”). The King’s Gaming Seller is not entitled to any Additional Incentive Shares
on a pro rata basis for multiples of less or greater than US$1,000,000.
The Earnout Shares, the Incentive Shares
and the Additional Incentive Shares shall be released and issued to the Seller as follows:
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a.
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In the event the Minimum Gross Profit Requirement for fiscal year 2011 is achieved, the Seller shall receive 500,000 Earnout
Shares and for each US$1,000,000 in which the Minimum Gross Profit Requirement for such year is exceeded, 10,000 Additional Incentive
Shares.
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b.
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In the event the Gross Profit of US$7,380,000 for fiscal year 2012 is achieved, the Seller shall receive 500,000 Earnout Shares
and for each US$1,000,000 in which the Gross Profit target for such year is exceeded, 10,000 Additional Incentive Shares.
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c.
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In the event the Gross Profit of US$8,860,000 for fiscal year 2013 is achieved, the Seller shall receive 500,000 Earnout Shares
and for each US$1,000,000 in which the Gross Profit target for such year is exceeded, 10,000 Additional Incentive Shares.
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d.
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In the event the Gross Profit of US$9,740,000 for the fiscal year 2014 is achieved, the Seller shall receive 100,000 Incentive
Shares and for each US$1,000,000 in which the Gross Profit target for such year is exceeded, 10,000 Additional Incentive Shares.
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e.
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In the event the Gross Profit of US$10,720,000 for fiscal year 2015 is achieved, the Seller shall receive 100,000 Incentive
Shares and for each US$1,000,000 in which the Gross Profit target for such year is exceeded, 10,000 Additional Incentive Shares.
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f.
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In the event the Gross Profit of US$11,790,000 for fiscal year 2016 is achieved, the Seller shall receive 100,000 Incentive
Shares and for each US$1,000,000 in which the Gross Profit target for such year is exceeded, 10,000 Additional Incentive Shares.
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g.
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In the event the Gross Profit of US$12,970,000 for fiscal year 2017 is achieved, the Seller shall receive 100,000 Incentive
Shares and for each US$1,000,000 in which the Gross Profit target for such year is exceeded, 10,000 Additional Incentive Shares.
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h.
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In the event the Gross Profit of US$14,260,000 for fiscal year 2018 is achieved, the Seller shall receive 100,000 Incentive
Shares and for each US$1,000,000 in which the Gross Profit target for such year is exceeded, 10,000 Additional Incentive Shares.
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i.
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In the event the Gross Profit of US$15,690,000 for fiscal year 2019 is achieved, the Seller shall receive 100,000 Incentive
Shares and for each US$1,000,000 in which the Gross Profit target for such year is exceeded, 10,000 Additional Incentive Shares.
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j.
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In the event the Gross Profit of US$17,260,000 for fiscal year 2020 is achieved, the Seller shall receive 100,000 Incentive
Shares and for each US$1,000,000 in which the Gross Profit target for such year is exceeded, 10,000 Additional Incentive Shares.
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King’s Gaming achieved approximately
$8.2 million of gross profit for the year ended December 31, 2011, and, accordingly, and the Seller was issued an aggregate of
520,000 Earnout Shares and Additional Incentive Shares.
King’s Gaming did not meet its 2012
gross profit target for the year ended December 31, 2012. Accordingly, the Seller is not entitled to receive any Earnout Shares
or Additional Incentive Shares.
Acquisition of Bao Li Gaming Promotion
Limited
On September12, 2012, we consummated the
transactions contemplated by that certain Profit Interest Purchase Agreement dated as of September 5, 2012 (the “Bao Li Gaming
Purchase Agreement”) by and among the Company, Bao Li Gaming Promotion Limited, a Macau company (“Bao Li Gaming”),
Mr. Lou Kan Kuong and Mr. Lei Kam Keong (each, individually, the “Bao Li Gaming Bao Li Gaming Seller” and collectively,
the “Bao Li Gaming Sellers”), whom collectively own 100% of the equity interests of Bao Li Gaming, pursuant to which
we acquired 100% of the profit interest in Bao Li Gaming (the “Bao Li Gaming Acquisition”).
Pursuant to the Bao Li Gaming Purchase Agreement,
Bao Li Gaming sold the Profit Interest to the Company (as defined below) pursuant to a separate Profit Interest Agreement (the
“Bao Li Gaming Profit Interest Agreement”) entered into between Bao Li Gaming and Jubilee Dynasty Ltd., a company incorporated
in the British Virgin Islands and a wholly owned subsidiary of the Company (“Jubilee Dynasty”). The Bao Li Gaming Profit
Interest was assigned to Jubilee Dynasty as from September 1, 2012. For purposes of the Bao Li Gaming Purchase Agreement,
“Bao Li Gaming Profit Interest” means the right, title, interest and benefits in and to 100% of the net operating profit
generated by Bao Li Gaming at the VIP gaming room located at the City of Dreams Macau at Crown Towers, City of Dreams, Estrada
do Istmo, Cotai, Macau.
We purchased the Bao Li Gaming Profit Interest
for US$15,000,000. Additionally, if Bao Li Gaming’s rolling chip turnover is at least US$2.5 billion in each of the three
years ending December 31, 2013, 2014 and 2015, in each such year it will receive an additional payment of US$13 million and 625,000
ordinary shares of the Company. Bao Li Gaming will also be entitled to additional payments of US$130,000 and 6,250 ordinary shares
of the Company (“Incremental Earnout Payment”) for each incremental US$25,000,000 in rolling chip turnover achieved
by Bao Li Gaming in excess of US$2.5 billion. Notwithstanding the foregoing, the Company is not required to make any additional
payments to Bao Li Gaming in the event that Bao Li Gaming’s rolling chip turnover exceeds US$5 billion in any year. As a
result, the maximum Incremental Earnout Payment that Bao Li Gaming may be entitled to receive in any year would be US$13,000,000
and 625,000 ordinary shares of the Company.
Other Events
In March 2012, we increased the regular
semi-annual dividend payable each year after the release of our financial results for the six months ending June 30 from $0.10
per outstanding ordinary share to $0.12 per outstanding ordinary share.
In July 2012, our board of directors established
a new share repurchase program which authorized us to purchase up to two million of our ordinary shares on the open market. As
of the date of this Annual Report, we have purchased all of the two million ordinary shares available under this repurchase program.
All two million of these ordinary shares will be retired and the purchase price for such ordinary shares was allocated to par value
and paid in capital.
In August 2012, we received a response to
our pre-IPO inquiry letter to the Hong Kong Stock Exchange, in which the Hong Kong Stock Exchange provided preliminary guidance
on the proposed listing application. Based on this guidance, the Company intends to file a formal listing application with the
Hong Kong Stock Exchange in the first half of 2013.
In September 2012, we changed our remuneration
model to a revenue sharing model for all of our VIP gaming rooms. Prior to September 2012, all AERL VIP gaming rooms were under
a fixed commission model of 1.25% of Rolling Chip Turnover.
Also in September 2012, we adopted a new
revenue sharing program to allow certain large cash basis junket agents (non-marker) to share in the risk of wins and losses in
the VIP gaming rooms. The maximum percentage of sharing that the junket agent may elect to share in the risk of wins and losses
is limited to their percentage of rolling chip turnover contribution to the Company’s VIP gaming rooms during the previous
month. The junket agent must make its election by the second day of the subsequent month and may elect to receive any percentage
from zero to the maximum (as described in the previous sentence).
In March 2013, our board of directors established
a new share repurchase program which authorizes us to purchase up to four million of our ordinary shares on the open market at
prices to be determined by our management (the “2013 Repurchase Plan”). The 2013 Repurchase Plan will expire on December
31, 2013. Any ordinary shares purchased under the 2013 Repurchase Plan will be retired and the purchase price for such ordinary
shares will be allocated to par value, additional paid in capital and retained earnings based on US GAAP.
The Macau Gaming Industry
Macau is a part of the territory of the
People’s Republic of China, located on China’s southeast coast to the west of the Pearl River delta. The Macau Special
Administrative Region (the “MSAR”) was established on December 20, 1999, after Macau was administered by Portugal for
more than 400 years. Macau consists of the Macau peninsula and the islands of Taipa and Coloane. Three bridges link the peninsula
to Taipa while the two islands are connected by the land reclamation area known as Cotai.
Macau has been one of the most rapidly growing
economies in Asia since the liberalization of the gaming industry in 2002 and it is also the only territory within China where
casino operations have been legalized. Macau is one of the most popular destinations for gaming in Asia and has more casinos than
any other region in Asia. In 2012, total revenues generated by casinos in Macau were approximately $38 billion, more than four
times the revenues generated by the Las Vegas Strip during the same period (source: Macau Gaming Inspection and Coordination Bureau
(“DICJ”)).
The gaming industry and tourism comprise
the largest components, and are the major growth drivers, of Macau’s economy. The gaming industry is the most important contributor
to the economy, 86.0% of Macau’s public revenues in 2010, 87.3% of Macau’s public revenues in 2011 and 86.4% of public
revenues in 2012 being derived from gaming and gaming-related industries. The sector contributed $14.0 billion in direct tax to
the MSAR in 2012, up 14.0% when compared to the same period in 2011.
Although Macau was affected by
the 1997 Asian financial crisis, the global financial downturn in 2001 and the impact of SARS in 2003, the economy rebounded
and the Gross Domestic Product (“GDP”) grew at an annual growth rate of 27.3% in 2004, 6.9% in 2005, 16.5% in
2006, 26.0% in 2007 and 12.9% in 2008. For 2009, Macau’s GDP recorded negative growth for the first two quarters but
returned to positive growth in the third quarter and ended up 1.3% year- on-year. AGRL and AGRL’s VIP gaming promoters
believe that this growth was largely driven by the liberalization of Macau’s gaming industry, the significant
investments associated with the expansion and development of the gaming industry, a rapid rise in the number of visitors from
mainland China and an increase in Macau’s spending on public infrastructure projects. GDP was $27.2 billion, $35.4
billion and $41.7 billion for 2010, 2011 and 2012, respectively, and the GDP real growth rate was 27.1% for 2010, 21.8% for
2011, and 12% for 2012.
Due in part to the global financial downturn,
gaming revenues in Macau decreased from $7.29 billion in the first half of 2008 to $6.22 billion in the second half of that year.
Macau gaming revenues increased to $6.43 billion in the first half of 2009 and then increased to $8.5 billion in the second half
of 2009, resulting in a total of $14.93 billion for the year, a 10.5% year-on-year increase over 2008. For 2010, gaming revenues
totaled $23.5 billion, 57.8% higher than the $14.93 billion reported in 2009. In 2011, gaming revenues totaled $33.46 billion.
In 2012, gaming revenues totalled $38.15 billion.
In 2007, Macau’s gaming revenue increased
more than 45% compared to 2006, surpassing the Las Vegas Strip as the world’s biggest casino market, followed by Atlantic
City. The following table shows the gaming revenue of Macau compared to that of the Las Vegas Strip and Atlantic City between 2008
and 2012 (sources: DICJ, Las Vegas Review Journal and UNLV Center for Gaming Research).
Gaming Revenue (Selected Locations)
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
|
U.S. $ Billion
|
|
Macau
|
|
|
13.51
|
|
|
|
14.93
|
|
|
|
23.50
|
|
|
|
33.46
|
|
|
|
38.15
|
|
Las Vegas
|
|
|
6.12
|
|
|
|
5.55
|
|
|
|
5.77
|
|
|
|
6.09
|
|
|
|
6.20
|
|
Atlantic City
|
|
|
4.54
|
|
|
|
3.94
|
|
|
|
3.57
|
|
|
|
3.32
|
|
|
|
3.05
|
|
Macau VIP Gaming Market
VIP gaming rooms are well appointed suites
generally located within a large casino that provide luxury accommodations and privacy exclusively for gambling by high-tier gaming
patrons. VIP gaming has historically been the major component of Macau’s gaming industry. VIP gaming patrons are typically
high-stakes gaming patrons who play VIP baccarat almost exclusively in dedicated VIP gaming rooms or designated casino areas. VIP
gaming operations are generally less subject to seasonal variations than, and face limited competition from, mass market gaming
operations and non-casino gaming activities.
VIP gaming patrons are usually brought to
VIP gaming rooms by VIP gaming promoters. Marketing and promotion of VIP gaming rooms through this business model is implemented
between concessionaires that are granted licenses to operate casinos and casino games in Macau (or sub-concessionaires that operate
casinos and casino games under an administrative contract with a concessionaire) and their gaming promoters. Gaming promoters,
particularly VIP gaming promoters, are incentivized to bring VIP gaming patrons to designated VIP gaming rooms by compensation
systems based on the net-win of the VIP gaming rooms and/or the amount of non-redeemable chips sold in the VIP gaming rooms pursuant
to contracts with a concessionaire or sub-concessionaire.
Macau Mass Gaming Market
Since the granting of new concessions in
2002 and the Chinese government’s implementation of the Facilitated Individual Travel Scheme (“FITS”) by the
Macau government, Macau’s gaming industry has witnessed significant growth in mass market casino gaming operations. However,
most mass market gaming patrons are not high-stakes gaming patrons. Mass market gaming patrons’ desire to visit casinos may
be influenced by a number of factors, such as the variety and quality of services and amenities offered, the ambience, promotions
and diversity of games in the casinos, the location of and ease of transportation to the casinos, and the presence of other attractions
and gaming-related facilities. Visits to casinos by mass market gaming patrons may also be negatively affected by a worsening economic
environment while those by high-tier gaming patrons historically have been much less affected.
Revenue generated by table games in Macau
has historically exceeded revenue generated by slot machines by a wide margin. Baccarat has been the most popular table game in
Macau since the 1970s, followed by various other traditional western and Asian casino games, such as blackjack and fish-prawn-crab.
According to the DICJ, in 2012 approximately 69.3% of gross revenue from casino games was derived from VIP baccarat and approximately
21.9% of gross revenue from casino games was derived from baccarat played in the mass market sections in casinos.
The following table shows a breakdown of
the gross revenue from different casino games in Macau for the years 2006 to 2012 (source: Macau Statistics and Census Bureau (“DSEC”)):
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
VIP baccarat
|
|
|
4.58
|
|
|
|
6.94
|
|
|
|
9.19
|
|
|
|
9.98
|
|
|
|
16.94
|
|
|
|
24.42
|
|
|
|
26.39
|
|
% change (year-on-year)
|
|
|
28
|
%
|
|
|
52
|
%
|
|
|
32
|
%
|
|
|
8.6
|
%
|
|
|
70
|
%
|
|
|
44
|
%
|
|
|
8.10
|
%
|
Mass market baccarat and mini-baccarat
|
|
|
1.49
|
|
|
|
2.05
|
|
|
|
2.65
|
|
|
|
3.19
|
|
|
|
4.39
|
|
|
|
6.06
|
|
|
|
8.34
|
|
% change (year-on-year)
|
|
|
15
|
%
|
|
|
38
|
%
|
|
|
29
|
%
|
|
|
20
|
%
|
|
|
38
|
%
|
|
|
38
|
%
|
|
|
38
|
%
|
Other mass market table games
|
|
|
0.73
|
|
|
|
0.90
|
|
|
|
1.10
|
|
|
|
0.95
|
|
|
|
1.09
|
|
|
|
1.45
|
|
|
|
1.68
|
|
% change (year-on-year)
|
|
|
6
|
%
|
|
|
23
|
%
|
|
|
22
|
%
|
|
|
14
|
%
|
|
|
15
|
%
|
|
|
33
|
%
|
|
|
16.0
|
%
|
Slot machines
|
|
|
0.26
|
|
|
|
0.45
|
|
|
|
0.57
|
|
|
|
0.81
|
|
|
|
1.08
|
|
|
|
1.42
|
|
|
|
1.66
|
|
% change (year-on-year)
|
|
|
67
|
%
|
|
|
75
|
%
|
|
|
27
|
%
|
|
|
42
|
%
|
|
|
33
|
%
|
|
|
31
|
%
|
|
|
14.0
|
%
|
Total
|
|
|
7.06
|
|
|
|
10.34
|
|
|
|
13.51
|
|
|
|
14.93
|
|
|
|
23.50
|
|
|
|
33.36
|
|
|
|
38.07
|
|
Demand for Gaming and Gaming-Related Services
According to the DSEC, approximately 28.08
million visitors arrived in Macau in 2012, up by 0.3% over 2011, of which approximately 16.9 million, or 60.19%, were from mainland
China, as compared to 57.7% in 2011. Gaming patrons can reach Macau in a relatively short period of time using various means of
transportation, including by car or bus from Guangdong province, by high-speed ferry or helicopter from Hong Kong and Shenzhen
and by air from elsewhere in China and other Asian countries.
AGRL believes that the increase in the number
of gaming and gaming-related facilities is likely to continue Macau’s transformation into a premier integrated gaming and
tourism centre. The completion of new world-class gaming and gaming-related facilities in Macau could attract a greater number
of gaming patrons and potentially result in an increase in total gaming revenue in Macau.
The following public policies implemented
by the Chinese government are expected to continue to have a positive influence on the development of the gaming industry of Macau:
FITS.
Since July 2003,
residents of selected areas of mainland China have been allowed to visit Macau and Hong Kong under FITS, whereby approval requirements
are significantly reduced and the application process is expedited. Since the introduction of FITS, visitors to Macau from mainland
China have outnumbered visitors from Hong Kong. FITS has continued to expand since was initially introduced and, at December 31,
2012, encompassed more than 49 cities, including Beijing, Chongqing, Guangzhou, Shanghai and Tianjin.
Chinese Government Policy With Respect
to Gaming.
Macau is the only region in China offering legal casino gaming and the Chinese government has strictly
enforced its regulations prohibiting domestic gaming operations and discouraging unlicensed gaming operations along China’s
borders.
Chinese Government’s Relaxation
of Foreign Exchange Controls.
The Chinese government has undertaken a number of measures to relax its controls on
the national currency,
renminbi
. Currently, each PRC resident is allowed to carry a maximum of $5,000 in a single trip abroad,
but mainland China visitors to Macau may now charge spending on their credit cards or bank charge cards.
The growth of Macau’s gaming industry
has correlated positively with the continued economic growth and development of mainland China. AGRL believes that the emergence
of the middle class in China represents a significant long-term growth opportunity for Macau’s gaming industry. However,
there is no guarantee that the economic growth in China will continue at its historic pace.
Macau also draws a significant number of
visitors from Hong Kong. The principal means of transportation to Macau from Hong Kong is the one hour high-speed ferry service.
In addition to visitors from mainland China
and Hong Kong, a substantial number of visitors to Macau are from nearby countries and territories in Southeast Asia, including
Taiwan. The following table illustrates the number of visitors by region with respect to the periods indicated (source: DSEC):
|
|
2008
|
|
|
|
|
|
2009
|
|
|
|
|
|
2010
|
|
|
|
|
|
2011
|
|
|
|
|
|
2012
|
|
|
|
|
|
|
No. of
Visitors
|
|
|
%
|
|
|
No. of
Visitors
|
|
|
%
|
|
|
No. of
Visitors
|
|
|
%
|
|
|
No. of
Visitors
|
|
|
%
|
|
|
No. of
Visitors
|
|
|
%
|
|
Mainland China
|
|
|
11,613.1
|
|
|
|
50.6
|
|
|
|
10,989.5
|
|
|
|
50.5
|
|
|
|
13,229.1
|
|
|
|
53.0
|
|
|
|
16,162.7
|
|
|
|
57.7
|
|
|
|
16,902.5
|
|
|
|
60.2
|
|
Hong Kong
|
|
|
7,016.4
|
|
|
|
30.6
|
|
|
|
6,727.8
|
|
|
|
30.9
|
|
|
|
7,466.1
|
|
|
|
29.9
|
|
|
|
7,582.9
|
|
|
|
27.0
|
|
|
|
7,081.2
|
|
|
|
25.2
|
|
Taiwan
|
|
|
1,315.8
|
|
|
|
5.7
|
|
|
|
1,292.5
|
|
|
|
5.9
|
|
|
|
1,292.7
|
|
|
|
5.2
|
|
|
|
1,215.2
|
|
|
|
4.3
|
|
|
|
1,072.4
|
|
|
|
3.8
|
|
Others
|
|
|
2,987.8
|
|
|
|
13.1
|
|
|
|
2,743.3
|
|
|
|
12.7
|
|
|
|
2,977.5
|
|
|
|
11.9
|
|
|
|
3,041.5
|
|
|
|
11.0
|
|
|
|
3,026.5
|
|
|
|
10.8
|
|
Total
|
|
|
22,933.1
|
|
|
|
100.0
|
|
|
|
21,753.1
|
|
|
|
100.0
|
|
|
|
24,965.4
|
|
|
|
100.0
|
|
|
|
28,002.3
|
|
|
|
100.0
|
|
|
|
28,082.3
|
|
|
|
100
|
|
Both VIP and mass-market gaming have benefited
from the increasing number of visitors to Macau. We expect the strong growth rate will continue because of the following factors:
Opening of New Casinos and Resorts.
The
opening of new mixed-use developments, together with the entertainment business, sports events, conventions, exhibitions and trade
shows that they will bring to Macau, will attract more regional visitors and visitors from outside the Asia-Pacific region.
UNESCO World Heritage List.
The
MSAR government has devoted substantial resources to marketing campaigns that promote Macau’s history, cultural heritage
and hotel and convention facilities, aiming to turn Macau into a premier integrated gaming and tourism centre. On July 15, 2005,
the United Nations Educational, Scientific and Cultural Organization (UNESCO) identified and inscribed the “Historic Centre
of Macau,” comprising eight squares and twenty-two monuments, on its prestigious World Heritage List, pursuant to the terms
of the Convention Concerning the Protection of the World Culture and Natural Heritage.
In addition, we believe that improved transportation
to and within Macau will also contribute to continued growth in visitation. A number of infrastructure projects to facilitate travel
have been recently completed or are in various stages of planning and development:
Hong Kong-Zhuhai-Macau Bridge.
The
project linking the three areas would include a bridge with a total length of around 30 km, boundary crossing facilities, access
roads and associated works. In January 2007, the three local governments established the HZMB Task Force to implement the project,
which is scheduled for completion sometime in 2015 or 2016. This bridge is currently under construction.
Expansion of Border Gate
. The expansion
of the border gate checkpoint in the Portas do Cerco area of Northern Macau is expected to increase the capacity of the border
from 300,000 people per day to more than 500,000 people per day. Expansion of the border gate is expected to be completed in 2013.
Guangzhou-Zhuhai Super Highway
. This
highway opened in 2004 and links Macau to Hengqin Island, a PRC government-mandated strategic new zone planned for development
into a commercial, residential and resort destination.
Inner Harbour Ferry Terminal.
In
February 2008, the Macau Maritime Administration opened the new Inner Harbour Ferry Terminal, providing increased berths and customs
counters for transfer to and from neighboring mainland China cities.
Lotus Flower Bridge and Boundary Crossing.
Renovations
have been completed for the bridge linking Cotai and Hengqin Island in mainland China, and the associated boundary crossing, which
reopened to traffic in May 2007.
Macau International Airport Expansion.
The
Macau International Airport has begun an expansion project to double its capacity from the current six million passengers. This
additional capacity is expected to increase the number of routes flown to and from the Macau international Airport, increasing
the number of persons who could potentially easily reach this market.
Macau Light Railway System.
The
MSAR government has conducted public consultations concerning the proposed elevated light rail system and reviewed proposals for
consultancy. It was announced in October 2006 that the railway could be in operation four years after acceptance of tender. The
first phase would extend approximately twenty kilometers, with twenty-three stations starting at the border gate and serving the
Macau peninsula including the Macau Maritime Terminal, as well as Cotai, Macau International Airport and the new ferry terminal
at Pac On. Phase I of the Macau Light Railway System commenced construction in February 2012 and is due to be in operation in May
2015, according to an announcement from the Bureau for Transport Infrastructure (GIT) published in the local press.
Pac on Ferry Terminal.
A
temporary ferry terminal on Taipa near Macau International Airport opened in October 2007. It aims to handle increasing visitor
traffic between Hong Kong and Macau and facilitate sea linkage service for air transfer.
Guangzhou-Zhuhai Intercity Mass Rapid
Transit (‘‘MRT’’).
The first stage of the MRT opened on January 7, 2011, between Guangzhou
South Station and Zhuhai North. Travel time between Guangzhou and Macau is expected to be between 40 and 50 minutes.
Travel Restrictions on Chinese Citizens
Since May 2008, the Chinese government has
imposed restrictions on travel to Macau and may impose further restrictions in the future. In May and July 2008, the Chinese government
readjusted its visa policy toward Macau and limited the number of visits that some mainland Chinese citizens may make to Macau
in a given time period. In September 2008, it was publicly announced that mainland Chinese citizens with only a Hong Kong visa
and not a Macau visa could no longer enter Macau from Hong Kong. In addition, in May 2009, China also began to restrict the operation
of “below-cost” tour groups involving low up-front payments and compulsory shopping. Due to the popularity of these
tours with mainland Chinese citizens, the number of visitors to Macau declined in 2009, but has since recovered. Further restrictions
on travel from China or other countries to Macau or any increase in prices of tours to Macau as a result of new regulations on
travel agencies or otherwise may reduce the number of visitors to Macau.
Concessionaires and Sub-Concessionaires
Six entities are currently authorized to
operate casinos in Macau as either concessionaires or sub-concessionaires:
Concessionaires:
|
·
|
Sociedade de Jogos de Macau, S.A. (“SJM”);
|
|
·
|
Galaxy Casino, S.A. (“Galaxy”); and
|
|
·
|
Wynn Resorts (Macau), S.A. (“Wynn Macau”).
|
Sub-Concessionaires:
|
·
|
Venetian Macau, S.A. (“Venetian Macau”);
|
|
·
|
Melco PBL Gaming (Macau) Limited (“Melco PBL”); and
|
|
·
|
MGM Grand Paradise Limited (“MGM Grand Paradise”).
|
These concessionaires and sub-concessionaires
have committed to invest in Macau pursuant to their respective concession and sub-concession contracts in order to develop projects
such as casinos, hotels, convention facilities and facilities for retailing, dining, entertainment and recreation. AGRL believes
that the substantial financial commitment by the concessionaires and sub-concessionaires will stimulate further revenue growth
in Macau’s gaming and tourism industries.
As at December 31, 2012, SJM operated 20
of the 35 casinos in Macau, Galaxy operated 6 casinos, Venetian Macau operated 4 casinos, Melco PBL operated 3 casinos and Wynn
Macau and MGM Grand Paradise each operated 1 casino (Source: DICJ).
Galaxy was awarded a gaming concession in
2002 and opened its six casinos between 2004 and 2012. Galaxy entered into a sub-concession with Venetian Macau in December 2002.
Venetian Macau currently operates four casinos in Macau, which opened in 2004, 2007, 2008 and 2012.
Wynn Macau was also awarded a concession
in 2002 and opened its casino in September 2006. Wynn Macau entered into a sub-concession with Melco PBL in 2006. Melco PBL operates
three casinos, of which its latest, the City of Dreams project located on the Cotai Strip, opened in 2009, and the others opened
in 2007 and 2008.
SJM was awarded its concession in March
2002 and currently operates 20 casinos. SJM entered into a sub-concession with MGM Grand Paradise on April 19, 2005. MGM Grand
Paradise opened its casino in December 2007.
With the development of Macau’s gaming
market, some of the concessionaires and sub-concessionaires have increased their investments in gaming and gaming-related facilities.
For example, construction on Macau Studio City resumed in 2012 and the resort is scheduled to open in 2015. The Galaxy Macau Phase
2 is expected to open in mid-2015. The Wynn Macau also announced in June 2012 that the construction of its first integrated resort
in Cotai is expected to be completed in four years. MGM Grand Paradise’s second property in Macau, the first in Cotai, made
significant headway in February 2013 and is now expected to open in 2016 and in October 2012, the Macau government awarded a land
grant to SJM in Cotai, and construction on this property is expected to be completed in four years.
VIP Gaming Promoters
The gaming promoter system began in Las
Vegas in the mid-1950s. In Las Vegas, gaming promoters are also known as casino junkets. In those days, casino operators would
hire representatives to fill a plane with qualified patrons. Typically, the patrons might receive free airfare, free hotel accommodations,
free meals and free shows in exchange for their commitment to gamble a specific number of hours per day at an explicit average
bet size. The casinos believed that the patrons would lose more than their out of pocket expenses for bringing, housing and feeding
them. Today, junkets function in a very similar way in Las Vegas, with the number of free items a patron receives based on the
number of chips that patron turns over.
VIP Gaming Promotion in Macau
Unlike in Las Vegas, the gaming promoter
system in Macau developed to promote VIP gaming operations. A VIP gaming room is an individual room within a casino specifically
designed and designated for VIP room gaming patrons’ usage only. A VIP gaming room has its own cage, which functions as a
financial vehicle between the casino and the VIP gaming promoter. All properties of the VIP gaming room belong to the casino, the
dealers and the gaming managers are employees of the casino, and the gaming operations of a VIP gaming room are run by the casino.
In effect, only the marketing efforts have been contracted out to the VIP gaming promoters, which efforts include the making of
loans to agents and collaborators. Unlike in Las Vegas, in Macau, it is this VIP room gaming segment, not the mass market, that
is driving the growth of its gaming industry. For 2012, VIP gaming operations in Macau amounted to $26.4 billion, or 69.3% of the
gross revenue from casino games.
Initially, U.S. companies operating in Macau
did not emphasize the importance of VIP gaming rooms. However, these U.S. companies quickly realized the importance of VIP gaming
rooms, as demonstrated by disclosures contained in the prospectuses of a number of companies operating casinos in Macau, including
Melco Crown Entertainment Limited, SJM Holdings Limited, Wynn Macau, Limited, and Sands China Ltd. Such disclosures indicate that
the various casino operators rely on VIP gaming promoters to generate revenue. Because VIP gaming promoters play such an important
role in the Macau gaming industry, they are heavily regulated by the government.
The gaming promoter system in Macau was
developed to promote VIP gaming operations. A VIP gaming promoter enters into a gaming promoter agreement (sometimes referred to
as junket representative agreements) with the concessionaire or sub-concessionaire pursuant to which the VIP gaming promoter agrees
to provide promotional services to the concessionaire or sub-concessionaire in consideration for a commission or other forms of
remuneration, including, for example, a share of net-win or percentage of rolling chip turnover from the VIP gaming room, fees
and allowances. The VIP gaming promoters then enter into arrangements with the junket agents (also known as collaborators) who
have the direct relationship with the gaming patrons and are relied upon by the VIP gaming promoters to direct gaming patrons to
their VIP gaming rooms. A concessionaire or sub-concessionaire may enter into gaming promoter agreements with multiple VIP gaming
promoters for operating at a single casino, all in competition with each other.
Under the gaming promoter agreements, VIP
gaming promoters are required to purchase non-negotiable chips from the concessionaires/sub-concessionaires and provide them to
VIP gaming patrons either directly or indirectly through their junket agents. The gaming promoter agreement may be terminated by
(i) mutual agreement, or (ii) if any party to the agreement cannot carry out its obligations under the agreement and this results
in a material breach of the terms of the agreement. In addition, the agreement is voidable upon the death or deregistration of
the VIP gaming promoter or the bankruptcy of any party to the agreement. Unless an agreement is terminated or notice is served
by a party thirty days prior to the date on which the agreement expires, the agreement will be automatically renewed for a period
of one to five years until the end of the term of the concessionaires or sub-concessionaires’ concessions.
Rolling Chip Turnover
Rolling chip turnover is used by casinos
to measure the volume of VIP gaming room business transacted and represents the aggregate amount of bets gaming patrons make. Bets
are wagered with “non-negotiable chips” and winning bets are paid out by casinos in so-called “cash” chips.
“Non-negotiable chips” are specifically designed for VIP gaming patrons to allow casinos to calculate the commission
payable to VIP gaming promoters. Commissions are paid based on the total amount of “non-negotiable chips” purchased
by each gaming patron. VIP gaming promoters therefore require the gaming patrons to “roll,” from time to time, their
“cash chips” into “non-negotiable” chips for further betting so that they may receive their commissions
(hence the term “rolling chip turnover”). Through the VIP gaming promoters “non-negotiable chips” can be
converted back into cash at any time. Betting using rolling chips, as opposed to using cash chips, is also used by the DICJ to
distinguish between VIP table revenue and mass market table revenue.
Compensation Methods
Commissions paid to VIP gaming promoters
are calculated on a monthly basis. Generally, the different compensation methods provide VIP gaming promoters with the ability
to diversify their commission base to balance short-term volatility. Until August 2012, the AGRL VIP gaming promoters received
all of their commissions based on chip commission calculated by reference to monthly rolling chip turnover. In this arrangement,
the casino bears the risk of losses from the gaming operations.
Gaming wins are generally expressed in terms
of “net-win,” which is the difference between wins and losses from gaming to the casino operator. Win rates for VIP
gaming promoters are generally expressed as the net-win as a percentage of rolling trip turnover and depend upon a number of factors,
some beyond their control. In addition to the element of chance inherent in gaming, win rates are also affected by factors such
as the skill, experience and financial resources of the gaming patrons, the mix of games played and the amount of time spent at
the gaming tables and the volume of bets placed by the gaming patrons. Win rates may differ greatly over short time periods, such
as from quarter to quarter, resulting in volatility in periodic results of VIP game promoters. Effective from September 1, 2012,
the AGRL VIP gaming promoters have shifted their remuneration model to a revenue sharing model.
In July 2009, all concessionaires and sub-concessionaires
in Macau entered into an agreement among themselves to cap gaming promoter commissions. Under this agreement, commission payments
to gaming promoters based on rolling chip turnover cannot exceed 1.25% of rolling chip volumes. The cap became effective on December
1, 2009. The agreement sets forth standards for what constitutes a commission to gaming promoters, including all types of payments,
either monetary or otherwise, that are made to gaming promoters such as food and beverage, hotel and other services and allowances.
The amendment also imposes obligations on gaming promoters, concessionaires and sub-concessionaires to report regularly to the
DICJ and permits the imposition of fines or other sanctions for noncompliance with the commission cap or the monthly obligations
to report and detail the amount of commissions paid to gaming promoters.
Credit Arrangements
The parties involved in VIP gaming frequently
enter into various credit arrangements, the ultimate goal of which are to provide credit to the gaming patrons for their gaming
activities. Thus, casino concessionaires and sub-concessionaires may grant credit to VIP gaming promoters who, in turn, may extend
credit to the junket agents or collaborators who have the direct relationships with the gaming patrons. The junket agents then
may extend credit to the gaming patrons. Such credit facilities may or may not be secured, depending upon the creditworthiness
of the borrowers and the relationship between the lender and borrower. In relatively rare circumstances, the VIP gaming promoters
may extend credit directly to the gaming patrons.
AGRL’s Gaming Operations
AGRL operates through six wholly owned subsidiaries
that were incorporated in the British Virgin Islands, listed in the table below. The principal business activities of the subsidiaries
are to hold profit interest agreements with the VIP gaming promoters that assign the profit streams from the gaming related businesses
of the VIP gaming promoters to the subsidiaries.
Subsidiary
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Date of Incorporation
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Foxhill Group Limited (“Foxhill”)
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February 15, 2007
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Kasino Fortune Investments Limited (“Kasino Fortune”)
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February 16, 2007
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Well Mount International Limited (“Well Mount”)
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November 1, 2007
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Link Bond International Limited (“Link Bond”)
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November 1, 2007
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Billion Boom International Limited (“Billion Boom”)
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November 1, 2007
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Super Number Limited (“Super Number”)
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April 11, 2011
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Jubilee Dynasty Ltd. (“Jubilee Dynasty”)
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May 18, 2012
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Kasino Fortune, Billion Boom, Super Number
and Jubilee Dynasty are each a party to a profit interest agreement with a VIP gaming promoter, as described below. Foxhill, Well
Mount and Link Bond are each a party to a profit interest agreement with a VIP gaming promoter that is inactive.
The major shareholders and management of
AGRL’s VIP gaming promoters are members of AGRL’s management team who operate the VIP gaming promoters for the benefit
of AGRL. These individuals, Messrs. Lam Man Pou, Vong Hon Kun, Leong Siak Hung, and Mok Chi Hung have extensive experience in the
gaming business and long personal and business relationships among each other, some beginning as early as 1990. See the section
entitled “Information About the Directors and Executive Officers” under Item 6.A. herein.
The following companies are the Promoter
Companies:
VIP Gaming
Promoter
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Date Formed
(Jurisdiction)
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Location
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Major Shareholder(s)
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AGRL Profit Interest
Agreement Party
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MACAU
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Sang Heng Gaming Promotion Company Limited (“Sang Heng”)
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March 28, 2007
(Macau)
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Star World Hotel and Casino — Downtown Macau
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Lam Man Pou
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Kasino Fortune
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King’s Gaming Promotion Ltd. (“King’s Gaming”)
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April 15, 2008
(Macau)
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Venetian Resort Hotel — Cotai, Macau
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Mok Chi Hung
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Billion Boom
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Sang Lung Gaming Promotion Company Limited (“Sang Lung”)
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March 28, 2011
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Galaxy Macau Resort, Macau
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Lam Man Pou and Vong Hon Kun
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Super Number
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Iao Pou Gaming Promotion Limited (“Iao Pou”)
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May 27, 2009
(Macau)
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MGM Grand Hotel and Casino — Macau — Not currently operating
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Lam Chou In
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Foxhill
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Bao Li Gaming Promotion Ltd. (“Bao Li”)
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November 3, 2009
(Macau)
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City of Dreams Hotel & Casino—Cotai, Macau
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Lou Kan Kuong
Lei Kam Keong
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Jubilee Dynasty
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Spring Gaming Promotion Limited (“Spring”)
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March 28, 2007
(Macau)
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Not currently operating
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Lam Man Pou
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Jinark Limited (“Jinark”)
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November 20, 2007
(British Virgin Islands)
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Not currently operating
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Lam Man Pou
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JEJU
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Champion Lion Limited (“Champion Lion”)
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November 14, 2009
(British Virgin Islands)
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Unicorn Hyatt Regency Casino — Jeju — Not currently operating
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Leong Siak Hong and Vong Hon Kun
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Link Bond
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Doowell Limited (“Doowell”)
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November 20, 2007 (British Virgin Islands)
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T.H.E. Hotel and Casino — Jeju — Not currently operating
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Lam Man Pou
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Well Mount
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Sang Heng’s gaming promoter agreement
for the operation of the VIP gaming room at the Star World Hotel and Casino in Macau was entered into with Galaxy on September
4, 2009. Iao Pou’s gaming promoter agreement for the operation of the VIP gaming room at the MGM Grand Hotel and Casino was
entered into with MGM Grand Paradise on November 9, 2009. MGM Grand Paradise is the holder of a sub-concession granted by SJM.
The agreements related to the MGM Grand Paradise terminated in June 2011 upon the closing of the VIP gaming room operated there.
King’s Gaming’s promoter agreement for the operation of the VIP gaming room at the Venetian-Resort-Hotel on the Cotai
Strip, Macau was entered into with Venetian Macau on December 9, 2010. King’s Gaming moved its VIP gaming room to Sands Cotai
Central in February 2013. Venetian Macau is the holder of a sub-concession granted by Galaxy. Sang Lung’s gaming promoter
agreement for the operation of the VIP gaming room at the Galaxy Macau Resort was entered into with Galaxy Casino Holdings Limited
(“Galaxy”), the concessionaire currently authorized to operate the Galaxy Resort. Bao Li’s gaming promoter agreement
for the operation of the VIP gaming room at the City of Dreams, Cotai, Macau was entered into with Melco Crown Gaming (Macau) on
February 7, 2011.
