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FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-----------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 33-75808
ARIZONA CHARLIE'S, INC.
(Exact name of registrant as specified in its charter)
Nevada 88-0199671
------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
740 S. Decatur
Las Vegas, Nevada 89107
- ----------------- -----
(Address of principal (Zip Code)
executive offices)
(702) 258-5200
--------------
(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former name, former address and former fiscal year if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of common stock January 31, 1996
- --------------------- --------------
No par value 1,000 shares
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ARIZONA CHARLIE'S, INC.
(A wholly owned subsidiary of Becker Gaming, Inc.)
FORM 10-Q/A
INDEX
PART I, FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Page
ARIZONA CHARLIE'S, INC.
Balance Sheets as of December 31, 1995 and
June 30, 1995.................................................... 1
Statements of Operation and Retained Earnings
(Deficit) for the Three-Month Periods
Ended December 31, 1995 and 1994 and for
the Six-Month Periods Ended December
31, 1995 and 1994................................................ 2
Statements of Cash Flows for the Six-Month
Periods Ended December 31, 1995 and 1994......................... 3
Notes to Financial Statements......................................... 4
SUNSET COIN, INC.
Balance Sheets as of December 31, 1995 and June
30, 1994.........................................................10
Statements of Income and Retained Earnings
for the Three-Month Periods Ended
December 31, 1995 and 1994 and for the Six-Month Periods
Ended December 31, 1995 and 1994.................................11
Statements of Cash Flows for the Three-month
Periods Ended December 31,1995 and 1994 and
for the Six-Month Periods Ended
December 31, 1995 and 1994.......................................12
Notes to Financial Statements.........................................13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Arizona Charlie's, Inc................................................ 18
Sunset Coin, Inc...................................................... 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 26
Item 6. Exhibits and Reports on Form 8-K.............................. 26
SIGNATURE............................................................. 27
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ARIZONA CHARLIE'S, INC.
(A Wholly Owned Subsidiary Of Becker Gaming, Inc. )
BALANCE SHEETS
(Dollars In Thousands)
ASSETS
December 31, June 30,
1995 1995
-------- --------
(unaudited)
Current assets:
Cash and cash equivalents ................. $ 4,952 $ 5,404
Restricted cash, in escrow account ........ 10 10
Trade and other accounts receivable ....... 581 658
Management fee receivable -
Becker Gaming Inc. ...................... 725 --
Receivable from related parties .......... 1,681 820
Notes receivable from related party ....... 4,416 4,416
Inventories ............................... 669 661
Prepaid expenses .......................... 756 1,162
-------- --------
Total current assets .................... 13,790 13,131
-------- --------
Property and equipment:
Building and improvements ................. 37,485 37,485
Furniture and equipment ................... 22,516 22,609
Land improvements ......................... 1,628 1,628
-------- --------
61,629 61,722
Less, accumulated depreciation ........... (14,764) (13,572)
-------- --------
46,865 48,150
Land ...................................... 208 208
-------- --------
Net property and equipment ............ 47,073 48,358
-------- --------
Other assets:
Receivable from related party, noncurrent.. -- 240
Deposits and other ........................ 432 551
Financing costs, less accumulated
amortization of $1,156 at December 31,
1995 and $329 June 30, 1995 .............. 2,717 2,993
-------- --------
Total other assets ................... 3,149 3,784
-------- --------
Total assets .......................... $ 64,012 $ 65,273
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
December 31, June 30,
1995 1995
-------- --------
(unaudited)
Current liabilities:
Trade accounts payable .................... $ 1,535 $ 1,449
Accounts payable to related parties ....... 5 3
Accrued expenses .......................... 3,343 3,097
Management fees due Becker Gaming, Inc. ... 5,049 3,287
Notes payable ............................. 0 121
Notes payable to related party ............ 2,250 2,250
Current portion of obligations
under capital leases .................... 3 4
-------- --------
Total current liabilities ......... 12,185 10,211
Long-term debt, less current portion ......... 55,000 55,000
Subordinated notes payable to prior
stockholders ............................... 5,000 5,000
Obligations under capital leases,
less current portion ....................... 2 4
-------- --------
Total liabilities ................. 72,187 70,215
-------- --------
Commitments and contingencies
Stockholder's equity (deficit):
Common stock, no par value,
2,500 shares authorized, 1,000
shares issued and outstanding ............. 469 469
Retained earnings (deficit) ................ (8,644) (5,411)
-------- --------
Total stockholder's equity
(deficit) ......................... (8,175) (4,942)
-------- --------
Total liabilities and
stockholder's equity (deficit) .... $ 64,012 $ 65,273
======== ========
The accompanying notes are an integral part of these financial statements.
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ARIZONA CHARLIE'S, INC.
(A Wholly Owned Subsidiary Of Becker Gaming, Inc.)
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
(Dollars In Thousands)
(unaudited)
Three Months Ended December 31,
1995 1994
-------- --------
Revenues:
Gaming ....................................... $ 13,642 $ 10,973
Food and beverage ............................ 3,390 2,519
Hotel ........................................ 771 708
Gift shop .................................... 153 143
Management fee from affiliates ............... 725 --
Other ........................................ 215 172
-------- --------
Gross revenues ........................... 18,896 14,515
Less, promotional allowances ................... (1,945) (1,148)
-------- --------
Net revenues ............................. 16,951 13,367
-------- --------
Operating expenses:
Gaming ....................................... 4,100 2,955
Food and beverage ............................ 4,140 3,310
Hotel ........................................ 417 413
Gift shop .................................... 127 105
Advertising and promotion .................... 1,145 1,116
General and administrative ................... 4,876 3,624
Management fee - Becker Gaming, Inc. ......... 906 723
Rent expense paid to related party ........... 54 46
Depreciation and amortization ................ 893 938
-------- --------
Total operating expenses ................. 16,658 13,230
-------- --------
Operating income ......................... 293 137
-------- --------
Other income (expenses):
Gain(Loss) on sale of assets ................. (14) --
Interest income .............................. 75 151
Interest expense ............................. (1,762) (1,821)
Interest capitalized ......................... -- 168
Other, net ................................... 10 --
-------- --------
Total other expenses ..................... (1,691) (1,502)
-------- --------
Income (loss) before taxes ............... (1,398) (1,365)
Provision for income tax ....................... -- --
-------- --------
Net (loss)income ......................... ($ 1,398) ($ 1,365)
Retained earnings (deficit),
beginning ofperiod ............................. (7,246) (950)
-------- --------
Retained earnings (deficit),
end of period .................................. ($ 8,644) ($ 2,315)
======== ========
Six Months Ended December 31,
1995 1994
-------- --------
Revenues:
Gaming ....................................... $ 26,533 $ 20,610
Food and beverage ............................ 6,463 4,684
Hotel ........................................ 1,493 1,146
Gift shop .................................... 307 264
Management fee from affiliates ............... 725 --
Other ........................................ 515 262
-------- --------
Gross revenues .......................... 36,036 26,966
Less, promotional allowances .................. (3,614) (1,990)
-------- --------
Net revenues ............................. 32,422 24,976
-------- --------
Operating expenses:
Gaming ....................................... 7,638 5,568
Food and beverage ............................ 8,015 6,084
Hotel ........................................ 816 728
Gift shop .................................... 234 211
Advertising and promotion .................... 2,321 1,890
General and administrative ................... 9,674 6,695
Management fee - Becker Gaming, Inc. ......... 1,763 1,343
Rent expense paid to related party ........... 108 93
Depreciation and amortization ................ 1,779 1,637
-------- --------
Total operating expenses ................. 32,348 24,249
-------- --------
Operating income ......................... 74 727
-------- --------
Other income (expenses):
Gain(Loss) on sale of assets ................. (11) --
Interest income .............................. 144 395
Interest expense ............................. (3,475) (3,638)
Interest capitalized ......................... -- 676
Other, net ................................... 35 --
-------- --------
Total other expenses ..................... (3,307) (2,567)
-------- --------
Income (loss) before taxes ............... (3,233) (1,840)
Provision for income tax ....................... -- --
-------- --------
Net (loss)income ......................... ($ 3,233) ($ 1,840)
Retained earnings (deficit),
beginning of period ............................ (5,411) (475)
-------- --------
Retained earnings (deficit),
end of period .................................. ($ 8,644) ($ 2,315)
======== ========
The accompanying notes are an integral part of these financial statements.
================================================================================
ARIZONA CHARLIE'S, INC.
(A Wholly Owned Subsidiary Of Becker Gaming, Inc.)