The following diagram illustrates our current
corporate structure and the relationships with AGRL’s VIP gaming promoters that are currently active:
To carry out their promotional activities,
AGRL’s VIP gaming promoters have a team of over 1,900 gaming collaborators and junket agents who have direct relationships
with VIP gaming patrons, a significant percentage of whom are mainland Chinese nationals. Junket agents compete among themselves
for VIP gaming patrons primarily through personal service. The VIP gaming promoter pays commissions to its collaborators and junket
agents based on the rolling chip turnover of each individual collaborator or junket agent.
Day-to-day management and operation of the
VIP gaming rooms is contracted by the VIP gaming promoter to a management company that is responsible for hiring and managing all
staff needed for the operation. This includes local managers and executives to provide supervision, finance and cage personnel,
public relations, drivers and other service staff (waiters, cleaners, etc.). The VIP gaming promoters have entered into such agreements
with Pak Si Management and Consultancy Limited (“Pak Si”), owned by Ms. Tam Lai Ching, Mr. Vong’s sister-in-law,
pursuant to which Sang Heng pays Pak Si approximately US $180,000 per month for the VIP gaming room at Star World Hotel; King’s
Gaming pays approximately US $103,000 per month for the VIP gaming room at the Venetian Resort Hotel; Bao Li pays approximately
US $103,000 per month for the VIP gaming room at the City of Dreams Hotel and Casino, Cotai, Macau; and Sang Lung pays approximately
$180,000 per month for the VIP gaming room at the Galaxy Resort, Macau. Pak Si must pay all salaries, benefits and other expenses
of operation out of such amounts. Total staff at each operation, including executives, is approximately 120 people. Such agreements
are for one-year terms effective January 1, 2012.
AGRL’s VIP gaming rooms are primarily
focused on high-stakes baccarat. In 2012, baccarat accounted for approximately 91.2% of total Macau casino winnings. Through August
31, 2012, the AGRL VIP gaming promoters at the Galaxy Star World Hotel Casino, Galaxy Macau Resort, and Venetian Resort Hotel in
Macau were paid on the basis of 1.25% of rolling chip turnover. Since then, they have been paid on a revenue sharing model pursuant
to which they receive a percentage of gaming wins before expenses; if there are losses during the relevant period, the VIP gaming
promoter will reimburse the concessionaire or sub-concessionaire in accordance with the gaming promoter agreement. AGRL’s
VIP gaming promoters’ gross win rate as a percentage of rolling chips turnover has historically ranged between approximately
1.1% and 4.5%.
Profit Interest Agreements
Current Macau laws do not allow non-Macau
companies such as AGRL to directly operate a gaming promotion business in Macau. Consequently, AGRL’s gaming promotion business
is operated through a series of contractual arrangements, including profits interest agreements, that enable AGRL to receive substantially
all of the economic benefits of AGRL’s VIP gaming promoters and exercise effective control over those VIP gaming promoters.
Pursuant to these arrangements, each VIP
gaming promoter enters into an agreement with the casino operator to promote a VIP gaming room in the casino. These agreements
provide that the VIP gaming promoter receives a commission of the type described above. The VIP gaming promoter then enters into
a profit interest agreement with an AGRL subsidiary, providing for the assignment to the subsidiary of 100% of the profits derived
by the VIP gaming promoter from its operation of the VIP gaming room. The manner of calculation of the profit is set out in an
exhibit to the profit interest agreement. All of the current profit interest agreements to which the AGRL subsidiaries are party
provided that such assignments were effective on February 2, 2010, the date of the consummation of our acquisition of AGRL.
In addition to the assignment of the profit
interest, each profit interest agreement provides that the VIP gaming promoter will not terminate its underlying agreement with
the casino without our consent and that it will at all times maintain all licenses, agreements and other permissions it requires
to perform its obligations pursuant to such agreement. In connection with the profit interest agreements, Messrs. Lam and Vong
have agreed to make loans to AGRL for use by AGRL for working capital and to make loans to AGRL’s VIP gaming promoters. Pursuant
to the agreement relating to such loans, such loans will be in an amount not less than approximately US $19,300,000 on and after
February 2, 2010 (the date of the acquisition of AGRL by AERL) and not less than approximately US $45,000,000 on and after March
31, 2010 and until the agreement is terminated. At February 2, 2010, the amount of the funding advanced to AGRL by Messrs. Lam
and Vong was US $20,220,000 and as of December 31, 2012, the amount of funding advanced to AGRL by Messrs. Lam and Vong was approximately
$62,214,000. This funding commitment was to terminate at the end of the fiscal quarter that AGRL’s working capital was
not less than approximately US $100,000,000, exclusive of any working capital provided by Messrs. Lam and Vong. On April 18, 2011,
to memorialize such loans, we issued an interest-free convertible note for $30 million to each of Mr. Lam Man Pou and Mr. Vong
Hon Kun (for an aggregate amount of $60 million). The notes expire on April 18, 2014 and are convertible into our ordinary
shares at a price of $20 per share at the option of the holder and callable at our option at a price of $20 per share if the closing
price of our ordinary shares for any ten consecutive trading days exceeds $25. Messrs. Lam and Vong also guarantee to AGRL the
repayment of the loans made by AGRL to the VIP gaming promoters. Any amounts due to AGRL pursuant to the guaranty provided by Messrs.
Lam and Vong may, at AGRL's election, be offset against amounts owing Messrs. Lam and Vong by AGRL pursuant to the agreement.
Competition
There are a large number of VIP gaming promoters
in Macau and competition among them is intense. They first compete at the level of obtaining gaming promoter agreements with concessionaires
and sub-concessionaires. Then, because concessionaires and sub-concessionaires frequently enter into gaming promoter agreements
with a number of VIP gaming promoters to promote VIP gaming rooms in the same hotel, they compete against each other in efforts
to attract gaming patrons to their own VIP gaming rooms through their arrangements with junket agents and collaborators. Finally,
they compete with VIP gaming promoters who operate in other hotels in which they don’t have a presence.
One of the most critical factors in competing
successfully in this environment is the experience of management. In this regard, AGRL believes that it is favorably positioned
as the owners and managers of its VIP gaming promoters have been engaged in the specialized market of VIP gaming for over 20 years
and have developed a junket agent marketing program of over 1,900 junket agents with a client referral base throughout Asia. Another
critical factor is the level of services that are provided to the junket agents and collaborators and their gaming patrons. AGRL
believes that the level of such services that it provides is very high and quite competitive. A third competitive factor is the
relationships that exist between the VIP gaming promoters and the junket agents and collaborators, on the one hand, and between
the junket agents and collaborators and their VIP gaming patrons, on the other hand. AGRL makes great efforts to select junket
agents and collaborators that have excellent patron relationships and to maintain strong personal relationships with them once
they are selected.
Because VIP gaming promoters are almost
all privately held companies, no public financial information is available as to their operations.
Business Strategy
We are considering the possibility of negotiating
with the casino operators of our current VIP gaming rooms to increase the number of tables or size of our operations in such rooms.
AGRL believes that gaming revenue growth
and visitation to Macau have been, and will continue to be, driven by a combination of factors, including: (i) Macau’s proximity
to major Asian population centers; (ii) the liberalization of currency restrictions to permit Chinese travelers to take larger
sums of currency out of mainland China; (iii) the increase in regional wealth, leading to a large and growing middle- and upper
middle-class in China with more disposable income; (iv) infrastructure improvements that are expected to facilitate more convenient
travel to and within Macau; and (v) an increasing supply of casino, hotel and entertainment offerings in Macau, including large
mixed-use developments. AGRL believes that its management’s knowledge of the Macau gaming industry and expertise in VIP gaming
provide it with a platform to capitalize on the opportunities in the overall growth of the Macau gaming industry.
In view of the increasing number of casinos
in Macau, AGRL’s VIP gaming promoters are applying a number of strategies, including:
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Seeking to grow AGRL’s VIP gaming promoters’ business through the development of strategically located gaming clusters
in Macau to target different segments of the VIP gaming patrons. For example, we have acquired a VIP gaming room at the Venetian
Resort Hotel that targets higher middle-tier gaming patrons.
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Having AGRL’s VIP gaming promoters continue to actively manage their portfolios by expanding and upgrading their existing
services and marketing efforts in line with the AGRL’s development strategy to improve overall yield. For example, we have
acquired King’s Gaming and Bao Li Gaming, both of whose VIP gaming rooms in Cotai provide an alternative gaming location
to downtown Macau for our gaming patrons.
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Increasing the number of collaborators and junket agents to promote the VIP gaming rooms. For example, we have increased our
network of junket agents through our acquisition of King’s Gaming and Bao Li Gaming and through referrals from our existing
junket agents.
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Marketing the Star World Hotel and the Galaxy Resort as 5-star hotels with comprehensive attractions and facilities for top
tier gaming patrons to collaborators and promoters.
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Providing an even more comfortable and relaxing atmosphere in the VIP gaming rooms. For example, we have increased the number
of service staff in our VIP gaming rooms at Star World.
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Expanding our presence in the Macau VIP gaming market into the Cotai Strip. Our acquisitions of 100% profit interest of each
of King’s Gaming and Bao Li Gaming enabled us to have a presence on the Cotai Strip.
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In addition, on April 18, 2011, we opened a new VIP gaming room at the Galaxy Casino, S.A. on the Cotai Strip, through Sang
Heng Gaming Promotion Company Limited. The VIP gaming room has 12 tables and opened in May 2011. It is currently operated by Sang
Lung Gaming Promotion Company Limited.
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Marketing
Our marketing channels consist of AGRL’s collaborator
and junket agent network. Collaborators and junket agent cultivate relationships with high-tier gaming patrons, who they bring
the VIP gaming rooms. The collaborators and junket agents typically maintain these relationships by arranging the gaming patrons’
transport, accommodations, eating, and entertainment. Gaming credits may also be issued to the gaming patrons to promote turnover
in the VIP gaming rooms. For additional details regarding such gaming credits, please refer to “–Governmental Regulation–Macau–Law
No. 5/2004, Enacted on June 14, 2004.
Governmental Regulation–Macau
The operation of casino games or other games
authorized by the Macau government is subject to general administrative, civil and criminal laws and to the specific gaming laws.
Law No. 16/2001 (the “Macau Gaming Law”) introduced and established the legal framework and the principal rules for
the operation of casino games and sets out the governing framework for regulation of casinos in Macau.
The concession regime restricts the operation
of casino games to private companies incorporated in Macau that have concessions granted by the MSAR pursuant to the concession
contracts and applicable gaming laws and regulations. Pursuant to the Macau Gaming Law, the MSAR granted concessions to SJM, Wynn
Macau and Galaxy under an international public tender. The Macau government also authorized three sub-concessions, one by Galaxy
to Venetian Macau, one by SJM to MGM Grand Paradise and one by Wynn Macau to Melco PBL. It is provided under SJM’s concession,
as well as in Galaxy’s and Wynn Macau’s concession contracts, that the concessionaires cannot enter into sub-concessions
without the authorization of the Macau government. The Macau government has stated in public announcements that only three sub-concessions
will be permitted.
The DICJ’s Role and Authority
The DICJ is the primary regulator and supervisory
institution of the MSAR’s gaming industry. The DICJ plays an active role in fulfilling the objectives set forth in the Macau
Gaming Law. The main objectives of the Macau Gaming Law are (i) that concessionaires and sub-concessionaires carry on adequate
operation of casino games or other forms of gaming, (ii) that parties involved in the operation, management and supervision of
casino games or other forms of gaming are eligible to perform their functions and undertake respective responsibilities, (iii)
that operation of casino games or other forms of gaming is performed in a just, honest manner and free from criminal influences
and (iv) that MSAR’s public interests relating to special gaming tax and other contributions are well protected by maintaining
effective controls and procedures.
Among other requirements, concessionaires
and sub-concessionaires are required to submit to the DICJ for record or inspection all significant documentation and periodic
reports regarding their business and operation, as well as to submit to the DICJ all matters requiring the Macau government’s
approval or authorization as required by laws, the concession or sub-concession contracts, as applicable (such as changes in shareholding
structure, changes in control, directorship and key employees, gaming equipment and other matters related to operation of casino
games).
In addition, the DICJ is responsible for
assessing the taxes and other amounts payable by concessionaires and sub-concessionaires to the MSAR. The DICJ continuously monitors
concessionaires’ and sub- concessionaires’ daily operations and tabulation of net-win generated from casino games including
casino table games and slot machines through various control procedures conducted in the casinos.
Macau Gaming Commission
The Macau Gaming Commission was created
by the MSAR Chief Executive’s Dispatch No. 120/2000, of July 4, 2000, further amended by Dispatch No. 194/2003. The Gaming
Commission is a specialized commission directly reporting to and presided over by the MSAR Chief Executive, with the responsibility
to formulate policies and facilitate the development of Macau’s gaming operations and relevant regulatory framework.
Regulations Relating to Macau’s Gaming Industry
The following are the pertinent laws and
regulations relating to us and the gaming industry in Macau:
The Macau Gaming Law.
The
Macau Gaming Law established the legal framework and the principal rules for the operation of casino games or other forms of gaming
in the MSAR. It sets forth the objectives of the legal system governing the operation of casino games and it defines the permitted
types of casino games, places, locations and periods for operation. It further sets forth principal rules for the concession regime
and provides for obligations of the concessionaires including submitting their accounts and records to the Macau government, and
special gaming tax to the MSAR.
Administrative Regulation No. 26/2001
(“Gaming Tender Regulation”).
The Gaming Tender Regulation, as amended, sets forth the terms of the
public tender procedures for the granting of concessions for the operation of casino games and the eligibility and financial capacity
requirements of bidders (also applicable to the sub-concessions).
The Rules of Casino Games.
The
Macau government has promulgated additional rules to supplement the rules of casino games set forth in Section 55 of the Macau
Gaming Law. These supplemental rules were approved by the External Dispatches of the Secretary for Economy and Finance, which set
out or renewed the detailed procedures and rules of certain casino games, namely football poker, wheel of fortune, baccarat, soccer
poker, black jack, fish-prawn-crab, roulette, Q poker, fan-tan and stud poker.
Law No. 5/2004, Enacted on June 14, 2004
(“Gaming Credit Law”).
The Gaming Credit Law governs the granting of gaming credit in the MSAR and authorizes
the (i) concessionaires, (ii) sub-concessionaires and (iii) VIP gaming promoters who enter into a contract with a concessionaire
or sub-concessionaire to grant gaming credits. Pursuant to the Gaming Credit Law, the granting of gaming credit is limited to the
following three circumstances: (i) a concessionaire or a sub-concessionaire as a creditor may grant gaming credits to a gaming
patron as a borrower; (ii) an authorized gaming promoter as a creditor may grant gaming credits to a gaming patron as a borrower;
or (iii) a concessionaire or a sub-concessionaire as a creditor may grant gaming credits to an authorized gaming promoter as a
borrower. It also forbids the assignment or transfer in any form of the power to grant gaming credits. However, for the past 20
years, it has been customary practice in Macau that casinos issue credits to VIP gaming promoters in the form of nonnegotiable
chips that can only be used by gaming patrons in that gaming promoter’s VIP gaming room. The chips may not be redeemed for
cash or exchanged for negotiable chips or other goods or services. The VIP gaming promoters then issue such credits, or their own
credits, to gaming patrons either directly or through junket agents and collaborators who in turn extend the credits to patrons.
The junket agents and collaborators act as a customer representative between the VIP gaming promoters and the patrons, and are
representatives of the patrons. Therefore, the credits extended by VIP gaming promoters to junket agents and collaborators are
actually credits issued to gaming patrons under the Gaming Credit Laws. The Gaming Credit Law provides for the obligations of the
credit grantors towards the DICJ and scope of the DICJ’s supervision. Specifically, the granting of gaming credits is enforceable
as a civil debt pursuant to Article 4 of the Gaming Credit Law.
Law No. 8/96/M, Enacted on July 22, 2002
(“Law on Illicit Gaming”).
The Law on Illicit Gaming prohibits all forms of operation, promotion or
assistance to gaming outside the authorized areas, as well as any fraudulent gaming in authorized areas, or any unlicensed granting
of loans or gaming credits to gaming patrons.
Administrative Regulation No. 27/2009,
Enacted on August 10, 2009.
As a result of the amendments made to Administrative Regulation No. 6/2002 by the recently
enacted Administrative Regulation 27/2009 dated August 10, 2009, the Secretary of Economy and Finance of the Macau government now
has the authority to issue a dispatch implementing the 1.25% Gaming Promoter commission cap, as agreed between all concessionaires
and sub-concessionaires.
The commission cap became effective on December
1, 2009. The amendment sets forth standards for what constitutes a commission to VIP gaming promoters, including all types of payments,
either monetary or otherwise, that are made to Gaming VIP gaming promoters such as food and beverage, hotel and other services
and allowances. The amendment also imposes obligations on VIP gaming promoters, concessionaires and sub-concessionaires to report
regularly to the DICJ and imposes fines or other sanctions for non-compliance with the commission cap or the monthly obligations
to report and detail the amount of commissions paid to VIP gaming promoters.
Compulsory Licensing and Registration
Requirements for VIP Gaming Promoters.
The DICJ initiated the first licensing process in Macau for gaming promoters,
under the transition arrangements introduced by the Gaming Promoters Regulation. Gaming promoters must also be registered with
one or more than one concessionaire or sub-concessionaire, unless otherwise restricted by contract. The gaming promoters must also
execute a contract with the concessionaire or sub-concessionaire after obtaining gaming promoter licenses.
The Gaming Promoters Regulation restricts
the operation of gaming promotion to licensed corporate entities, commercial partnerships or individuals that are registered as
entrepreneurs with the MSAR Finance Department and meet the relevant requirements promulgated by the DICJ. In order to obtain a
license for gaming promotion, the applicant must submit its application for suitability assessment by the DICJ, which includes
assessment of the suitability of the gaming promoters’ key employees. When the gaming promoter is a commercial partnership
or a company, the suitability of the gaming promoter’s directors and shareholders holding 5% or more of the share capital
is also assessed. A gaming promoter license is valid until December 31st in the year it is granted and can be renewed each year
upon submission of an application to the DICJ. The renewal application must include a signed declaration by the legal representative
of the relevant concessionaire that it is the intention of the concessionaire to operate with such gaming promoter in the following
year. Gaming promoters that are sole proprietors are subject to compulsory assessment of their suitability every three years, and
gaming promoters that are commercial partnerships or companies are subject to compulsory assessment every six years. Extraordinary
suitability assessment may be conducted also by the DICJ.
Concessionaires and sub-concessionaires
are jointly liable to the Macau government for the activities conducted by the gaming promoters, gaming promoters’ employees,
collaborators and junket agents within their respective casino premises. Gaming promoters are jointly liable for the activities
of their employees and collaborators within the casino premises of concessionaires and sub-concessionaires and for their compliance
with applicable laws and regulations. Failure by the gaming promoters or the concessionaires or sub-concessionaires to fulfill
their major obligations under the Gaming Promoters Regulation may result in the following consequences:
|
·
|
the issue of a non-suitability report;
|
|
·
|
refusal to grant a new gaming promotion license or to renew an existing license;
|
|
·
|
upon notice by the concessionaire or sub-concessionaire to the DICJ, suspension of the gaming promotion activities of gaming
promoters; and
|
|
·
|
administrative liability arising out of violation of the Gaming Promoters Regulation without prejudice of contractual liability
of the gaming promoter towards the concessionaire.
|
Major Obligations Imposed Upon Gaming
Promoters.
VIP gaming promoters in Macau are required to comply with the following obligations:
|
·
|
to register with concessionaires or sub-concessionaires and operate under the terms agreed in a written contract submitted
to the DICJ (including, in particular, the amount and payment method of commissions or other agreed remunerations, the nature of
their activities in the casinos, including the designation of any gaming rooms or other premises within the casinos, the amounts
and forms of required securities and guarantees and the waiver indicating that concessionaires or sub-concessionaires and gaming
promoters agree to submit to the exclusive jurisdiction of the MSAR courts and defer to Macau Laws);
|
|
·
|
to execute written contracts with their collaborators and submit copies of such contracts to the DICJ;
|
|
·
|
to submit annually, through concessionaires or sub-concessionaires, a list containing the identification of their chosen collaborators
for the following year, and copies of their identification documents and no criminal record certificates or equivalent documents
to the DICJ for approval;
|
|
·
|
to comply with laws and regulations relating to gaming promoters and gaming promoter related announcements and instructions
issued by the DICJ;
|
|
·
|
to accept auditing carried out by the DICJ and the MSAR Finance Department;
|
|
·
|
to make all books and records available for the inspection and review by the DICJ and the MSAR Finance Department and provide
any additional information and materials upon their request;
|
|
·
|
to perform all contractual obligations, especially obligations to gaming patrons;
|
|
·
|
to comply with the reasonable instructions issued by the concessionaires or sub-concessionaires to the extent that such instructions
do not interfere with the gaming promoters’ autonomy;
|
|
·
|
to perform all contractual obligations stipulated in the written contracts with concessionaires or sub-concessionaires; and
|
|
·
|
to comply with all legal and regulatory requirements required by the laws and regulations of the MSAR.
|
Major Obligations Imposed Upon Concessionaires
and Sub-Concessionaires.
Concessionaires and sub-concessionaires in Macau are required to comply with the following
obligations with respect to their gaming promoters:
|
·
|
to submit to the DICJ annually a list of gaming promoters with whom they intend to operate in the following year (the Macau
government, through the DICJ, determines annually the maximum number of gaming promoters and issues licenses to the gaming promoters
identified in lists provided to it by the concessionaires and sub-concessionaires);
|
|
·
|
to submit to the DICJ, prior to the 10th of each month, a detailed list of the amounts of commissions or other remunerations
paid to each gaming promoter in the previous month, as well as the amounts of taxes withheld;
|
|
·
|
to prepare and maintain an updated list of the names of registered gaming promoters, their directors, key employees and collaborators
for submission to the DICJ quarterly;
|
|
·
|
to inform the DICJ or proper authorities of any fact that may affect the solvency of their gaming promoters;
|
|
·
|
to maintain and update the book records with their gaming promoters;
|
|
·
|
to supervise the activities of their gaming promoters, in particular their compliance with legal and contractual obligations;
|
|
·
|
to inform the authorities of any potential criminal activity by their gaming promoters, in particular potential money laundering
activities;
|
|
·
|
to promote a healthy relationship with registered gaming promoters;
|
|
·
|
to settle commissions or other remunerations agreed upon with their gaming promoters in a timely manner; and
|
|
·
|
to pay withholding taxes for their gaming promoters in a timely manner.
|
Anti-Money Laundering Regulations
The MSAR has been a member of the Asia/Pacific
Group on Money Laundering (“APG”) since 2000. As a member of APG, the MSAR undertook, between 1990 and 2004, to implement
the 40 recommendations and nine special recommendations of the Financial Action Task Force on Money Laundering (“FATF”),
an inter-governmental body created in 1989 to develop and promote policies to combat money laundering and terrorist financing.
As at July 24, 2007, the APG and Offshore Group of Banking Supervisors (“OGBS”), in their “Mutual Evaluation
Report on Macau, China Against the FATF 40 Recommendations (2003) and 9 Special Recommendations,” determined that, despite
non-compliance with Special Recommendation 9 relating to cross-border declaration and disclosure, Macau had demonstrated a strong
commitment towards implementing laws and institutional bodies to enhance its compliance with international anti-money laundering
standards. The MSAR Legislative Assembly approved a new anti-money laundering law on March 23, 2006 to combat money laundering
by further strengthening the record-keeping and reporting requirements relating to suspicious activities.
The following are the pertinent laws and
regulations relating to the anti-money laundering regulations in Macau that have recently been enacted:
Law No. 2/2006, Published in Macau Official
Gazette No. 14 of 3 April 2006.
This law requires casino operators, concessionaires, sub-concessionaires, gaming
promoters, and other entities such as financial institutions, insurance companies, exchange houses, money remittance companies
and professionals to assist the Macau government in its efforts to combat money laundering activities. Corporate entities and associations
are responsible and liable for money laundering when the crime is committed in their name and corporate interest be either (i)
their corporate bodies or representatives, or (ii) a person under their authority, when the crime became possible by virtue of
an unlawful breach of the vigilance or control duties pending on such entity.
Section 34 of the Gaming Law.
This
section imposes a duty on the external auditors of the concessionaires, sub-concessionaires and managing companies of gaming operations
to inform the DICJ and the Finance Department about any facts that may give rise to a suspicion of that entity, the members of
that relevant corporate bodies or their employees of being involved in money laundering.
Section 30 of the Gaming Promoters Regulation.
This
section provides that the concessionaires and sub-concessionaires must inform the relevant authorities about any fact indicating
gaming promoters and their collaborators involved in acts of money laundering.
Legislative Developments
In order to better address the needs of
the existing concession regime and to facilitate the modernization of the gaming industry in the MSAR, the Macau government and
its Legislative Assembly have been revising the existing gaming regulations and are expected to enact new legislation or amend
existing legislation to strengthen the legal framework on gaming activities. The MSAR Legislative Assembly enacted legislation
in 2004 allowing concessionaires or sub-concessionaires to extend gaming credits to gaming patrons and to enforce gaming debts.
Future legislation may cover operation of gaming areas, gaming chips and tokens, slot machines and offenses related to gaming and
may change or update existing legislation.
Environmental Regulations
All organizations in Macau have to comply
with the environmental principles of the environmental protection policy according to the Macau Ordinance, namely in respect of
noise, pollution and construction nuisance. AGRL does not believe that it is in violation of any environmental laws.
Labor and Safety Regulations
Pursuant to Macau laws and regulations,
Macau employers must register their employees under the mandatory Social Security Fund, make social security contributions for
each of its employees and contract insurance to protect the rights and interests of their employees in the event of working accident
and/or professional disease. AGRL believes that it is in compliance with all such regulations.
New Smoking Regulations in Macau
The Macau Legislative Assembly has approved
a new Smoking Prevention and Tobacco Control law. Under this new law, smoking is not permitted on casino premises except for a
separated area of up to 50% of the casino which is open to the public and complies with other requirements to be determined. Casinos
had to comply with the smoking ban by January 1, 2013.
Seasonality
Typically, holiday periods in China, such
as the New Year, the National Day, the Labour Day and the Mid-Autumn Festival, when many people in China take vacations, show peaks
in gambling activity. Because AGRL has operated for only a few years and has experienced large growth from its inception, its results
to date do not reflect any such peaks. However, as its business matures, it expects that it will experience peaks of activity at
the times of holidays.
Legal Proceedings
We are not involved in any legal proceedings
that are anticipated to have a significant effect on our business, financial position, results of operations or liquidity, nor
are we aware of any proceedings that are pending or threatened that may have a significant effect on our business, financial position,
results of operations or liquidity. From time to time, AGRL is subject to legal proceedings and claims in the ordinary course of
business, certain of which would be covered by insurance. Such claims, even if lacking merit, could result in the expenditure of
significant financial and managerial resources.
|
C.
|
Organizational Structure
|
The following diagram illustrates our corporate structure and
the relationships with AGRL’s VIP gaming promoters that are currently active:
Please refer to the section titled “AGRL’s
Gaming Operations” under Item 4.B. herein for additional information about our organizational structure.
|
D.
|
Property, plant and equipment
|
We lease a building located at Alameda Drive,
Carlos d’Assumpcao; No. 181-187 Centro Commercial; c/o Grupo Brilhantismo; 12 Andar; Macau, which we use for our administrative
offices. Rent is $2,315 per month. We also lease a building located at Unit 605 East Town Building, 16 Fenwick Street, Wanchai,
Hong Kong. Rent is $3,249 per month.
|
ITEM
4A.
|
UNRESOLVED STAFF COMMENTS
|
None.
|
ITEM
5.
|
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
|
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis contains
forward-looking statements about our plans and expectations of what may happen in the future. Forward-looking statements are based
on a number of assumptions and estimates that are inherently subject to significant risks and uncertainties, and our results could
differ materially from the results anticipated by our forward-looking statements as a result of many known and unknown factors.
You should read the following management
discussion and analysis (“MD&A”) in conjunction with the audited consolidated financial statements and related
footnotes thereto included in this annual report. All capitalized terms in this MD&A that are not defined shall have the meaning
ascribed to them in the Notes to the Financial Statements included herewith.
Overview
We are a holding company that operates
a gaming promotion business in VIP gaming rooms located in hotels and casinos in Macau through our wholly owned subsidiary, Asia
Gaming & Resort Limited (“AGRL”), its subsidiaries and VIP gaming promoters. We were incorporated in the Cayman
Islands on September 24, 2007 under the name “CS China Acquisition Corp.” for the purpose of acquiring an operating
business.
Prior to the business combination with
AGRL, we had no operating business.
On February 2, 2010, we acquired all of
the outstanding securities of AGRL from Spring Fortune Investment Ltd. (“Spring Fortune”), resulting in AGRL becoming
our wholly owned subsidiary. Upon the business combination with AGRL, we changed our name to “Asia Entertainment & Resources
Ltd.” (“AERL”).
AGRL was incorporated on May 2, 2007 in
Hong Kong. It is a holding company of subsidiaries that, through profit interest agreements with affiliated companies known as
VIP gaming promoters, are entitled to receive all of the profits of the VIP gaming promoters from VIP gaming rooms promoted by
the VIP gaming promoters in casinos at major hotels in Macau.
The acquisition of AGRL has been accounted
for as a “reverse merger” and recapitalization since Spring Fortune, the former shareholder of AGRL, became the owner
of a majority of the outstanding ordinary shares immediately following the completion of the transaction and has significant influence
and the ability to elect or appoint or to remove a majority of the members of the governing body of the combined entity, and AGRL’s
senior management dominates the management of the combined entity, in accordance with the provisions of FASB ASC Topic 805 "Business
Combinations". Accordingly, AGRL was deemed to be the accounting acquirer in the transaction and, consequently, the transaction
is treated as a recapitalization of AGRL. Accordingly, the assets and liabilities and the historical operations that are reflected
in the financial statements are those of AGRL and are recorded at the historical cost basis of AGRL. Our assets, liabilities and
results of operations were consolidated with the assets, liabilities and results of operations of AGRL after consummation of the
acquisition.
Foxhill, Billion Boom, Kasino Fortune,
Super Number and Jubilee Dynasty Limited are the significant subsidiaries of AGRL, which have a relationship with AGRL’s
VIP gaming promoters.
Upon the closing of the acquisition of
AGRL by AERL, AGRL’s VIP gaming promoters (the “Promoter Companies”) became variable interest entities (“VIEs”)
of the subsidiaries of AGRL, which are the primary beneficiaries of the operations of the Promoter Companies. Management’s
determination of the appropriate accounting method with respect to AGRL’s VIEs is based on FASB ASC Topic 810, “Consolidation
of Variable Interest Entities”. AGRL consolidates the VIEs in which it is the primary beneficiary and will disclose significant
variable interests in VIEs of which it is not the primary beneficiary, if any. Therefore, the operations of the Promoter Companies
are to be consolidated with those of AGRL for all periods subsequent to the closing of the acquisition of AGRL by AERL.
We completed the acquisition of the rights
to 100% of the profits derived by King’s Gaming for the promotion of the Wenzhou VIP Room at the Venetian Hotel and Casino
in Macau in November 2010. King’s Gaming moved its VIP gaming room to Sands Cotai Central in February 2013.
We completed the acquisition of the rights
to 100% of the profits derived by Bao Li Gaming Promotion Limited (“Bao Li Gaming”) for the promotion of the Kam Bao
Li Club at the City of Dreams Hotel and Casino in Macau in September 2012.
Sang Heng, King’s Gaming, Bao Li
Gaming, Iao Pou and Sang Lung are promoters of VIP gaming rooms, which are private room gaming facilities in casinos, in Macau,
Special Administrative Region (“Macau” or “Macau SAR”), China.
The gaming industry in Macau is somewhat
seasonal in nature as a result of the various week-long holidays celebrated in China which increases the number of gaming patrons
who visit our VIP gaming rooms. The most significant holidays which impact our revenue by quarter are as follows:
Quarter
|
|
|
1
|
|
Chinese New Year Celebration
|
2
|
|
None
|
3
|
|
None
|
4
|
|
National Day Golden Week
|
Highlights
When compared to the year ended December
31, 2011, our revenue in the year ended December 31, 2012 decreased by 5.7% period-over-period, compared to the overall growth
in Macau of 13.5 % and growth in VIP Baccarat of 7.5% according to the Macau Gaming Inspection and Coordination Bureau (DICJ).
The following factors contributed to our results of operations:
|
·
|
The slowdown in the growth of overall Macau gaming revenue from 42.2% period-over-period in 2011
to 13.5% period-over-period in 2012;
|
|
·
|
The economic slowdown in parts of Mainland China caused us to reduce the amount of markers made
available to junket agents and take steps to collect outstanding markers. The reduction in amounts made available to junket agents
negatively impacted the growth in our total Rolling Chip Turnover. Rolling Chip Turnover generally is correlated with the availability
of cage capital that can be made available for credit to junket agents. In order to reduce the effects of the policy of tightening
credit to junket agents, management is continuing to explore ways to enlarge its network of junket agents. From recent economic
indicators, we expect that the Chinese economy will begin to improve. If we believe the recovery is sustainable, we will consider
relaxing up our credit policy towards our junket agents. As an incentive to attract more non-credit junket agents (junket agents
who provide their own credit to gaming patrons), beginning September 1, 2012, the Company provided an option for large non-credit
junket agents to share the wins and losses under the revenue sharing model based on their proportionate contribution of total Rolling
Chip Turnover.
|
Recent Activities
In March 2012, our Board
of Directors authorized an increase in the cash dividend paid after our 6-month results are released (the “Six Month Dividend”)
from $0.10 to $0.12 per outstanding ordinary share. The Company also pays a dividend each year after the release of the Company’s
annual financial results., The year-end payment per outstanding ordinary share is equal to (i) 15% of the Company’s Non-GAAP
net income (defined as operating income before amortization of intangible assets and change in fair value of contingent consideration)
for the most recently completed fiscal year less the Six Month Dividend amount, divided by (ii) the number of ordinary shares outstanding
on the record date for such dividend. The first dividend was paid on September 2, 2011, totaling $3,880,406. We declared an additional
dividend of $7,529,000 in March 2012, which was paid on April 18, 2012. We paid the 2012 Six Month Dividend of $0.12 per outstanding
ordinary share on August 31, 2012, for an aggregate Six Month Dividend amount of $5,093,128. We estimate an additional dividend
will be declared and paid in 2013 amounting to approximately $4,100,000.
In
June 2012, the Board of Directors established a share repurchase program, which will expire on June 30, 2013 (the
“2012 Repurchase Plan”). The 2012 Repurchase Plan authorized the Company to purchase up to two million of its
ordinary shares on the open market at prices to be determined by the Company’s management. During the year ended
December 31, 2012, the Company repurchased an aggregate of 1,273,947 ordinary shares for an aggregate purchase price of
$4,166,483 pursuant to the 2012 Repurchase Plan. By the end of February 2013, the Company had repurchased the remaining
726,053 ordinary shares available under the 2012 Repurchase Plan for an aggregate purchase price of $2,728,911. The Ordinary
Shares have been retired and the purchase price was allocated to par value and additional paid in capital. In March 2013
the Board of Directors established a new share repurchase program, which will expire on December 31, 2013 (the
“2013 Repurchase Plan”). The 2013 Repurchase Plan authorizes the Company to purchase up to four million of its
ordinary shares on the open market at prices to be determined by the Company’s management. Any ordinary shares
repurchased under the 2013 Repurchase Plan will be retired and the purchase price was allocated to par value, additional paid
in capital and retained earnings based on US GAAP.
Beginning on September 1, 2012,
we changed our remuneration model from a fixed commission model of 1.25% on Rolling Chip Turnover to the revenue sharing model.
Beginning in September 2012,
the Company has adopted a new revenue sharing program to allow certain cash basis junket agents (non-marker) to share in the risk
of wins and losses in the VIP gaming rooms. The maximum percentage of sharing that the junket agent may elect to share in the risk
of wins and losses is limited to their percentage of rolling chip turnover during the previous month. The junket agent must make
its election by the second day of the subsequent month and may elect from zero percent to the maximum percent.
On September 12, 2012, we completed
the acquisition of the rights to 100% of the profits derived by Bao Li Gaming, effective September 1, 2012, from the promotion
of the Kam Bao Li Club at the City of Dreams Hotel and Casino.
RESULTS OF OPERATIONS
Year ended December 31, 2012 Compared to the Year ended
December 31, 2011
The following table sets forth certain
information regarding our results of operations for the years ended December 31, 2012 and 2011 (all figures are in $ thousands
except ratios and percentages).
|
|
Year
Ended December
31, 2012
|
|
|
Year
Ended December 31,
2011
|
|
|
% change
from 2011
to 2012
|
|
Revenue from VIP gaming promotion
|
|
$
|
236,301
|
|
|
$
|
250,575
|
|
|
|
(6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commission to junket agents
|
|
$
|
154,570
|
|
|
$
|
155,969
|
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
$
|
18,341
|
|
|
$
|
16,550
|
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income after amortization of intangible assets and before change in fair value of contingent consideration
|
|
$
|
54,953
|
|
|
$
|
71,005
|
|
|
|
(23
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of operating income after amortization of intangible assets and before change in fair value of contingent consideration/Revenue from VIP gaming promotion
|
|
|
23.26
|
%
|
|
|
28.34
|
%
|
|
|
|
|
Non-GAAP Financial Results
The following Non-GAAP financial results
for the years ended December 31, 2012 and 2011 are used by management to evaluate our financial performance prior to the deduction
of amortization of intangible assets related to the acquisitions of King's Gaming and Bao Li Gaming (all figures are in $
thousands except ratios and percentages) (see Non-GAAP Financial Measure on page 53).
|
|
Year
Ended December
31, 2012
|
|
|
Year
Ended December 31,
2011
|
|
|
% change
from 2011
to 2012
|
|
Non-GAAP income before amortization of intangible assets and change in
fair value of contingent consideration
|
|
$
|
61,575
|
|
|
$
|
76,063
|
|
|
|
(19
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Non-GAAP income before amortization of intangible assets and change in fair value of contingent consideration/Revenue from VIP gaming promotion
|
|
|
26.06
|
%
|
|
|
30.36
|
%
|
|
|
|
|
Rolling Chip Turnover Ratios
Rolling Chip Turnover is used by casinos
to measure the volume of VIP gaming room business transacted and represents the aggregate amount of bets made by gaming patrons.
Bets are wagered with ‘‘non-negotiable chips’’ and winning bets are paid out by casinos in so-called ‘‘cash’’
chips. If a gaming patron continues to make bets, they have to change the cash chips to non-negotiable chips.
Rolling Chip Turnover ratios are calculated
as percentages of Rolling Chip Turnover, and represent the growth in revenue, expenses and income in comparison to the growth in
gaming volume which investors and management use to assess the operating efficiencies of the VIP gaming promoters.
The following table sets forth certain
information regarding our results relating to our Rolling Chip Turnover and certain performance ratios for the years ended
December 31, 2012 and 2011 (all figures are in $ thousands except for ratios and percentages).
|
|
Year
Ended December
31, 2012
|
|
|
Year
Ended December 31,
2011
|
|
|
% change
from 2011 to
2012
|
|
Rolling Chip Turnover
|
|
$
|
18,149,348
|
|
|
$
|
19,931,385
|
|
|
|
(9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from VIP gaming promotion/Rolling Chip Turnover
|
|
|
1.30
|
%
|
|
|
1.26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin (Revenues less commissions and special rolling tax)/Rolling Chip Turnover
|
|
|
0.44
|
%
|
|
|
0.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commission to junket agents/Rolling Chip Turnover
|
|
|
0.85
|
%
|
|
|
0.78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses/Rolling Chip Turnover
|
|
|
0.10
|
%
|
|
|
0.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income after amortization of intangible assets and before change in fair value of contingent consideration/Rolling Chip Turnover
|
|
|
0.30
|
%
|
|
|
0.36
|
%
|
|
|
|
|
Beginning in September 2012, we changed
our remuneration model from a fixed commission of 1.25% on Rolling Chip Turnover to a revenue sharing model. Under a revenue sharing
model, we share in the gaming wins and losses of the VIP gaming rooms we promote. Our share of the gaming wins and losses ranges
from 42.5% to 49% in our four VIP gaming rooms.
The decision to change to the revenue sharing
model was made as a result of the Company’s expansion into four VIP gaming rooms, giving the Company the ability to spread
the risk of fluctuations surrounding gaming wins and losses.
Gaming wins and losses are sometimes referred
to as the “win rate” in the VIP gaming rooms. The win rate is the percentage of Rolling Chip Turnover wagered in the
VIP gaming room that is won by the casino (gross wins and losses divided by Rolling Chip Turnover). The statistical average win
rate for baccarat ranges from 2.85% to 3.00%. Generally, when the win rate is below the statistical average, we have more Rolling
Chip Turnover, because the gaming patron is winning and is paid in cash chips, which they in turn convert to non-negotiable chips.
When the win rate is greater than the statistical average, we have a lower Rolling Chip Turnover, because the casino is winning,
therefore the gaming patron is not converting as many cash chips into non-negotiable chips.
Below is a quarterly analysis of the win rate in our VIP gaming
rooms from January 1, 2011 to December 31, 2012:
Period
|
|
Win Rate %
|
|
|
|
|
|
Q1 2011
|
|
|
3.33
|
%
|
Q2 2011
|
|
|
3.23
|
%
|
Q3 2011
|
|
|
2.52
|
%
|
Q4 2011
|
|
|
2.27
|
%
|
Q1 2012
|
|
|
2.93
|
%
|
Q2 2012
|
|
|
3.10
|
%
|
Q3 2012
|
|
|
3.13
|
%
|
Q4 2012
|
|
|
3.00
|
%
|
Revenue from VIP gaming promotion was $236,300,623 for the year
ended December 31, 2012, as compared to $250,575,452 for the year ended December 31, 2011, a decrease of 5.7%, principally as a
result of the following factors:
(i) reduced Rolling Chip Turnover, partially
offset by the change in remuneration method from the fixed commission model of 1.25% on Rolling Chip Turnover to the revenue sharing
model in September 2012;
(ii) continued tightening of credit as
a result of slower expansion of China’s economy and managing bad debt risk; and
(iii) variations in the number of weekends
and timing of visits to Macau.
The decrease was offset by the following
factors, which had their greatest impact in the first two quarters of 2012:
(i) the increase in our network of junket
agents;
(ii) continued growth of the Macau gaming
markets;
(iii) increased cage capital as a result
of reinvesting profits, use of increased lines of credit available from the Casino Operators, use of increased and shareholder
loans; and
(iv) the full year operation of the Iao
Kun VIP Room at the Galaxy Resort Macau opened on May 15, 2011.
Revenue from VIP gaming promotion, as a
percentage of Rolling Chip Turnover, increased 0.04% to 1.30% during the year ended December 31, 2012, from 1.26% during the year
ended December 31, 2011 as a result of changing our remuneration model from a fixed commission of 1.25% on Rolling Chip Turnover
to a revenue sharing model beginning in September 2012. All of our VIP gaming rooms now operate under the revenue sharing model.
Prior to the change, the VIP gaming rooms in the Star World Hotel and Casino, the Venetian Hotel and Casino and the Galaxy Resort
Macau, all of which operated under the fixed commission model of 1.25% on Rolling Chip Turnover, constituted 97% of the Company’s
revenue during the comparative period of 2011.
Availability of cage capital, our credit
extension policies and the win rate in the VIP gaming rooms have the most significant impact on our revenue. As of December 31,
2011, the total available lines of credit was $55,263,000. As of December 31, 2012, the total available lines of credit are an
aggregate of approximately $59,349,000, and the Casino Operators may extend temporary credit in excess of this amount. Additional
cage capital is available as a result of the reinvestment of profits and additional shareholder loans. As of September 1, 2012,
all of our revenue is derived from the revenue sharing model, which has a higher risk of volatility than revenue earned under the
fixed commission model. With the increase in the scale of operations and the number of gaming tables available to us, management
believes the risk of loss is lower than in prior periods. Due to economic uncertainties in parts of Mainland China, we reduced
the amounts of markers made available to junket agents and took steps to collect outstanding markers. The reduction in amounts
made available to junket agents negatively impacted the growth in our total Rolling Chip Turnover during 2012. As a result, we
continue our marketing efforts to increase our Rolling Chip Turnover by working with junket agents who can provide their own capital
(“non-credit junket agent”). Rolling Chip Turnover is correlated with the availability of cage capital and the win
rate in the VIP gaming room. In order to reduce the effects of the policy of tightening credit to junket agents, management continues
to explore ways to enlarge its network of junket agents, including through the acquisition of Bao Li Gaming, and to implement a
more attractive commission program for non-credit junket agents. We expect that the Chinese government will implement economic
policies in the near future that will further stimulate the economy. If such policies are implemented and the Chinese economy improves
as a result, we will consider increasing credit made available to junket agents.
The commission paid to junket agents decreased
by $1,398,667, or 0.9%, during the year ended December 31, 2012, as compared to the same period in 2011 as a result of a decrease
in total Rolling Chip Turnover. The commission paid to junket agents, as a percentage of Rolling Chip Turnover, was 0.85% for the
year ended December 31, 2012, up from 0.78% for the year ended December 31, 2011, as a result of greater non-marker commission
paid in 2012 and a smaller percentage of direct business in relation to total Rolling Chip Turnover. In order to attract more
non-credit junket agents, beginning on September 1, 2012, the Company provided an option for large non-credit junket agents to
share the wins and losses under the revenue sharing model based on their proportionate contribution of total Rolling Chip Turnover.
This also resulted in a higher percentage of commission paid to junket agents in relation to Rolling Chip Turnover.
Sales, general and administrative expenses
increased by approximately $1,790,585, or 10.82%, while revenue decreased by 5.7%, during the year ended December 31, 2012 as compared
to 2011. Legal and professional fees increased by approximately $611,000 as a result of higher compliance costs and fees associated
with our planned listing on the Hong Kong Stock Exchange as well as acquisition costs for Bao Li Gaming during 2012. Management
salaries and director fees increased by approximately $286,000 as a result of an increase in the number of employees as well as
increases in salaries. Management fees increased by approximately $642,000 as a result of increased employee costs in Macau
as well as the operation of a larger Iao Kun VIP Room in the Galaxy Resort Macau, which opened in May 2011, and the acquisition
of Bao Li Gaming. While entertainment and hotel accommodation costs increased by approximately $590,000 during the year ended December
31, 2012, in the aggregate other VIP gaming room operating costs decreased by approximately $276,000 as a result of obtaining partial
reimbursement from some junket agents and gaming patrons for entertainment and hotel costs.
The special rolling tax decreased by $178,174,
or 8.94%, during the year ended December 31, 2012 as compared to the same period in 2011 as a direct result of the decrease in
Rolling Chip Turnover. The percentage of the rolling tax to revenue from VIP gaming promotion remained consistent at approximately
0.8%.
Operating income, after amortization of
intangible assets and before change in the fair value of contingent consideration for the acquisitions of King's Gaming and Bao
Li Gaming was $54,952,542 for the year ended December 31, 2012 as compared to operating income of $71,005,149, for the year ended
December 31, 2011, a decrease of approximately 22.61%, principally as a result of lower Rolling Chip Turnover and higher commissions
paid to non-marker junket agents in the current period. The decrease as a percentage of revenue from VIP gaming promotion was primarily
due to higher commissions paid to non-marker junket agents in the current period and a smaller percentage of direct business in
relation to total Rolling Chip Turnover. In order to attract more non-credit junket agents, beginning on September 1,
2012, we provided an option for these large non-credit agents to share the wins and losses under the revenue sharing model based
on their proportionate contribution of total Rolling Chip Turnover. This resulted in a higher percentage of commission paid to
junket agents in relation to Rolling Chip Turnover.
Non-GAAP income before amortization of
intangible assets and change in fair value of contingent consideration related to the acquisitions of King's Gaming and Bao Li
Gaming, as a percentage of revenue from VIP gaming promotion was 26.1% for the year ended December 31, 2012, as compared to 30.4%
for the year ended December 31, 2011. The decrease as a percentage of revenue from VIP gaming promotion was due to higher
commissions paid in the current period and a smaller percentage of direct business in relation to total Rolling Chip Turnover.
The change in
the fair value of the contingent consideration resulted in a decrease to the contingent consideration liability for King’s
Gaming of $14,612,297 due primarily to a decrease of approximately 45% in the market price of our ordinary shares and a lower forecasted
gross profit level of King’s Gaming which, in turn, resulted in a decrease in the number of earn-out shares expected to be
earned by the Sellers of King’s Gaming. Additionally, there was a decrease to the contingent consideration liability for
Bao Li Gaming of $554,403 due primarily to a decrease of approximately 12% in the market price of our ordinary shares as compared
to September 12, 2012. As required by FASB ASC Topic 805 on business combinations, any change in the fair value of the acquisition-related
contingent consideration subsequent to the acquisition date, including changes from events after the acquisition date, such as
changes in our estimate of the gross profit and Rolling Chip Turnover expected to be achieved, will be recognized in earnings in
the period that estimated fair value changes. The fair value estimate assumes probability-weighted gross profit and Rolling Chip
Turnover are achieved over the earn-out period. Actual achievement of gross profit range and Rolling Chip Turnover Target for this
assumed earn-out period could reduce the liability to zero. A change in the fair value of the acquisition-related contingent consideration
could have a material impact on our statement of operations and financial position in the period of change in estimate.
Earnings per share (“EPS”)
attributable to ordinary shareholders for the year ended December 31, 2012 was $1.66, for basic and fully diluted based upon the
basic and fully diluted weighted average share count of 42,324,462 and 42,324,628, respectively.
Non-GAAP EPS before amortization of intangible
assets and change in the fair value of contingent consideration for the year ended December 31, 2012 was $1.46 for basic and fully
diluted.
RESULTS OF OPERATIONS
Year ended December 31, 2011 Compared to the Year ended
December 31, 2010
The following table sets forth certain information regarding
our results for the years ended December 31, 2011 and 2010 (all figures are in $ thousands except ratios and percentages).
|
|
Year Ended
December
31, 2011
|
|
|
Year Ended
December 31,
2010
|
|
|
% change
from
2010 to 2011
|
|
Revenue from VIP gaming operations
|
|
$
|
250,575
|
|
|
$
|
127,036
|
|
|
|
97
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commission to junket agents
|
|
$
|
155,969
|
|
|
$
|
76,608
|
|
|
|
104
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
$
|
16,550
|
|
|
$
|
11,247
|
|
|
|
47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income after amortization of intangible assets including pre-acquisition income and before change in fair value of contingent consideration
|
|
$
|
71,005
|
|
|
$
|
37,296
|
|
|
|
90
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of operating income after amortization of intangible assets, including pre-acquisition income and before change in fair value of contingent consideration/Revenue from VIP gaming operations
|
|
|
28.34
|
%
|
|
|
29.36
|
%
|
|
|
|
|
Non-GAAP Financial Results
The following Non-GAAP financial results for the years ended
December 31, 2011 and 2010 are used by management to evaluate the financial performance of the Company prior to the deduction
of amortization of intangible assets related to the acquisition of King's Gaming (all figures are in $ thousands except ratios
and percentages) (see Reconciliation of Non-GAAP to GAAP financial results on page 53).
|
|
Year Ended
December
31, 2011
|
|
|
Year Ended
December
31, 2010
|
|
|
% change
from
2010 to 2011
|
|
Non-GAAP income before amortization of intangible assets including pre-acquisition profit and change in fair value of contingent consideration
|
|
$
|
76,063
|
|
|
$
|
38,139
|
|
|
|
99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Non-GAAP income before amortization of intangible assets including pre-acquisition profit and change in fair value of contingent consideration/Revenue from VIP gaming operations
|
|
|
30.36
|
%
|
|
|
30.02
|
%
|
|
|
|
|
Rolling Chip Turnover Ratios
Rolling Chip Turnover is used by casinos to measure the volume
of VIP gaming room business transacted and represents the aggregate amount of bets gaming patrons make. Bets are wagered with ‘‘non-negotiable
chips ’’ and winning bets are paid out by casinos in so-called ‘‘cash ’’ chips, if they continue
to play they have to change the cash chips to non-negotiable chips.
Rolling Chip Turnover ratios are calculated based upon percentages
of Rolling Chip Turnover, and represent the growth in revenues, expenses and income in comparison to the growth in gaming volume
and investors and management to assess the operating efficiencies of the VIP gaming promoters.
The following table sets forth certain information regarding
our results related to our Rolling Chip Turnover and certain performance ratios for the years ended December 31, 2011 and
2010 (all figures are in $ thousands except for ratios and percentages).
|
|
Year Ended
December
31, 2011
|
|
|
Year Ended
December
31, 2010
|
|
|
% change from
2010 to 2011
|
|
Rolling Chip Turnover
|
|
$
|
19,931,385
|
|
|
$
|
10,423,462
|
|
|
|
91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from VIP gaming operations/Rolling Chip Turnover
|
|
|
1.26
|
%
|
|
|
1.22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commission to junket agents/Rolling Chip Turnover
|
|
|
0.78
|
%
|
|
|
0.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses/Rolling Chip Turnover
|
|
|
0.08
|
%
|
|
|
0.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operating income after amortization of intangible assets, including pre-acquisition income and before change in fair value of contingent consideration/Rolling Chip Turnover
|
|
|
0.36
|
%
|
|
|
0.36
|
%
|
|
|
|
|
Revenue from VIP gaming promotion was $250,575,452 for the year
ended December 31, 2011, as compared to $127,036,361 for the year ended December 31, 2010, an increase of 97.3%, principally as
a result of the following factors:
(i) the acquisition of King's Gaming effective November 1, 2010
and its network of junket agents;
(ii) recovery of the Macau gaming markets;
(iii) increased cage capital as a result of reinvesting profits,
use of increased lines of credit available from the casino license holders, use of increased shareholder loans, and the use of
warrant exercises proceeds of $35.5 million in October 2010; and
(iv) the opening of the Iao Kun VIP Room at the Galaxy Resort
Macau on May 15, 2011;
Revenue for the year ended December 31, 2011 from VIP gaming
promotion increased in proportion to the increase in Rolling Chip Turnover due to the majority of our business earning revenues
on a fixed 1.25% commission on Rolling Chip Turnover. Fixed commission of 1.25% is effectively equivalent to 2.9% of gross win
as a percentage of Rolling Chip Turnover based on a 43% win share (2.9% x 0.43 = 1.25%). Gross win rate for the Iao Kun VIP Room
at the MGM Grand Hotel and Casino was 4.23% through the period ended June 16, 2011. In January 2011, Sang Heng increased the number
of gaming tables from 11 to 12 at the Galaxy Star World Hotel and Iao Pou decreased the number of gaming tables from 11 to six
at the MGM Grand Hotel and Casino, and subsequently closed the VIP gaming room on June 16, 2011. The closure of the VIP gaming
room at the MGM Grand Hotel and Casino did not materially impact our revenues for 2011 because the percentage of revenues in relationship
to total Rolling Chip Turnover was less than 3% and the increase in business at our other three VIP gaming rooms.
Revenues from VIP gaming promotion, as a percentage of Rolling
Chip Turnover, increased 0.04% to 1.26% during the year ended December 31, 2011, up from 1.22% during the year ended December 31,
2010 due to the majority of our business earning revenues on a fixed 1.25% commission and the higher win rate at the Iao Kun VIP
Room at the MGM Grand Hotel and Casino through the period ended June 16, 2011. The VIP gaming rooms in the Star World Hotel and
Casino, the Venetian Hotel and Casino and the Galaxy Resort Macau constitute over 97% of the Company’s revenue. The gross
win rate for the Iao Kun VIP gaming room in MGM Grand Hotel and Casino was 4.23% for the year ended December 31, 2011, above the
effective gross win average of 2.9% under the 1.25% fixed commission scheme.
Availability of cage capital has the most
significant impact on revenues. During 2011, additional cage capital was made available as a result of increased lines of credit
provided by the casino license holders. The total lines of credit were $55,263,000. Additionally, during 2010, additional
cage capital was made available as a result of warrant exercises in October 2010 resulting in the Company receiving $35.5 million,
reinvestment of profits and additional shareholder loans. Over 97% of our revenues were based upon a fixed commission on Rolling
Chip Turnover of approximately $19,458,960,000. As a result, we are able to concentrate our marketing efforts and increase our
rolling chip turnover. Rolling Chip Turnover is impacted by the availability of cage capital. With the increase in cage capital,
we can increase our Rolling Chip Turnover, which then results in increased revenues under the fixed commission revenue model.
Since June 16, 2011, all of our revenue is based upon a fixed commission on Rolling Chip Turnover.
The commission paid to junket agents increased by $79,360,792,
or 103.6%, during the year ended December 31, 2011 as compared to the same period in 2010 as a result of an increase in Rolling
Chip Turnover. The commissions to junket agents, as a percentage of Rolling Chip Turnover, was 0.78% for the year ended December
31, 2011, up from 0.73% for the year ended December 31, 2010, as a result of greater non-marker commissions paid in 2011 and a
smaller percentage of direct business in relation to total Rolling Chip Turnover. An increase in Rolling Chip Turnover may decrease
the percentage of direct business which may result in a higher percentage of commissions paid to junket agents in relation to the
revenue received.
Sales, general and administrative expenses increased by approximately
$5,303,449, or 47.2%, while revenues increased by 97.3%, during the year ended December 31, 2011 as compared to 2010. Management
salaries and director fees increased approximately $211,000 as a result of employment contracts and director fees initiated in
the first half of 2010. Management fees increased approximately $1,580,000 as a result of the expansion of operations at
the Iao Kun VIP Room in the Star World Hotel and Casino in Downtown Macau as well as the addition of King’s Gaming in November
2010 and the Iao Kun VIP Room in the Galaxy Resort Macau in May 2011. Additional increased operating costs in the VIP gaming rooms
were approximately $3,325,000 as a result of our expanded operations and the addition of King’s Gaming and the Iao Kun VIP
Room in the Galaxy Resort Macau in May 2011. Our investor relations expenses increased by approximately $259,000 in 2011 due to
increased investor relations activities. The percentage of VIP gaming room administrative costs and other selling, general
and administrative expenses may decrease in relation to revenues received as most of these costs are fixed in nature or are not
impacted by changes in revenues.
The special rolling tax increased by $950,808, or 91.2%, during
the year ended December 31, 2011 as compared to 2010 as a direct result of an increase in Rolling Chip Turnover. The percentage
of the rolling tax to revenue remained consistent at 0.08%
Operating income, after amortization of intangible assets and
before change in the fair value of contingent consideration for the acquisition of King's Gaming, was $71,005,149 for the year
ended December 31, 2011 as compared to operating income of $37,296,250, including pre-acquisition profit, for the year ended December
31, 2010, an increase of approximately 90.4%, principally as a result of (i) the continued recovery of the Macau gaming markets
from the impact of the global economic crisis; (ii) the acquisition of King's Gaming effective November 1, 2010, and its network
of junket agents; (iii) increased cage capital as a result of reinvesting profits, increased lines of credit from the casino license
holders, increased shareholder loans, and warrant exercises that provided $35.5 million in October 2010, and (iv) the opening of
the Iao Kun VIP Room at the Galaxy Resort Macau on May 15, 2011. Operating income after amortization of intangible assets
and before the change in the fair value of contingent consideration for the acquisition of King's Gaming as a percentage of VIP
gaming revenues was 28.3% for the year ended December 31, 2011 as compared to 29.4% for the year ended December 31, 2010.
The decrease as a percentage of VIP gaming revenues was due to higher commissions paid to non-marker junket agents in the current
period, a smaller percentage of direct business in relation to total Rolling Chip Turnover and amortization of intangible assets
Our Non-GAAP income,before amortization of intangible assets
and change in fair value of contingent consideration related to the acquisition of King's Gaming, was $76,063,353 for the year
ended December 31, 2011 as compared to income of $38,139,311, including pre-acquisition profit, for the year ended December 31,
2010, an increase of approximately 99.4%, principally as a result of (i) the Macau gaming markets continued recovery from the impact
of the global economic crisis; (ii) the acquisition of King's Gaming effective November 1, 2010 and its network of junket agents;
(iii) increased cage capital as a result of reinvesting profits, investing increased lines of credit from the casino license holders,
investing increased shareholder loans, and investing warrant exercises of $35.5 million in October 2010, and (iv) the opening of
the Iao Kun VIP Room at the Galaxy Resort Macau on May 15, 2011. Non-GAAP income before amortization of intangible assets
and change in fair value of contingent consideration related to the acquisition of King's Gaming, as a percentage of VIP gaming
revenues was 30.4% for the year ended December 31, 2011 as compared to 30.0% for the year ended December 31, 2010. The decrease
as a percentage of VIP gaming revenues was due to higher commissions paid in the current period, a smaller percentage of direct
business in relation to total Rolling Chip Turnover and a higher win rate for the Iao Kun VIP Room at the MGM Grand Hotel and Casino
during the current period.
Amortization of intangible assets for the year ended December
31, 2011 was $5,058,204 for the full year as a result of the acquisition of King's Gaming. Amortization expense for the year ended
December 31, 2010 was $843,061 since its acquisition in November, 2010.
The change in the fair value of the contingent consideration
resulted in a decrease to the contingent consideration liability of $6,248,361 due primarily to the decrease in the market price
of our ordinary shares and increased estimated future performance of King's Gaming. As required by FASB ASC Topic 805 on
business combinations, any change in the fair value of the acquisition-related contingent consideration subsequent to the acquisition
date, including changes from events after the acquisition date, such as changes in our estimate of the gross profit expected to
be achieved, will be recognized in earnings in the period that estimated fair value changes. The fair value estimate assumes probability-weighted
gross profits are achieved over the earn-out period. Actual achievement of gross profit range for this assumed earn-out period
could reduce the liability to zero. A change in the fair value of the acquisition-related contingent consideration could have a
material impact on our statement of operations and financial position in the period of change in estimate.
During June 2011, we issued 12,050,000 ordinary shares to Spring
Fortune pursuant to the incentive share provisions of the merger agreement with AGRL. Additionally, we issued 4,210,000 shares
as a result of the filing of Form 20-F for the fiscal year ended December 31, 2010 in May of 2011 pursuant to the provisions of
the merger agreement. The shares are considered to be issued as part of our merger and therefore have been treated as issued
for no additional cost or compensation.
EPS attributable to ordinary shareholders for the year ended
December 31, 2011 was $2.07, based upon the basic weighted average share count of 37,371,426 (which includes director and management
compensation of 18,796 ordinary shares, which have not been issued) and $2.00 based upon the fully diluted weighted average share
count of 38,691,186. The fully diluted share count includes ordinary share equivalents for the issuance of a total of 3,103,000
shares for AGRL having met its earnings incentive targets, 520,000 for King’s having met its earnings incentive targets and
1,440,000 shares and warrants issuable upon the exercise of a unit purchase option granted to the representative of the underwriters
of its initial public offering.
Non-GAAP EPS before amortization of intangible assets and change
in the fair value of contingent consideration for the year ended December 31, 2011 was $2.04 for basic and $1.97 for fully diluted.
Non-GAAP Financial Measures
Our calculation of Non-GAAP income (operating
income before amortization of intangible assets and change in fair value of contingent consideration) and Non-GAAP EPS for the
years ended December 31, 2012, 2011 and 2010, differs from EPS based on net income because it does not include amortization of
intangible assets and change in fair value of contingent consideration. We use this information internally in evaluating
our operations and believe this information is important to investors because it provides a complete picture of our operations
for the entire period and is more accurately comparable to the prior-year period. Notwithstanding the foregoing, Non-GAAP
income and EPS should not be considered an alternative to, or more meaningful than, net income and EPS as determined in accordance
with GAAP. The following is a reconciliation of our unaudited net income to Non-GAAP income and GAAP EPS to our Non-GAAP
EPS:
|
|
For
the Year Ended
December 31, 2012
|
|
|
For
the Year Ended
December 31, 2011
|
|
|
For
the Year Ended
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
Net Income attributable to ordinary shareholders
|
|
$
|
70,119,242
|
|
|
$
|
77,253,510
|
|
|
$
|
32,966,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
6,622,238
|
|
|
|
5,058,204
|
|
|
|
843,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior Owners' Interest in Pre-Acquisition Profit
|
|
|
-
|
|
|
|
-
|
|
|
|
4,329,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of contingent consideration
|
|
|
(15,166,700
|
)
|
|
|
(6,248,361
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP income (before amortization of intangible assets and change in fair value of contingent consideration)
|
|
$
|
61,574,780
|
|
|
$
|
76,063,353
|
|
|
$
|
38,139,311
|
|
|
|
For the Year Ended
December 31, 2012
|
|
|
For the Year Ended
December 31, 2011
|
|
|
For the Year Ended
December 31, 2010
|
|
|
|
Basic
|
|
|
Fully
Diluted
|
|
|
Basic
|
|
|
Fully
Diluted
|
|
|
Basic
|
|
|
Fully
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to ordinary shareholders
|
|
$
|
1.66
|
|
|
$
|
1.66
|
|
|
$
|
2.07
|
|
|
$
|
2.00
|
|
|
$
|
2.33
|
|
|
$
|
1.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
0.16
|
|
|
|
0.16
|
|
|
|
0.14
|
|
|
|
0.13
|
|
|
$
|
0.06
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior Owners' Interest in Pre-Acquisition Profit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
0.31
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of contingent consideration
|
|
|
(0.36
|
)
|
|
|
(0.36
|
)
|
|
|
(0.17
|
)
|
|
|
(0.16
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Earnings per share (before amortization
of intangible assets and change in fair value of contingent consideration)
|
|
$
|
1.46
|
|
|
$
|
1.46
|
|
|
$
|
2.04
|
|
|
$
|
1.97
|
|
|
$
|
2.69
|
|
|
$
|
2.17
|
|
Liquidity and Capital Resources
As of December 31, 2012, total available
cage capital in Macau was approximately $262,350,959. The total available cage capital is comprised of markers receivable
of approximately $241,706,663 and cash, cash chips and non-negotiable chips of approximately $20,644,296. AERL’s
loans from related parties decreased from $62,641,619 as of December 31, 2011 to $62,214,078 as of December 31, 2012, a decrease
of $427,541. $60,000,000 of the related party loans are convertible long-term loans. AERL’s related parties have guaranteed
the lines of credit with the Casino Operators, as well as uncollectible markers receivable (if any), which further reasonably demonstrates
the strong commitment from the principals to the continued success of the Company.
As of December 31, 2012, AERL had total
cash and cash equivalents balance of $20,644,296. Cash and cash equivalents provided by operations was $46,428,105 for the year
ended December 31, 2012 compared to cash provided by operations of $5,280,509 for the year ended December 31, 2011 as a result
of our tightening credit to junket agents and strengthening collection efforts on outstanding markers receivable. The Company’s
credit risk is primarily attributable to markers receivable which are guaranteed by Mr. Lam, Mr. Vong, Mr. Mok and Mr. Lou. Management
has a credit policy in place and the exposures to these credit risks are monitored on an ongoing basis. With respect to markers
receivable, credit evaluations are performed on all junket agents and direct gaming patrons. These evaluations focus on the junket
agent or direct gaming patron’s past history of making payments when due and current ability to pay, and take into account
information specific to the junket agents and direct gaming patrons as well as analysis of the economic environment from which
the junket agents and direct gaming patrons come from. As of December 31, 2012, management believes that there is no concentration
of credit risk related to markers receivable.
We have available lines of credit of approximately
$59,348,712 from Casino Operators, of which $34,799,982 was outstanding as of December 31, 2012. The lines of credit may be increased
from time to time at the discretion of the Casino Operators.
If the Casino Operators decide not to renew
the lines of credit in any given month, Rolling Chip Turnover may be reduced as a result of reducing credit extended to junket
agents and gaming patrons for gaming purposes. As a result, the amount of the reduced Rolling Chip Turnover, our gaming revenue
from the Casino Operators and our net operating income would also be reduced.
Our expected sources of repayment of the
Lines of Credit are the repayment of markers receivable from junket agents and gaming patrons as well as receivables due from the
Casino Operators.
In order to attract more non-credit junket
agents, beginning on September 1, 2012, the Company provided an option for large non-credit junket agents to share the wins and
losses under the revenue sharing model based on their proportionate contribution of total Rolling Chip Turnover. This may result
in a higher percentage of commission paid to junket agents in relation to Rolling Chip Turnover.
We paid dividends on September 2,
2011, totaling $3,880,406 and on April 18, 2012 totaling $7,529,000. Additionally, we paid a dividend of $5,093,128 on August
31, 2012. We estimate an additional dividend will be declared and paid in 2013 amounting to approximately $4,142,000. We
expect to pay the dividend of $0.12 per outstanding ordinary share after our-6-month results every year.
During the year ended December 31,
2012, we repurchased an aggregate of 1,273,947 ordinary shares for an aggregate purchase price of $4,166,483 pursuant to the
2012 share repurchase program.
We made cash payments of $9,000,000 and
$15,000,000 for the acquisitions of King’s Gaming and Bao Li Gaming, respectively.
Future Sources and Uses of Cash
We expect that our future liquidity and
capital requirements will be affected by:
|
·
|
Capital requirements related to prior and future acquisitions;
|
|
·
|
Cash flow from acquisitions;
|
|
·
|
Working capital requirements;
|
|
·
|
Funds obtained as a result of the exercise of our Unit Purchase Option;
|
|
·
|
Dividend distributions;
|
|
·
|
Repurchase of outstanding shares;
|
|
·
|
Funds raised through the sale of our securities; and
|
|
·
|
Earnings accumulated and reinvested.
|
Off-Balance Sheet Arrangements
None.
Contractual Obligations
We have the following long term debt, capital lease obligations,
operating lease obligations, purchase obligations or other long term liabilities as of December 31, 2012:
|
|
Payments due by period
|
|
|
|
Total
|
|
|
Less than
1
year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than
5
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholder Loans
|
|
$
|
62,214,078
|
(1)
|
|
$
|
2,214,078
|
|
|
$
|
60,000,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Operating Lease Obligations
|
|
|
35,348
|
(2)
|
|
|
35,348
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Management Agreements
|
|
|
6,806,667
|
(3)
|
|
|
6,806,667
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Employment Agreements
|
|
|
2,496,521
|
(4)
|
|
|
860,590
|
|
|
|
1,635,931
|
|
|
|
-
|
|
|
|
-
|
|
Contingent Consideration
|
|
|
50,294,981
|
(5)
|
|
|
9,000,000
|
|
|
|
41,294,981
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
121,847,595
|
|
|
$
|
18,916,683
|
|
|
$
|
102,930,912
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
(1)
|
Loans payable ($62,214,078) to Messrs. Lam and Vong;
|
|
(2)
|
Office leases in Hong Kong and Macau for executive offices
which expire in September 2013. Minimum future lease payments are $35,348 during the year ended December 31, 2013;
|
|
(3)
|
Management agreements between three of AGRL’s VIP gaming promoters and Pak Si Management and Consultancy Limited of Macau,
pursuant to which that company is responsible for the hiring and management of staff at the VIP gaming rooms promoted by the VIP
gaming promoters in Macau. Each of the management agreements is for a one-year term, subject to renewal;
|
|
(4)
|
Employment agreements with certain of our executive officers, as described under Item 6.B.; and
|
|
(5)
|
Contingent consideration ($50,294,981) due to the former owners of King’s Gaming and Bao Li Gaming.
|
Other Events
On March 26, 2013, the Company issued a press
release announcing fourth quarter and year 2012 financial results. A copy of the press release is attached as Exhibit 99.1.
Company Operations and Critical Accounting Policies
Profit Interest Agreements
Each Promoter Company has entered into an
agreement with the casino operators and license holders to promote a VIP gaming room in the respective casino. These agreements
provide that the Promoter Company receives a commission or share in the net win/loss of the VIP gaming room. Current Macau laws
do not allow non-Macau companies, such as AGRL, to directly operate a gaming promotion business in Macau. Consequently, the Promoter
Company enters into a profit interest agreement with a subsidiary of AGRL, providing for the assignment to the AGRL subsidiary
of 100% of the profits derived by the Promoter Company from its promotion of the VIP gaming room. The manner of calculation of
the profit is set out in an exhibit to the profit interest agreement. The profit agreements do not have expiration dates and continue
conterminously with the operation of the respective VIP gaming rooms.
In addition to the assignment of the profit
interest, each profit interest agreement provides that the VIP gaming promoter will not terminate its underlying agreement with
the casino without AERL’s consent and that it will at all times maintain all licenses, agreements and other permissions it
requires to perform its obligations pursuant to such agreement.
In connection with the profit interest agreements,
Messrs. Lam Man Pou (“Mr. Lam”) (Chairman and Director of AERL and principal stockholder of AERL) and Vong Hon Kun
(“Mr. Vong”) (Chief Operating Officer and Director of AERL) have agreed to make loans to AGRL for use by AGRL for working
capital and to make loans to AGRL’s VIP gaming promoters not less than $45,000,000. This funding commitment terminates at
the end of the fiscal quarter that AGRL’s working capital is not less than $100,000,000, exclusive of any working capital
provided by Messrs. Lam and Vong. Messrs. Lam and Vong will also guaranty to AGRL the repayment of the loans made by AGRL to the
VIP gaming promoters. On April 18, 2011, to memorialize such loans we issued an interest-free convertible note for $30 million
to each of Mr. Lam Man Pou and Mr. Vong Hon Kun (for an aggregate amount of $60 million). The notes expire on April 18, 2014
and are convertible into our ordinary shares at a price of $20 per share at the option of the holder and callable at our option
at a price of $20 per share if the closing price of our ordinary shares for any ten consecutive trading days exceeds $25.
Revenue Recognition
Revenue from VIP gaming room operations
is recorded monthly based upon the Promoter Companies’ share of the net gaming wins or as a percentage of non-negotiable
chips wagered in VIP gaming rooms. The amounts due the Promoter Companies are calculated and reported by the casino operators on
a monthly basis, usually within ten days of the month end.
In accordance with long standing industry
practice in Macau, the Promoter Companies’ operations in Grand Waldo Hotel and Casino, Star World Hotel and Casino and MGM
Grand Hotel and Casino had similar revenue and loss sharing arrangements. Under these arrangements, Sang Heng, Spring and Iao Pou
shared in the casino’s VIP gaming room wins or losses from the gaming patrons recruited by the Promoter Companies. Typically,
wins and losses are allocated as 40.25% to 49% of net gaming wins on a pre-gaming tax basis. The Promoter may or the Casino Operators
may adjust these arrangements with adequate notice and agreement by both parties to the arrangement.
Additionally, the Promoter Companies earn
revenues based upon percentages of non-negotiable chips wagered in the VIP gaming rooms (typically 0.05%), which is available to
offset costs incurred for accommodations, food and beverage and other services furnished to VIP gaming room patrons without charge
and is included in gross revenues and then deducted as promotional allowances as incurred. These revenues are recorded as fees
and incentive revenues in the statements of operations.
In July 2009, all concessionaires and sub-concessionaires
entered into an agreement to cap gaming promoter commissions. Under this agreement, commission payments to gaming promoters could
not exceed 1.25% of rolling chip volumes regardless of the commission structure adopted. As a result of the amendments made to
Administrative Regulation No. 6/2002 by Administrative Regulation 27/2009 dated August 10, 2009, the Secretary of Economy and Finance
of the Macau SAR now has the authority to issue a dispatch implementing the 1.25% gaming promoter commission cap, as agreed between
all concessionaires and sub-concessionaires. The amendment sets forth standards for what constitutes a commission to gaming promoters,
including all types of payments, either monetary or in specie, that are made to gaming promoters such as food and beverage, hotel
and other services and allowances. The amendment also imposes obligations on gaming promoters, casino operators to report regularly
to the Gaming Inspection and Coordination Bureau of the Macau SAR and imposes fines or other sanctions for noncompliance with the
commission cap or the monthly obligations to report and detail the amount of commissions paid to gaming promoters.
Beginning in October 2009, Star World Hotel
and Casino agreed to revise the Sang Heng Agreement and removed the win/loss sharing component and replaced it with a commission
payable to Sang Heng at a rate of 1.25% of rolling chip turnover. Management had requested that the MGM Grand Hotel and Casino
revise the Iao Pou Agreement to remove the win/loss sharing component and replace it with a commission payable to Iao Pou at a
rate of 1.25% of rolling chip turnover. MGM Grand Hotel and Casino declined the request to allow for fixed commissions. The Company
closed its VIP gaming room in the MGM Hotel and Casino on June 16, 2011. The Sang Lung and King’s Gaming arrangements were
also based on 1.25% of the rolling chip turnover. Total rolling chip turnover in the Group’s VIP gaming rooms was approximately
$18,149,348,000, $19,931,385,000 and $10,423,462,000 during the years ended December 31, 2012, 2011, and 2010 respectively.
On August 1, 2012, the Company announced
that beginning on September 1, 2012, it would be changing its remuneration model from a fixed commission model of 1.25% of the
rolling chip turnover to a win and loss sharing model. The decision to change from the fixed commission model to the sharing model
was made as a result of the Company’s expansion into four VIP gaming rooms, giving it the ability to spread the risk of fluctuations
surrounding gaming wins and losses. Additionally, management has initiated a new program for junket agents that provide their own
credit to gaming patrons, allowing the junket agent to assume some of the risk of gaming losses and receive increased commissions
as a result of gaming wins. Win rate was 3.03% and 2.77% during the years ended December 31, 2012 and 2011, respectively.
VIP Gaming Room Cage and Marker Accounting
As of December 31, 2009 and through the
period prior to the reverse merger on February 2, 2010, the Promoter Companies did not extend credit to junket agents. Previously,
the operations of the cage, which is where cash, non-negotiable and cash chips transactions and extension of credit occur, were
owned by the individual owners of the Promoter Companies. Subsequent to the acquisition of AGRL by AERL, the operations and extension
of credit by the cage became controlled by the Company through the Promoter Companies and Messrs. Lam and Vong assigned the assets
of the cage to AERL and its subsidiaries as a loan in the amount of $20,220,000 to enable AERL and its subsidiaries to extend credit
to the VIP gaming promoters and not less than $45,000,000 on and after March 31, 2010 and until the agreement is terminated.
At December 31, 2012, the loan amounted to $62,214,078. On April 18, 2011, to memorialize such loans we issued an interest-free
convertible note for $30 million to each of Mr. Lam Man Pou and Mr. Vong Hon Kun (for an aggregate amount of $60 million).