STATEMENTS OF CASH FLOWS
(Dollars In Thousands)
(Unaudited)
Six Months Ended December 31,
1995 1994
-------- --------
Cash flows from operating activities:
Net income (loss) .................................. ($ 3,233) ($ 1,840)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization ...................... 1,779 1,637
Provision for losses on related
party receivables ................................. 2,152 --
(Gain) loss on sale of equipment ................... 11 (2)
(Increase) decrease in operating assets:
Receivables ........................................ (2,728) 559
Inventories ........................................ (8) (133)
Prepaid expenses ................................... 406 (7)
Deposits and other ................................. (13) (50)
Increase (decrease) in operating liabilities:
Accounts payable, net of amounts for
capital expenditures .............................. 88 (148)
Accrued expenses ................................... 246 728
Management fees due to Becker Gaming, Inc. ......... 1,762 1,343
-------- --------
Total adjustments ............................... 3,695 3,927
-------- --------
Net cash provided by operating activities ...... 462 2,087
-------- --------
Cash flows from investing activities:
Capital expenditures, net of amounts in
accounts payable .................................. (77) (19,448)
Increase in receivable from Becker Gaming, Inc. .... -- (3,000)
Increase in management fee receivable from Becker
Gaming, Inc. ....................................... (725) --
Net (additions to) reductions in restricted cash
equivalents ........................................ -- 19,905
Proceeds from assets sales ......................... 12 --
-------- --------
Net cash provided by (used in)
investing activities ......................... (790) (2,543)
-------- --------
Cash flows from financing activities:
Proceeds from borrowing under notes payable ........ -- 1,000
Principal payments on notes payable ................ (121) (120)
Payments under capital lease obligations ........... (3) (14)
-------- --------
Net cash provided by (used in)
financing activities ......................... (124) 866
-------- --------
Net increase in cash and cash equivalents ....... (452) 410
Cash and cash equivalents, beginning of the period ..... 5,404 4,014
-------- --------
Cash and cash equivalents, end of the period ........... $ 4,952 $ 4,424
======== ========
Supplemental cash flow disclosures:
Interst paid, net of amount capitalized ............ $ 3,558 $ 3,558
======== ========
Income taxes paid .................................. -- $ 136
======== ========
Capital lease obligations incurred ................. -- $ 9
======== ========
The accompanying notes are an integral part of these financial statements.
================================================================================
ARIZONA CHARLIE'S, INC.
(A Wholly Owned Subsidiary of Becker Gaming, Inc.)
NOTES TO THE FINANCIAL STATEMENTS
----------
1) Basis of Presentation:
Arizona Charlie's, Inc. ("AC") is a wholly owned subsidiary of Becker
Gaming, Inc. ("BGI"). The accompanying financial statements of AC have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments and normal
recurring accruals considered necessary for a fair presentation have been
included. Operating results for the three and six-month periods ended December
31, 1995 are not necessarily indicative of the results that may be expected for
the year ended June 30, 1996. The unaudited financial statements should be read
in conjunction with the financial statements and footnotes included in AC's
annual report on Form 10-K for the year ended June 30, 1995.
2) Denial of Missouri Gaming License Application of
Capitol Queen & Casino, Inc.:
Sunset Coin, Inc. ("SC"), a wholly owned subsidiary of BGI, has guaranteed
12% First Mortgage Notes due November 15, 2000, of Arizona Charlie's, Inc.,
another wholly owned subsidiary of BGI, until such time as AC completes an
expansion of its casino facilities (which it has done) and obtains a specified
fixed charge coverage ratio, as defined in the indenture governing the AC First
Mortgage Notes (the "AC Notes"). AC, in turn, has guaranteed the 12% First
Mortgage Notes (the "CQC Notes") due November 15, 2000 of Capitol Queen &
Casino, Inc. ("CQC"), another wholly owned subsidiary of BGI, until such time as
CQC is licensed to conduct gaming in Missouri.
CQC was formed to develop, own and operate the "Capitol Queen" riverboat
casino in Jefferson City, Missouri. On September 28, 1994, CQC was notified that
its application for a gaming license was rejected by the Missouri Gaming
Commission (the "Commission"). Under the Commission's order, CQC, its principal
owners and affiliated companies cannot reapply for a gaming license in Missouri
prior to September 28, 1996.
The Commission's decision was based on an August 1994 recommendation of
its staff (the "Staff") that CQC's license application be denied without an
investigative review because CQC knowingly failed to disclose material,
substantive information in the application. The Commission did not find that CQC
knowingly failed to disclose information, but did find that the application
contained omissions of a substantive and material nature. Management of CQC
believes that its application was complete and accurate. Moreover, CQC has fully
disclosed the information cited by the Staff in post-application filings, other
public documents and communications with the Staff, all of which management
considers to be part of the licensing and related investigative process. Based
on the advice of legal counsel, CQC believes that the Commission acted outside
its authority in rejecting the application without a formal investigation.