The notes expire on April 18, 2014 and are convertible into our ordinary shares at a price of $20 per share at the option of the
holder and callable at our option at a price of $20 per share if the closing price of our ordinary shares for any ten consecutive
trading days exceeds $25.
In the VIP gaming rooms, junket agents primarily
purchase non-negotiable chips from the cage either with cash, cash chips, cashier’s order, or markers (short term, non-interest
bearing loans). Non-negotiable chips can only be used to make wagers. Winning wagers are paid in cash chips. The wager of the non-negotiable
chips by the gaming patrons in the VIP gaming room is recorded as rolling chip turnover and provides a basis for measuring VIP
gaming room win percentage. It is customary in Macau to measure VIP gaming room play using this rolling chip method.
The law in Macau permits VIP gaming promoters
to extend credit to junket agents.
With the completion of the acquisition of
AGRL by AERL, the Company, through the Promoter Companies, extends credit to junket agents. A majority of the Company’s consolidated
markers receivable are owed by junket agents from Macau and the rest are primarily in Asia. In addition to enforceability issues,
the collectability of markers from foreign junket agents is affected by a number of factors including changes in economic conditions
in the junket agents’ home countries.
The Company may not be able to collect all
of their markers receivables from the junket agents. Management expects that the Company will be able to enforce these obligations
only in a limited number of jurisdictions, including Macau. To the extent that junket agents of the Company, through the Promoter
Companies, are from other jurisdictions, the Company may not have access to a forum in which they will be able to collect all of
their markers receivables because, among other reasons, courts of many jurisdictions do not enforce gaming debts and the Company
may encounter forums that will refuse to enforce such debts. The Company’s inability to collect gaming debts could have a
significant negative impact on their operating results.
The Company regularly evaluates the allowance
for uncollectible marker receivable based on a specific review of junket agent accounts as well as management’s prior experience
with collection trends in the casino industry and current economic and business conditions. Upon the completion of the acquisition
of AGRL by AERL, Messrs. Lam and Vong guaranteed all markers receivable in the Company’s VIP gaming rooms. The guarantees
by Messrs. Lam and Vong do not cover markers receivable attributable to the junket agent networks of Mr, Mok or Mr. Lou, as described
below. The guarantee of Messrs. Lam and Vong can be offset against the loans provided by them for the working capital. Upon the
acquisition of King’s Gaming, Mr. Mok has guaranteed the collection of all markers receivable attributable to Mr. Mok and
his network of junket agents at both King’s Gaming’s existing VIP gaming room and the Company’s existing and
future VIP gaming rooms. Upon the acquisition of Bao Li Gaming, Mr. Lou guaranteed the collection of all markers receivable attributable
to Mr. Lou and his network of junket agents at both Bao Li Gaming’s existing VIP gaming room and the Company’s existing
and future VIP gaming rooms through December 31, 2015.
Goodwill and Other Intangible Assets
In accordance with the provisions of FASB
ASC Topic 350, “Intangibles—Goodwill and Other”, the Company amortizes intangible assets over their estimated
useful lives unless it is determined their lives to be indefinite. Goodwill and other intangible assets with indefinite lives are
not amortized but are subject to tests for impairment at least annually. FASB ASC Topic 350 requires that that management perform
impairment tests more frequently than annually if events or circumstances indicate that the value of goodwill or intangible assets
with indefinite lives might be impaired.
The following are the useful lives of the
respective intangible assets:
Bad Debt Guarantee
|
|
5.5 years
|
|
Based upon six months after the expiration of the employment agreement
|
|
|
|
|
|
Non-Compete agreement
|
|
12.2 years
|
|
Based upon the termination date of the casino’s license
|
|
|
|
|
|
Profit interest agreement
|
|
12.2 years
|
|
Based upon the termination date of the casino’s license
|
Indefinite Useful Life Assets
Goodwill is evaluated for possible impairment
by comparing the fair value of a business unit with its carrying value, including the goodwill assigned to that business unit.
Fair value of a business unit is estimated using a combination of income-based and market-based valuation methodologies. Under
the income approach, forecasted cash flows of a business unit are discounted to a present value using a discount rate commensurate
with the risks of those cash flows. Under the market approach, the fair value of a business unit is estimated based on the revenues
and earnings multiples of a group of comparable public companies and from recent transactions involving comparable companies. An
impairment charge is recorded if the carrying value of the goodwill exceeds its implied fair value. Assets with indefinite useful
lives are not subject to amortization and are tested for impairment annually or more frequently if events or circumstances indicate
that the assets might be impaired. The impairment test consists of a comparison of the fair value of the asset with its carrying
amount. If the carrying amount of the asset exceeds its fair value, an impairment will be recognized in an amount equal to that
excess. If the carrying amount of the asset does not exceed the fair value, no impairment is recognized.
Impairment of Long-lived Assets
In accordance with the provisions of FASB
ASC Topic 360, “Impairment or Disposal of Long-Lived Assets”, when events or circumstances indicate that the carrying
amount of long-lived assets to be held and used might not be recoverable, the expected future undiscounted cash flows from the
assets are estimated and compared with the carrying amount of the assets. If the sum of the estimated undiscounted cash flows was
less than the carrying amount of the assets, an impairment loss would be recorded. The impairment loss would be measured on a location
by location basis by comparing the fair value of the asset with its carrying amount. Long-lived assets that are held for disposal
are reported at the lower of the assets’ carrying amount or fair value less costs related to the assets’ disposition.
No impairment has been recognized.
Stock-Based Compensation
The Company awards stock and other equity-based
instruments to its employee, directors and consultant (collectively “share-based payments”) pursuant to the terms of
its incentive plan which is further described under Item 6.B. Compensation cost related to such awards is recorded when earned.
Ordinary shares are issued to the directors subsequent to year end based on average trading price prior to December 31 each year.
All of the Company’s stock-based compensation is based on grants of equity instruments and no liability awards have been
granted.
Fair Market Value of Contingent Consideration
A total liability of $83,718,658 was recognized
for the estimated acquisition fair value of the contingent consideration based on the probability of the achievement of the gross
profit targets. Any change in the fair value of the acquisition-related contingent consideration subsequent to the acquisition
date, including changes from events after the acquisition date, such as changes in the Company’s estimate of the gross profit
expected to be achieved, will be recognized in earnings in the period that estimated fair value changes. The fair value estimate
assumes probability-weighted gross profits are achieved over the earn-out period. Actual achievement of gross profit range for
this assumed earn-out period could reduce the liability to zero. A change in the fair value of the acquisition-related contingent
consideration could have a material impact on the Company’s statement of operations and financial position in the period
of change in estimate. Fluctuations in the market value of the Company's ordinary shares and subsequent performance will cause
the fair value to increase or decrease and the resulting change will be recognized in earnings.
Foreign Currency
The functional and reporting currency of
AERL is in the United States dollar (“US $”, “$”, “Reporting Currency”). AGRL’s and the
Promoter Companies’ functional currency is the Hong Kong Dollar (“HKD $”, “Functional Currency”).
Monetary assets and liabilities denominated in currencies other than the Functional Currency are translated into the Functional
Currency at rates of exchange prevailing at the balance sheet dates. Transactions denominated in currencies other than the Functional
Currency are translated into the Functional Currency at the exchange rates prevailing at the dates of the transaction.
Exchange gains or losses arising from foreign
currency transactions are included in the determination of net income for the respective period. Exchange gains or losses have
historically been insignificant.
For financial reporting purposes, the consolidated/combined
financial statements of the Company, which are prepared using the Functional Currency, are then translated into the Reporting Currency.
Assets and liabilities are translated at the exchange rates at the balance sheet dates and revenue and expenses are translated
at the average exchange rates and shareholders’ equity is translated at historical exchange rates. Any translation adjustments
resulting are not included in determining net income but are included in foreign currency translation adjustment in other comprehensive
income, a component of shareholders’ equity.
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Period end HK$:US$ exchange rate
|
|
$
|
7.75
|
|
|
$
|
7.78
|
|
|
$
|
7.77
|
|
Average annual HK$:US$ exchange rate
|
|
$
|
7.76
|
|
|
$
|
7.78
|
|
|
$
|
7.77
|
|
ITEM
6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|
A.
|
Directors and senior management
|
Our board of directors consists of nine
(9) directors divided into three classes, each of which serves for a term of three years, with only one class of directors being
elected in each year. All of the current directors other than João Manuel Santos Ferreira, George Chui Vai Hou, and Yeung
Lun Allan, and Peter Li were initially elected by the shareholders at the time of the acquisition of AGRL. Messrs. Ferreira, Chui
and Yeung were initially appointed by the existing directors on April 7, 2010. Peter Li was initially elected by the shareholders
at our 2011 annual meeting on December 13, 2011. The directors serve as follows:
|
·
|
in the class to stand for reelection in 2013: Lam Man Pou, Vong Hon Kun and George Chui Vai Hou;
|
|
·
|
in the class to stand for reelection in 2014: Peter Li, Raymond Li Chun Ming, and Yeung Lun Allan; and
|
|
·
|
in the class to stand for reelection in 2015: Leong Siak Hung, James R. Preissler and João Manuel Santos Ferreira.
|
Our executive officers are:
Name
|
|
Position
|
|
|
|
Lam Man Pou
|
|
Chairman and Chief Marketing Officer
|
|
|
|
Leong Siak Hung
|
|
Chief Executive Officer
|
|
|
|
Raymond Li Chun Ming
|
|
Chief Financial Officer
|
|
|
|
Vong Hon Kun
|
|
Chief Operating Officer
|
|
|
|
Sylvia Lee
|
|
Executive Vice President
|
Our executive officers other than Ms. Lee
also hold the same positions with AGRL and are paid in accordance with their employment agreements with AGRL that are described
below.
The following pages set forth the names,
ages and director start dates of the directors and director nominees, their respective principal occupations or brief employment
history for the past five years and the names of other publicly-held companies of which each serves or has served as a director
during the past five years.
Lam Man Pou
, age 49, has been the chairman and
chief marketing officer and a director of the Company since February 2010 and has been the chairman, chief marketing officer and
a director of AGRL since its inception in May 2007. He is responsible for the overall direction and development of the Company,
its subsidiaries and VIP gaming promoters. He is also responsible for developing AGRL’s and its VIP gaming promoters’
marketing programs. Mr. Lam is a citizen of Macau, China and has been involved in the gaming industry in Macau for over 20 years.
He had served as junket agent for various VIP gaming rooms in SJM casinos and Waldo Casino before setting up his own gaming promotion
business in May 2006. From May 2006 to early July 2007, he was the sole proprietor of Sang Heng and Spring. From March 1990 to
May 2002, Mr. Lam was a junket agent for the Casinos of Sociedade de Turismo e Diversoes de Macau, S.A. From June 2002 through
May 2005, Mr. Lam was a junket agent for Casino New Century. From July 2004 through May 2006 Mr. Lam was a junket agent for Waldo
Casino. He is a member of the Macau Gaming Industry General Association of Administrators and VIP Gaming Promoters. Mr. Lam’s
business address is Unit 605, East Town Building, 16 Fenwick Street, Wanchai, Hong Kong.
Leong Siak Hung
, age 42, has served as the Chief
Executive Officer and a director of the Company since February 2010 and has served as the chief executive officer and a director
of AGRL since its formation and is responsible for the direct general administration of the Company and the Company’s strategic
planning and expansion. Mr. Leong is a citizen of Macau, China and has over 17 years of active management with various industrial
and real property companies in Macau, Hong Kong and China. From November 2001 through June 2003, he was chief executive officer
of National Craft Industrial Co. Ltd, a toys manufacturing company in China. From July 2003 to June 2006, he was chief executive
officer of Idea Kids Toy Co. Ltd. and Genesis Industrial Co. Ltd. Since July 2006, he has been chairman of Idea Kids Toy Co., Ltd,
a toy manufacturing company in China, and also has been chairman of Genesis Industrial Co., Ltd, a toy manufacturing company in
Macau. From July 2006 to December 31, 2009, he was chairman of Zhuhai Zhongzhu Real Estate Development Company Ltd, a real property
developer. He has acted as management advisor for Mr. Lam in respect of general administration and human resources management for
VIP gaming rooms since May 2006. Mr. Leong’s business address is Unit 605, East Town Building, 16 Fenwick Street, Wanchai,
Hong Kong.
Raymond Li Chun Ming
, age 55, has served as the
chief financial officer and a director of the Company since February 2010 and has served as chief financial officer and a director
of AGRL since its formation and is responsible for the accounting and finance of the Company. Mr. Li is a citizen of Hong Kong,
China and is a practicing Certified Public Accountant and a member of the Hong Kong Institute of Certified Public Accountants.
He is also an associate of the Hong Kong Taxation Institute and the Association of International Accountants. He is a graduate
of Hong Kong Polytechnic University, Department of Accounting. From July 1984 through July 2005 he worked as senior manager for
Tony C. M. Yau & Company, Certified Public Accountant, in Hong Kong, where he was engaged in auditing, accounting and corporate
services. From August 2005 through July 2006 he worked as a consultant for K Li Business Consultancy Limited, where he was engaged
in the provision of corporate and financial advisory services. Since August 2006 he has been an executive director of Klis &
Associates CPA Limited, Certified Public Accountants, in Hong Kong. In September 2004, he was appointed as an independent non-executive
director of Benefun International Holding Limited, a Hong Kong publicly listed company engaged in the sales of plantation products,
property development, garment manufacturing and retailing, and held such position until May 2009. He has acted as an advisor to
Mr. Lam in respect of the financial management of the VIP gaming rooms since May 2006. Mr. Li’s business address is Unit
605, East Town Building, 16 Fenwick Street, Wanchai, Hong Kong.
Vong Hon Kun
, age 47, has served as the chief
operating officer and a director of the Company since February 2010 and has served as chief operating officer and a director of
AGRL since its formation and is responsible for the day-to-day operation of the Company and developing the VIP gaming patron market
in mainland China and the junket agent network throughout that country. Mr. Vong is a citizen of Macau, China. Mr. Vong has spent
over 20 years in the gaming industry and had served as junket agent for various VIP gaming rooms in SJM casinos and Waldo Casino
before joining Lam Man Pou for promoting gaming business in May 2006. From July 1990 to May 2002, Mr. Vong was a junket agent for
the Casinos of Sociedade de Turismo e Diversoes de Macau, S.A. From June 2002 through May 2005, Mr. Vong was a junket agent for
Casino New Century. From July 2004 through May 2005 Mr. Vong was a junket agent for Waldo Casino. Before he joined the gaming industry,
Mr. Vong had worked as a civil servant for six years. He is a member of the Macau Gaming Industry General Association of Administrators
and VIP Gaming Promoters. Mr. Vong’s business address is Unit 605, East Town Building, 16 Fenwick Street, Wanchai, Hong Kong.
James R. Preissler
, age 39, has served as a director
of CS China Acquisition Corp. (“CS China”), the Company’s corporate predecessor, from June 2008 and served as
chief financial officer and secretary of the Company from June 2008 until the Company’s acquisition of AGRL on February 2,
2010. Since November 2006, Mr. Preissler has served as a managing partner of Panthera Capital Group, an advisory firm for Chinese
companies. From November 2004 until November 2006, Mr. Preissler served as the chief financial officer and secretary for China
Unistone Acquisition Corp., a blank check company that subsequently merged with a target in China to form Yucheng Technologies
(Nasdaq: YTEC), a provider of financial technologies and solutions to banks in China. Mr. Preissler has served as an investment
advisor to Yucheng Technologies since its merger in November 2006. From March 2003 until September 2005, Mr. Preissler served as
the associate director of research for Majestic Research, a New York-based independent research boutique firm focused on proprietary
research for hedge funds and institutional investors. From March 2002 to February 2003, he served as a head of the digital media
research group of Investec, an investment bank specializing on mid-cap growth companies in the United States and Europe. Mr. Preissler
received a Bachelor of Arts degree from Yale University and currently holds Series 7, 24, 63, and 79 securities licenses. Mr. Preissler’s
business address is 50 Old Route 25A, Fort Salonga, New York
João Manuel Santos Ferreira
, age 59, has
served as a director of the Company since April 7, 2010. Mr. Ferreira is an attorney at law in Macau. From 1996 to July 2008, he
was a practicing solicitor at the Macau Jurisdiction Court. From 1975 to 1996, he served in various positions with Macau public
departments, including the Macau Inspection Gaming Bureau (DICJ), where he was a Gaming Inspector from 1989 to 1996. He holds a
Bachelor’s degree in law from the University of Macau. Mr. Ferreira’s business address is Suite G, 2/F, 26 Rua Dr.
Pedro Jose Lobo, Macau.
Yeung Lun Allan
, age 56, has served as a director
of the Company since April 7, 2010. Since 1982, Mr. Yeung has had extensive experience in the manufacturing industry in China.
Since June 2008, he has been the operation manager of Yen Hing Leather Works Factory, which operates a manufacturing plant of 3,500
employees in Dongguang, China. From 1982 to 1985, he was with Sun Chung Precision Metal Industry Limited, where he was General
Manager at the time he left that company. From 1995 to March 2007, as general manager or deputy general manager, he managed 5 other
manufacturing plants in China having thousands of employees. From April 2007 to March 2009, he was an assistant operations manager
for High-Tech Industrial (HK) Ltd. Mr. Yeung holds a Bachelor’s degree in Electrical Engineering from Aichi Institute of
Technology in Japan. Mr. Yeung’s business address is 27/F, Yen Sheng Centre, 64 Hoi Yuen Road, Kwun Tong, Kowloon, Hong Kong.
George Chui Vai Hou
, age 45, has served as a director
of the Company since April 7, 2010. Mr. Chui has been Executive Director of Wai Luen Import & Export Company Limited in Macau
since 1998. Since December 2008, he has also been Executive Director of Ieng Tat Investment & Development Company Limited,
a Macau company engaged in investment activities. From December 2000 to June 2006, he was also Executive Director of Tai Chong
Ip (Group) Company Limited, a real estate trading company in Macau. Mr. Chui has also been invited and serves as a Member of the
9th, 10th and 11th Guangzhou Committees of the Chinese People’s Political Consultative Conference of China, which are consultative
committees for the Conference. He received a Bachelor’s degree in Social Sciences with First Class Honours, majoring in accounting
and statistics, from the University of Southampton in the United Kingdom and also holds a Master of Science degree in International
Banking and Financial Studies from the same university. Mr. Chui’s business address is 13A Seng Vo Kok, 405 Rua De Amizade,
Macau.
Peter Li
, age 48, has served as our director since
December 2011. Mr. Li served as a director of CS China from June 2008 until the Company’s acquisition of AGRL on February
2, 2010. Mr. Li is currently chief financial officer of Hollysys Automation Technologies (NASDAQ: HOLI), a leading automation technology
and product provider to industrial, rail, and nuclear sectors in China. Mr. Li is an independent director and audit committee chairman
for China Valves Technology, Inc. (NASDAQ: CVVT) and Yuhe International Inc.(PK.YUII). Prior to working at Hollysys, Mr. Li was
CFO of Yucheng Technologies (NASDAQ: YTEC), a leading IT service provider to banking industry in China. Mr. Li was Internal Controller
with Lenovo, a leading PC maker in China, before he joined Yucheng Technologies. Mr. Li graduated from Beijing Foreign Studies
University with a B.A. and received a Master of Education from University of Toronto. Mr. Li is a Certified General Accountant
in Ontario, Canada.
Sylvia Lee
, age 48, became our executive vice
president in April 2010. She served as the president, chief financial officer and secretary of CS China from its inception until
June 2008 and as a director of the Company from February to April 2010. Ms. Lee is a founding member, and has served as the vice
chairman and chief financial officer of CS Capital USA since August 2004. She has also been a director of SK Development since
May 2006. Ms. Lee is a founding member and has been the executive vice president of Lee Holdings Company, Inc. since August 1989.
From November 1994 to January 2001, Ms. Lee served as the president and was a co-founder of Unique Domain, Inc., an interior design
firm and furniture trade showroom chain store in Florida. From June 1993 to September 1997, Ms. Lee was a member and also served
as the treasurer of the Arts and Design Village Development Council of Buena Vista, Inc., a non-profit organization which had helped
revitalize the mid-town Miami area and the Miami Design District. From August 1989 to August 1995, Ms. Lee served as the vice president
of City Homes, Inc. Ms. Lee received a Master of Science degree. from Florida International University and a Bachelor of Arts degree
from the University of Hawaii. Ms. Lee’s business address is 4100 N.E. Second Avenue, Suite 318, Miami, Florida 33137.
There are currently no family relationships
among our directors and executive officers.
Compensation Committee Interlocks and Insider Participation
No member of our compensation committee
has at any time been our officer or employee, or our subsidiaries. No interlocking relationship exists between our board of directors
or compensation committee and the board of directors or compensation committee of any other company, nor has any interlocking relationship
existed in the past.
During the last fiscal year, none of our
officers and employees, and none of our former officers participated in deliberations of our Board of Directors or our compensation
committee concerning executive officer compensation.
Benchmarking of Cash and Equity Compensation
We believe it is important when making compensation-related
decisions to be informed as to current practices of similarly situated publicly held companies. We expect to stay apprised of the
cash and equity compensation practices of publicly held companies in the gaming industry through the review of such companies’
public reports and other resources. It is expected that any companies chosen for inclusion in any benchmarking group would have
business characteristics comparable to us, including revenues, financial growth metrics, stage of development, employee headcount
and market capitalization. While benchmarking may not always be appropriate as a stand-alone tool for setting compensation due
to the aspects of our business and objectives that may be unique to us, we generally believe that gathering this information will
be an important part of our compensation-related decision-making process.
Compensation Components
Base Salary
. Generally,
we set executive base salaries for our executives and those of AGRL at levels comparable with those of executives in similar positions
and with similar responsibilities at comparable companies. We seek to maintain base salary amounts at or near the industry norms
while avoiding paying amounts in excess of what we believe is necessary to motivate executives to meet corporate goals. Base salaries
will generally be reviewed annually, subject to terms of employment agreements, and we will seek to adjust base salary amounts
to realign such salaries with industry norms after taking into account individual responsibilities, performance and experience.
Incentive Bonuses
. We
may design and utilize cash incentive bonuses for our executives and those of AGRL to focus them on achieving key operational and
financial objectives within a yearly time horizon. It is expected that such bonuses will be based on the standards include objective
standards for job specific matters and subjective standards based on diligence, improvement of skills and company loyalty, decisiveness
and an appropriate service mind-set. Improvement over the prior year is considered highly important. No cash bonuses have been
granted to date.
Equity-Based Awards.
We
may also use equity-based awards, such as stock options and stock grants, as part of our compensation packages. As of the date
of this annual report, we have not adopted any plans or policies regarding such awards. As part of her annual compensation, Sylvia
Lee, our executive vice president, receives $20,000 of our ordinary shares, as further described under “—Officer Compensation;
Employment Agreements” below.
Officer Compensation; Employment Agreements
The following table sets forth all compensation
paid to our executive officers (not including amounts paid in connection with their services as directors, which is described below)
during 2012:
Name and Principal Position
|
|
Fees
Earned or
Paid in
Cash
(US$)
|
|
|
Ordinary
Shares
(US$)
|
|
|
Total
(US$)
|
|
Lam Man Pou, Chairman and Chief Marketing Officer
|
|
|
126,462
|
|
|
|
—
|
|
|
|
126,462
|
|
Leong Siak Hung, Chief Executive Officer
|
|
|
262,217
|
|
|
|
—
|
|
|
|
262,217
|
|
Raymond Li Chun Ming, Chief Financial Officer
|
|
|
192,777
|
|
|
|
—
|
|
|
|
192,777
|
|
Vong Hon Kun, Chief Operating Officer
|
|
|
126,462
|
|
|
|
—
|
|
|
|
126,462
|
|
Sylvia Lee, Executive Vice President
|
|
|
30,000
|
|
|
|
20,000
|
|
|
|
50,000
|
|
(1) Our board of directors determined that the valuation price
of our ordinary shares with respect to the 2012 equity compensation was $3.30.
AGRL has entered into employment agreements
with its four executive officers that became effective upon the closing of our acquisition of AGRL. The following table sets forth
certain information about these employment agreements as of December 31, 2012.
Officer
|
|
Position
|
|
Term
|
|
Annual Salary
|
|
Leong Siak Hung
|
|
Chief Executive Officer
|
|
Three Years
|
|
$
|
262,217
|
|
Raymond Li Chun Ming
|
|
Chief Financial Officer
|
|
Three Years
|
|
$
|
192,777
|
|
Lam Man Pou
|
|
Chief Marketing Officer
|
|
Five Years
|
|
$
|
126,462
|
|
Vong Hon Kun
|
|
Chief Operating Officer
|
|
Five Years
|
|
$
|
126,462
|
|
Certain of the agreements were amended on
February 2, 2012 to increase annual salary, effective January 1, 2012. Leong Siak Hung’s annual salary increased to $262,217,
Raymond Li Chun Ming’s annual salary increased to $192,777, Lam Man Pou’s annual salary increased to $126,462, and
Von Hon Kun’s annual salary increased to $126,462.
Each officer is entitled to paid vacation
in accordance with AGRL’s policies. Each officer is also entitled to reasonable use of company-provided automobiles, with
the officer to be reimbursed for all reasonable expenses related to the use and operation of such automobiles. However, no automobiles
are currently being provided and we currently have no plan in place to provide automobiles.
The employment agreements, except Ms. Lee’s
employment agreement, provide that the executive, during the period of five years following the termination of his employment (three
years in the case of Messrs. Leong and Li), shall not compete with AGRL or solicit any of its employees.
The agreements, except Ms. Lee’s employment
agreement, contain provisions prohibiting the executives, during their respective terms of employment, from selling, hypothecating
or otherwise transferring more than 20% of any ordinary shares that may be transferred to them by Spring Fortune from shares it
received or receives as a result of the acquisition. If an executive’s employment is terminated for any reason prior to the
expiration of the employment term, or if the executive breaches the confidentiality and non-competition and non-solicitation provisions
of his employment agreement, the executive is obligated to transfer and assign to us all securities then held by him and all rights
to receive securities in the future, which securities will be canceled.
Messrs. Leong, Li, Lam and Vong serve in
similar positions as our officers, for which they receive no additional compensation.
Director Compensation
All of our directors presently receive annual
compensation of $30,000 in cash and $20,000 in our ordinary shares, valued at the average of the closing prices of the ordinary
shares over the three-month period preceding the end of each fiscal year. The directors of the Company are entitled to receive
an aggregate of 54,549 ordinary shares for fiscal 2012. The chairman of the audit committee receives additional annual cash compensation
of $10,000 and the other members of the audit committee each receive additional annual cash compensation of $5,000. The chairman
of the compensation and nominating committees each receive additional annual cash compensation of $5,000 and the other members
of these committees each receive additional annual cash compensation of $3,000. Each director receives $1,000 for each board or
committee meeting that he or she attends (whether in person or telephonically) that is at least an hour in duration and $500 for
each board or committee meeting he or she attends that is less than an hour in duration.
The following table sets forth information
regarding compensation provided to our directors for their service on the board of directors in 2012.
Name
|
|
Fees Earned
or Paid in
Cash
(US$)
|
|
|
Ordinary
Shares(1)
(US$)
|
|
|
Total
(US$)
|
|
Raymond Li Chun Ming
|
|
|
35,000
|
|
|
|
20,000
|
|
|
|
55,000
|
|
Yeung Lun Allan
|
|
|
38,000
|
|
|
|
20,000
|
|
|
|
58,000
|
|
Lam Man Pou
|
|
|
30,000
|
|
|
|
20,000
|
|
|
|
50,000
|
|
Vong Hon Kun
|
|
|
30,000
|
|
|
|
20,000
|
|
|
|
50,000
|
|
George Chui Vai Hou
|
|
|
38,000
|
|
|
|
20,000
|
|
|
|
58,000
|
|
Leong Siak Hung
|
|
|
30,000
|
|
|
|
20,000
|
|
|
|
50,000
|
|
James R. Preissler
|
|
|
40,000
|
|
|
|
20,000
|
|
|
|
60,000
|
|
Manuel Santos Ferreira
|
|
|
38,000
|
|
|
|
20,000
|
|
|
|
58,000
|
|
Peter Li
|
|
|
38,000
|
|
|
|
20,000
|
|
|
|
58,000
|
|
|
(1)
|
Our board of directors determined that the valuation price of our ordinary shares with respect to the 2012 directors’
equity compensation was $3.30.
|
Incentive Plan
On December 13, 2011, our shareholders approved
the the Asia Entertainment & Resources Ltd. 2011 Omnibus Securities and Incentive Plan (the “2011 Incentive Plan”).
The purpose of the 2011 Incentive Plan is to assist us to attract, retain and provide incentives to key management employees and
nonemployee directors of, and nonemployee consultants, to us and our affiliates, and to align the interests of such employees,
nonemployee directors and nonemployee consultants with those of our shareholders. Awards under the 2011 Incentive Plan are limited
in the aggregate to 200,000 ordinary shares. As of the date of this Annual Report, there are149,600 ordinary shares available for
issuance under the 2011 Incentive Plan. We plan to issue 60,610 ordinary shares for the equity portion of 2012 compensation.
General Description of the 2011 Incentive Plan
The following is a summary of the material
provisions of the 2011 Incentive Plan and is qualified in its entirety by reference to the complete text of the 2011 Incentive
Plan, a copy of which is attached as an exhibit hereto.
Administration
. The 2011 Incentive
Plan is administered by a committee (the “Committee”) designated by the Board of Directors, which shall consist solely
of three (3) or more Directors who are each (i) “outside directors” (“Outside Directors”) within the meaning
of Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), (ii) “non-employee directors”
within the meaning of Rule 16b-3 (“Non-Employee Directors”) and (iii) “independent” for purposes of
any applicable listing requirements; provided, however, that the Board of Directors or the Committee may delegate to a committee
of one or more members of the Board of Directors who are not (x) Outside Directors, the authority to grant awards to eligible persons
who are not (A) then “covered employees” within the meaning of Section 162(m) of the Code and are not expected to be
“covered employees” at the time of recognition of income resulting from such award, or (B) persons with respect to
whom the Company wishes to comply with the requirements of Section 162(m) of the Code, and/or (y) Non-Employee Directors, the authority
to grant awards to eligible persons who are not then subject to the requirements of Section 16 of the Exchange Act. Our Compensation
Committee serves as this Committee. If a member of the Committee shall be eligible to receive an award under the Plan, such Committee
member shall have no authority hereunder with respect to his or her own award. Among other things, the Committee has complete discretion,
subject to the terms of the 2011 Incentive Plan, to determine the employees, non-employee directors and non-employee consultants
to be granted an award under the 2011 Incentive Plan, the type of award to be granted, the number of ordinary shares subject to
each award, the exercise price under each option and base price for each SAR (as defined below), the term of each award, the vesting
schedule for an award, whether to accelerate vesting, the value of the ordinary shares underlying the award, and the required withholdings,
if any. The Committee is also authorized to construe the award agreements, and may prescribe rules relating to the 2011 Incentive
Plan.
Grant of Awards; Shares Available for
Awards
. The 2011 Incentive Plan provides for the grant of awards which are distribution equivalent rights, incentive share
options, non-qualified share options, performance shares, performance units, restricted shares, restricted share units, share appreciation
rights (“SARs”), tandem share appreciation rights, unrestricted shares or any combination of the foregoing, to key
management employees and nonemployee directors of, and nonemployee consultants of, the Company or any of its subsidiaries (each
a “participant”) (however, solely employees of the Company or its subsidiaries are eligible for awards which are incentive
share options). We have reserved a total of 200,000 shares for issuance as or under awards to be made under the 2011 Incentive
Plan. To the extent that an award lapses, expires, is canceled, is terminated unexercised or ceases to be exercisable for any reason,
or the rights of its holder terminate, any shares subject to such award shall again be available for the grant of a new award.
The 2011 Incentive Plan shall continue in effect, unless sooner terminated, until the tenth (10th) anniversary of the date on which
it is adopted by the Board of Directors (except as to awards outstanding on that date). The Board of Directors in its discretion
may terminate the 2011 Incentive Plan at any time with respect to any shares for which awards have not theretofore been granted;
provided, however, that the 2011 Incentive Plan’s termination shall not materially and adversely impair the rights of a holder
with respect to any award theretofore granted without the consent of the holder. The number of shares for which awards which are
options or SARs may be granted to a participant under the 2011 Incentive Plan during any calendar year is limited to 10,000.
Future new hires, non-employee directors
and additional non-employee consultants would be eligible to participate in the 2011 Incentive Plan as well. The number of awards
to be granted to officers, non-employee directors, employees and non-employee consultants cannot be determined at this time as
the grant of awards is dependent upon various factors such as hiring requirements and job performance.
Options
. The term of each option
shall be as specified in the option agreement; provided, however, that except for options which are incentive share options (“ISOs”)
granted to an employee who owns or is deemed to own (by reason of the attribution rules applicable under Code Section 424(d)) more
than 10% of the combined voting power of all classes of stock of the Company or the parent or a subsidiary of the Company (a “ten
percent shareholder”), no option shall be exercisable after the expiration of ten (10) years from the date of its grant.
The price at which an ordinary share may
be purchased upon exercise of an option shall be determined by the Committee; provided, however, that such option price (i) shall
not be less than the fair market value of an ordinary share on the date such option is granted, and (ii) shall be subject to adjustment
as provided in the 2011 Incentive Plan. The Committee or the Board of Directors shall determine the time or times at which or the
circumstances under which an option may be exercised in whole or in part, the time or times at which options shall cease to be
or become exercisable following termination of the option holder’s employment or upon other conditions, the methods by which
such exercise price may be paid or deemed to be paid, the form of such payment, and the methods by or forms in which ordinary shares
will be delivered or deemed to be delivered to participants who exercise options.
Options which are ISOs shall comply in all
respects with Section 422 of the Code. In the case of ISOs granted to a ten percent shareholder, the per share exercise price under
such ISO (to the extent required by the Code at the time of grant) shall be no less than 110% of the fair market value of a Share
on the date such ISO is granted. The term of an ISO may not exceed 10 years (5 years in the case of an ISO granted to a ten percent
shareholder). ISOs may solely be granted to employees. In addition, the aggregate fair market value of the Shares subject to an
ISO (determined at the time of grant) which are exercisable for the first time by an employee during any calendar year may not
exceed $100,000.
Restricted Share Awards
. A restricted
share award is a grant or sale of ordinary shares to the participant, subject to such restrictions on transferability, risk of
forfeiture and other restrictions, if any, as the Committee or the Board may impose, which restrictions may lapse separately or
in combination at such times, under such circumstances (including based on achievement of performance goals and/or future service
requirements), in such installments or otherwise, as the Committee or the Board of Directors may determine at the date of grant
or purchase or thereafter. Except to the extent restricted under the terms of the 2011 Incentive Plan and any agreement relating
to the restricted share award, a participant who is granted or has purchased restricted shares shall have all of the rights of
a shareholder, including the right to vote the restricted shares and the right to receive dividends thereon (subject to any mandatory
reinvestment or other requirement imposed by the Committee or the Board of Directors). During the restricted period applicable
to the restricted shares, subject to certain exceptions, the restricted shares may not be sold, transferred, pledged, hypothecated,
or otherwise disposed of by the participant.
Unrestricted Share Awards
. Pursuant
to the terms of the applicable unrestricted share award agreement, a holder may be awarded (or sold) ordinary shares which are
not subject to restrictions, in consideration for past services rendered thereby to us or an affiliate or for other valid consideration.
Restricted Share Units Awards
. The
Committee shall set forth in the applicable restricted share unit award agreement the individual service-based or performance-based
vesting requirement which the holder would be required to satisfy before the holder would become entitled to payment and the number
of units awarded to the Holder. Such payment shall be subject to a “substantial risk of forfeiture” under Section 409A
of the Code. At the time of such award, the Committee may, in its sole discretion, prescribe additional terms and conditions or
restrictions. The holder of a restricted share unit shall be entitled to receive a cash payment equal to the fair market value
of an ordinary share, or one (1) ordinary share, as determined in the sole discretion of the Committee and as set forth in the
restricted share unit award agreement, for each restricted share unit subject to such restricted share unit award, if and to the
extent the applicable vesting requirement is satisfied. Such payment shall be made no later than by the fifteenth (15th) day of
the third (3rd) calendar month next following the end of the calendar year in which the restricted share unit first becomes vested.
Performance Unit Awards
. The Committee
shall set forth in the applicable performance unit award agreement the performance goals and objectives (and the period of time
to which such goals and objectives shall apply) which the holder and/or the Company would be required to satisfy before the holder
would become entitled to payment, the number of units awarded to the holder and the dollar value assigned to each such unit. Such
payment shall be subject to a “substantial risk of forfeiture” under Section 409A of the Code. At the time of such
award, the Committee may, in its sole discretion, prescribe additional terms and conditions or restrictions. The holder of a performance
unit shall be entitled to receive a cash payment equal to the dollar value assigned to such unit under the applicable performance
unit award agreement if the holder and/or the Company satisfy (or partially satisfy, if applicable under the applicable performance
unit award agreement) the performance goals and objectives set forth in such performance unit award agreement. If achieved, such
payment shall be made no later than by the fifteenth (15th) day of the third (3rd) calendar month next following the end of the
Company’s fiscal year to which such performance goals and objectives relate.
Performance Share Awards
. The Committee
shall set forth in the applicable performance share award agreement the performance goals and objectives (and the period of time
to which such goals and objectives shall apply) which the holder and/or the Company would be required to satisfy before the holder
would become entitled to the receipt of ordinary shares pursuant to such holder’s performance share award and the number
of ordinary shares subject to such performance share award. Such payment shall be subject to a “substantial risk of forfeiture”
under Section 409A of the Code and, if such goals and objectives are achieved, the distribution of such ordinary shares shall be
made no later than by the fifteenth (15th) day of the third (3rd) calendar month next following the end of the Company’s
fiscal year to which such goals and objectives relate. At the time of such award, the Committee may, in its sole discretion, prescribe
additional terms and conditions or restrictions. The holder of a performance share award shall have no rights as a shareholder
of the Company until such time, if any, as the holder actually receives ordinary shares pursuant to the performance share award.
Distribution Equivalent Rights
. The
Committee shall set forth in the applicable distribution equivalent rights award agreement the terms and conditions, if any, including
whether the holder is to receive credits currently in cash, is to have such credits reinvested (at fair market value determined
as of the date of reinvestment) in additional ordinary shares or is to be entitled to choose among such alternatives. Such receipt
shall be subject to a “substantial risk of forfeiture” under Section 409A of the Code and, if such award becomes vested,
the distribution of such cash or ordinary shares shall be made no later than by the fifteenth (15th) day of the third (3rd) calendar
month next following the end of the Company’s fiscal year in which the holder’s interest in the award vests. Distribution
equivalent rights awards may be settled in cash or in ordinary shares, as set forth in the applicable distribution equivalent rights
award agreement. A distribution equivalent rights award may, but need not be, awarded in tandem with another award, whereby, if
so awarded, such distribution equivalent rights award shall expire, terminate or be forfeited by the holder, as applicable, under
the same conditions as under such other award. The distribution equivalent rights award agreement for a distribution equivalent
rights award may provide for the crediting of interest on a distribution rights award to be settled in cash at a future date (but
in no event later than by the fifteenth (15th) day of the third (3rd) calendar month next following the end of the Company’s
fiscal year in which such interest was credited), at a rate set forth in the applicable distribution equivalent rights award agreement,
on the amount of cash payable thereunder.