On October 31, 1994, CQC petitioned the Cole County Circuit Court in
Jefferson City for a writ of mandamus. In response to the petition, the court
issued an order declaring that by denying CQC's application without first
conducting an investigation and by deliberating in a closed session, the
Commission had violated Missouri gaming and open meeting laws. The court issued
a preliminary writ of mandamus declaring the Commission's decision void and
ordering the Commission to immediately commence a full investigation and
thereafter to act on CQC's application. The court ordered the Commission to show
cause within thirty days why the preliminary writ should not be made permanent.
Initially, the Commission did not respond directly to the Circuit Court's
order to show cause, but instead filed two actions, both unsuccessful, in the
Missouri Court of Appeals for the Western District. On November 16, 1994, the
Commission petitioned the Court of Appeals for a writ of prohibition against the
Circuit Court, contending, among other things, that CQC was not entitled to
judicial relief because it had not exhausted its administrative remedy of an
evidentiary hearing before the Commission. The Court of Appeals initially issued
a preliminary writ in prohibition staying further proceedings in the Circuit
Court. However, in an opinion issued on April 18, 1995, the Court of Appeals
concluded that its preliminary writ of prohibition had been improvidently
granted, quashed the preliminary writ, and denied the Commission's request for a
permanent writ, relegating the Commission to its remedies in the Circuit Court.
On December 13, 1994, the Commission also filed an appeal of the Circuit Court's
order. On December 23, CQC moved to dismiss the appeal on the grounds that the
preliminary writ of mandamus was not a final order and therefore was not
appealable. On January 5, 1995, the Court of Appeals granted CQC's motion and
dismissed the appeal.
On June 26, 1995, the Circuit Court issued a peremptory (permanent) writ of
mandamus similar to the preliminary writ, declaring the Commission's order void
and ordering the Commission to proceed with an investigation of CQC's
application "with all deliberate speed." On July 21, 1995, the Commission
appealed the Circuit Court's decision to the Missouri Court of Appeals for the
Western District. That appeal is pending.
On November 1, 1994, concurrent with its efforts to obtain judicial
relief, CQC (with BGI as a co-party) requested an administrative hearing
pursuant to the Missouri gaming statutes, under which a denied applicant may
request an evidentiary hearing before a Commission appointed hearing officer.
The hearing officer's decision is subject to review by the Commission, and the
Commission's decision is in turn subject to judicial review. The Commission
filed an answer on November 29, alleging, among other things, that CQC is not
entitled to an administrative hearing because CQC had not been investigated. On
December 22, because the Commission had not appointed a hearing officer or
otherwise responded to CQC's request for a hearing, CQC moved the Commission to
appoint a hearing officer and establish a procedural schedule. The Commission
did not respond to this motion. However, in March 1995, CQC's counsel was
notified by a member of the Commission's staff that he had been appointed
hearing officer in the case. Because this person appears to have participated in
the staff's recommendation that CQC's license be denied, CQC moved on March 31
for the appointment of an impartial, independent hearing officer. The
Commission's attorney filed a response in opposition to this motion on April 12,
but the Commission has not responded to it. Instead, on August 10, 1995, the
hearing officer issued an order proclaiming his ability to proceed impartially
and purporting to deny the motion. Hearing dates have been vacated by
stipulation, and, after the Circuit Court's order voiding the Commission's
decision appeared to make the administrative proceeding premature, postponed
indefinitely.
On March 24, 1995, CQC filed an action against the Commission in the Cole
County, Missouri, Circuit Court, alleging that the Commission had violated
Missouri's open meeting law by deliberating in a closed session before issuing
its decision denying CQC's license. The petition requested an order voiding the
Commission's decision. On March 27, as a protective measure against possible
arguments that Cole County is not the proper venue, CQC filed a substantively
identical action in the St. Louis County Circuit Court. In April, the Commission
filed answers to both complaints denying that it had violated the open meeting
law. On June 1, CQC moved for summary judgment in the Cole County case. In its
response, the Commission stated that it "did not deliberately intend to
circumvent" the open meeting law but had deliberated in closed session based on
erroneous advice of counsel. The Commission argued that the closed session could
nevertheless be justified under statutory exceptions allowing agencies to meet
privately with their lawyers to discuss confidential information and litigation.
The motion for summary judgment was heard on December 19, 1995, and taken under
submission by the court.
In January 1995, CQC engaged in settlement discussions initiated by the
Missouri Attorney General's office, legal counsel for the Commission, with
respect to the civil matters involving the Commission. The discussions, which
terminated in March 1995, were resumed in August 1995 and were expanded to
include the misdemeanor charges filed by the Missouri Attorney General. While
CQC and its lawyers continue to seek a negotiated settlement to the disputes
with the Commission and the Attorney General, the discussions have again been
terminated by the Attorney General's office.
At the time CQC was notified of the Staff's position, construction of the
riverboat contemplated under the project being developed by CQC was almost
completed. CQC had also obtained the necessary permits for the land-based
development portion of the project and had performed certain dredging and other
site preparation work. In August 1994, CQC suspended all further land site
development activity pending resolution of the review of its license
application. Management of CQC believes that the Commission's subsequent ruling
in September 1994 makes further development of the project not feasible because
of significant delays in the ability to operate the riverboat casino, either
through appeal of the decision or expiration of the two-year probation period.
Accordingly, on September 29, 1994, management decided to suspend further
development of the Capitol Queen project. As a result of that decision, costs
associated with the development of the project which had been deferred during
the development stage were written-off in the fourth quarter of the fiscal year
ended June 30, 1994, and the land site and riverboat were written down to their
estimated net realizable value.
Prior to its suspension, CQC had financed the Capitol Queen project
through the issuance of $40 million in principal amount of the 12% First
Mortgage Notes due November 15, 2000. As of January 1, 1995, the CQC Indenture
was amended to (i) eliminate CQC's obligation to construct and open the Capitol
Queen and (ii) permit a two-step purchase of the CQC Notes at 101% of principal
plus accrued and unpaid interest from a sale of assets. The repurchase of
$20,000,000 principal amount of the CQC Notes (plus accrued and unpaid interest
thereon) was completed on January 17, 1995 with funds from the project escrow
account and an aggregate of $20,000,000 principal amount of the CQC Notes
remained outstanding. However, the dates by which CQC previously agreed with the
holders of the CQC Notes to effect the sale of its assets and repurchase the
remaining CQC Notes have passed. The CQC Notes outstanding require annual
interest payments of $2,400,000, payable in equal installments semi-annually on
May 15 and November 15. CQC was not able to make its scheduled interest payment
of $1,200,000 on November 15, 1995, and AC did not have available funds to
advance on behalf of CQC. Management of AC and CQC are currently undergoing
discussions with an informal committee representing the holders of the AC Notes
and CQC Notes regarding a proposed restructuring plan, however, an agreement has
not yet been reached.
CQC had entered into an Asset Purchase Agreement dated April 10, 1995 for
the sale of its assets to Aerie Riverboat Casinos of Missouri, Inc. at a
purchase price of $18,000,000. However, the consummation of the Aerie purchase
agreement was subject to the satisfaction of several conditions which could not
be satisfied timely, including, among others, that Jefferson City consent to the
assignment of the Development Agreement, that Aerie be found preliminary
suitable to hold a Missouri Gaming license and that riverboat gaming is legally
permitted in Jefferson City. As a result, the agreement with Aerie was
terminated without penalty when the expiration date of December 31, 1995 passed.
CQC is currently pursuing offers on its riverboat assets from prospective
buyers.
On November 7, 1995, voters in Jefferson City rejected an ordinance
permitting riverboat gambling, reversing the vote of an earlier election in
which Jefferson City voters approved riverboat gambling. Because CQC's
Development Agreement with Jefferson City was entered into pursuant to the
earlier ordinance permitting riverboat gambling, the Company believes that as a
matter of law the 1995 election does not affect the validity of the Development
Agreement. However, it has not yet been determined whether Jefferson City will
honor the Agreement in light of the election without litigation to uphold CQC's
position. CQC is exploring its legal options in the event Jefferson City
declines to honor the Development Agreement, but has not reached any decision. A
final judicial determination that the 1995 vote abrogates the Development
Agreement would have a material adverse effect on CQC and its ability to sell
its assets.
CQC is not expected to generate sufficient funds through the sale of its
assets to repurchase all of the outstanding CQC Notes. AC, pursuant to its
guarantee of the CQC Notes, will be liable for the principal of, and interest
on, any remaining outstanding CQC Notes. AC is restricted from selling assets
under the covenants governing the AC Notes, and management believes that access
to additional capital from other sources is restricted as a result of the
above-described circumstances. As a result, management does not believe that AC
(nor SC, as guarantor of the AC Notes) would have sufficient resources to
satisfy such obligation, should it be necessary.