Share Appreciation Rights
. A SAR
provides the participant to whom it is granted the right to receive, upon its exercise, the excess of (A) the fair market value
of the number of ordinary shares subject to the SAR on the date of exercise, over (B) the product of the number of ordinary shares
subject to the SAR multiplied by the base value under the SAR, as determined by the Committee or the Board. The base value of a
SAR shall not be less than the fair market value of an ordinary share on the date of grant. If the Committee grants a share appreciation
right which is intended to be a tandem SAR, additional restrictions apply.
Recapitalization or Reorganization
.
Subject to certain restrictions, the 2011 Incentive Plan provides for the adjustment of ordinary shares underlying awards previously
granted if, and whenever, prior to the expiration or distribution to the holder of ordinary shares underlying an award theretofore
granted, the Company shall effect a subdivision or consolidation of the ordinary shares or the payment of an ordinary share dividend
on ordinary shares without receipt of consideration by the Company. If the Company recapitalizes or otherwise changes its capital
structure, thereafter upon any exercise or satisfaction, as applicable, of a previously granted award, the holder shall be entitled
to receive (or entitled to purchase, if applicable) under such award, in lieu of the number of ordinary shares then covered by
such award, the number and class of shares and securities to which the holder would have been entitled pursuant to the terms of
the recapitalization if, immediately prior to such recapitalization, the holder had been the holder of record of the number of
ordinary shares then covered by such award. The 2011 Incentive Plan also provides for the adjustment of shares underlying awards
previously granted by the Board of Directors in the event of changes to the outstanding ordinary shares by reason of extraordinary
cash dividend, reorganization, mergers, consolidations, combinations, split ups, spin offs, exchanges or other relevant changes
in capitalization occurring after the date of the grant of any award, subject to certain restrictions.
Amendment and Termination
. The 2011
Incentive Plan shall continue in effect, unless sooner terminated pursuant to its terms, until the tenth (10th) anniversary of
the date on which it is adopted by the Board of Directors (except as to awards outstanding on that date). The Board of Directors
may terminate the 2011 Incentive Plan at any time with respect to any shares for which awards have not theretofore been granted;
provided, however, that the 2011 Incentive Plan’s termination shall not materially and adversely impair the rights of a holder
with respect to any award theretofore granted without the consent of the holder. The Board of Directors shall have the right to
alter or amend the 2011 Incentive Plan or any part hereof from time to time; provided, however, that without the approval by a
majority of the votes cast at a meeting of shareholders at which a quorum representing a majority of the ordinary shares of the
Company entitled to vote generally in the election of directors is present in person or by proxy, no amendment or modification
of the 2011 Incentive Plan may (i) materially increase the benefits accruing to holders, (ii) except as otherwise expressly provided
in the 2011 Incentive Plan, materially increase the number of ordinary shares subject to the 2011 Incentive Plan or the individual
award agreements, (iii) materially modify the requirements for participation, or (iv) amend, modify or suspend certain repricing
prohibitions or amendment and termination provisions as specified therein. In addition, no change in any award theretofore granted
may be made which would materially and adversely impair the rights of a holder with respect to such award without the consent of
the holder (unless such change is required in order to cause the benefits under the 2011 Incentive Plan to qualify as “performance-based”
compensation within the meaning of Section 162(m) of the Code or to exempt the 2011 Incentive Plan or any Award from Section 409A
of the Code).
Certain U.S. Federal Income Tax Consequences of
the 2011 Incentive Plan
The following is a general summary of the
U.S. federal income tax consequences under current tax law to the Company, were it subject to U.S. federal income taxation on a
net income basis, and to participants under the 2011 Incentive Plan who perform services for the Company and who are individual
citizens or residents of the United States for U.S. federal income tax purposes (“U.S. participants”) of options, which
include ISOs and non-qualified share options, SARs, restricted shares, performance shares, performance units, restricted share
units, dividend equivalent rights and unrestricted shares. It does not purport to cover all of the special rules that may apply,
including special rules relating to limitations on the ability of the Company, to deduct certain compensation for U.S. federal
income tax purposes, special rules relating to deferred compensation, golden parachutes, participants subject to Section 16(b)
of the Exchange Act and the exercise of a share option with previously-acquired ordinary shares of the Company. This summary does
not address the application of the passive foreign investment company rules of the Code to U.S. participants, which are discussed
generally in the Company’s most recent Form 20-F as filed with the Securities and Exchange Commission. In addition, this
summary does not address the foreign, state or local income or other tax consequences, or any U.S. federal non-income tax consequences,
inherent in the acquisition, ownership, vesting, exercise, termination or disposition of an award under the 2011 Incentive Plan
or ordinary shares issued pursuant thereto. Participants are urged to consult their own tax advisors concerning the tax consequences
to them of an award under the 2011 Incentive Plan or ordinary shares issued pursuant thereto.
A U.S. participant generally does
not recognize taxable income upon the grant of an option. Upon the exercise of a non-qualified share option, the
participant generally recognizes ordinary income in an amount equal to the excess, if any, of the fair market value of the
ordinary shares acquired on the date of exercise over the exercise price therefor, and the Company would be entitled to a
deduction as compensation for such amount at that time. If the U.S. participant later disposes the ordinary shares acquired
under a non-qualified share option, the U.S. participant generally recognizes a short-term or long-term gain or loss,
depending upon the period for which the ordinary shares were held thereby. A long-term capital gain generally is subject to
more favorable tax treatment than a short-term capital gain or ordinary income. The deductibility of
capital losses is subject to certain limitations. Upon the exercise of an ISO, a U.S. participant generally does not
recognize taxable income. If the U.S. participant disposes of the ordinary shares acquired pursuant to the exercise of an ISO
more than two years after the date of grant and more than one year after the transfer of the shares to the U.S. participant,
the U.S. participant generally recognizes a long-term capital gain or loss, and the Company would not be entitled to a
compensation deduction. However, if the U.S. participant disposes of such ordinary shares prior to the end of the required
holding period, all or a portion of the gain is treated as ordinary income, and the Company, generally would be entitled to
deduct such amount.
In addition to the U.S. federal income tax
consequences described above, the U.S. participant may be subject to the alternative minimum tax (“AMT”), which is
payable to the extent it exceeds the U.S. participant’s regular income tax. For this purpose, upon the exercise of an ISO,
the excess of the fair market value of the ordinary shares for which the ISO is exercised over the exercise price for such ordinary
shares is a preference item for purposes of the AMT. In addition, the U.S. participant’s basis in such ordinary shares is
increased by such excess for purposes of computing the gain or loss on the disposition of the ordinary shares for AMT purposes.
If a U.S. participant is required to pay any AMT, the amount of such tax which is attributable to deferral preferences (including
any ISO adjustment) generally may be allowed as a credit against the participant’s regular income tax liability (and, in
certain cases, may be refunded to the participant) in subsequent years. To the extent the credit is not used, it may be carried
forward.
A U.S. participant who receives a grant
of restricted ordinary shares or who purchases restricted ordinary shares, which ordinary shares, in either case, are subject to
a substantial risk of forfeiture and certain transfer restrictions, generally does not recognize income on the receipt of the grant
or the purchased restricted ordinary shares and generally recognizes ordinary compensation income at the time the restrictions
lapse in an amount equal to the excess, if any, of the fair market value of the shares at such time over any amount paid by the
U.S. participant for the ordinary shares. Alternatively, the U.S. participant may elect to be taxed upon receipt of the restricted
ordinary shares based on the value of the ordinary shares at the time of receipt. The Company generally would be entitled to deduct
such amount at the same time as ordinary compensation income is required to be included by the U.S. participant and in the same
amount. Dividends received with respect to restricted ordinary shares generally are treated as compensation, unless the U.S. participant
elects to be taxed on the receipt (rather than the vesting) of the restricted ordinary shares.
A U.S. participant generally does not recognize
income upon the grant of an SAR. The U.S. participant recognizes ordinary compensation income upon the exercise of the SAR equal
to the increase in the value of the underlying ordinary shares, and the Company generally would be entitled to a deduction for
such amount.
A U.S. participant generally does not recognize
income on the receipt of a performance shares award, performance units award, restricted share units award, unrestricted shares
award, or dividend equivalent right award until a payment is received under the award. At such time, the U.S. participant recognizes
ordinary compensation income equal to the amount of any cash payments and the fair market value of any ordinary shares received,
and the Company generally would be entitled to deduct such amount at such time.
Indemnification
Cayman Islands law provides that a corporation
may indemnify its directors and officers as well as its other employees and agents against judgments, fines, and amounts paid in
settlement and expenses, including attorneys’ fees, in connection with various proceedings, except where there has been fraud
or dishonesty or willful neglect or willful default. Our Second Amended and Restated Memorandum and Articles of Association provide
that each member of our board of directors, officer and agent shall be indemnified out of our assets against any liability incurred
by him or her as a result of any act or failure to act in carrying out his or her functions other than such liability (if any)
that he or her may incur by his or her own fraud or willful default and that no such director, agent or officer shall be liable
to us for any loss or damage in carrying out his or her functions unless that liability arises through the fraud or willful default
of such director, officer or agent. Our Second Amended and Restated Memorandum and Articles of Association do not eliminate any
of our director’s fiduciary duties. The inclusion of the foregoing provision may, however, discourage or deter shareholders
or management from bringing a lawsuit against directors even though such an action, if successful, might otherwise have benefited
us and our shareholders. This provision, however, will not eliminate or limit liability arising under United States federal securities
laws.
Insofar as indemnification for liabilities
arising under the Securities Act of 1933, as amended (the “Securities Act”) may be permitted to directors, officers
or persons controlling the registrant pursuant to the foregoing provisions, we have been informed that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as expressed in that act and is therefore unenforceable.
It should be noted, however, that the opinion of the SEC is not binding on courts and courts, particularly those of jurisdictions
other than the United States, may determine otherwise.
We have entered into indemnification agreements
separately with each of our current directors and officers that provide, in consideration of the director or officer continuing
to serve us in his current capacity, for us to indemnify, and advance expenses to, him or her to the fullest extent permitted by
law in effect on the date of execution of the agreements or to such greater extent as applicable law may thereafter permit. The
rights of indemnification apply if, by reason of such person’s position as an officer or director of us or any of our subsidiaries,
he or she was or is threatened to be made, a party to any threatened, pending or completed legal proceeding. With respect to proceedings
other than one brought by or in our right (
i.e.,
a shareholders’ derivative proceeding), the indemnification covers
expenses, judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by the indemnified person
or on his or her behalf in connection with any such proceeding or any claim, issue or matter therein, if he or she acted in good
faith and in a manner he or she reasonably believed to be in or not opposed to our best interests, and, with respect to any criminal
proceeding, had no reasonable cause to believe his or her conduct was unlawful. With respect to proceedings brought by or in our
right, the indemnification covers expenses and amounts paid in settlement (such settlement amounts not to exceed, in the judgment
of our board of directors, the estimated expense of litigating the proceeding to conclusion) actually and reasonably incurred by
him or her or on his or her behalf in connection with any such proceeding if he or she acted in good faith and in a manner he or
she reasonably believed to be in or not opposed to our best interests. However, no indemnification against such expenses or amounts
paid in settlement shall be made in respect of any claim, issue or matter in any such proceeding as to which indemnified person
has been adjudged to be liable to us if applicable law prohibits such indemnification unless the court in which such proceeding
shall have been brought, was brought or is pending, shall determine that indemnification against expenses or amounts paid in settlement
may nevertheless be made by us. We will advance an indemnified person reasonable and substantiated expenses, judgments, penalties
and fines and amounts paid in settlement in advance of a final determination of liability upon such person agreeing to repay amounts
advanced in the event of an ultimate determination that he or she is not entitled to be indemnified with respect to the amounts
advanced. The rights of the indemnitees under the agreements are not deemed exclusive of any other rights they may be entitled
to under applicable law, our memorandum and articles of association, any agreement, vote of shareholders or resolution of directors
or otherwise. Each agreement will remain in effect until the later of ten years after the date the indemnitee shall have ceased
to serve as a director or officer or the final determination of all pending proceedings.
Term of Office and Benefits
Our board of directors is divided into three
classes, each of which serves a term of three years, with only one class of directors being elected in each year. Please refer
to the disclosure under Item 6.A. herein for further information about the term of our directors.
Board Operations
The positions of principal executive officer
and chairman of the Board of Directors are held by different persons. The chairman of the Board of Directors chairs Board of Director
and shareholder meetings and participates in preparing their agendas.
The Board of Directors is responsible for
overall supervision of our risk oversight efforts as they relate to the key business risks facing the organization. Management
identifies, assesses, and manages the risks most critical to the Company’s operations on a day-to-day basis and routinely
advises the Board of Directors on those matters as the CEO and CFO have access to the Board of Directors, attend regular meetings
as well as the audit committee meetings. The Board’s role in risk oversight is consistent with our leadership structure,
with senior management having responsibility for assessing and managing our risk exposure, and the Board and its Committees, providing
oversight as necessary in connection with those efforts.
Independence of Directors
Messrs. James Preissler, João Manuel
Santos Ferreira, Yeung Lun Allan, Peter Li and George Chui Vai Hou, who constitute a majority of our board of directors, meet the
standards for independence that are required by the Nasdaq Stock Market. The Nasdaq Stock Market’s listing standards define
an “independent director” generally as a person, other than an officer of a company, who does not have a relationship
with the company that would interfere with the director’s exercise of independent judgment.
Code of Ethics
In August 2008, our board of directors adopted
a code of ethics that applies to our directors, officers and employees as well as those of our subsidiaries and is described in
the section of this Annual Report entitled “
Code of Ethics and Related Person Policy
” under Item 7.B. herein.
Copies of the code of ethics are available free of charge upon request. Requests for copies of the code of ethics should be sent
in writing to Asia Entertainment & Resources Ltd., Unit 605, East Town Building, 16 Fenwick Street, Wanchai, Hong Kong.
Committee Information
Audit Committee
On March 10, 2010, the Board of Directors
formed the Audit Committee and adopted a written charter. The Audit Committee is established in accordance with Section 3(a)(58)(A)
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). James R. Preissler (Chairman), Yeung Lun Allan
and George Chui Vai Hou currently serve on this committee. So that we meet the Nasdaq Stock Exchange and other stock exchange listing
requirements, the audit committee will now at all times be composed exclusively of “independent directors” who are
“financially literate” as defined under the Nasdaq Stock Exchange listing standards. The definition of “financially
literate” generally means being able to read and understand fundamental financial statements, including a company’s
balance sheet, income statement and cash flow statement. Messrs. Preissler, Yeung and Chui meet the standards for independence
and financial literacy that are required by the Nasdaq Stock Market and other exchanges and Mr. Preissler also meets the standards
for an “Audit Committee Financial Expert” required by SEC rules and current stock exchange listing standards.
The audit committee’s duties, which
are specified in our audit committee charter, include, but are not limited to:
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·
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reviewing and discussing with management and the independent auditor the annual audited financial statements, and recommending
to the board whether the audited financial statements should be included in our Annual Report on Form 20-F;
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·
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discussing with management and the independent auditor significant financial reporting issues and judgments made in connection
with the preparation of our financial statements;
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·
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discussing with management major risk assessment and risk management policies;
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·
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monitoring the independence of the independent auditor;
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·
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verifying the rotation of the lead (or coordinating) audit partner having primary responsibility for the audit and the audit
partner responsible for reviewing the audit as required by law;
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·
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inquiring and discussing with management our compliance with applicable laws and regulations;
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·
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pre-approving all audit services and permitted non-audit services to be performed by our independent auditor, including the
fees and terms of the services to be performed;
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·
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appointing or replacing our independent auditor;
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·
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determining the compensation and oversight of the work of our independent auditor (including resolution of disagreements between
management and the independent auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or
related work;
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·
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establishing procedures for the receipt, retention and treatment of complaints received by us regarding accounting, internal
accounting controls or reports which raise material issues regarding our financial statements or accounting policies; and
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·
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reviewing and approving any related party transactions we may enter into. The audit committee will consider all relevant factors
when determining whether to approve a related party transaction, including whether the related party transaction is on terms no
less favorable than terms generally available to an unaffiliated third-party under the same or similar circumstances and the extent
of the related party’s interest in the transaction.
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Nominating Committee
On April 7, 2010, the Board of Directors
formed the Nominating Committee and adopted a written charter. Manuel Santos Ferreira (Chairman), George Chui Vai Hou and Peter
Li, each of whom is independent as defined in Rule 5605(a)(2) of the Nasdaq Listing Rules, currently serve on this committee. The
nominating committee is responsible for overseeing the selection of persons to be nominated to serve on our board of directors.
The nominating committee considers persons identified by its members, management, shareholders and others. The guidelines for selecting
nominees, which are specified in the nominating committee charter, generally provide that persons to be nominated:
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should have demonstrated notable or significant achievements in business, education or public service;
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·
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should possess the requisite intelligence, education and experience to make a significant contribution to the board of directors
and bring a range of skills, diverse perspectives and backgrounds to its deliberations; and
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·
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should have the highest ethical standards, a strong sense of professionalism and intense dedication to serving the interests
of the shareholders.
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The nominating committee will consider a
number of qualifications relating to management and leadership experience, background and integrity and professionalism in evaluating
a person’s candidacy for membership on the board of directors. The nominating committee may require certain skills or attributes,
such as financial or accounting experience, to meet specific board needs that arise from time to time. The nominating committee
does not distinguish among nominees recommended by shareholders and other persons. The procedures by which security holders may
recommend nominees to our board of directors have not been changed by the formation of the nominating committee.
Compensation Committee
On April 7, 2010, the Board of Directors
formed a Compensation Committee and adopted a written charter. Peter Li (Chairman), Manuel Santos Ferreira, and Yeung Lun Allan,
each of whom is independent as defined in Rule 5605(a)(2) of the Listing Rules, currently serve on this committee. The charter
sets forth responsibilities, authority and specific duties of the Compensation Committee. The principal functions of the compensation
committee are to evaluate the performance of our officers, to review any compensation payable to our directors and officers, to
prepare compensation committee reports, and to administer the issuance of any common stock or other equity awards issued to our
officers and directors.
The table below provides information as
to the total number of employees at the end of the last three fiscal years. We have no contracts or collective bargaining agreements
with labor unions and have never experienced work stoppages. We consider our relations with our employees to be good.
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2010
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2011
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2012
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Number of Employees
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14
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14
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17
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The staffing of the VIP gaming rooms is outsourced.
See Item 7, below.
ITEM
7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
The following table sets forth information
regarding the beneficial ownership of our ordinary shares as of March 29, 2013 by:
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each person known by us to be the beneficial owner of more than 5% of our outstanding ordinary shares;
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·
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each of our current executive officers and directors; and
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·
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all of our current executive officers and directors as a group.
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Unless otherwise indicated, we believe
that all persons named in the table have sole voting and investment power with respect to all ordinary shares beneficially
owned by them. Our major shareholders do not have different voting rights than our non-majority shareholders. Percentages of
ownership are based on 40,451,164 ordinary shares outstanding as of March 29, 2013. Ordinary shares which an individual or
group has a right to acquire within 60 days pursuant to the exercise or conversion of options, warrants or other convertible
securities are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group,
but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the
table.
Name and Address of Beneficial Owner
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Amount and Nature of
Beneficial Ownership
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Percent of
Class
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Chien Lee(1)
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1,853,682
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(2)
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4.6
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%
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Sylvia Lee(1)
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1,853,682
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(2)
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4.6
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%
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Vong Hon Kun(3)
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6,570,242
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16.2
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%
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Lam Chou In(3)
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5,018,135
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12.4
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%
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Lam Man Pou(3)
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4,887,245
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12.1
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%
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Chui Vai Hou, George(3)
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5,164
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*
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%
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James R. Preissler(4)
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216,057
|
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*
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%
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Leong Siak Hung(5)
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867,288
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|
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2.1
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%
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Li Chun Ming, Raymond(3)
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5,790
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|
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*
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%
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Peter Li
|
|
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171,273
|
|
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*
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Joao Manuel Santos Ferreira(3)
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5,164
|
|
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*
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%
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Yeung Lun, Allan(3)
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5,164
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*
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%
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All of our directors and executive officers as a group (10 individuals)
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14,587,069
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36.1
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%
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(1)
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The business address of Mr. and Mrs. Lee is 4100 N.E. Second Avenue, Suite 318, Miami, Florida 33137.
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(2)
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Represents 5,790 ordinary shares owned jointly by Mr. and Mrs. Lee and 1,847,892 ordinary shares held by CS Capital USA, LLC,
an affiliate of Mr. and Mrs. Lee.
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(3)
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Each of these persons maintains a business address at 605 East Town Building, 16 Fenwick Street, Wanchai, Hong Kong.
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(4)
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The business address of James R. Preissler is 50 Old Route 25A, Fort Salonga, NY 11768.
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(5)
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Shares are held by Legend Global International Limited, of which Leong Siak Hung, director, has sole voting and dispositive
power over the shares owned by it, which shares constitute all of the shares beneficially owned by Mr. Leong. The business address
of Legend Global International Limited is Flat G, 37/F, Block 3, Island Harbourview, Tai Kok Tsui, Kowloon, Hong Kong.
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As of March 29, 2013, we believe that
10 holders of record of approximately 43% of our outstanding ordinary shares reside in the United States.
We are not
aware of any arrangements that may, at a subsequent date, result in a change of control of our company.
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B.
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Related Party Transactions
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Code of Ethics and Related Person Policy
Our Code of Ethics requires us to avoid,
wherever possible, all related party transactions that could result in actual or potential conflicts of interest, except under
guidelines approved by the board of directors (or the audit committee, if one exists at the time). Related-party transactions are
defined as transactions in which (1) the aggregate amount involved will or may be expected to exceed $120,000 in any calendar year,
(2) we or any of our subsidiaries is a participant, and (3) any (a) executive officer, director or nominee for election as a director,
(b) greater than 5 percent beneficial owner of our ordinary shares, or (c) immediate family member, of the persons referred to
in clauses (a) and (b), has or will have a direct or indirect material interest (other than solely as a result of being a director
or a less than 10 percent beneficial owner of another entity). A conflict of interest situation can arise when a person takes actions
or has interests that may make it difficult to perform his or her work objectively and effectively. Conflicts of interest may also
arise if a person, or a member of his or her family, receives improper personal benefits as a result of his or her position. We
are not prohibited from entering into related-party transactions with our directors and officers.
Our board of directors is responsible for
reviewing and approving related-party transactions to the extent we enter into such transactions. The board of directors will consider
all relevant factors when determining whether to approve a related party transaction, including whether the related party transaction
is on terms no less favorable than terms generally available to an unaffiliated third-party under the same or similar circumstances
and the extent of the related party’s interest in the transaction. No director may participate in the approval of any transaction
in which he is a related party, but that director is required to provide the other members of the board of directors with all material
information concerning the transaction. Additionally, we require each of our directors and executive officers to complete a directors’
and officers’ questionnaire that elicits information about related party transactions. These procedures are intended to determine
whether any such related party transaction impairs the independence of a director or presents a conflict of interest on the part
of a director, employee or officer.
Related Person Transactions of the Company
From August 2009 until the business combination
on February 2, 2010, Chien Lee and James Preissler loaned to us, in the aggregate, $162,000 for working capital. Such amounts were
represented by unsecured non-interest bearing promissory notes that were paid upon the closing of the acquisition of AGRL.
We reimbursed our officers and directors
a total of $151,169 for their reasonable out-of-pocket business expenses incurred by them in connection with certain activities
on our behalf such as identifying and investigating possible target businesses and business combinations.
On November 15, 2010, we acquired King’s
Gaming from Mr. Mok Chi Hung and Mr. Wong Hon Meng, as described in the section titled “Our History and Business—Acquisition
of King’s Gaming Promotion Limited.” Mr. Wong is the brother of Mr. Vong Hon Kun, our Chief Operating Officer, and
owned 4% of the equity of King’s Gaming immediately prior to the acquisition. In connection with the acquisition, on November
10, 2010, we entered into an employment agreement with Mr. Wong, pursuant to which he will serve as our operating officer at the
Wen Zhou VIP Club located at the Venetian Macau Resort Hotel in exchange for $4,800 per month plus expenses. Mr. Wong’s salary
was increased to $6,200 per month plus expenses effective January 1, 2012. We may terminate Mr. Wong’s employment for cause
or upon Mr. Wong’s disability without any obligation of further payment. The agreement has a term of five years from November
10, 2010.
All ongoing and future transactions between
us and any of our officers and directors or their respective affiliates, including loans by our officers and directors, will be
on terms believed by us to be no less favorable to it than are available from unaffiliated third parties. Such transactions or
loans, including any forgiveness of loans, will require prior approval by a majority of our uninterested independent directors
or the members of our board who do not have an interest in the transaction, in either case who had access, at our expense, to our
attorneys or independent legal counsel. We will not enter into any such transaction unless our disinterested independent directors
determine that the terms of such transaction are no less favorable to us than those that would be available to us with respect
to such a transaction from unaffiliated third parties.
AGRL Related Party Transactions
Because AGRL and its subsidiaries are not
able to directly operate as VIP gaming promoters, AGRL’s management has technical ownership of AGRL’s VIP gaming promoters,
but each such VIP gaming promoter has entered into an agreement with a subsidiary of AGRL providing that 100% of the profits of
each VIP gaming promoter be paid to a subsidiary of AGRL. None of the members of AGRL’s management team receive compensation
for being the owners of AGRL’s VIP gaming promoters. The following table shows the relationships of AGRL’s management
team to its VIP gaming promoters:
Entity Name
|
|
Management Team Member Owning Entity
|
Sang Heng Gaming Promotion Company Limited
|
|
Lam Man Pou, Vong Hon Kun and Leong Siak Hung
|
Doowell Limited
|
|
Lam Man Pou, Vong Hon Kun and Leong Siak Hung
|
Iao Pou Gaming Promotion Limited
|
|
Lam Chou In
|
King’s Gaming Promotion Limited
|
|
Mok Chi Hung
|
Star World Hotel and Casino has extended
a credit line of $27.2 million to Sang Heng which is guaranteed by Mr. Lam. Galaxy Macau Resort has extended a credit line of $25.6
million to Sang Lung which is guaranteed by Mr. Lam. These credit lines are used to advance funds to junket agents and gaming patrons
so that the junket agents can provide gaming patrons with credit at the Iao Kun VIP Rooms operated by Sang Heng at the Star World
Hotel and Casino and by Sang Lung at the Galaxy Macau Resort. The credit lines are non-interest bearing, and Mr. Lam is not compensated
by AGRL for the guarantee.
The Venetian Resort Hotel has extended a
credit line of $3.85 million to King’s Gaming, which is guaranteed by Mr. Vong and Mr. Mok. The credit line is used to advance
funds to junket agents and gaming patrons so that the junket agents can provide gaming patrons with credit at the Wenzhou VIP gaming
room promoted by King’s Gaming at the Venetian Resort Hotel. The credit line is non-interest bearing and Mr. Vong and Mr.
Mok are not compensated by AGRL for the guarantees.
From time to time, Mr. Lam makes small loans
to AGRL for operational purposes. Such loans do not bear interest and Mr. Lam is not otherwise compensated for making such loans.
City of Dreams Hotel & Casino has extended
a credit line of $3.9 million to Bao Li Gaming, which is guaranteed by Mr. Lou. The credit line is used to advance funds to junket
agents and gaming patrons so that the junket agents can provide gaming patrons with credit at the VIP gaming room promoted by Bao
Li Gaming at City of Dreams Hotel & Casino. The credit line is non-interest bearing and Mr. Lou is not compensated by AGRL
for the guarantee.
Sang Heng paid approximately $131,578 to
KLi Business Consultancy Limited, a company controlled by Ms. Ip Ching Wah, spouse of Mr. Li Chun Ming, for the year ended December
31, 2009. The amount paid to this company were for the services provided by Mr. Li to AGRL and AGRL’s VIP gaming promoters.
Messrs. Lam and Vong have agreed to extend
credit to AGRL to lend funds to its VIP gaming promoters so that they in turn can extend credit to their agents and collaborators.
Such loans by Messrs. Lam and Vong are non-interest bearing. See the section entitled “AGRL’s Gaming Operations—Profit
Interest Agreements” under Item 4.B. herein for further information regarding these arrangements.
Day-to-day management and operation of the
VIP gaming rooms is contracted by the VIP gaming promoter to a management company that is responsible for hiring and managing all
staff needed for the operation. This includes local managers and executives to provide supervision, finance and cage personnel,
public relations, drivers and other service staff (waiters, cleaners, etc.). The VIP gaming promoters have entered into such agreements
with Pak Si, owned by Ms. Tam Lai Ching, Mr. Vong’s sister-in-law, pursuant to which Sang Heng pays Pak Si approximately
US $180,000 per month for the VIP gaming room at Star World Hotel; King’s Gaming pays approximately US $103,000 per month
for the VIP gaming room at the Sands Cotai Central; Bao Li Gaming pays approximately US $103,000 per month for the VIP gaming room
at City of Dreams Hotel & Casino; and Sang Lung pays approximately $180,000 per month for the VIP gaming room at the Galaxy
Resort, Macau. Pak Si must pay all salaries, benefits and other expenses of operation out of such amounts. Total staff at each
operation, including executives, is approximately 100 people. Such agreements are for one-year terms effective January 1, 2010.
Similar agreements were made with Ms. Tam for each of the two preceding years, including for the VIP gaming room at the MGM Grand
Hotel and Casino which is now closed.
|
C.
|
Interests of Experts and Counsel
|
Not required.
|
ITEM
8.
|
FINANCIAL INFORMATION
|
|
A.
|
Consolidated Statements and Other Financial Information.
|
See Item 18.
None
|
ITEM
9.
|
THE OFFER AND LISTING
|
|
A.
|
Offer and Listing Details
|
The following table sets forth the range
of high and low closing bid prices for the ordinary shares and warrants for the periods indicated since the ordinary shares and
warrants commenced separate public trading on September 5, 2008. It also sets forth the range of high and low closing bid prices
for our units (each consisting of one ordinary share and two warrants; symbol: CSACF) for such periods until the units were separated
into their component shares and warrants and ceased trading separately on February 19, 2010. The over-the-counter market quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily reflect actual transactions.
Our warrants were redeemed for cash at the redemption price of $0.01 on October 28, 2010. Accordingly, there are
currently no warrants outstanding.
|
|
Ordinary Shares
|
|
|
Warrants
|
|
|
Units
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
Annual Highs and Lows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013*
|
|
|
5.00
|
|
|
|
2.98
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
2012
|
|
|
7.24
|
|
|
|
2.40
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
2011
|
|
|
12.41
|
|
|
|
6.90
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
2010
|
|
|
11.55
|
|
|
|
4.96
|
|
|
|
1.90
|
|
|
|
0.25
|
|
|
|
10.01
|
|
|
|
6.50
|
|
2009
|
|
|
6.00
|
|
|
|
4.70
|
|
|
|
0.63
|
|
|
|
0.03
|
|
|
|
6.70
|
|
|
|
4.85
|
|
Quarterly Highs and Lows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
5.00
|
|
|
|
2.98
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
7.24
|
|
|
|
5.47
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Second Quarter
|
|
|
6.80
|
|
|
|
3.66
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Third Quarter
|
|
|
4.45
|
|
|
|
2.40
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Fourth Quarter
|
|
|
4.37
|
|
|
|
2.70
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
|
7.49
|
|
|
|
4.72
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Third Quarter
|
|
|
10.87
|
|
|
|
5.39
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Second Quarter
|
|
|
10.75
|
|
|
|
5.50
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
First Quarter
|
|
|
12.41
|
|
|
|
8.32
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Monthly Highs and Lows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 2013*
|
|
|
4.35
|
|
|
|
3.61
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
February 2013
|
|
|
4.80
|
|
|
|
3.36
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
January 2013
|
|
|
5.00
|
|
|
|
2.98
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
December 2012
|
|
|
3.48
|
|
|
|
2.70
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
November 2012
|
|
|
4.37
|
|
|
|
3.30
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
October 2012
|
|
|
3.98
|
|
|
|
2.83
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
September 2012
|
|
|
3.80
|
|
|
|
2.94
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
* Through March 28, 2013
The closing bid price for our ordinary shares
on March 28, 2013 was 4.12.
Holders of ordinary shares should obtain
current market quotations for their securities. The market price of the ordinary shares could vary at any time.
Not Applicable.
Our ordinary shares have traded on the Nasdaq
Global Market under the symbol AERL since July 3, 2010. Our warrants traded on the NASDAQ Market under the symbol AERLW from July
3, 2010 until October 28, 2010, when they ceased trading. From February 22, 2010 until July 2, 2010, the ordinary shares and warrants
traded on the OTC Bulletin Board under the symbols AERCF and AERLF, respectively. Prior to February 22, 2010, the ordinary shares
and the warrants traded under the symbols CSAQF and CSAXF, respectively. The warrants ceased trading on October 29, 2010.
Not Applicable.
Not Applicable.
Not Applicable.
|
ITEM
10.
|
ADDITIONAL INFORMATION
|
Not Applicable.
|
B.
|
Memorandum and Articles of Association
|
The information required by Item 10.B. of
Form 20-F is included in the section titled “Description of Securities—Memorandum and Article of Association”
in our Post-Effective Amendment on Form F-3 to Registration Statement on Form F-1 initially filed with the SEC on October 20, 2010,
as amended (File No. 333-166860), which section is incorporated herein by reference.
Our only long term liabilities are the management
agreements between three of AGRL’s VIP gaming promoters and Pak Si Management and Consultancy Limited of Macau, pursuant
to which that company is responsible for the hiring and management of staff at the VIP gaming rooms promoted by the VIP gaming
promoters in Macau. Each of the management agreements is for a one-year term, subject to renewal. The total obligations of the
VIP gaming promoters during each one-year period are approximately US $5,560,000. See the section entitled “AGRL’s
Gaming Operations” under Item 4.B. herein.
On October 6, 2009, we entered into a Stock
Purchase Agreement with AGRL and Spring Fortune, a British Virgin Islands company, that provided for the purchase by us from Spring
Fortune of all of the outstanding capital stock of AGRL. The Purchase Agreement was subsequently amended on November 10, 2009,
December 9, 2009, January 11, 2010 and April 18, 2011. For further details about such agreement, please refer to the section titled
“The Acquisition” under Item 4.A. herein.
On November 15, 2010, we consummated the
transactions contemplated by that certain Profit Interest Purchase Agreement dated as of November 10, 2010 among us, King’s
Gaming, Mr. Mok Chi Hung and Mr. Wong Hon Meng, pursuant to which we acquired 100% of the profit interest in King’s Gaming.
For further details about such agreement, please refer to the section titled “Acquisition of King’s Gaming Promotion
Limited” under Item 4.A. herein.
On September 12, 2012, we consummated the
transactions contemplated by that certain Profit Interest Purchase Agreement dated as of September 12, 2012, among us, Bao Li Gaming,
Mr. Lou Kan Kuong and Mr. Lei Kam Keong, pursuant to which we acquired 100% of the profit interest in Bao Li Gaming. For further
details about such agreement, please refer to the section titled “Acquisition of Bao Li Gaming Promotion Limited” under
Item 4.A. herein.
Messrs. Lam and Vong have agreed to extend
credit to AGRL to lend funds to its VIP gaming promoters so that they in turn can extend credit to their agents and collaborators.
Such loans by Messrs. Lam and Vong are non-interest bearing. See the section entitled “AGRL’s Gaming Operations—Profit
Interest Agreements” under Item 4.B. herein for further information regarding these arrangements.
There is no exchange control legislation
under Cayman Islands law and accordingly there are no exchange control regulations imposed under Cayman Islands law.
The following summary sets forth the material
Cayman Islands and U.S. federal income tax consequences of the acquisition, ownership and disposition of our ordinary shares covered
by this Annual Report, based upon laws and relevant interpretations thereof in effect as of the date of this Annual Report, all
of which are subject to change. This summary does not deal with all possible tax consequences relating to an investment in our
ordinary shares, such as the tax consequences under state, local and other tax laws. As used in this discussion, references to
“we,” “our,” “us,” or “the company” refer only to Asia Entertainment & Resources
Ltd.
Cayman Islands Taxation
The government of the Cayman Islands will
not, under existing legislation, impose any income, corporate or capital gains tax, estate duty, inheritance tax, gift tax or withholding
tax upon the company or its shareholders. The Cayman Islands are not party to any double taxation treaties that are applicable
to payments made to or by us.
No Cayman Islands stamp duty will be payable
by you in respect of the issue or transfer of shares. However, an instrument transferring title to a share, if brought to or executed
in the Cayman Islands, would be subject to Cayman Islands stamp duty.
We have received an undertaking from the
Governor-in-Cabinet of the Cayman Islands that, in accordance with section 6 of the Tax Concessions Law (Revised) of the Cayman
Islands, for a period of 20 years from the date of the undertaking, no law which is enacted in the Cayman Islands imposing any
tax to be levied on profits, income, gains or appreciations shall apply to us or our operations and, in addition, that no tax to
be levied on profits, income, gains or appreciations or which is in the nature of estate duty or inheritance tax shall be payable
(i) on or in respect of the shares, debentures or other obligations, of the company or (ii) by way of the withholding in whole
or in part of a payment of a dividend or other distribution of income or capital by the company to its shareholders or a payment
of principal or interest or other sums due under a debenture or other obligation of the company.
United States Federal Income Taxation
General
The following is a summary of the material
U.S. federal income tax consequences of the acquisition, ownership and disposition of our ordinary shares. The discussion below
of the U.S. federal income tax consequences to “U.S. Holders” will apply to a beneficial owner of our ordinary shares
that is for U.S. federal income tax purposes:
|
·
|
an individual citizen or resident of the United States;
|
|
·
|
a corporation (or other entity treated as a corporation) that is created or organized (or treated as created or organized)
in or under the laws of the United States, any state thereof or the District of Columbia;
|
|
·
|
an estate whose income is includible in gross income for U.S. federal income tax purposes regardless of its source; or
|
|
·
|
a trust if (i) a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons
are authorized to control all substantial decisions of the trust, or (ii) it has a valid election in effect under applicable U.S.
Treasury regulations to be treated as a U.S. person.
|
A beneficial owner of our ordinary shares
that is described above is referred to herein as a “U.S. Holder.” If a beneficial owner of our ordinary shares is not
described as a U.S. Holder and is not an entity treated as a partnership or other pass-through entity for U.S. federal income tax
purposes, such owner will be considered a “Non-U.S. Holder.” The material U.S. federal income tax consequences applicable
specifically to Non-U.S. Holders are described below under the heading “Non-U.S. Holders.”
This summary is based on the Internal Revenue
Code of 1986, as amended (the “Code”), its legislative history, Treasury regulations promulgated thereunder, published
rulings and court decisions, all as currently in effect. These authorities are subject to change or differing interpretations,
possibly on a retroactive basis.
This discussion does not address all aspects
of U.S. federal income taxation that may be relevant to any particular holder based on such holder’s individual circumstances.