3) Relationship To Becker Gaming, Inc.:
Due to the decision to suspend development of CQC's riverboat casino
project and sell its assets, the majority of BGI's management and administrative
services are anticipated to benefit AC in the future. Accordingly, in late March
1995, BGI transferred approximately 40 employees involved in accounting and
administrative functions from BGI to AC. These employees were originally
employees of AC and were transferred to BGI in June 1994, when the
Reorganization became effective. The Company has reviewed the amount of the BGI
management fee (currently 5% of gross revenues) and determined that effective
October 1, 1995 an amount equal to 4% of gross revenues will be returned to AC
from BGI for the services that AC provides for BGI's subsidiaries as mentioned
above.
================================================================================
SUNSET COIN, INC.
(A Wholly Owned Subsidiary Of Becker Gaming, Inc.)
BALANCE SHEETS
(Dollars In Thousands)
ASSETS
December 31, June 30,
1995 1995
------- -------
(Unaudited)
Current assets:
Cash ................................................... $ 842 $ 506
Current portion of notes receivable .................... 175 175
Note receivable from related party ..................... 2,250 2,250
Other receivables ...................................... 130 146
Prepaid expenses ....................................... 33 46
------- -------
Total current assets ............................... 3,430 3,123
------- -------
Property and equipment:
Building and leasehold improvements .................... 509 461
Furniture, fixtures and equipment ...................... 2,930 2,984
------- -------
3,439 3,445
Less, accumulated depreciation ......................... (1,586) (1,710)
------- -------
Net property and equipment ......................... 1,853 1,735
------- -------
Notes receivable, less current
portion ................................................ 273 267
Advances to related parties .............................. 110 86
Other assets, less accumulated
amortization of $20 at December 31, 1995,
and $19 at June 30 , 1995 .............................. 87 138
------- -------
Total assets ....................................... $ 5,753 $ 5,349
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
December 31, June 30,
1995 1995
------ ------
(Unaudited)
Current liabilities:
Trade accounts payable ................................. $ 11 $ 69
Accrued expenses ....................................... 506 284
Current portion of long term debt ...................... 304 255
------ ------
Total current liabilities ......................... 821 608
Long-term liabilities:
Long-term debt, less current portion .................. 632 664
Subordinated notes payable to
former stockholders ................................. 3,000 3,000
------ ------
Total liabilities .................................. 4,453 4,272
------ ------
Commitments and contingencies
Stockholder's equity:
Common stock, no par value, 2,500
shares authorized, 400 shares
issued and outstanding ................................. 27 27
Retained earnings ........................................ 1,273 1,050
------ ------
Total stockholder's equity ......................... 1,300 1,077
------ ------
Total liabilities and stockholder's
equity ............................................. $5,753 $5,349
====== ======
The accompanying notes are an integral part of these financial statements.
================================================================================
SUNSET COIN, INC.
(A Wholly Owned Subsidiary of Becker Gaming, Inc.)
STATEMENTS OF INCOME AND RETAINED EARNINGS
(Dollars in Thousands)
Three Months Ended December 31,
1995 1994
------- -------
Revenues:
Slot route:
From locations controlled
by related parties ........... $ 576 $ 584
Other ........................... 33 73
Slot service fees:
From related parties ............ 24 18
Other ........................... 8 16
------- -------
Total revenues ................ 641 691
Operating expenses:
Slot route and service ............. 307 271
General and administrative ......... 9 15
Management fee - Becker Gaming, Inc. 38 33
Depreciation and amortization ...... 76 58
------- -------
Total operating expenses ........ 425 382
------- -------
Operating income ....................... 216 309
------- -------
Other income (expense):
Interest income .................... 42 34
Interest expense ................... (104) (86)
Other income ....................... 13 15
------- -------
Total other income (expense) .... (49) (37)
------- -------
Net income before income tax ........... 167 272
Provision for income tax ............... (57) (102)
------- -------
Net income ............................. 110 191
Retained earnings,
beginning of period .................... 1,163 527
------- -------
Retained earnings, end of
period ................................. $ 1,273 $ 718
======= =======
Six Months Ended December 31,
1995 1994
------- -------
Revenues:
Slot route:
From locations controlled
by related parties ........... $ 1,143 $ 1,128
Other ........................... 74 142
Slot service fees:
From related parties ............ 48 36
Other ........................... 16 33
------- -------
Total revenues ................ 1,281 1,339
Operating expenses:
Slot route and service ............. 614 508
General and administrative ......... 27 35
Management fee - Becker Gaming, Inc. 67 74
Depreciation and amortization ...... 149 113
------- -------
Total operating expenses ........ 857 730
------- -------
Operating income ....................... 424 609
------- -------
Other income (expense):
Interest income .................... 82 59
Interest expense ................... (203) (170)
Other income ....................... 35 41
------- -------
Total other income (expense) .... (86) (70)
------- -------
Net income before income tax .......... 338 539
Provision for income tax ............... (115) (183)
------- -------
Net income ............................. 223 356
Retained earnings,
beginning of period .................... 1,050 362
------- -------
Retained earnings,
end of period .......................... $ 1,273 $ 718
======= =======
The accompanying notes are an integral part of these financial statements.