In particular, this discussion considers only holders that own and hold our ordinary shares as capital assets within the meaning
of Section 1221 of the Code, and does not discuss the potential application of the alternative minimum tax or the U.S. federal
income tax consequences to holders that are subject to special rules, including:
|
·
|
financial institutions or financial services entities;
|
|
·
|
persons that are subject to the mark-to-market accounting rules under Section 475 of the Code;
|
|
·
|
governments or agencies or instrumentalities thereof;
|
|
·
|
regulated investment companies;
|
|
·
|
real estate investment trusts;
|
|
·
|
certain expatriates or former long-term residents of the United States;
|
|
·
|
persons that actually or constructively own 5% or more of our voting shares;
|
|
·
|
persons that acquired our ordinary shares pursuant to an exercise of employee options, in connection with employee incentive
plans or otherwise as compensation;
|
|
·
|
persons that hold our ordinary shares as part of a straddle, constructive sale, hedging, conversion or other integrated transaction;
|
|
·
|
persons whose functional currency is not the U.S. dollar;
|
|
·
|
controlled foreign corporations; or
|
|
·
|
passive foreign investment companies.
|
This discussion does not address any aspect
of U.S. federal non-income tax laws, such as gift or estate tax laws, or state, local or non-U.S. tax laws or, except as discussed
herein, any tax reporting obligations applicable to a holder of our ordinary shares. Additionally, this discussion does not consider
the tax treatment of partnerships or other pass-through entities or persons who hold our ordinary shares through such entities.
If a partnership (or other entity classified as a partnership for U.S. federal income tax purposes) is the beneficial owner of
our ordinary shares, the U.S. federal income tax treatment of a partner in the partnership generally will depend on the status
of the partner and the activities of the partnership. This discussion also assumes that any distribution made (or deemed made)
in respect of our ordinary shares and any consideration received (or deemed received) by a holder in connection with the sale or
other disposition of such ordinary shares will be in U.S. dollars.
We have not sought, and will not seek, a
ruling from the Internal Revenue Service (“IRS”) or an opinion of counsel as to any U.S. federal income tax consequence
described herein. The IRS may disagree with the description herein, and its determination may be upheld by a court. Moreover, there
can be no assurance that future legislation, regulations, administrative rulings or court decisions will not adversely affect the
accuracy of the statements in this discussion.
THIS DISCUSSION IS ONLY A SUMMARY OF
THE MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES. IT IS NOT
TAX ADVICE. EACH HOLDER OF OUR ORDINARY SHARES IS URGED TO CONSULT ITS OWN TAX ADVISOR IN RESPECT TO THE PARTICULAR TAX CONSEQUENCES
TO SUCH HOLDER OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES, INCLUDING THE APPLICABILITY AND EFFECT OF
ANY STATE, LOCAL, AND NON-U.S. TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS AND ANY APPLICABLE TAX TREATIES.
U.S. Holders
Taxation of Cash Distributions
Paid on Ordinary Shares
Subject to the passive foreign investment
company (“PFIC”) rules discussed below, a U.S. Holder generally will be required to include in gross income as ordinary
income the amount of any cash dividend paid on our ordinary shares. A cash distribution on such ordinary shares generally will
be treated as a dividend for U.S. federal income tax purposes to the extent the distribution is paid out of our current or accumulated
earnings and profits (as determined for U.S. federal income tax purposes). Such dividend generally will not be eligible for the
dividends-received deduction generally allowed to U.S. corporations in respect of dividends received from other U.S. corporations.
The portion of such cash distribution, if any, in excess of such earnings and profits will be applied against and reduce (but not
below zero) the U.S. Holder’s adjusted tax basis in our ordinary shares. Any remaining excess generally will be treated as
gain from the sale or other taxable disposition of such ordinary shares.
With respect to non-corporate U.S. Holders,
any such dividends may be subject to U.S. federal income tax at the lower applicable regular long term capital gains tax rate (see
“ — Taxation on the Disposition of Ordinary Shares” below) provided that (1) our ordinary shares are readily
tradable on an established securities market in the United States, (2) we are not a PFIC, as discussed below, for either the taxable
year in which such dividend was paid or the preceding taxable year, and (3) certain holding period requirements are met. Under
published IRS authority, ordinary shares are considered for purposes of clause (1) above to be readily tradable on an established
securities market in the United States only if they are listed on certain exchanges, which presently include the Nasdaq Global
Market. Although our ordinary shares are currently listed on the Nasdaq Global Market, U.S. Holders nevertheless should consult
their own tax advisors regarding the availability of the lower rate for any dividends paid in respect to our ordinary shares.
Taxation on the Disposition
of Ordinary Shares
Upon a sale or other taxable disposition
of our ordinary shares, and subject to the PFIC rules discussed below, a U.S. Holder generally will recognize capital gain or loss
in an amount equal to the difference between the amount realized and the U.S. Holder’s adjusted tax basis in the ordinary
shares.
The regular U.S. federal income tax rate
on capital gains recognized by U.S. Holders generally is the same as the regular U.S. federal income tax rate on ordinary income,
except that long-term capital gains recognized by non-corporate U.S. Holders generally are subject to U.S. federal income tax at
a maximum regular rate of 20%. Capital gain or loss will constitute long-term capital gain or loss if the U.S. Holder’s holding
period for the ordinary shares exceeds one year. The deductibility of capital losses is subject to various limitations.
Passive Foreign Investment Company
Rules
A foreign (i.e., non-U.S.) corporation will
be a PFIC if either (a) at least 75% of its gross income in a taxable year of the foreign corporation, including its pro rata share
of the gross income of any corporation in which it is considered to own at least 25% of the shares by value, is passive income,
or (b) at least 50% of its assets in a taxable year of the foreign corporation, ordinarily determined based on fair market value
and averaged quarterly over the year, including its pro rata share of the assets of any corporation in which it is considered to
own at least 25% of the shares by value, are held for the production of, or produce, passive income. Passive income generally includes
dividends, interest, rents and royalties (other than certain rents or royalties derived from the active conduct of a trade or business),
and gains from the disposition of passive assets.
Based on the composition (and estimated
values) of the assets and the nature of our income and our subsidiaries during our 2012 taxable year, we do not believe that we
will be treated as a PFIC for such year. However, because we have not performed a definitive analysis as to our PFIC status for
our 2012 taxable year, there can be no assurance in respect to our PFIC status for our 2012 taxable year. There also can be no
assurance in respect to our status as a PFIC for our current (2013) taxable year or any future taxable year.
If we are determined to be a PFIC for any
taxable year (or portion thereof) that is included in the holding period of a U.S. Holder of our ordinary shares, and such U.S.
Holder did not make either a timely qualified electing fund (“QEF”) election for our first taxable year as a PFIC in
which the U.S. Holder held (or was deemed to hold) our ordinary shares, or a mark-to-market election, each as described below,
such holder generally will be subject to special rules for regular U.S. federal income tax puropses in respect to:
|
·
|
any gain recognized by the U.S. Holder on the sale or other disposition of its ordinary shares; and
|
|
·
|
any “excess distribution” made to the U.S. Holder (generally, any distributions to such U.S. Holder during a taxable
year of the U.S. Holder that are greater than 125% of the average annual distributions received by such U.S. Holder in respect
of the ordinary shares during the three preceding taxable years of such U.S. Holder or, if shorter, such U.S. Holder’s holding
period for the ordinary shares).
|
Under these rules,
|
·
|
the U.S. Holder’s gain or excess distribution will be allocated ratably over the U.S. Holder’s holding period for
the ordinary shares;
|
|
·
|
the amount allocated to the U.S. Holder’s taxable year in which the U.S. Holder recognized the gain or received the excess
distribution, or to the period in the U.S. Holder’s holding period before the first day of our first taxable year in which
we qualified as a PFIC, will be taxed as ordinary income;
|
|
·
|
the amount allocated to other taxable years (or portions thereof) of the U.S. Holder and included in its holding period will
be taxed at the highest tax rate in effect for that year and applicable to the U.S. Holder; and
|
|
·
|
the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each
such other taxable year of the U.S. Holder.
|
In general, if we are determined to be a
PFIC, a U.S. Holder may avoid the PFIC tax consequences described above in respect to our ordinary shares by making a timely QEF
election (or a QEF election along with a purging election). Pursuant to the QEF election, a U.S. Holder will be required to include
in income its pro rata share of our net capital gains (as long-term capital gain) and other earnings and profits (as ordinary income),
on a current basis, in each case whether or not distributed, in the taxable year of the U.S. Holder in which or with which our
taxable year ends. A U.S. Holder may make a separate election to defer the payment of taxes on undistributed income inclusions
under the QEF rules, but if deferred, any such taxes will be subject to an interest charge.
The QEF election is made on a shareholder-by-shareholder
basis and, once made, can be revoked only with the consent of the IRS. A U.S. Holder generally makes a QEF election by attaching
a completed IRS Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund),
including the information provided in a PFIC annual information statement, to a timely filed U.S. federal income tax return for
the taxable year to which the election relates. Retroactive QEF elections generally may be made only by filing a protective statement
with such return and if certain other conditions are met or with the consent of the IRS.
In order to comply with the requirements
of a QEF election, a U.S. Holder must receive certain information from us. Upon request from a U.S. Holder, we will endeavor to
provide to the U.S. Holder no later than 90 days after the request such information as the IRS may require, including a PFIC annual
information statement, in order to enable the U.S. Holder to make and maintain a QEF election. However, there is no assurance that
we will have timely knowledge of our status as a PFIC in the future or of the required information to be provided.
If a U.S. Holder has made a QEF election
in respect to our ordinary shares, and the special tax and interest charge rules do not apply to such ordinary shares (because
of a timely QEF election for our first taxable year as a PFIC in which the U.S. Holder holds (or is deemed to hold) such shares
or a QEF election along with a purge of the PFIC taint pursuant to a purging election, as described below), any gain recognized
on the sale or other taxable disposition of such ordinary shares generally will be taxable as capital gain and no interest charge
will be imposed. As discussed above, for regular U.S. federal income tax purposes, U.S. Holders of a QEF are currently taxed on
their pro rata shares of the QEF’s earnings and profits, whether or not distributed. In such case, a subsequent distribution
of such earnings and profits that were previously included in income should not be taxable as a dividend to such U.S. Holders.
The adjusted tax basis of a U.S. Holder’s ordinary shares in a QEF will be increased by amounts that are included in income,
and decreased by amounts distributed but not taxed as dividends, under the above rules. Similar basis adjustments apply to property
if by reason of holding such property the U.S. Holder is treated under the applicable attribution rules as owning ordinary shares
in a QEF.
Although a determination as to our PFIC
status will be made annually, an initial determination that we are a PFIC generally will apply for subsequent years to a U.S. Holder
who held our ordinary shares while we were a PFIC, whether or not we meet the test for PFIC status in those subsequent years. A
U.S. Holder who makes the QEF election discussed above for our first taxable year as a PFIC in which the U.S. Holder holds (or
is deemed to hold) our ordinary shares, however, will not be subject to the PFIC tax and interest charge rules discussed above
in respect to such ordinary shares. In addition, such U.S. Holder will not be subject to the QEF inclusion regime in respect to
such ordinary shares for any of our taxable years that end within or with a taxable year of the U.S. Holder and in which we are
not a PFIC. On the other hand, if the QEF election is not effective for each of our taxable years in which we are a PFIC and during
which the U.S. Holder holds (or is deemed to hold) our ordinary shares, the PFIC rules discussed above will continue to apply to
such shares unless the holder files on a timely filed U.S. income tax return (including extensions) a QEF election and a purging
election to recognize under the rules of Section 1291 of the Code any gain that it would otherwise recognize if the U.S. Holder
sold shares for their fair market value on the “qualification date.” The qualification date is the first day of our
tax year in which we qualify as a QEF with respect to such U.S. Holder. The purging election can only be made if such U.S. Holder
held shares on the qualification date. The gain recognized by the purging election will be subject to the special tax and interest
charge rules treating the gain as an excess distribution, as described above. As a result of the purging election, the U.S. Holder
will increase the adjusted tax basis in its shares by the amount of the gain recognized and will also have a new holding period
in the shares for purposes of the PFIC rules.
Alternatively, if a U.S. Holder, at the
close of its taxable year, owns ordinary shares in a PFIC that are treated as marketable stock, the U.S. Holder may make a mark-to-market
election in respect to such ordinary shares for such taxable year. If the U.S. Holder makes a valid mark-to-market election for
the first taxable year of the U.S. Holder in which the U.S. Holder holds (or is deemed to hold) our ordinary shares and for which
we are determined to be a PFIC, such holder generally will not be subject to the PFIC rules described above in respect to its ordinary
shares. Instead, in general, the U.S. Holder will include as ordinary income each year the excess, if any, of the fair market value
of its ordinary shares at the end of its taxable year over the adjusted tax basis in its ordinary shares. The U.S. Holder also
will be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted tax basis of its ordinary shares over
the fair market value of its ordinary shares at the end of its taxable year (but only to the extent of the net amount of previously
included income as a result of the mark-to-market election). The U.S. Holder’s adjusted tax basis in its ordinary shares
will be adjusted to reflect any such income or loss amounts, and any further gain recognized on a sale or other taxable disposition
of the ordinary shares will be treated as ordinary income.
The mark-to-market election is available
only for stock that is regularly traded on a national securities exchange that is registered with the Securities and Exchange Commission,
including the Nasdaq Global Market, or on a foreign exchange or market that the IRS determines has rules sufficient to ensure that
the market price represents a legitimate and sound fair market value. Although our ordinary shares are currently listed on the
Nasdaq Global Market, U.S. Holders nevertheless should consult their own tax advisors regarding the availability and tax consequences
of a mark-to-market election in respect to our ordinary shares.
If we are a PFIC and, at any time, have
a foreign subsidiary that is classified as a PFIC, a U.S. Holder of our ordinary shares generally should be deemed to own a portion
of the shares of such lower-tier PFIC, and generally could incur liability for the deferred tax and interest charge described above
if we receive a distribution from, or dispose of all or part of our interest in, or the U.S. Holder otherwise were deemed to have
disposed of an interest in, the lower-tier PFIC. Upon request, we will endeavor to cause any lower-tier PFIC to provide to a U.S.
Holder no later than 90 days after the request the information that may be required to make or maintain a QEF election in respect
to the lower-tier PFIC. However, there is no assurance that we will have timely knowledge of the status of any such lower-tier
PFIC or will be able to cause the lower-tier PFIC to provide the required information. A mark-to-market election generally would
not be available in respect to such a lower-tier PFIC. U.S. Holders are urged to consult their own tax advisors regarding the tax
issues raised by lower-tier PFICs.
A U.S. Holder that owns (or is deemed to
own) ordinary shares in a PFIC during any taxable year of the U.S. Holder may have to file an IRS Form 8621 (whether or not a QEF
election or mark-to-market election is or has been made) with such U.S. Holder’s U.S. federal income tax return and provide
such other information as may be required by the U.S. Treasury Department.
The rules dealing with PFICs and with the
QEF and mark-to-market elections are very complex and are affected by various factors in addition to those described above. Accordingly,
U.S. Holders of our ordinary shares should consult their own tax advisors concerning the application of the PFIC rules to our ordinary
shares under their particular circumstances.
Additional Taxes
U.S. Holders that are individuals, estates or trusts and whose
income exceeds certain thresholds generally will be subject to a 3.8% Medicare contribution tax on unearned income, including,
without limitation, dividends on, and gains from, the sale or other taxable disposition of, our ordinary shares, subject to certain
limitations and exceptions. Under recently issued proposed regulations, in the absence of a special election, such unearned income
generally would not include income inclusions under the QEF rules discussed above under “— Passive Foreign Investment
Company Rules,” but would include distributions of earnings and profits from a QEF. U.S. Holders should consult their own
tax advisors regarding the effect, if any, of such tax on their ownership and disposition of our ordinary shares.
Non-U.S. Holders
Cash dividends paid to a Non-U.S. Holder
in respect to our ordinary shares generally will not be subject to U.S. federal income tax unless such dividends are effectively
connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable
income tax treaty, are attributable to a permanent establishment or fixed base that such holder maintains or maintained in the
United States).
In addition, a Non-U.S. Holder generally
will not be subject to U.S. federal income tax on any gain attributable to a sale or other taxable disposition of our ordinary
shares unless such gain is effectively connected with its conduct of a trade or business in the United States (and, if required
by an applicable income tax treaty, is attributable to a permanent establishment or fixed base that such holder maintains or maintained
in the United States) or the Non-U.S. Holder is an individual who is present in the United States for 183 days or more in the taxable
year of sale or other disposition and certain other conditions are met (in which case, such gain from U.S. sources generally is
subject to U.S. federal income tax at a 30% rate or a lower applicable tax treaty rate).
Cash dividends and gains that are effectively
connected with the Non-U.S. Holder’s conduct of a trade or business in the United States (and, if required by an applicable
income tax treaty, are attributable to a permanent establishment or fixed base in the United States) generally will be subject
to regular U.S. federal income tax that such holder maintains or maintained at the same regular U.S. federal income tax rates applicable
to a comparable U.S. Holder and, in the case of a Non-U.S. Holder that is a corporation for U.S. federal income tax purposes, may
also be subject to an additional branch profits tax at a 30% rate or a lower applicable tax treaty rate.
Backup Withholding and Information Reporting
In general, information reporting for U.S.
federal income tax purposes will apply to cash distributions made on our ordinary shares within the United States to a U.S. Holder
(other than an exempt recipient) and to the proceeds from sales and other dispositions of our ordinary shares by a U.S. Holder
(other than an exempt recipient) to or through a U.S. office of a broker. Payments made (and sales and other dispositions effected
at an office) outside the United States will be subject to information reporting in limited circumstances. In addition, certain
information concerning a U.S. Holder’s adjusted tax basis in its ordinary shares and adjustments to that tax basis and whether
any gain or loss with respect to such ordinary shares is long-term or short-term also may be required to be reported to the IRS,
and certain holders may be required to file an IRS Form 8939 (Statement of Specified Foreign Financial Assets) to report their
interest in our ordinary shares.
Moreover, backup withholding of U.S. federal
income tax at a rate of 28%, generally will apply to cash dividends paid on our ordinary shares to a U.S. Holder (other than an
exempt recipient) and the proceeds from sales and other dispositions of our ordinary shares by a U.S. Holder (other than an exempt
recipient), in each case who:
|
·
|
fails to provide an accurate taxpayer identification number;
|
|
·
|
is notified by the IRS that backup withholding is required; or
|
|
·
|
in certain circumstances, fails to comply with applicable certification requirements.
|
A Non-U.S. Holder generally may eliminate
the requirement for information reporting and backup withholding by providing certification of its foreign status, under penalties
of perjury, on a duly executed applicable IRS Form W-8 or by otherwise establishing an exemption.
Backup withholding is not an additional
tax. Rather, the amount of any backup withholding will be allowed as a credit against a U.S. Holder’s or a Non-U.S. Holder’s
U.S. federal income tax liability and may entitle such holder to a refund, provided that certain required information is timely
furnished to the IRS. Holders are urged to consult their own tax advisors regarding the application of backup withholding and the
availability of and procedures for obtaining an exemption from backup withholding in their particular circumstances.
|
F.
|
Dividends and paying agents
|
Not required.
Not required.
Documents concerning us that are referred
to in this document may be inspected at Unit 605, East Town Building, 16 Fenwick Street, Wanchai, Hong Kong.
In addition, we file annual reports and
other information with the Securities and Exchange Commission. We file annual reports on Form 20-F and submit other information
under cover of Form 6-K. As a foreign private issuer, we are exempt from the proxy requirements of Section 14 of the Exchange Act
and our officers, directors and principal shareholders will be exempt from the insider short-swing disclosure and profit recovery
rules of Section 16 of the Exchange Act. Annual reports and other information we file with the Commission may be inspected at the
public reference facilities maintained by the Commission at Room 1024, 100 F. Street, N.E., Washington, D.C. 20549, and copies
of all or any part thereof may be obtained from such offices upon payment of the prescribed fees. You may call the Commission at
1-800-SEC-0330 for further information on the operation of the public reference rooms and you can request copies of the documents
upon payment of a duplicating fee, by writing to the Commission. In addition, the Commission maintains a web site that contains
reports and other information regarding registrants (including us) that file electronically with the Commission which can be assessed
at http://www.sec.gov.
|
I.
|
Subsidiary Information
|
Not required.
|
ITEM
11.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK
|
Foreign Currency Risk
We do not currently have any foreign exchange
exposure as our promotion income and expenses are predominantly denominated in HKD$. However, in the future, it is possible
that a proportion of our promotion income and expenses may be denominated in other currencies if we expand into
overseas markets. In such circumstances, we anticipate our primary market risk, if any, to be related to fluctuations in exchange
rates. Exchange rate risk may arise if the we are required to use different currencies for various aspects of our
operations.
|
ITEM
12.
|
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
|
Not required.
ASIA ENTERTAINMENT & RESOURCES LTD.
CONSOLIDATED BALANCE SHEETS
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
20,644,296
|
|
|
$
|
16,718,565
|
|
Accounts Receivable, Net
|
|
|
2,480,961
|
|
|
|
1,240,142
|
|
Markers Receivable
|
|
|
241,706,663
|
|
|
|
240,131,089
|
|
Prepaid Expenses and Other Assets
|
|
|
303,570
|
|
|
|
292,559
|
|
Total Current Assets
|
|
|
265,135,490
|
|
|
|
258,382,355
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets (net of accumulated amortization of $12,553,037 and $5,902,419 at December 31, 2012 and 2011, respectively)
|
|
|
94,451,063
|
|
|
|
54,983,937
|
|
Goodwill
|
|
|
17,037,761
|
|
|
|
14,992,009
|
|
Property and Equipment (net of accumulated depreciation of $14,366 and $1,101 at December 31, 2012 and 2011, respectively)
|
|
|
13,698
|
|
|
|
26,855
|
|
Deferred Offering Costs
|
|
|
807,401
|
|
|
|
-
|
|
Other Assets
|
|
|
21,592
|
|
|
|
22,158
|
|
TOTAL ASSETS
|
|
$
|
377,467,005
|
|
|
$
|
328,407,314
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Lines of Credit Payable
|
|
$
|
34,799,982
|
|
|
$
|
46,270,563
|
|
Accrued Expenses
|
|
|
14,091,723
|
|
|
|
16,157,439
|
|
Payable-King's Gaming Acquisition-Contingent Purchase Price Obligation
|
|
|
9,000,000
|
|
|
|
12,057,600
|
|
Loan Payable, Shareholders, current
|
|
|
2,214,078
|
|
|
|
2,641,619
|
|
Total Current Liabilities
|
|
|
60,105,783
|
|
|
|
77,127,221
|
|
|
|
|
|
|
|
|
|
|
Loan Payable, Shareholders
|
|
|
60,000,000
|
|
|
|
60,000,000
|
|
Bao Li Gaming Acquisition-Contingent Purchase Price Obligation
|
|
|
32,294,981
|
|
|
|
-
|
|
King's Gaming Acquisition-Contingent Purchase Price Obligation, net of current portion
|
|
|
9,000,000
|
|
|
|
32,492,985
|
|
Total Liabilities
|
|
|
161,400,764
|
|
|
|
169,620,206
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Preferred Shares, $0.0001 par value Authorized 1,150,000 shares; none issued
|
|
|
-
|
|
|
|
-
|
|
Ordinary Shares, $0.0001 par value Authorized 200,000,000 shares; issued 41,177,217 at December 31, 2012 and 38,804,064 at December 31, 2011
|
|
|
4,118
|
|
|
|
3,881
|
|
Additional Paid-in Capital
|
|
|
69,670,922
|
|
|
|
52,581,098
|
|
Retained Earnings
|
|
|
145,828,260
|
|
|
|
106,308,297
|
|
Accumulated Comprehensive Income (Loss)
|
|
|
562,941
|
|
|
|
(106,168
|
)
|
Total Shareholders' Equity
|
|
|
216,066,241
|
|
|
|
158,787,108
|
|
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
$
|
377,467,005
|
|
|
$
|
328,407,314
|
|
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
ASIA ENTERTAINMENT & RESOURCES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31,
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Revenue from VIP Gaming Operations
|
|
$
|
236,300,623
|
|
|
$
|
250,575,452
|
|
|
$
|
127,036,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
- Commission to Agents
|
|
|
154,569,837
|
|
|
|
155,968,504
|
|
|
|
76,607,712
|
|
- Selling, General and Administrative Expenses
|
|
|
18,340,972
|
|
|
|
16,550,387
|
|
|
|
11,246,938
|
|
- Special Rolling Tax
|
|
|
1,815,034
|
|
|
|
1,993,208
|
|
|
|
1,042,400
|
|
- Amortization of Intangible Assets
|
|
|
6,622,238
|
|
|
|
5,058,204
|
|
|
|
843,061
|
|
Total Expenses
|
|
|
181,348,081
|
|
|
|
179,570,303
|
|
|
|
89,740,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income including pre-acquisition profit before change in fair value of contingent consideration
|
|
|
54,952,542
|
|
|
|
71,005,149
|
|
|
|
37,296,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior Owners' Interest in Pre-Acquisition Profit
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,329,385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income attributable to ordinary shareholders before change in fair value of contingent consideration
|
|
|
54,952,542
|
|
|
|
71,005,149
|
|
|
|
32,966,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Fair Value of Contingent Consideration for the Acquisitions of King's Gaming and Bao Li
|
|
|
15,166,700
|
|
|
|
6,248,361
|
|
|
|
-
|
|
Net Income Attributable to Ordinary Shareholders
|
|
|
70,119,242
|
|
|
|
77,253,510
|
|
|
|
32,966,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency
|
|
|
|
|
|
|
|
|
|
|
|
|
- Translation Adjustment
|
|
|
669,109
|
|
|
|
(64,634
|
)
|
|
|
(41,534
|
)
|
Total Comprehensive Income
|
|
$
|
70,788,351
|
|
|
$
|
77,188,876
|
|
|
$
|
32,925,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.66
|
|
|
$
|
2.07
|
|
|
$
|
2.33
|
|
Diluted
|
|
$
|
1.66
|
|
|
$
|
2.00
|
|
|
$
|
1.88
|
|
Weighted Average Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
42,324,462
|
|
|
|
37,371,426
|
|
|
|
14,177,408
|
|
Diluted
|
|
|
42,324,628
|
|
|
|
38,691,186
|
|
|
|
17,571,255
|
|
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
ASIA ENTERTAINMENT & RESOURCES LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2012,
2011, AND 2010
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Owners' Equity
|
|
|
Accumulated
|
|
|
Total
|
|
|
|
Ordinary Shares
|
|
|
Paid-In
|
|
|
Retained
|
|
|
(Deficit)
|
|
|
Comprehensive
|
|
|
Shareholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings (Deficits)
|
|
|
Pre-Acquisition
|
|
|
Income (Loss)
|
|
|
Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, January 1, 2010 (A)
|
|
|
10,350,000
|
|
|
|
1,035
|
|
|
|
11,788
|
|
|
|
(30,046
|
)
|
|
|
(1,507,929
|
)
|
|
|
-
|
|
|
|
(1,525,152
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares effectively issued to former shareholders as part of the recapitalization
|
|
|
2,195,224
|
|
|
|
220
|
|
|
|
451,824
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
452,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital contribution by shareholders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,507,929
|
|
|
|
-
|
|
|
|
1,507,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares issued in May 2010 for cash at $9.50 per share
|
|
|
60,000
|
|
|
|
6
|
|
|
|
569,994
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
570,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares issued for exercise of warrants at $5.00 per share
|
|
|
7,095,790
|
|
|
|
710
|
|
|
|
35,478,240
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35,478,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares issued for cash-less exercise of warrants
|
|
|
1,343,050
|
|
|
|
134
|
|
|
|
(134
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for warrants expired unexercised
|
|
|
-
|
|
|
|
-
|
|
|
|
(40,464
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(40,464
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares issued in acquisition
|
|
|
1,500,000
|
|
|
|
150
|
|
|
|
16,109,850
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,110,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to ordinary shareholders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
32,966,865
|
|
|
|
-
|
|
|
|
-
|
|
|
|
32,966,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(41,534
|
)
|
|
|
(41,534
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2010
|
|
|
22,544,064
|
|
|
|
2,255
|
|
|
|
52,581,098
|
|
|
|
32,936,819
|
|
|
|
-
|
|
|
|
(41,534
|
)
|
|
|
85,478,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive shares issued for 2010 net income target treated as dividend
|
|
|
12,050,000
|
|
|
|
1,205
|
|
|
|
-
|
|
|
|
(1,205
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive shares issued for filing of 2010 Form 20-F treated as dividend
|
|
|
4,210,000
|
|
|
|
421
|
|
|
|
-
|
|
|
|
(421
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Declared dividend paid
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,880,406
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,880,406
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
77,253,510
|
|
|
|
-
|
|
|
|
-
|
|
|
|
77,253,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(64,634
|
)
|
|
|
(64,634
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2011
|
|
|
38,804,064
|
|
|
$
|
3,881
|
|
|
$
|
52,581,098
|
|
|
$
|
106,308,297
|
|
|
$
|
-
|
|
|
$
|
(106,168
|
)
|
|
$
|
158,787,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend paid
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(12,622,128
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(12,622,128
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares repurchased and retired
|
|
|
(1,300,247
|
)
|
|
|
(130
|
)
|
|
|
(4,290,560
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,290,690
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive shares issued for AGRL's 2011 net income target treated as dividend
|
|
|
3,103,000
|
|
|
|
310
|
|
|
|
17,976,841
|
|
|
|
(17,977,151
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive shares issued for King's Gaming 2011 net income target
|
|
|
520,000
|
|
|
|
52
|
|
|
|
3,057,548
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,057,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director shares issued for compensation
|
|
|
50,400
|
|
|
|
5
|
|
|
|
345,995
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
346,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
70,119,242
|
|
|
|
-
|
|
|
|
-
|
|
|
|
70,119,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
669,109
|
|
|
|
669,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2012
|
|
|
41,177,217
|
|
|
$
|
4,118
|
|
|
$
|
69,670,922
|
|
|
$
|
145,828,260
|
|
|
$
|
-
|
|
|
$
|
562,941
|
|
|
$
|
216,066,241
|
|
(A) Represents the combined changes in shareholders' equity
(deficit) of AGRL, its subsidiaries and VIP Gaming Promoters, the Accounting Acquirer.
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
ASIA ENTERTAINMENT & RESOURCES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income Attributable to Ordinary Shareholders including pre-acquisition profit
|
|
$
|
70,119,242
|
|
|
$
|
77,253,510
|
|
|
$
|
32,966,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
6,622,238
|
|
|
|
5,058,204
|
|
|
|
843,061
|
|
Change in fair value of contingent purchase price obligation for the acquisition of King's Gaming and Bao Li Gaming
|
|
|
(15,166,700
|
)
|
|
|
(6,248,361
|
)
|
|
|
-
|
|
Depreciation
|
|
|
13,250
|
|
|
|
1,101
|
|
|
|
-
|
|
Directors' stock-based compensation
|
|
|
200,000
|
|
|
|
181,000
|
|
|
|
165,000
|
|
Change in assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable
|
|
|
(1,088,951
|
)
|
|
|
9,557,858
|
|
|
|
(6,446,270
|
)
|
Markers Receivable
|
|
|
(639,414
|
)
|
|
|
(119,933,203
|
)
|
|
|
(120,140,393
|
)
|
Advance to Owner pre-acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
1,547,668
|
|
Prepaid Expenses and Other Assets
|
|
|
(9,211
|
)
|
|
|
(161,770
|
)
|
|
|
(127,826
|
)
|
Lines of Credit Payable
|
|
|
(11,641,406
|
)
|
|
|
34,413,426
|
|
|
|
9,247,096
|
|
Accrued Expenses
|
|
|
(1,980,943
|
)
|
|
|
5,158,744
|
|
|
|
5,493,314
|
|
Net cash provided by (used in) operating activities
|
|
|
46,428,105
|
|
|
|
5,280,509
|
|
|
|
(76,451,485
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOW FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
-
|
|
|
|
(27,956
|
)
|
|
|
-
|
|
Cash paid for King's Gaming acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
(9,028,590
|
)
|
Cash paid for Bao Li Gaming acquisition
|
|
|
(15,146,032
|
)
|
|
|
-
|
|
|
|
-
|
|
Net cash used in investing activities
|
|
|
(15,146,032
|
)
|
|
|
(27,956
|
)
|
|
|
(9,028,590
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOW FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration paid for King's Gaming acquisition
|
|
|
(9,000,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Cash paid for shares repurchased
|
|
|
(4,290,690
|
)
|
|
|
-
|
|
|
|
-
|
|
Ordinary shares issued for cash
|
|
|
-
|
|
|
|
-
|
|
|
|
36,048,950
|
|
Dividend paid
|
|
|
(12,622,128
|
)
|
|
|
(3,880,406
|
)
|
|
|
-
|
|
Redemption of warrants for cash
|
|
|
-
|
|
|
|
-
|
|
|
|
(40,464
|
)
|
Payment of deferred offering costs
|
|
|
(806,745
|
)
|
|
|
-
|
|
|
|
-
|
|
Proceeds from merger
|
|
|
-
|
|
|
|
-
|
|
|
|
452,044
|
|
Repayment of shareholder loans
|
|
|
(671,071
|
)
|
|
|
-
|
|
|
|
-
|
|
Proceeds from shareholder loans
|
|
|
-
|
|
|
|
1,574,644
|
|
|
|
62,549,192
|
|
Net cash (used in) provided by financing activities
|
|
|
(27,390,634
|
)
|
|
|
(2,305,762
|
)
|
|
|
99,009,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
3,891,439
|
|
|
|
2,946,791
|
|
|
|
13,529,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency translation on cash
|
|
|
34,292
|
|
|
|
(71,848
|
)
|
|
|
(7,172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
16,718,565
|
|
|
|
13,843,622
|
|
|
|
321,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
20,644,296
|
|
|
$
|
16,718,565
|
|
|
$
|
13,843,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated payable for King's acquisition
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
50,857,564
|
|
Ordinary shares issued for acquisition
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
16,110,000
|
|
Estimated contingent purchase price- Bao Li Gaming
|
|
$
|
32,294,981
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive shares issued for 2011 net income target
|
|
$
|
17,977,151
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Incentive shares issued for King's Gaming 2011 net income target and relieved from contingent consideration
|
|
$
|
3,057,600
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Notes issued for shareholder loans
|
|
$
|
-
|
|
|
$
|
60,000,000
|
|
|
$
|
-
|
|
Capital contributed by shareholders offset to Shareholder loans payable
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,507,929
|
|
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012,
2011 AND 2010
Note 1 – Organization and Business of Companies
Asia Entertainment
& Resources Ltd. (formerly CS China Acquisition Corp.) ("AERL" or the “Company”) was incorporated in
the Cayman Islands on September 24, 2007 as a blank check company whose objective was to acquire, through a share exchange, asset
acquisition or other similar business combination, an operating business, or control of such operating business through contractual
arrangements, that has its principal operations located in People’s Republic of China (“PRC”, “China”).
On October 6, 2009,
AERL entered into a Stock Purchase Agreement, subsequently amended on November 10, 2009, December 9, 2009, January 11, 2010 and
April 18, 2011 (the “Agreement”), with Asia Gaming & Resort Limited and its wholly owned subsidiaries, (collectively
“AGRL”) and Spring Fortune Investments Ltd. (“Spring Fortune”) that provided for the acquisition by AERL
from Spring Fortune of all of the outstanding capital stock of AGRL. On February 2, 2010, the acquisition was consummated
pursuant to the terms of the Agreement, and AGRL became a wholly owned subsidiary of AERL, as discussed in Note 9. The
operations of AGRL's Promoter Companies are based in Macau, and are subject to Macau jurisdiction. The Company operates a gaming
promotion business in VIP gaming rooms located in hotels and casinos in Macau.
The acquisition was
accounted for as a “reverse merger” and recapitalization since the shareholder of AGRL (i) owns a majority of the outstanding
ordinary shares of AERL, par value $0.0001 (the “Ordinary Shares”) immediately following the completion of the transaction,
and (ii) has significant influence and the ability to elect or appoint or to remove a majority of the members of the governing
body of the combined entity, and AGRL’s senior management dominates the management of the combined entity immediately following
the completion of the transaction. The assets and liabilities and the historical operations that are reflected in the financial
statements are those of AGRL and its VIP gaming promoters (sometimes referred to as the “Promoter Companies”) and are
recorded at the historical cost basis of AGRL and the VIP gaming promoters. AERL’s assets, liabilities and results of operations
are consolidated with the assets, liabilities and results of operations of AGRL, its subsidiaries and the Promoter Companies
subsequent to the acquisition.
AERL, its subsidiaries
(including AGRL) and the Promoter Companies are collectively referred to as the "Group".
Upon the closing of
the acquisition of AGRL by AERL, the Promoter Companies became variable interest entities (‘‘VIEs’’) of
the subsidiaries of AGRL, which are the primary beneficiaries of the operations of the Promoter Companies through the profit interest
agreements which were entered into on February 2, 2010 and agreements subsequent to that date.
On November 10, 2010,
the Company entered into an agreement to acquire the right to 100% of the profits derived by King's Gaming Promotion Limited (“King's
Gaming”) from the promotion of the Wenzhou VIP Room at the Venetian Hotel and Casino in Macau as discussed in Note 10.
On May 15, 2011 the
Company opened a new VIP gaming room at Galaxy Resort Macau located in Cotai, Macau.
On June 16, 2011, the
Company closed the VIP gaming room at the MGM Grand Hotel and Casino in Macau.
Jubilee Dynasty Limited
("Jubilee Dynasty"), a subsidiary of AGRL, was incorporated on May 18, 2012. The main asset of Jubilee Dynasty
is the right to 100% of the profit derived by Bao Li Gaming Promotion Limited (“Bao Li” or “Bao Li Gaming”)
from the promotion of a VIP gaming room at the City of Dreams Hotel and Casino in Macau, pursuant to a profit interest agreement
between Jubilee Dynasty and Bao Li effective September 1, 2012.
On September 5, 2012,
the Company entered into an agreement to acquire the right to 100% of the profits derived by Bao Li Gaming from the promotion of
a VIP gaming room at the City of Dreams Hotel and Casino in Macau as discussed in Note 11.
Currently, Macau laws
do not allow corporate entities, such as AERL, to directly operate a gaming promotion business in Macau. Consequently,
AERL’s gaming promotion business is operated through a series of contractual arrangements, including profit interest agreements
that enable the AGRL subsidiaries to receive substantially all of the economic benefits of the Promoter Companies and for AGRL
to exercise effective control over the Promoter Companies.
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012,
2011 AND 2010
Management’s
determination of the appropriate accounting method with respect to the AGRL variable interest entities is based on Financial Accounting
Standards Board Accounting Standards Codification (“FASB ASC”) Topic 810 “Consolidation of Variable Interest
Entities". AGRL consolidates the VIEs because the equity investors in the Promoter Companies do not have the characteristics
of a controlling financial interest and AERL through AGRL is the primary beneficiary and will disclose significant variable interests
in VIEs of which it is not the primary beneficiary, if any.
In accordance with
FASB ASC Topic 810 "Consolidations", the operations of the Promoter Companies are consolidated with those of AERL for
all periods subsequent to the closing of the acquisition of AGRL by AERL. Prior to the closing of the acquisitions, all revenue
and expenses of the Promoter Companies has been attributed to the former beneficiaries of the VIEs and has been disclosed
as the prior owners' interest in pre-acquisition profit and has reduced income available to the ordinary shareholders.