================================================================================
SUNSET COIN, INC.
(A Wholly Owned Subsidiary of Becker Gaming, Inc.)
STATEMENTS OF CASH FLOWS
(Dollars In Thousands)
(Unaudited)
Six Months Ended December 31,
1995 1994
------- -------
Cash flows from operating activities:
Net income ........................ $ 223 $ 356
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization .... 149 113
Gain on sales of equipment ....... 13 12
(Increase) decrease in operating assets:
Other receivables ................. 16 21
Prepaid expenses .................. 13 8
Increase (decrease) in operating liabilities:
Accounts payable ................. (58) (58)
Notes payable .................... -- 15
Accrued expenses ................. 222 (1)
------- -------
Total adjustments ............ 355 110
------- -------
Net cash provided by
operating activities ........ 578 466
------- -------
Cash flows from investing activities:
Capital expenditures ............... (285) (313)
Proceeds from sales of equipment ... 12 14
Decrease (increase) in related
party notes receivable ........... -- (1,000)
Decrease (increase) in advances
to related parties ............... (24) (23)
Repayments of notes receivable ..... 39 109
------- -------
Net cash provided by
investing activities ........ (258) (1,213)
------- -------
Cash flows from financing activities:
Proceeds from notes payable ....... 177 237
Principal payments on notes payable (161) (72)
------- -------
Net cash provided by
financing activities ........ 16 165
------- -------
Net increase in cash .......... 336 (582)
Cash, beginning of period ............. 506 1,940
------- -------
Cash, end of period ................... $ 842 $ 1,358
======= =======
Supplemental cash flow disclosures:
Interest paid ..................... $ 204 $ 170
======= =======
Income taxes paid ................. $- $ 102
======= =======
The accompanying notes are an integral part of these financial statements.
================================================================================
SUNSET COIN, INC.
(A Wholly Owned Subsidiary Of Becker Gaming, Inc.)
NOTES TO THE FINANCIAL STATEMENTS
----------
1) Basis of Presentation:
Sunset Coin, Inc. ("SC") is wholly owned subsidiary of Becker Gaming, Inc.
("BGI"). The accompanying financial statements of SC are unaudited and have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all adjustments and normal
recurring accruals considered necessary for a fair presentation have been
included. Operating results for the three and six-month periods ended December
31, 1995 are not necessarily indicative of the results that may be expected for
the year ended June 30, 1996. The unaudited financial statements should be read
in conjunction with the financial statements and footnotes including in SC's
annual report on Form 10-K for the year ended June 30, 1995.
2) Denial of Missouri Gaming License Application of
Capitol Queen & Casino, Inc.:
Sunset Coin, Inc., a wholly owned subsidiary of BGI, has guaranteed 12%
First Mortgage Notes due November 15, 2000, of Arizona Charlie's, Inc. ("AC"),
another wholly owned subsidiary of BGI, until such time as AC completes an
expansion of its casino facilities (which it has done) and obtains a specified
fixed charge coverage ratio, as defined in the indenture governing the AC First
Mortgage Notes (the "AC Notes"). AC, in turn, has guaranteed the 12% First
Mortgage Notes (the "CQC Notes") due November 15, 2000 of Capitol Queen &
Casino, Inc. ("CQC"), another wholly owned subsidiary of BGI, until such time as
CQC is licensed to conduct gaming in Missouri.
CQC was formed to develop, own and operate the "Capitol Queen" riverboat
casino in Jefferson City, Missouri. On September 28, 1994, CQC was notified that
its application for a gaming license was rejected by the Missouri Gaming
Commission (the "Commission"). Under the Commission's order, CQC, its principal
owners and affiliated companies cannot reapply for a gaming license in Missouri
prior to September 28, 1996.