VIP Gaming Promoter Agreements
Sang Heng’s Gaming
Representative (VIP Room Promoter) Agreement dated as of February 1, 2008 entered into between Galaxy Casino, S.A., and Sang Heng
allowed for the sharing of profits as a gaming representative of Iao Kun VIP Room in Star World Hotel and Casino in Macau for the
period from November 30, 2007 to December 31, 2008. Pursuant to an agreement in October 2009, both parties agreed that Sang Heng
should be compensated in accordance with Order no. 83/2009 of the Secretary for the Economy and Finances of the Macau SAR, which
provides the maximum commission for gaming activity of promotion of games at 1.25% of the rolling chip turnover. The agreement
became effective on November 1, 2009. The agreement must be, and has been, renewed annually. Effective September 1, 2012, both
parties agreed to change to the revenue sharing model to provide that Sang Heng be compensated based upon a mutually agreed upon
percentage of the win/losses of the VIP gaming room.
King’s Gaming’s
Gaming Representative (VIP Room Promoter) Agreement was entered into in July 2008 between Venetian Macau S.A. and King's Gaming
which allowed for the sharing of profits as a gaming representative of Wenzhou VIP Room in Venetian Hotel and Casino in Macau for
the period ended December 31, 2008. The agreement was renewed in January 2009 for the period from January 1, 2009 to December 31,
2009. Pursuant to an agreement in September 2009, both parties agreed that King's Gaming should be compensated in accordance with
Order no. 83/2009, which provides the maximum commission for gaming activity of promotion of games at 1.25% of the rolling chip
turnover. The agreement became effective on November 1, 2009. The agreement automatically renews annually. Effective September
1, 2012, both parties agreed to change to the revenue sharing model to provide that King’s Gaming be compensated based upon
a mutually agreed upon percentage of the wins/losses of the VIP gaming room.
Sang Lung’s Gaming
Representative (VIP Room Promoter) Agreement dated as of June 24, 2011 entered into between Galaxy Casino, S.A., and Sang Lung
allowed for Sang Lung to be compensated in accordance with Order no. 83/2009, which provides the maximum commission for gaming
activity of promotion of games at 1.25% of the rolling chip turnover. The agreement became effective on July 1, 2011. The agreement
must be, and has been, renewed annually. Effective September 1, 2012, both parties agreed to change to the revenue sharing model
to provide that Sang Lung be compensated based upon a mutually agreed upon percentage of the wins/losses of the VIP gaming room.
Bao Li’s Gaming
Promoter Agreement was entered into on February 7, 2011 between Melco Crown Gaming (Macau) Limited and Bao Li Gaming which allowed
for it to be compensated in accordance with Order no. 83/2009, which provides the maximum commission for gaming activity of promotion
of games at 1.25% of the rolling chip turnover. The agreement automatically renews annually. As a matter of convenience and
to maintain flexibility in remuneration methods, the Company also entered into an agreement with Melco Crown Gaming (Macau) Limited
to share in the casino’s VIP gaming room wins or losses from the gaming patrons recruited by the Company. Either the Promoter
or the Casino Operators may adjust these arrangements with adequate notice and agreement by both parties to the arrangement. Effective
September 1, 2012, both parties agreed to change to the revenue sharing model Bao Li Gaming be compensated based upon a mutually
agreed upon percentage of the wins/losses of the VIP gaming room.
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012,
2011 AND 2010
Iao Pou’s Gaming
Representative (VIP Room Promoter) Agreement dated as of June 22, 2009 entered into between MGM Grand Hotel and Casino in Macau
and Iao Pou allows for the sharing of profits as a Gaming Promoter of Iao Kun VIP Room in the MGM Grand Hotel and Casino in Macau
for the period from June 22, 2009 to March 31, 2010. A new agreement was entered into on November 9, 2009 and was automatically
renewed on January 1 for a one year period. The Group closed the Iao Kun VIP Room on June 16, 2011 to focus its resources
at its other VIP gaming rooms and the Agreement was terminated.
Note 2 — Summary
of Significant Accounting Policies
Principles of Consolidation
The operations of the
Promoter Companies are consolidated with those of AGRL and its wholly owned subsidiaries and AERL as of December 31, 2012 and 2011
and for the years ended December 31, 2012, 2011 and 2010. Intercompany transactions and account balances have been eliminated.
Unless otherwise indicated all currency amounts are in United States Dollars.
Fiscal Year End
The fiscal year end
of the Company is December 31.
Use of Estimates
The preparation of
the consolidated financial statements in conformity with U.S. GAAP requires the management to make estimates and judgments that
affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and
liabilities. These estimates and judgments are based on historical information, information that is currently available to the
management and on various other assumptions that the management believes to be reasonable under the circumstances. The Company
has made significant estimates of the contingent purchase price due for the King's Gaming and Bao Li Gaming acquisitions in these
consolidated financial statements. Actual results could vary from those estimates.
Revenue Recognition
Revenue from VIP gaming
room promotion operations is recorded monthly based upon the Promoter Companies’ share of the net gaming wins or as a percentage
of non-negotiable chips wagered in VIP gaming rooms. The amounts due to the Promoter Companies are calculated and reported
by the Casino Operators on a monthly basis, usually within two days of the month end.
In accordance with
long standing industry practice in Macau, the Promoter Companies’ operations in Grand Waldo Hotel and Casino, Star World
Hotel and Casino and MGM Grand Hotel and Casino had similar win and loss sharing arrangements (“model”). Under these
arrangements, Sang Heng, Spring and Iao Pou shared in the casino’s VIP gaming room wins or losses from the gaming patrons
recruited by the Promoter Companies. Typically, wins or losses are allocated as 40.25% to 49% of net gaming wins on a pre-gaming
tax basis. The Promoter Companies may or the Casino Operators may adjust these arrangements with adequate notice and agreement
by both parties to the arrangement.
Additionally, the Promoter
Companies earn revenues based upon percentages of non-negotiable chips wagered in the VIP gaming rooms (typically 0.05%), which
is available to offset costs incurred for accommodations, food and beverage and other services furnished to VIP gaming patrons
without charge and is included in gross revenues and then deducted as promotional allowances incurred. These revenues are
included in revenue from VIP gaming room promotion operations in the accompanying consolidated statements of operations.
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012,
2011 AND 2010
In July 2009, all concessionaires
and sub-concessionaires entered into an agreement to cap gaming promoter commissions. Under this agreement, commission payments
to gaming promoters cannot exceed 1.25% of the rolling chip turnover regardless of the commission structure adopted. As a result
of the amendments made to Administrative Regulation No. 6/2002 by Administrative Regulation 27/2009 dated August 10, 2009, the
Secretary of Economy and Finance of the Macau SAR now has the authority to issue a dispatch implementing the 1.25% gaming promoter
commission cap, as agreed between all concessionaires and sub-concessionaires. The amendment sets forth standards for what
constitutes a commission to gaming promoters, including all types of payments, either monetary or in specie, that are made to gaming
promoters such as food and beverage, hotel and other services and allowances. The amendment also imposes obligations on gaming
promoters and Casino Operators to report regularly to the Gaming Inspection and Coordination Bureau of the Macau SAR and imposes
fines or other sanctions for noncompliance with the commission cap or the monthly obligations to report and detail the amount of
commissions paid to gaming promoters.
Beginning in October
2009, Star World Hotel and Casino agreed to revise the Sang Heng Agreement and removed the win/loss sharing component and replaced
it with a commission payable to Sang Heng at a rate of 1.25% of the rolling chip turnover. Management had requested that
the MGM Grand Hotel and Casino revise the Iao Pou Agreement to remove the win/loss sharing component and replace it with a commission
payable to Iao Pou at a rate of 1.25% of the rolling chip turnover. MGM Grand Hotel and Casino declined the request to allow
for fixed commissions. The Company closed its VIP gaming room in the MGM Hotel and Casino on June 16, 2011. The Sang
Lung and King’s Gaming arrangements were also based on 1.25% of the rolling chip turnover. Management believed
that this change in the revenue structure had reduced the inherent risk in promoting a VIP gaming room, due to the fluctuation
surrounding gaming wins and losses. The fixed commission revenues were based only on the amount of the rolling chip turnover,
rather than the win/loss of the gaming operations. Total rolling chip turnover in the Group’s VIP gaming rooms was
approximately $18,149,348,000, $19,931,385,000 and $ 10,423,462,000 during the years ended December 31, 2012, 2011 and 2010, respectively.
On August 1, 2012,
the Company announced that beginning on September 1, 2012, it would be changing its remuneration model from a fixed commission
model of 1.25% of the rolling chip turnover to a model. The decision to change from the fixed commission model to the model, was
made as a result of the Company’s expansion into four VIP gaming rooms with the ability to spread the risk of fluctuations
surrounding gaming wins and losses. Additionally, management has initiated a new program for junket agents that provide their own
credit to gaming patrons, allowing the junket agent to assume some of the risk of gaming losses or receive increased commissions
as a result of gaming wins. Win rate was 3.03% and 2.77% during the years ended December 31, 2012 and 2011 respectively.
VIP Gaming Room Cage and Marker Accounting
In the VIP gaming rooms,
junket agents primarily purchase non-negotiable chips from the cage either with cash, cash chips, cashier’s order, or markers
(short term, non-interest bearing loans). Non-negotiable chips can only be used to make wagers. Winning wagers are paid in cash
chips. If the gaming patrons continue to play, they must exchange the cash chips for non-negotiable chips, which is the basis for
commission. The wager of the non-negotiable chips by the gaming patrons in the VIP gaming room is recorded as rolling chip
turnover and provides a basis for measuring VIP gaming room win percentage. It is customary in Macau to measure VIP gaming room
play using this rolling chip method.
The law in Macau permits
VIP gaming promoters to extend credit to junket agents, who act as patron representatives.
With the completion
of the acquisition of AGRL by AERL, the Group, through the Promoter Companies, extends credit to junket agents. A majority of the
Group’s consolidated markers receivable are owed by junket agents from Macau and the rest are primarily in Asia. In addition
to enforceability issues, the collectability of markers receivable from foreign junket agents is affected by a number of factors
including changes in economic conditions in the junket agents’ home countries. As of December 31, 2012 and 2011, markers
receivable amounted to $241,706,663 and $240,131,089, respectively.
The Group may not be
able to collect all of their markers receivable from the junket agents. Management expects that the Group will be able to enforce
these obligations only in a limited number of jurisdictions, including Macau and Hong Kong. To the extent that junket agents of
the Group, through the Promoter Companies, are from other jurisdictions, the Group may not have access to a forum in which they
will be able to collect all of their markers receivable because, among other reasons, courts of many jurisdictions do not enforce
gaming debts and the Group may encounter forums that will refuse to enforce such debts. The Group’s inability to collect
gaming debts could have a significant negative impact on their operating results.
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012,
2011 AND 2010
The following is a summary of an aging of
the Company’s markers receivable by jurisdiction that may refuse to enforce such debts:
Jurisdiction/Aging
|
|
December 31,
2012
|
|
|
% of total
markers
receivable
|
|
|
December 31,
2011
|
|
|
% of total
markers
receivable
|
|
PRC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-30 days
|
|
$
|
40,749,342
|
|
|
|
|
|
|
$
|
37,987,405
|
|
|
|
|
|
31-60 days
|
|
|
28,065,490
|
|
|
|
|
|
|
|
8,791,929
|
|
|
|
|
|
61-90 days
|
|
|
26,651,442
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Greater than 90 days
|
|
|
4,012,489
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Total
|
|
$
|
99,478,763
|
|
|
|
41
|
%
|
|
$
|
46,779,334
|
|
|
|
19
|
%
|
The Group regularly
evaluates the allowance for uncollectible marker receivable based on a specific review of junket agent accounts as well as management’s
prior experience with collection trends in the casino industry and current economic and business conditions. Upon the completion
of the acquisition of AGRL by AERL, Messrs. Lam and Vong guaranteed all markers receivable in the Company’s VIP gaming rooms.
The guarantees by Messrs. Lam and Vong do not cover markers receivable attributable to the junket agent networks of Mr, Mok or
Mr. Lou, as described below. The guarantee of Messrs. Lam and Vong can be offset against the loans provided by them for the working
capital. Upon the acquisition of King’s Gaming, Mr. Mok has guaranteed the collection of all markers receivable attributable
to Mr. Mok and his network of junket agents at both King’s Gaming’s existing VIP gaming room and the Group’s
existing and future VIP gaming rooms. Upon the acquisition of Bao Li Gaming, Mr. Lou guaranteed the collection of all markers receivable
attributable to Mr. Lou and his network of junket agents at both Bao Li Gaming’s existing VIP gaming room and the Company’s
existing and future VIP gaming rooms through December 31, 2015. Therefore, as of December 31, 2012, and 2011, management believes
that an allowance for uncollectible markers receivable is not necessary.
Deferred Offering Cost
Deferred
offering costs, consisting of legal, accounting and filing fees relating to a proposed offering of Ordinary Shares on the Hong
Kong Stock Exchange have been capitalized. The deferred offering costs will be offset against offering proceeds in the event the
offering is successful. In the event the offering is unsuccessful or is abandoned, the deferred offering costs will be expensed.
Fair Value of Financial Instruments
FASB ASC Topic 820
“Fair Value Measurements and Disclosures” defines fair value, the methods used to measure fair value and the expanded
disclosures about fair value measurements. Fair value is the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between the buyer and the seller at the measurement date. In determining fair value, the
valuation techniques consistent with the market approach, income approach and cost approach shall be used to measure fair value.
FASB ASC Topic 820 establishes a fair value hierarchy for inputs, which represent the assumptions used by the buyer and seller
in pricing the asset or liability. These inputs are further defined as observable and unobservable inputs. Observable inputs are
those that buyer and seller would use in pricing the asset or liability based on market data obtained from sources independent
of the Company. Unobservable inputs reflect the Company’s assumptions about the inputs that the buyer and seller would use
in pricing the asset or liability developed based on the best information available in the circumstances.
The fair value hierarchy
is categorized into three levels based on the inputs as follows:
Level 1 —
|
Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not being applied. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entail a significant degree of judgment.
|
Level 2 —
|
Valuations based on (i) quoted prices in active markets for similar assets and liabilities, (ii) quoted prices in markets that are not active for identical or similar assets, (iii) inputs other than quoted prices for the assets or liabilities, or (iv) inputs that are derived principally from or corroborated by market through correlation or other means.
|
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012,
2011 AND 2010
Level 3 —
|
Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
|
For certain of the
Group's financial instruments, none of which are held for trading purposes, including cash and cash equivalents, accounts receivable,
markers receivable, certain other current assets, lines of credit payable, accrued expenses, and loan payable to shareholders
the carrying values of these financial instruments, other than long-term loan payable to shareholders, approximate their fair value
due to their short maturities. The carrying value of long-term loan payable to shareholders approximates their fair
value since they guarantee the markers receivable. The payables-King’s Gaming and Bao Li acquisitions were initially
recognized for the fair values of the acquisition contingent consideration and are adjusted to the fair value at each subsequent
reporting date (see Notes 10 and Note 11).
At least annually,
management determines if the current valuation techniques used in the fair value measurements are still appropriate and evaluates
and adjusts the unobservable inputs used in the fair value measurements based on current market conditions and other information.
There were no changes in the valuation techniques during the current year.
Contingent
|
|
Fair Value
|
|
|
Valuation
|
|
|
|
|
|
Consideration
|
|
at
12/31/2012
|
|
|
Techniques
|
|
Unobservable
Input
|
|
Range
|
|
|
|
|
|
|
|
|
|
|
|
|
King’s Gaming
|
|
$
|
18,000,000
|
|
|
Forecasted Performance, 2013-2022
|
|
Chip Turnover Annual Growth
|
|
|
1.9%
- 15.0
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forecasted Performance, 2013-2022
|
|
Operating Income/Chip Turnover
|
|
|
0.28%
- 0.30
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monte Carlo Method
|
|
Average Simulated Share Prices
|
|
|
$
2.95
- $3.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bao-Li Gaming
|
|
$
|
32,294,981
|
|
|
Forecasted Performance, 2013-2015
|
|
Chip Turnover Annual Growth
|
|
|
5.0%
- 19.0
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monte Carlo Method
|
|
Average Simulated Share Prices
|
|
|
$
3.05
- $3.09
|
|
The significant unobservable
inputs used in the fair value measurement of the Company’s contingent consideration for the King’s Gaming and Bao Li
Gaming acquisitions are the forecasted performance results of the operations of King’s Gaming and Bao Li Gaming and the simulated
share prices of the Company’s Ordinary Shares under the Monte Carlo method. Significant increases (decreases) in any of those
inputs in isolation would result in a significantly higher (lower) fair value measurement.
With the adoption of
ASU 2011-04, there were no changes in valuation technique and related inputs resulting from the adoption of the new requirements.
Cash and Cash Equivalents
Cash and cash equivalents
consist of cash, cash chips, non-negotiable chips and short-term investments with original maturities of less than 90 days.
Cash equivalents are placed with high credit quality financial institutions.
Accounts Receivable and Concentration of Credit Risk
Accounts receivable
are principally comprised of net gaming revenues, fees and incentives revenues receivable, which do not bear interest and are recorded
at amounts due from the Casino Operators.
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012,
2011 AND 2010
When deemed necessary,
the Group records an allowance for doubtful accounts which represents management’s best estimate of the amount of probable
credit losses in the Group’s existing accounts receivable. Management believes that all outstanding balances are collectible
and therefore an allowance has not been established. Although management believes that no allowance is currently necessary, it
is possible that the estimated amount of cash collections with respect to accounts receivable could change.
Earnings Per Share
The calculations of
earnings per share are computed as follows for the years ended December 31,:
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net income for basic and diluted earnings per share
|
|
$
|
70,119,242
|
|
|
$
|
77,253,510
|
|
|
$
|
32,966,865
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
- Weighted-average Ordinary Shares outstanding during the year
|
|
|
42,324,462
|
|
|
|
37,371,426
|
|
|
|
14,177,408
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
- Weighted-average Contingent Ordinary Shares to be Issued for Earnings Incentives
|
|
|
-
|
|
|
|
913,194
|
|
|
|
3,012,500
|
|
- Weighted-average Director shares issued/ issuable
|
|
|
166
|
|
|
|
82
|
|
|
|
56
|
|
- Weighted average Unit Purchase Option
|
|
|
-
|
|
|
|
406,484
|
|
|
|
381,291
|
|
Denominator for diluted earnings per share
|
|
|
42,324,628
|
|
|
|
38,691,186
|
|
|
|
17,571,255
|
|
Basic earnings per share
|
|
$
|
1.66
|
|
|
$
|
2.07
|
|
|
$
|
2.33
|
|
Diluted earnings per share
|
|
$
|
1.66
|
|
|
$
|
2.00
|
|
|
$
|
1.88
|
|
During the fourth quarter
of 2010, contingent Ordinary Shares of 12,050,000 for the AGRL 2010 earnings incentive were earned and have been included in the
basic and diluted earnings per share based on the weighted average shares for the year ended December 31, 2011 and have been included
in the dilutive earnings per share based on the weighted average shares since the 4th quarter of 2010.
During the fourth quarter
of 2011, contingent Ordinary Shares of 2,573,000 and 530,000 for the AGRL 2011 earnings incentive were earned and have been included
in the basic and diluted earnings per share based on the weighted average shares for the fourth quarter of 2011. During the fourth
quarter of 2011, contingent Ordinary Shares of 500,000 and 20,000 for the King’s Gaming 2011 earnings incentive were earned
and have been included in the basic and diluted earnings per share based on the weighted average shares for the fourth quarter
of 2011.
4,210,000 Ordinary
Shares were to be issued within 30 days of the Company filing its Form 20-F for 2010 (filed on May 6, 2011) and have been included
in the basic and diluted earnings per share based on the weighted average shares for the year ended December 31, 2011.
AGRL did not achieve
the performance target for the year ended December 31, 2012 and no incentive shares were issued for AGRL’s results in 2012.
King’s Gaming did not meet its 2012 Gross Profit Target to exceed $7,380,000 and no incentive shares were issued.
In 2011, the Company
decided that a portion of the Directors fees would be paid in Ordinary Shares. The shares are to be issued in January of each year.
A total of 50,400 shares were issued on April 24, 2012 to satisfy the Company’s obligations for 2011 and 2010 and have been
included in basic and diluted earnings per share based on the weighted average shares for the years ended December 31, 2012, 2011
and 2010. A liability of approximately $209,000 and $346,000 is included in accrued expenses at December 31, 2012 and 2011, respectively.
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012,
2011 AND 2010
The Company has 1,440,000
dilutive potential Ordinary Shares related to the Underwriter Unit Purchase Option (UPO). The UPO expires in 2013.
Property and Equipment
Property and equipment
is stated at cost. Depreciation and amortization is recorded on a straight-line basis over the estimated useful lives of the assets
ranging from two to five years, which do not exceed the lease term for leasehold improvements, if applicable
Goodwill and Other Intangible Assets
The Company amortizes
intangible assets over their estimated useful lives unless it is determined their lives to be indefinite. Goodwill and other intangible
assets with indefinite lives are not amortized but are subject to tests for impairment at least annually. Management performs impairment
tests more frequently than annually if events or circumstances indicate that the value of goodwill or intangible assets with indefinite
lives might be impaired.
The following are the
useful lives of the respective finite-lived intangible assets:
Bad Debt Guarantee
|
|
3.3 to 5.5 years
|
|
Based upon six months after the expiration of the employment agreement
|
|
|
|
|
|
Non-Compete agreement
|
|
10.8 to 12.2 years
|
|
Based upon the termination date of the casino's license
|
|
|
|
|
|
Profit interest agreement
|
|
10.8 to 12.2 years
|
|
Based upon the termination date of the casino's license
|
Indefinite
Useful Life Assets
Goodwill is evaluated
for possible impairment by comparing the fair value of a business unit with its carrying value, including the goodwill assigned
to that business unit. Fair value of a business unit is estimated using a combination of income-based and market-based valuation
methodologies. Under the income approach, forecasted cash flows of a business unit are discounted to a present value using a discount
rate commensurate with the risks of those cash flows. Under the market approach, the fair value of a business unit is derived from
recent market transactions involving merger and acquisition and/or publicly-traded guideline companies deemed broadly similar to
the subject business unit . An impairment charge is recorded if the carrying value of the goodwill exceeds its implied fair value.
Assets with indefinite useful lives are not subject to amortization and are tested for impairment annually or more frequently if
events or circumstances indicate that the assets might be impaired. The impairment test consists of a comparison of the fair value
of the asset with its carrying amount. If the carrying amount of the asset exceeds its fair value, an impairment will be recognized
in an amount equal to that excess. If the carrying amount of the asset does not exceed the fair value, no impairment is recognized.
Impairment of Long-lived Assets
The Company evaluates
when events or circumstances indicate that the carrying amount of long-lived assets to be held and used might not be recoverable,
the expected future undiscounted cash flows from the assets are estimated and compared with the carrying amount of the assets.
If the sum of the estimated undiscounted cash flows was less than the carrying amount of the assets, an impairment loss would be
recorded. The impairment loss would be measured on a location by location basis by comparing the fair value of the asset with its
carrying amount. Long-lived assets that are held for disposal are reported at the lower of the assets’ carrying amount or
fair value less costs related to the assets’ disposition. No impairment has been recognized.
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012,
2011 AND 2010
Advertising Costs
Costs for advertising and marketing are expensed the first time
the advertising or marketing takes place or as incurred. Advertising and marketing costs for ongoing operations are included in
selling, general and administrative expense. During the years ended December 31, 2012 and 2011, the Group incurred advertising
costs of $158,436 and $100,196. The Group did not incur advertising or marketing expenses during the year ended December 31, 2010.
Stock-Based Compensation
The Company awards
stock and other equity-based instruments to its employees, directors and consultants (collectively "share-based payments").
Compensation cost related to such awards is recorded when earned. Ordinary Shares are issued to the directors subsequent
to year end based on average trading price prior to December 31 each year. All of the Company's stock-based compensation
is based on grants of equity instruments and no liability awards have been granted. All of the Company directors presently receive
$20,000 payable in Ordinary Shares, valued at the average of the closing prices of the Ordinary Shares over the three-month period
preceding the end of each fiscal year. As of December 31, 2012 and 2011, the Company has reserved a total of 60,610 and 50,400
Ordinary Shares for issuance to the Company's directors and key management employees.
In December 2011, the
shareholders approved the 2011 Omnibus Securities and Incentive Plan (the “Plan”). The purpose of the plan is to assist
the Company in attracting, retaining and providing incentives to key management employees and nonemployee directors of, and nonemployee
consultants to the Company and its Affiliates, and to align the interests of such employees, nonemployee directors and nonemployee
consultants with those of the Company’s shareholders. The Plan provides for the granting of Distribution Equivalent Rights,
Incentive Share Options, Non-Qualified Share Options, Performance Share Awards, Performance Unit Awards, Restricted Share Awards,
Restricted Share Unit Awards, Share Appreciation Rights, Tandem Share Appreciation Rights, Unrestricted Share Awards or any combination
of the foregoing up to a maximum of 200,000 Ordinary Shares, as may be best suited to the circumstances of the particular Employee,
Director or Consultant. On April 24, 2012, 50,400 ordinary shares were issued.
Foreign Currency
The reporting currency
of AERL is in the United States dollar ("US $", "$", “Reporting Currency”). AERL and AGRL’s
and the Promoter Companies' functional currency is the Hong Kong Dollar (“HKD $”, “Functional Currency”).
Monetary assets and liabilities denominated in currencies other than the Functional Currency are translated into the Functional
Currency at rates of exchange prevailing at the balance sheet dates. Transactions denominated in currencies other than the Functional
Currency are translated into the Functional Currency at the exchange rates prevailing on the dates of the transaction.
Exchange gains or losses
arising from foreign currency transactions are included in the determination of net income for the respective period.
For financial reporting
purposes, the consolidated financial statements of the Group, which are prepared using the Functional Currency, are then translated
into the Reporting Currency. Assets and liabilities are translated at the exchange rates at the balance sheet dates and revenue
and expenses are translated at the average exchange rates and shareholders' equity is translated at historical exchange rates.
Any translation adjustments resulting are not included in determining net income but are included in foreign currency translation
adjustment in other comprehensive income, a component of shareholders' equity.
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
|
December 31,
2010
|
|
Period end HK$:US$ exchange rate
|
|
$
|
7.75
|
|
|
$
|
7.78
|
|
|
$
|
7.77
|
|
Average annual HK$:US$ exchange rate
|
|
$
|
7.76
|
|
|
$
|
7.78
|
|
|
$
|
7.77
|
|
Comprehensive Income
The Group follows standards
for the reporting and display of comprehensive income and its components in the financial statements. Comprehensive income is defined
as the change in equity of a company during the period from transactions and other events and circumstances excluding transactions
resulting from investments from owners and distributions to owners. Accumulated comprehensive income, as presented on the accompanying
consolidated statements of changes in equity, is the cumulative foreign currency translation adjustment.
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012,
2011 AND 2010
Economic and political risks
The Group’s current
operations are conducted in Macau and Hong Kong. Accordingly, the Group’s consolidated financial condition and results of
operations may be influenced by the political, economic and legal environment in the PRC and by the general state of the PRC economy.
The Group’s operations
in Macau and Hong Kong are subject to special considerations and significant risks not typically associated with companies in North
America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and
foreign currency exchange. The Group’s consolidated results may be adversely affected by changes in the political and social
conditions in the PRC and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures,
currency conversion, remittances abroad and rates and methods of taxation, among other things.
Income Taxes
Sang Heng, King's Gaming,
Bao Li, Iao Pou and Sang Lung are not subject to Macau Complimentary tax, because, pursuant to the VIP gaming promoter agreements
with the Casino Operators, gaming revenue is received net of taxes collected by the Macau SAR paid directly by the Casino Operator
on a monthly basis. No provision for Macau Complimentary tax has been made.
As VIP gaming promoters,
Sang Heng, King's Gaming, Bao Li, Iao Pou and Sang Lung are subject to a tax on the amount of nonnegotiable chips wagered by gaming
patrons in the VIP gaming rooms (“rolling chip turnover”), which is referred to as a “rolling tax”. The
rolling tax is deducted and paid by the Casino Operator on a monthly basis. The rate of rolling tax is 0.01% on the rolling chip
turnover of the VIP gaming room and the rolling tax is deducted as a cost of revenues.
Doowell and Champion
Lion are incorporated under the BVI Business Companies Act, 2004 (No. 16 of 2004) and are exempted from payment of BVI taxes. Doowell
and Champion Lion are not subject to Korean Income tax because all promotion services are performed outside Korea. No provision
for Korean Income tax has been made.
AGRL is not subject
to Hong Kong profits tax because all operations are performed outside Hong Kong and Hong Kong adopts a territorial tax regime under
which only Hong Kong sourced income is subject to the profit tax.
All subsidiaries are
incorporated under the BVI Business Companies Act, 2004 (No. 16 of 2004) and are exempted from payment of BVI taxes.
The Company is not
incorporated nor does it engage in any trade or business in the United States and is not subject to United States federal income
taxes. The Company did not derive any significant amount of income subject to such taxes after completion of the Share Exchange
and accordingly, no relevant tax provision is made in the consolidated statements of operations.
Deferred income tax
assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be effective when the differences are expected to reverse.
Deferred tax assets
are reduced by a valuation allowance to the extent that management concludes it is more likely than not that the assets will not
be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in the consolidated statements of income in the period that includes the enactment date.
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012,
2011 AND 2010
The Company prescribes
a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken in the tax return.
This interpretation also provides guidance on de-recognition of income tax assets and liabilities, classification of current and
deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for
income taxes in interim periods and income tax disclosures. As of December 31, 2012 and 2011, there were no amounts that had been
accrued with respect to uncertain tax positions.
Reclassifications
Certain reclassifications were made to prior years’ amounts
to conform to the current period presentation. None of the reclassifications affected the net income of the prior years.
Recently Issued Accounting Pronouncements
Management does not believe that any recently
issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial
statements.
Note 3 — Accounts Receivable
Accounts receivable
consisted of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Gaming revenues receivable
|
|
$
|
2,480,961
|
|
|
$
|
1,240,142
|
|
As of December 31,
2012 and December 31, 2011, accounts receivable were due from three Casino Operators. The accounts receivable from the three
casinos at December 31, 2012 were 32%, 26% and 42% of total receivables. The accounts receivable from the three casinos at
December 31, 2011 were 77%, 20% and 3% of total receivables.
Note 4 — Intangible Assets
Intangible assets as
of December 31, 2012 and 2011 consist of the following:
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
Balance at
|
|
|
|
January 1,
|
|
|
|
|
|
Amortization
|
|
|
Impairment
|
|
|
Currency
|
|
|
December 31,
|
|
|
|
2012
|
|
|
Additions
|
|
|
Expense
|
|
|
Charge
|
|
|
Translation
|
|
|
2012
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad Debt Guarantee
|
|
$
|
366,689
|
|
|
$
|
122,381
|
|
|
$
|
(97,044
|
)
|
|
$
|
-
|
|
|
$
|
1,253
|
|
|
$
|
393,279
|
|
Non-Compete Agreement
|
|
|
715,419
|
|
|
|
723,484
|
|
|
|
(89,542
|
)
|
|
|
-
|
|
|
|
3,226
|
|
|
|
1,352,587
|
|
Profit Interest Agreement
|
|
|
53,901,829
|
|
|
|
45,016,159
|
|
|
|
(6,435,652
|
)
|
|
|
-
|
|
|
|
222,861
|
|
|
|
92,705,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortized intangible assets
|
|
$
|
54,983,937
|
|
|
$
|
45,862,024
|
|
|
$
|
(6,622,238
|
)
|
|
$
|
-
|
|
|
$
|
227,340
|
|
|
$
|
94,451,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
14,992,009
|
|
|
$
|
1,986,550
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
59,202
|
|
|
$
|
17,037,761
|
|
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012,
2011 AND 2010
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
Balance at
|
|
|
|
January 1,
|
|
|
|
|
|
Amortization
|
|
|
Impairment
|
|
|
Currency
|
|
|
December 31,
|
|
|
|
2011
|
|
|
Additions
|
|
|
Expense
|
|
|
Charge
|
|
|
Translation
|
|
|
2011
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad Debt Guarantee
|
|
$
|
451,991
|
|
|
$
|
-
|
|
|
$
|
(84,781
|
)
|
|
$
|
-
|
|
|
$
|
(521
|
)
|
|
$
|
366,689
|
|
Non-Compete Agreement
|
|
|
781,450
|
|
|
|
-
|
|
|
|
(65,146
|
)
|
|
|
-
|
|
|
|
(886
|
)
|
|
|
715,418
|
|
Profit Interest Agreement
|
|
|
58,876,866
|
|
|
|
-
|
|
|
|
(4,908,277
|
)
|
|
|
-
|
|
|
|
(66,759
|
)
|
|
|
53,901,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortized intangible assets
|
|
$
|
60,110,307
|
|
|
$
|
-
|
|
|
$
|
(5,058,204
|
)
|
|
$
|
-
|
|
|
$
|
(68,166
|
)
|
|
$
|
54,983,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
15,008,424
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(16,415
|
)
|
|
$
|
14,992,009
|
|
Amortization expense for the years ended
December 31, 2012 and 2011 were $6,622,238 and $5,058,204, respectively.
Estimated amortization
expense of intangibles for the next five years and thereafter is as follows:
2013
|
|
$
|
9,744,478
|
|
2014
|
|
|
9,744,478
|
|
2015
|
|
|
9,744,478
|
|
2016
|
|
|
9,651,265
|
|
2017
|
|
|
9,623,015
|
|
Thereafter
|
|
|
45,943,349
|
|
|
|
$
|
94,451,063
|
|
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012,
2011 AND 2010
Note 5 — Property and Equipment
Property and equipment consisted of the
following at December 31:
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Office Equipment
|
|
$
|
1,507
|
|
|
$
|
1,502
|
|
Furniture and Fixtures
|
|
|
4,417
|
|
|
|
4,400
|
|
Leasehold Improvements
|
|
|
22,140
|
|
|
|
22,054
|
|
|
|
|
28,064
|
|
|
|
27,956
|
|
Less: Accumulated Depreciation
|
|
|
(14,366
|
)
|
|
|
(1,101
|
)
|
|
|
$
|
13,698
|
|
|
$
|
26,855
|
|
Depreciation expense was $13,250 and $1,101 for the years ended
December 31, 2012 and 2011. There was no depreciation expense in prior years.
Note 6 — Lines of Credit Payable
Lines of Credit Payable
consisted of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Due to Casino Operators (A)
|
|
$
|
34,799,982
|
|
|
$
|
35,989,109
|
|
Due to Others (B)
|
|
|
-
|
|
|
|
10,281,454
|
|
|
|
$
|
34,799,982
|
|
|
$
|
46,270,563
|
|
(A) Due to Casino Operators
represents an advance of non-negotiable chips to Sang Heng, Sang Lung, King's Gaming (other amounts payable) and Bao Li Gaming
(as of December 31, 2012) and are interest free and renewable monthly.
The Casino Operators
have extended lines of credit totaling approximately $59,349,000 and $55,263,000 as of December 31, 2012 and 2011, respectively.
The lines of credit may be exceeded from time to time at the discretion of the Casino Operators. The lines of credit
for Sang Heng, Sang Lung and King’s Gaming are guaranteed by Mr. Lam or Mr. Vong and are secured by their personal checks
and a deposit paid by Mr. Lam. The line of credit for Bao Li Gaming is guaranteed by Mr. Lou and is secured by his personal
check.
(B) Due to Others is
a temporary advance from Mr. Lou, who was considered an unrelated third party in 2011. The amount is unsecured and interest free
and was repaid on January 1, 2012.
Note 7 — Accrued Expenses
Accrued Expenses consist
of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Commission payable-Junket Agents
|
|
$
|
12,314,860
|
|
|
$
|
14,545,733
|
|
Management fee payable-related party (Note 13)
|
|
|
567,684
|
|
|
|
462,665
|
|
Management and Directors' compensation
|
|
|
502,437
|
|
|
|
720,131
|
|
Others
|
|
|
706,742
|
|
|
|
428,910
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,091,723
|
|
|
$
|
16,157,439
|
|
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012,
2011 AND 2010
Note 8 — Loans Payable, Shareholders
On February 2, 2010,
AGRL entered in to an agreement with Messrs. Lam and Vong to provide funding for working capital and to advance funds to the Promoter
Companies. Pursuant to the agreement, the loans will be in an amount not less than $19,300,000 on and after February 2, 2010
(the date of the acquisition of AGRL by AERL), not less than $45,000,000 on and after March 31, 2010 and until the agreement is
terminated. This funding commitment terminates at the end of the fiscal quarter that AGRL’s working capital is not less than
$100,000,000, exclusive of any working capital provided by Messrs. Lam and Vong. If at any time the balance exceeds the minimum
requirement, Messrs. Lam and Vong may request repayment for the excess amount. As of December 31, 2012 and 2011, the amount of
the funding advanced to AGRL by Messrs. Lam and Vong was approximately $62,214,078 and $62,641,619, respectively. Messrs.
Lam and Vong also guarantee to AGRL the repayment of the loans made by AGRL to the Promoter Companies. Any amounts due to
AGRL pursuant to the guaranty provided by Messrs. Lam and Vong may, at AGRL's election, be offset against amounts owing Messrs.
Lam and Vong by AGRL pursuant to the agreement.
On April 18, 2011,
the terms of the loan agreement were amended and the loan amount totaling $60,000,000 ($30,000,000 each to Messrs. Lam and Vong)
was fixed, non-interest bearing and due on April 18, 2014. Therefore, this portion of the loan amount as of December 31,
2012 and 2011 has been classified as a long term liability. In conjunction with the loan amendment, the loans are convertible
at the option of the lenders at a rate of $20 per Ordinary Share or an aggregate of 3,000,000 Ordinary Shares. Additionally,
should the closing price of the Ordinary Shares as reported by the Nasdaq Stock Market for any ten (10) consecutive Trading Days
following the date of amendment equals or exceeds $25, the Company shall have the right to convert all of the loans at a rate of
$20 per Ordinary Shares, or an aggregate of 3,000,000 Ordinary Shares.
Note 9 — Acquisition of AGRL
On October 6, 2009,
AERL entered into a Stock Purchase Agreement, subsequently amended on November 10, 2009, December 9, 2009, January 11, 2010 and
April 18, 2011 (the “Agreement”), with AGRL and Spring Fortune that provided for the acquisition by AERL from Spring
Fortune of all of the outstanding capital stock of AGRL. On February 2, 2010, the acquisition was consummated pursuant to
the terms of the Agreement and AGRL became a wholly owned subsidiary of AERL.
The amendment dated
April 18, 2011 increased the amount of the incentive targets from $49,500,000 to $65,000,000 for the year ended December 31, 2011
and from $58,000,000 to $78,000,000 for the year ended December 31, 2012 to receive 2,573,000 incentive shares for each year.
Additionally, the additional incentive target to earn 530,000 Ordinary Shares in 2011 and 2012 was increased from $75,000,000 to
$78,000,000 and from $82,500,000 to $94,000,000, respectively.
Additionally, on April 18, 2011, members
of management who are also designees of Spring Fortune with respect to ordinary shares issued in connection with the acquisition
of AGRL, and were designees of the ordinary shares issued to Spring Fortune upon the filing of the Company's Annual Report on Form
20-F for 2010, entered into lock-up agreements pursuant to which such members of management would be restricted from transferring
ordinary shares of the Company. 20% of such shares are released from lock-up each year beginning one year after the execution of
the agreement. The following persons and entities had entered into lock-up agreements: Mr. Lam with respect to 2,940,000 ordinary
shares, Mr. Vong with respect to 3,940,000 ordinary shares; Legend Global International Limited (whose ordinary shares are deemed
to be beneficially owned by Leong Siak Hung, chief executive officer and director) with respect to 16,000 ordinary shares; and
Lam Chou In with respect to 2,860,000 ordinary shares. This is an aggregate of 9,756,000 ordinary shares, or 60% of the 16,260,000
ordinary shares issued subsequent to the filing of the Group's Annual Report on Form 20-F for 2010.
The acquisition of AGRL by AERL has been
accounted for as a “reverse merger” and recapitalization since Spring Fortune, the former shareholder of AGRL, became
the owner of a majority of the outstanding Ordinary Shares of AERL immediately following the completion of the transaction
and has significant influence and the ability to elect or appoint or to remove a majority of the members of the governing body
of the combined entity, and AGRL’s senior management dominates the management of the combined entity, Accordingly, AGRL was
deemed to be the accounting acquirer in the transaction and, consequently, the transaction is treated as a recapitalization of
AGRL. AERL’s assets, liabilities and results of operations were consolidated with the assets, liabilities and results of
operations of AGRL after consummation of the acquisition. For periods after the consummation of the acquisition, the assets
and liabilities and the historical operations that are reflected in the consolidated financial statements are those of AGRL and
the Promoter Companies and are recorded at their historical cost basis.
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012,
2011 AND 2010
Upon closing, AERL acquired all the outstanding
capital stock of AGRL from Spring Fortune for a total consideration of 10,350,000 Ordinary Shares of AERL issued to Spring Fortune
and its designees and an additional 4,210,000 Ordinary Shares issued upon the filing of AERL’s annual report on Form 20-F
for the 2010 fiscal year. In addition, Spring Fortune is entitled to receive additional Ordinary Shares of AERL stock for
each of the years 2010, 2011 and 2012 in which AGRL, through the Promoter Companies, meets or exceeds the following net after tax
income targets specified for such year in the Agreement (the “Incentive Targets”) as amended:
Year
|
|
Incentive Target
|
|
|
Incentive Shares
|
|
2010
|
|
$
|
41,800,000 and above
|
|
|
|
12,050,000
|
|
2011
|
|
$
|
65,000,000 and above
|
|
|
|
2,573,000
|
|
2012
|
|
$
|
78,000,000
and above
|
|
|
|
2,573,000
|
|
As of December 31, 2012, the maximum number
of incentive shares that Spring Fortune could have received for achieving Incentive Targets was 17,196,000 (including 12,050,000
earned in 2010). Also, for each of the years 2011 and 2012, AERL may issue an additional 530,000 Ordinary Shares if AGRL has adjusted
net income equal to, or greater than, $78 million, and $94 million, respectively, which would amount to an additional 1,060,000
Ordinary Shares to Spring Fortune if all of such targets are achieved. However, if for any fiscal year through the fiscal
year ending December 31, 2012, (i) at the end of any fiscal quarter during such fiscal year, AGRL does not have at least $10,000,000
in cash and cash equivalents (including redeemable chips and receivables from casinos with respect to operations during such fiscal
quarter that are received within five (5) days after the end of such fiscal quarter) and (ii) based on the audited financial statements
for such fiscal year, positive cash flow from operations, as determined in accordance with U.S. GAAP, Spring Fortune shall not
be entitled to receive one-half of the incentive shares it would otherwise be entitled to receive with respect to such fiscal year.
Total incentive shares and additional earnout shares potentially issuable pursuant to the above targets are 18,256,000 (including
12,050,000 earned in 2010).
AGRL achieved the performance
target for the year ended December 31, 2010 of net after tax income in excess of $41,800,000 as calculated under US GAAP, pursuant
to the Agreement, and 12,050,000 ordinary shares were issued subsequent to the filing of the 2010 annual report on Form 20-F.
AGRL achieved the performance
target for the year ended December 31, 2011 of $65,000,000 to earn 2,573,000 Ordinary Shares and the additional incentive target
of $78,000,000 to earn 530,000 Ordinary Shares in 2011 pursuant to the Agreement. The shares were issued subsequent to the filing
of the 2011 annual report on Form 20-F. The issuance is treated similar to a stock dividend and resulted in an increase to Ordinary
Shares and Additional Paid in Capital totaling $17,977,151 and a decrease to Retained Earnings of $17,977,151.
AGRL did not achieve
the performance target for the year ended December 31, 2012 and no incentive shares were issued.
Additionally, the Company
issued 4,210,000 shares as a result of the filing of Form 20-F for the fiscal year ended December 31, 2010 in May of 2011.
The shares are considered to be issued as part of the merger and therefore have been treated as issued for no additional cost or
compensation. The issuance is treated as an increase to Ordinary Shares and a decrease to Retained Earnings of $421 to reflect
the par value of the Ordinary Shares. The Company considered indicators to determine if the contingent payments as a result
of the reverse merger between AGRL and AERL constituted a form of additional compensation to/or profit sharing with the sellers
and concluded they are not to be treated as additional compensation or profit sharing.
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012,
2011 AND 2010
Note 10—Acquisition of King’s Gaming Promotion
Limited
On November 10, 2010,
the Company completed the purchase of the profit interest pursuant to a Profit Interest Purchase Agreement (“Purchase
Agreement”) with Mr. Mok and Mr. Wong (together, the “Seller”), to acquire the right to 100% of the
profit interest derived by King’s Gaming, effective November 1, 2010, from the promotion of the Wenzhou VIP Room at the Venetian
Hotel and Casino in Macau for an aggregate amount of (i) up to US$36,000,000, of which US$9,000,000 was paid at the closing, and
(ii) 1,500,000 Ordinary Shares of the Company (the “Purchase Price”) issued at the closing. The balance of US$27,000,000
of the Purchase Price will be maintained as working capital at the cage of King’s Gaming
(and shall be the
sole property of the Company until paid to the Seller in accordance with the terms of the Purchase Agreement) and shall be paid
to the Seller in installments of US$9,000,000 (each, an “Installment Payment”), subject to meeting a minimum Gross
Profit (as defined below) requirement equal to US$6,150,000 (the “Minimum Gross Profit Requirement”) for each of the
three fiscal years following the closing date commencing with fiscal year 2011, which shall be evidenced by the management prepared
financial statements of King’s Gaming approved by the Audit Committee of the Company. In the event King’s Gaming
fails to achieve the Minimum Gross Profit Requirement in any of the three fiscal years following the closing date, the Installment
Payment shall be reduced by an amount equal to the product of (x) US$9,000,000 and (y) the quotient obtained by dividing (A) the
actual Gross Profit for such year, by (B) the Minimum Gross Profit Requirement.
For purposes of the
Purchase Agreement, “Gross Profit” means 1.25% of the rolling chip turnover (which means the amount of nonredeemable
chips that the Seller’s network of junket agents purchase from King’s Gaming and the Company’s VIP gaming rooms)
attributable to the Seller’s network of junket agents at both King’s Gaming existing VIP gaming room and the Company’s
existing and future VIP gaming rooms, after deducting commissions and fees paid to the Seller’s network of junket agents
and a fixed management fee of $77,500 per month unless otherwise agreed by the parties. Revenues from VIP gaming rooms not employing
a flat percentage of rolling chip turnover may not account for more than 30% of the rolling chip turnover and to the extent that
revenues from such VIP gaming rooms account for more than 30% of the rolling chip turnover, such excess amount shall not be deemed
Gross Profit for purposes of the Purchase Agreement.
In addition, as more
fully set forth below, the Company is required to issue to the Seller (i) up to an aggregate of 1,500,000 (500,000 annually) Ordinary
Shares in the event certain Gross Profit targets are achieved for each of the three years following the closing date (the “Earnout
Shares”), (ii) up to an aggregate of 700,000 (100,000 annually) Ordinary Shares in the event certain Gross Profit targets
are achieved for each of the seven years following the third anniversary of the closing date (the “Incentive Shares”),
and (iii) additional Ordinary Shares in the event the Gross Profit targets for each of the ten years following the closing date
are exceeded by at least US$1,000,000 (the “Additional Incentive Shares”). For each US$1,000,000 in which the Gross
Profit target for such year is exceeded, 10,000 Additional Incentive Shares are required to be issued. The Seller is not entitled
to any Additional Incentive Shares on a pro rata basis for multiples of less or greater than US$1,000,000.
The Earnout Shares, Incentive Shares and Additional Incentive
Shares shall be released and issued to the Seller as follows:
|
|
Gross Profit Target
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnout/Incentive
|
|
|
Additional
|
|
Year
|
|
For Earnout/Incentive Shares
|
|
|
Shares
|
|
|
Incentive Shares
|
|
2011
|
|
$
|
6,150,000
|
|
|
|
500,000
|
|
|
|
*
|
|
2012
|
|
$
|
7,380,000
|
|
|
|
500,000
|
|
|
|
*
|
|
2013
|
|
$
|
8,860,000
|
|
|
|
500,000
|
|
|
|
*
|
|
2014
|
|
$
|
9,740,000
|
|
|
|
100,000
|
|
|
|
*
|
|
2015
|
|
$
|
10,720,000
|
|
|
|
100,000
|
|
|
|
*
|
|
2016
|
|
$
|
11,790,000
|
|
|
|
100,000
|
|
|
|
*
|
|
2017
|
|
$
|
12,970,000
|
|
|
|
100,000
|
|
|
|
*
|
|
2018
|
|
$
|
14,260,000
|
|
|
|
100,000
|
|
|
|
*
|
|
2019
|
|
$
|
15,690,000
|
|
|
|
100,000
|
|
|
|
*
|
|
2020
|
|
$
|
17,260,000
|
|
|
|
100,000
|
|
|
|
*
|
|
*- For each US$1,000,000 in which the Gross
Profit target for such year is exceeded, 10,000 Additional Incentive Shares will be issued. The Seller is not entitled to
any Additional Shares on a pro rata basis for multiples of less or greater than US$1,000,000.
For the year ended December 31, 2011, Incentive
Shares of 500,000 were earned since King’s Gaming met its 2011 Gross Profit Target, exceeding $6,150,000, and earned 20,000
additional incentive shares by exceeding its Gross Profit Target by over $2,000,000.
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012,
2011 AND 2010
King’s Gaming
did not meet its 2012 Gross Profit Target and no incentive shares will be issued.
Additionally, Mr. Mok has agreed to
provide a personal guaranty, for so long as he is employed by the Company or King’s Gaming providing for the guaranty of
all obligations of King’s Gaming and the Seller pursuant to the Purchase Agreement, including, but not limited to any bad
debts the Seller network of junket agents may have incurred or may incur in the future.
As of December 31,
2010, the total estimated purchase price of $75,973,890, consisting of $9 million in cash, 1.5 million Ordinary Shares valued at
$10.74 per share for a value of $16,110,000, and estimated contingent consideration of $50,863,890 consisting of contingent cash
and Ordinary Shares, was allocated based on valuations performed to determine the fair values of the acquired assets, as follows:
Gaming License Deposit
|
|
$
|
12,446
|
|
Bad Debt Guarantee
|
|
|
466,116
|
|
Non-Compete agreement
|
|
|
792,304
|
|
Profit interest agreement
|
|
|
59,694,600
|
|
Goodwill
|
|
|
15,008,424
|
|
|
|
|
|
|
Total Estimated Purchase Price
|
|
$
|
75,973,890
|
|
In accordance with
the FASB ASC Topic 805 on business combinations, a liability of $50,857,564 was recognized for the estimated acquisition fair value
of the contingent consideration based on the probability of the achievement of the Gross Profit targets at December 31, 2010. Any
change in the fair value of the acquisition-related contingent consideration subsequent to the acquisition date, including changes
from events after the acquisition date, such as changes in the Group’s estimate of the gross profit expected to be achieved,
will be recognized in earnings in the period that estimated fair value changes. The fair value estimate assumes probability-weighted
gross profits are achieved over the earn-out period. Actual achievement of gross profit range for this assumed earn-out period
could reduce the liability to zero. A change in the fair value of the acquisition-related contingent consideration could have a
material impact on the Group’s statement of operations and financial position in the period of change in estimate.
During the years ended December 31, 2012 and 2011, the Company recognized gains of $14,612,297 and $6,248,361, respectively due
to the change in the fair value of the contingent consideration utilizing Level 3 fair value measurements. Fluctuations in
the market value of the Company's ordinary shares and subsequent performance will cause the fair value to increase or decrease
and the resulting change will be recognized in earnings.
The following is a
reconciliation of the change in fair value of the contingent consideration:
Contingent Consideration as of January 1, 2011
|
|
$
|
50,857,564
|
|
Change in Fair Value of Contingent Consideration
|
|
|
(6,248,361
|
)
|
Foreign Currency Translation Adjustment
|
|
|
(58,618
|
)
|
Contingent Consideration as of December 31, 2011
|
|
$
|
44,550,585
|
|
Cash Consideration Paid
|
|
|
(9,000,000
|
)
|
Ordinary Shares Issued
|
|
|
(3,057,600
|
)
|
Change in Fair Value of Contingent Consideration
|
|
|
(14,612,297
|
)
|
Foreign Currency Translation Adjustment
|
|
|
119,312
|
|
Contingent Consideration Payable as of December 31, 2012
|
|
$
|
18,000,000
|
|
Management has considered
the factors that make up the goodwill recognized in the transaction including the reputation of the VIP gaming room and its location
at the Venetian Hotel and Casino on Cotai in Macau. Additional factors include the synergies between the operations of King's Gaming
and the operations of Sang Heng, Sang Lung and Bao Li, including the expanded network of junket agents and the ability to offer
higher tier gaming patrons the opportunity to play at either a high end luxury Cotai location or a high end luxury downtown Macau
location. These factors do not qualify for separate recognition in the overall purchase price allocation.
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012,
2011 AND 2010
The following is a
summary of the current and long term portions of the estimated contingent consideration expected to be paid for the acquisition
of King's Gaming:
|
|
Total Contingent
|
|
Years Ended December 31,
|
|
Consideration
|
|
|
|
|
|
2013*
|
|
$
|
9,000,000
|
|
2014
|
|
|
9,000,000
|
|
Thereafter
|
|
|
-
|
|
|
|
$
|
18,000,000
|
|
*Cash consideration to be paid subsequent
to the completion of the December 31, 2012 audit in 2013.
The operations of King’s
Gaming have been included in the results of operations of the Company from November 1, 2010 the date for such inclusion per the
acquisition agreement dated November 10, 2010. The acquisition has been accounted for using the acquisition method of accounting
and accordingly, the aggregate consideration has been allocated based on estimated fair values as of the acquisition date.
Management determined
that the acquisition of the operations of King’s from the promotion of the Wenzhou VIP Room at the Venetian Hotel and Casino
in Macau would allow the Company to rapidly expand its operations to the Cotai area of Macau and appeal to a wider number of gaming
patrons. Prior to the acquisition, the Company's operations were only located in downtown Macau. Additionally, the acquisition
of King's brought an additional network of junket agents that may increase revenues at the Company's other VIP gaming rooms.
The following is a
summary of revenues, expenses and net income of King’s since the effective acquisition date (November 1, 2010) included in
the consolidated results of operations for the Company during the year ended December 31, 2010:
Revenues
|
|
$
|
4,641,331
|
|
Expenses
|
|
|
3,240,158
|
|
Net Income Attributable To King’s
|
|
$
|
1,401,173
|
|
Transaction costs for
the acquisition of King's Gaming charged to operations in 2010 were $241,730.
The following unaudited,
pro forma consolidated and combined statements of operations have been prepared assuming that the acquisition of King's occurred
on January 1 of each year presented.
|
|
Pro Forma Consolidated
|
|
|
Pro Forma Combined
|
|
|
Pro Forma Combined
|
|
|
|
For the Year Ended
|
|
|
For the Year
|
|
|
For the Year
|
|
|
|
Ended December 31,
2010
|
|
|
Ended December 31,
2009
|
|
|
Ended December 31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
145,392,594
|
|
|
$
|
73,291,510
|
|
|
$
|
55,684,509
|
|
Expenses
|
|
|
106,176,729
|
|
|
|
59,517,603
|
|
|
|
39,020,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Net Income Attributable
|
|
|
|
|
|
|
|
|
|
|
|
|
To Ordinary Shareholders
|
|
$
|
39,215,865
|
|
|
$
|
13,773,907
|
|
|
$
|
16,663,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Net Income Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.53
|
|
|
$
|
1.16
|
|
|
$
|
1.41
|
|
Diluted
|
|
$
|
2.08
|
|
|
$
|
1.16
|
|
|
$
|
1.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
15,488,367
|
|
|
|
11,850,000
|
|
|
|
11,850,000
|
|
Diluted
|
|
|
18,882,214
|
|
|
|
11,850,000
|
|
|
|
11,850,000
|
|
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012,
2011 AND 2010
Note 11—Acquisition of Bao Li Gaming Promotion Limited
On September 12, 2012,
the Company completed the purchase of the profit interest pursuant to a Profit Interest Purchase Agreement (“Purchase
Agreement”) with Mr. Lou and Mr. Lei (together, the “Seller”), to acquire the right to 100% of the
profit derived by Bao Li Gaming, effective September 1, 2012, from the promotion of the VIP gaming room at the City of Dreams Hotel
and Casino in Macau for an aggregate amount of $15,000,000, of which $7,500,000 was paid upon the satisfaction of all conditions
to closing and $7,500,000 paid at the closing (the “Purchase Price”). Additionally, the Company reimbursed the Seller
approximately $146,026 for cash and incentive receivables acquired.
For purposes of the
Purchase Agreement, “Base Rolling Chip Turnover” means $2,500,000,000 of non-negotiable chips that the Seller’s
network of junket agents purchases from Bao Li Gaming’s and the Company’s VIP gaming rooms attributable to the Seller’s
network of junket agents at Bao Li Gaming’s existing VIP gaming room and the Company’s existing and future VIP gaming
rooms.
In addition, as more
fully set forth below, the Company is required to issue to the Seller (i) up to an aggregate of $39,000,000 and 1,875,000 Ordinary
Shares in the event certain rolling chip turnover targets are achieved for each of the three years following the closing date (the
“Base Earnout Payment”), (ii) and additional cash payments and Ordinary Shares in the event the rolling chip turnover
targets for each of the three years following the closing date are exceeded, in increments of $25,000,000, (the “Incremental
Earnout Payment”). For each $25,000,000 increment in which the rolling chip Turnover target for such year is exceeded,
the Company shall pay an additional $130,000 and issue 6,250 Ordinary Shares. The Seller is not entitled to any additional
Incremental Earnout Payments in the event that the Seller’s rolling chip turnover exceeds $5,000,000,000. As a result, in
any year the maximum Incremental Earnout Payment cannot exceed $13,000,000 in cash and 625,000 in Ordinary Shares. In the event
that the Seller fails to achieve the Base Rolling Chip Turnover in any year, the Seller will not be entitled to receive any earnout
payments.
The Earnout Shares, Incentive Shares and
Additional Incentive Shares shall be released and issued to the Seller as follows:
|
|
Rolling Chip Turnover Target
|
|
|
|
|
|
|
|
|
Incremental
|
|
Year
|
|
For Base Earnout Payments
|
|
|
Base Earnout
Cash Payments
|
|
|
Base Earnout
Shares
|
|
|
Earnout
Payment
|
|
2013
|
|
$
|
2,500,000,000
|
|
|
$
|
13,000,000
|
|
|
|
625,000
|
|
|
*
|
|
2014
|
|
$
|
2,500,000,000
|
|
|
$
|
13,000,000
|
|
|
|
625,000
|
|
|
*
|
|
2015
|
|
$
|
2,500,000,000
|
|
|
$
|
13,000,000
|
|
|
|
625,000
|
|
|
*
|
|
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012,
2011 AND 2010
*- For each $25,000,000 increment in which
the rolling chip turnover target for such year is exceeded, the Company shall pay an additional $130,000 and 6,250 Ordinary Shares
will be issued.
Additionally, Mr. Lou
and Mr. Lei have agreed to provide personal guarantees, through December 31, 2015 providing for the guaranty of all obligations
of Bao Li Gaming and the Seller pursuant to the Purchase Agreement, including, but not limited to any bad debts the Seller network
of junket agents may have incurred or may incur in the future.
As of September 12,
2012, the total estimated purchase price of $48,007,120 consisting of $15,146,026 in cash, and estimated contingent consideration
of $32,861,094 consisting of contingent cash and Ordinary Shares has been allocated based on valuations performed to determine
the fair values of the acquired assets as follows:
Gaming License Deposit
|
|
$
|
12,520
|
|
Cash and Incentive Receivables
|
|
|
146,026
|
|
Bad Debt Guarantee
|
|
|
122,381
|
|
Non-Compete agreement
|
|
|
723,484
|
|
Profit interest agreement
|
|
|
45,016,159
|
|
Goodwill
|
|
|
1,986,550
|
|
|
|
|
|
|
Total Estimated Purchase Price
|
|
$
|
48,007,120
|
|
In accordance with
the FASB ASC Topic 805 on business combinations, a liability of $32,294,981
was recognized for the estimated acquisition
fair value of the contingent consideration based on the probability of the achievement of the rolling chip turnover targets at
December 31, 2012. Any change in the fair value of the acquisition-related contingent consideration subsequent to the acquisition
date, including changes from events after the acquisition date, such as changes in the Group’s estimate of the gross profit
expected to be achieved, will be recognized in earnings in the period that estimated fair value changes. The fair value estimate
assumes probability-weighted rolling chip turnover targets are achieved over the earn-out period. Actual achievement of rolling
chip turnover targets for this assumed earn-out period could reduce the liability to zero. A change in the fair value of the acquisition-related
contingent consideration could have a material impact on the Group’s statement of operations and financial position in the
period of change in estimate. During the year ended December 31, 2012, the Company recognized gains of $554,403 due to the change
in the fair value of the contingent consideration utilizing Level 3 fair value measurements. Fluctuations in the market value
of the Company's ordinary shares and subsequent performance will cause the fair value to increase or decrease and the resulting
change will be recognized in earnings.
The following is a
reconciliation of the change in fair value of the contingent consideration:
Contingent Consideration as of September 12, 2012
|
|
$
|
32,861,094
|
|
Change in Fair Value of Contingent Consideration
|
|
|
(554,403
|
)
|
Foreign Currency Translation Adjustment
|
|
|
(11,710
|
)
|
Contingent Consideration Payable as of December 31, 2012
|
|
$
|
32,294,981
|
|
Management has considered
the factors that make up the goodwill recognized in the transaction including the reputation of the VIP gaming room and its location
at the City of Dreams Hotel and Casino in Macau . Additional factors include the synergies between the operations of Bao Li Gaming
and the operations of Sang Heng, Sang Lung, and King’s Gaming, including the expanded network of junket agents and the ability
to offer higher tier gaming patrons the opportunity to play at another high end luxury Cotai location or a high end luxury downtown
Macau location. These factors do not qualify for separate recognition in the overall purchase price allocation.
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012,
2011 AND 2010
The following is a
summary of the current and long term portions of the estimated contingent consideration expected to be paid for the acquisition
of Bao Li Gaming:
Years Ended December 31,
|
|
Total Contingent
Consideration
|
|
|
|
|
|
2013
|
|
$
|
-
|
|
2014
|
|
|
15,453,972
|
|
2015
|
|
|
16,841,009
|
|
|
|
$
|
32,294,981
|
|
The operations of Bao Li Gaming acquired
assets have been included in the results of operations of the Company from September 1, 2012, the date for such inclusion per the
acquisition agreement dated September 5, 2012. The acquisition has been accounted for using the acquisition method of accounting
and accordingly, the aggregate consideration has been allocated based on estimated fair values as of the acquisition date.
Management determined that the acquisition
of the operations of Bao Li from the promotion of a VIP gaming room at the City of Dreams Hotel and Casino in Macau would allow
the Company to rapidly expand its operations and network of junket agents and appeal to a wider number of gaming patrons which
may increase revenues at the Company's other VIP gaming rooms.
The following is a summary of revenues,
expenses and net income of Bao Li since the effective acquisition date (September 1, 2012) included in the consolidated results
of operations for the Company during the year ended December 31, 2012:
Revenues
|
|
$
|
10,267,456
|
|
Expenses
|
|
|
6,343,591
|
|
Net Income Attributable To Bao Li
|
|
$
|
3,923,865
|
|
Transaction costs for the acquisition of Bao Li Gaming charged
to operations for the year ended December 31, 2012 were $251,386.
The following pro forma consolidated statements
of operations have been prepared assuming that the acquisition of Bao Li occurred on January 1 of each of the years presented.
|
|
Pro Forma
Consolidated
For the Year
Ended
December
31, 2012
|
|
|
Pro Forma
Consolidated
For the Year
Ended
December
31, 2011
|
|
Revenue
|
|
$
|
245,660,873
|
|
|
$
|
268,394,076
|
|
Expenses
|
|
|
176,972,496
|
|
|
|
190,787,979
|
|
Pro Forma Net Income Attributable To Ordinary Shareholders
|
|
$
|
68,688,377
|
|
|
$
|
77,606,097
|
|
Pro Forma Net Income Per Share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.62
|
|
|
$
|
2.08
|
|
Diluted
|
|
$
|
1.62
|
|
|
$
|
2.01
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
42,324,462
|
|
|
|
37,371,426
|
|
Diluted
|
|
|
42,324,628
|
|
|
|
38,691,186
|
|
The pro forma summary
information presented above reflects additional amortization expense of $3,125,472 and $4,688,208 for the years ended December
31, 2012 and 2011, respectively, as well as additional salary expense pursuant to the employment agreements of $216,000 and $324,000
for the years ended December 31, 2012 and 2011, respectively. Bao Li commenced operations during the year ended December 31, 2011.
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012,
2011 AND 2010
Note 12 — Shareholders’ Equity
Ordinary Shares
AERL is authorized
to issue 200,000,000 Ordinary Shares, par value $.0001. As of December 31, 2012 and 2011, 41,177,217 and 38,804,064 Ordinary
Shares are outstanding, respectively. The Company issued 12,050,000 and 4,210,000 ordinary shares related to achieving earnings
targets in 2010 following the filing of Form 20-F during the second quarter of 2011 and 3,103,000 ordinary shares related to achieving
earnings targets in 2011 following the filing of the Annual Report on Form 20-F during the second quarter of 2012. The Company
issued 520,000 ordinary shares in 2012 relating to King’s Gaming achieving earnings targets for the year ended December 31,
2011. AGRL did not achieve its performance targets, and King’s Gaming did not meet its Gross Profit Target for the year ended
December 2012, and therefore no shares for achieving those performance targets will be issued. Ordinary shares totaling 31,604
and 18,796 issuable for 2011 and 2010 director and key management compensation were issued on April 24, 2012. The holders
of the Ordinary Shares have no conversion, preemptive or other subscription rights and there are no sinking fund or redemption
provisions applicable to the Ordinary Shares.
Private Placement
On May 18, 2010, pursuant
to certain Share Purchase Agreements dated as of April 15, 2010 (each a “Share Purchase Agreement” and together the
“Share Purchase Agreements”) by and between AERL and 200 individual investors, the Company consummated the sale of
60,000 Ordinary Shares of the Company (the “Shares”) for a purchase price of $9.50 per share or an aggregate purchase
price of $570,000. The sale of the Shares was exempt from the registration requirements of the Securities Act of 1933, as amended
(the “Act”) pursuant to Regulation S under the Act due to the fact that the offering of the Shares was not made in
the United States and that none of the investors were U.S. Persons (as defined in the Act).
Directors Compensation
All of the Company’s
directors presently receive annual compensation of $30,000 in cash and $20,000 payable in Ordinary Shares, valued at the average
of the closing prices of the Ordinary Shares over the three-month period preceding the end of each fiscal year. The Ordinary Shares
will be issued the following year. The chairman of the audit committee will receive additional annual cash compensation of
$10,000 and the other members of the audit committee will each receive additional annual cash compensation of $5,000. The chairman
of the compensation and nominating committees each receive additional annual cash compensation of $5,000 and the other members
of these committees each receive additional annual cash compensation of $3,000. Each director will also receive cash compensation
of $1,000 for each board or committee meeting that he or she attends (whether in person or telephonically) that is at least an
hour in duration and $500 for each board or committee meeting he or she attends that is less than an hour in duration. Total
director fees charged to operations during the years ended December 31, 2012, 2011 and 2010 were $547,000, $508,000 and $477,000,
respectively.
Warrants
As of December 31,
2012 and 2011, there are no warrants outstanding from AERL's initial public offering ("IPO"), with the exception of the
warrants issuable upon the exercise of the underwriter unit purchase option as below.
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012,
2011 AND 2010
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
Warrants
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
Outstanding
|
|
|
Warrants
|
|
|
Exercise
|
|
|
Contractual
|
|
|
|
(A)
|
|
|
Exercisable
|
|
|
Price
|
|
|
Life
|
|
Outstanding January 1, 2011
|
|
|
1,440,000
|
|
|
|
1,440,000
|
|
|
$
|
5.64
|
|
|
|
2.5 years
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Redeemed
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding December 31, 2011
|
|
|
1,440,000
|
|
|
|
1,440,000
|
|
|
$
|
5.64
|
|
|
|
1. 5 years
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemed
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding December 31, 2012
|
|
|
1,440,000
|
|
|
|
1,440,000
|
|
|
$
|
5.64
|
|
|
|
.5 year
|
|
|
(A)
|
Represents shares and warrants issuable under the Underwriter Unit Purchase Option of 1,440,000, which will expire on August 10, 2013.
|
Share Repurchase Program
During June 2011, the
Board of Directors authorized the establishment of a share repurchase program for the Company to purchase up to two million of
its ordinary shares on the open market at prices to be determined by the Company’s management. The program expired on June
30, 2012. An aggregate of 26,300 ordinary shares were repurchased for an aggregate purchase price of $124,207 pursuant to the 2011
share repurchase program. The Ordinary Shares have been retired and the purchase price was allocated to par value and additional
paid in capital.
The Board of Directors
has established a share repurchase program, with an expiration date of June 30, 2013. The share repurchase program authorizes the
Company to purchase up to two million of its ordinary shares on the open market at prices to be determined by the Company’s
management. During the year ended December 31, 2012, the Company repurchased an aggregate of 1,273,947 Ordinary Shares for
an aggregate purchase price of $4,166,483 pursuant to the 2012 share repurchase program. Subsequent to the year ended December
31, 2012, the Company purchased the remaining 726,053 shares.. The Ordinary Shares have been retired and the purchase price was
allocated to par value and additional paid in capital. In March 2013 The Board of Directors has established a new share repurchase
program, which will expire on December 31, 2013. The share repurchase program authorizes the Company to purchase up to four million
of its ordinary shares on the open market at prices to be determined by the Company’s management.
Dividend
During June 2011, the
Board of Directors authorized a regular cash dividend of $0.10 per outstanding ordinary share each year after the release of the
Company’s financial results for the six months ending June 30, and, for each year after the release of the Company’s
annual financial results, an amount per outstanding ordinary share equal to (i) 15% of the Company’s non-GAAP net income
(defined as operating income before amortization of intangible assets and change in fair value of contingent consideration) for
the most recently completed fiscal year, less the amount paid pursuant to the immediately previous six-month dividend, divided
by (ii) the number of ordinary shares outstanding on the record date for such dividend. In March 2012, the Board of Directors
authorized an increase in our dividend taking place after the release of the Company’s 6-month financial statements from
$0.10 to $0.12 per outstanding ordinary share.
The record date for
each period’s dividend will be set by the Company’s management to be as close as practicable to, but no less than,
15 days after the public release by the Company of the financial results for the applicable six-month period and fiscal year end.
The payment date for each period’s dividend will be set by the Company’s management to be as close as practicable to,
but no less than, 10 days after the record date. The first dividend was paid on September 2, 2011, totaling $3,880,406. An additional
dividend amounting to $7,529,000 was paid on April 18, 2012. On August 31, 2012, the Company paid a dividend of $5,093,128. The
Company estimates an additional dividend will be declared and paid in 2013 amounting to $4,142,077.
Preferred Stock
The Company is authorized
to issue 1,150,000 preferred shares with such designations, voting and other rights and preferences as may be determined from time
to time by the Board of Directors. There are no issued and outstanding preferred shares at December 31, 2012 and 2011.
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012,
2011 AND 2010
Ordinary Shares Reserved for Future Issuance
At December 31, 2012 and 2011, the Company has reserved 4,664,600
and 10,046,000 shares of its authorized but unissued Ordinary Shares for possible future issuance in connection with the following:
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Officer and Director Shares
|
|
|
149,600
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
Underwriter Warrants
|
|
|
1,440,000
|
|
|
|
1,440,000
|
|
|
|
|
|
|
|
|
|
|
Contingently Issuable Incentive Shares-AGRL
|
|
|
-
|
|
|
|
6,206,000
|
|
|
|
|
|
|
|
|
|
|
Contingently Issuable Incentive Shares-King's Gaming
|
|
|
1,200,000
|
|
|
|
2,200,000
|
|
|
|
|
|
|
|
|
|
|
Contingently Issuable Incentive Shares-Bao Li Gaming
|
|
|
1,875,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,664,600
|
|
|
|
10,046,000
|
|
Note 13 — Commitments and Contingencies
Management Agreements
Day-to-day management
and operation of the VIP gaming rooms is contracted by the Promoter Companies to Pak Si Management and Consultancy Limited of Macau
(“Pak Si”) a related party management company that is responsible for hiring and managing all staff needed for operations.
This includes local managers and executives to provide supervision, finance and cage personnel, public relations, drivers and other
service staff (waiters, cleaners, etc.). The principal of Pak Si is the sister-in-law of Mr. Vong, a director of the Company
and its chief operating officer.
Sang Heng and Iao Pou,
initially entered into one year agreements to provide such services with Pak Si, pursuant to which each of them paid Pak Si $155,000
per month, and King's Gaming paid approximately $77,500 per month for the VIP gaming room at the Venetian Hotel and Casino, from
which Pak Si is responsible to pay all salaries, benefits and other expenses of operation.
Beginning in March
2011, the monthly payments were revised for Sang Heng, Iao Pou and King's Gaming, to $180,000, $103,000 and $103,000, respectively.
Beginning on May 15, 2011, Sang Heng entered into an additional management agreement with Pak Si for the management of the Iao
Kun VIP gaming room located in the Galaxy Resort Macau for $180,000 per month, which was then transferred to Sang Lung. Beginning
in September 2012, Bao Li entered into a management agreement with Pak Si for $103,000 per month.
Total expenses for
Pak Si's services were $5,966,147, $5,305,258 and $3,732,650 during the years ended December 31, 2012, 2011 and 2010, respectively.
Amounts due to Pak Si as of December 31, 2012 and 2011 were $567,683 and $462,665, respectively and have been recorded in accrued
expenses.
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012,
2011 AND 2010
Employment Agreements
AGRL entered into employment
agreements with five executive officers: Mr. Lam (Chairman of the Board), Leong Siak Hung (Chief Executive Officer), Li Chun Ming
(Chief Financial Officer), Mr. Vong (Director), and Lam Chou In (Operating Officer) that became effective upon the closing of the
acquisition of AGRL. Upon the closing of the acquisition of King’s Gaming, AERL has entered into two additional employments
contracts with Mr. Mok and Mr. Wong. Upon the closing of the acquisition of Bao Li, the Company entered into employment agreements
with Mr. Lou and Mr. Lei. In February 2012 the Board amended the employment contracts with Leong Siak Hung, Li Chun Ming Raymond,
Lam Man Pou, Vong Hon Kun, Ip Ching Wah, Lam Chou In, Mok Chi Hung and Wong Hon Meng effective January 1, 2012 to increase their
respective annual salaries.
Annual minimum compensation
for the terms of the employment agreements, as amended, is as follows:
2013
|
|
$
|
860,590
|
|
2014
|
|
|
822,529
|
|
2015
|
|
|
489,402
|
|
2016
|
|
|
324,000
|
|
Total
|
|
$
|
2,496,521
|
|
Each executive is entitled
to paid vacation in accordance with AGRL’s policies and other customary benefits. The employment agreements provide that
the executive, during the period of five years following the termination of his employment (three years in the case of Messrs.
Leong and Li), shall not compete with AGRL or solicit any of its employees. The agreements with each of Liang Siak Hung, Li Chun
Ming Raymond, Lam Man Pou, Vong Hon Kun and Lam Chou In contain provisions prohibiting the executives, during their respective
terms of employment, from selling, hypothecating or otherwise transferring more than 20% of any Ordinary Shares that may be transferred
to them by Spring Fortune from shares it received or receives as a result of the acquisition. If an executive’s employment
is terminated for any reason prior to the expiration of the employment term, or if the executive breaches the confidentiality and
non-competition and non-solicitation provisions of his employment agreement, the executive is obligated to transfer and assign
to the Company all securities then held by him and all rights to receive securities in the future, which securities will be canceled.
Total compensation
charged to operations during the years ended December 31, 2012, 2011 and 2010 related to these employment contracts were $1,063,256,
$775,200 and $690,200, respectively.
Office Lease
The Company has office
leases in Hong Kong and Macau for executive offices which expire in September and April, 2013 respectively. Minimum
future lease payments are $ 35,348 for the year ended December 31, 2013. Rent expense was $66,753, $38,976 and $0 for the years
ended December 31, 2012, 2011 and 2010, respectively.
Beginning in September
2012, the Company has adopted a new program to allow certain cash basis junket agents (non-marker) to share in the risk of wins
and losses in the VIP gaming rooms. The maximum percentage of sharing that the junket agent may elect to share in the risk of
wins and losses is limited to their percentage of rolling chip turnover during the previous month. The junket agent must make
its election by the second day of the subsequent month and may elect from zero percent to the maximum percent. Based upon the
participating junket agents during the month of January 2013, a total of approximately $809,000 will be recorded as additional
commission expense in January 2013. Due to fluctuations in wins and losses as well as the junket agents’ participation,
levels, the total amount of revenues and losses shared as well as their percentage of rolling chip turnover may fluctuate significantly.
Certain Risks and Uncertainties
The Group’s operations
are dependent on the annual renewal of the gaming licenses by the Macau SAR to the Promoter Companies. The tenure of the
Promoter Companies acting as gaming promoters for the Casinos is subject to the Gaming Representative / Gaming Promoter Arrangements.
ASIA ENTERTAINMENT & RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012,
2011 AND 2010
The Group may not be
able to collect all of their markers receivable from the junket agents. Management expects that the Group will be able to enforce
these obligations only in a limited number of jurisdictions, including Macau. To the extent that junket agents of the Group, through
the Promoter Companies, are from other jurisdictions, the Group may not have access to a forum in which they will be able to collect
all of their markers receivable because, among other reasons, courts of many jurisdictions do not enforce gaming debts and the
Group may encounter forums that will refuse to enforce such debts. The Group’s inability to collect gaming debts could have
a significant negative impact on their operating results.
The Group receives
all of their revenue from gaming patrons within the Asia-Pacific Region. If economic conditions in these areas were to decline
materially or additional casino licenses to new Casino Operators were awarded in these locations, the Group’s consolidated
results of operations could be materially affected.
SIGNATURES
The Registrant hereby certifies that it
meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual
report on its behalf.
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ASIA ENTERTAINMENT & RESOURCES
LTD.
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|
|
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April 5, 2013
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By:
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/s/ Leong Siak Hung
|
|
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Name: Leong Siak Hung
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Title: Chief Executive Officer (Principal
Executive Officer)
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April 5, 2013
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By:
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/s/ Raymond Li Chun Ming
|
|
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Name: Raymond Li Chun Ming
|
|
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Title: Chief Financial Officer (Principal
Financial and Accounting Officer)
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