The Commission's decision was based on an August 1994 recommendation of
its staff (the "Staff") that CQC's license application be denied without an
investigative review because CQC knowingly failed to disclose material,
substantive information in the application. The Commission did not find that CQC
knowingly failed to disclose information, but did find that the application
contained omissions of a substantive and material nature. Management of CQC
believes that its application was complete and accurate. Moreover, CQC has fully
disclosed the information cited by the Staff in post-application filings, other
public documents and communications with the Staff, all of which management
considers to be part of the licensing and related investigative process. Based
on the advice of legal counsel, CQC believes that the Commission acted outside
its authority in rejecting the application without a formal investigation.
On October 31, 1994, CQC petitioned the Cole County Circuit Court in
Jefferson City for a writ of mandamus. In response to the petition, the court
issued an order declaring that by denying CQC's application without first
conducting an investigation and by deliberating in a closed session, the
Commission had violated Missouri gaming and open meeting laws. The court issued
a preliminary writ of mandamus declaring the Commission's decision void and
ordering the Commission to immediately commence a full investigation and
thereafter to act on CQC's application. The court ordered the Commission to show
cause within thirty days why the preliminary writ should not be made permanent.
Initially, the Commission did not respond directly to the Circuit Court's
order to show cause, but instead filed two actions, both unsuccessful, in the
Missouri Court of Appeals for the Western District. On November 16, 1994, the
Commission petitioned the Court of Appeals for a writ of prohibition against the
Circuit Court, contending, among other things, that CQC was not entitled to
judicial relief because it had not exhausted its administrative remedy of an
evidentiary hearing before the Commission. The Court of Appeals initially issued
a preliminary writ in prohibition staying further proceedings in the Circuit
Court. However, in an opinion issued on April 18, 1995, the Court of Appeals
concluded that its preliminary writ of prohibition had been improvidently
granted, quashed the preliminary writ, and denied the Commission's request for a
permanent writ, relegating the Commission to its remedies in the Circuit Court.
On December 13, 1994, the Commission also filed an appeal of the Circuit Court's
order. On December 23, CQC moved to dismiss the appeal on the grounds that the
preliminary writ of mandamus was not a final order and therefore was not
appealable. On January 5, 1995, the Court of Appeals granted CQC's motion and
dismissed the appeal.
On June 26, 1995, the Circuit Court issued a peremptory (permanent) writ of
mandamus similar to the preliminary writ, declaring the Commission's order void
and ordering the Commission to proceed with an investigation of CQC's
application "with all deliberate speed." On July 21, 1995, the Commission
appealed the Circuit Court's decision to the Missouri Court of Appeals for the
Western District. That appeal is pending.
On November 1, 1994, concurrent with its efforts to obtain judicial
relief, CQC (with BGI as a co-party) requested an administrative hearing
pursuant to the Missouri gaming statutes, under which a denied applicant may
request an evidentiary hearing before a Commission appointed hearing officer.
The hearing officer's decision is subject to review by the Commission, and the
Commission's decision is in turn subject to judicial review. The Commission
filed an answer on November 29, alleging, among other things, that CQC is not
entitled to an administrative hearing because CQC had not been investigated. On
December 22, because the Commission had not appointed a hearing officer or
otherwise responded to CQC's request for a hearing, CQC moved the Commission to
appoint a hearing officer and establish a procedural schedule. The Commission
did not respond to this motion. However, in March 1995, CQC's counsel was
notified by a member of the Commission's staff that he had been appointed
hearing officer in the case. Because this person appears to have participated in
the staff's recommendation that CQC's license be denied, CQC moved on March 31
for the appointment of an impartial, independent hearing officer. The
Commission's attorney filed a response in opposition to this motion on April 12,
but the Commission has not responded to it. Instead, on August 10, 1995, the
hearing officer issued an order proclaiming his ability to proceed impartially
and purporting to deny the motion. Hearing dates have been vacated by
stipulation, and, after the Circuit Court's order voiding the Commission's
decision appeared to make the administrative proceeding premature, postponed
indefinitely.
On March 24, 1995, CQC filed an action against the Commission in the Cole
County, Missouri, Circuit Court, alleging that the Commission had violated
Missouri's open meeting law by deliberating in a closed session before issuing
its decision denying CQC's license. The petition requested an order voiding the
Commission's decision. On March 27, as a protective measure against possible
arguments that Cole County is not the proper venue, CQC filed a substantively
identical action in the St. Louis County Circuit Court. In April, the Commission
filed answers to both complaints denying that it had violated the open meeting
law. On June 1, CQC moved for summary judgment in the Cole County case. In its
response, the Commission stated that it "did not deliberately intend to
circumvent" the open meeting law but had deliberated in closed session based on
erroneous advice of counsel. The Commission argued that the closed session could
nevertheless be justified under statutory exceptions allowing agencies to meet
privately with their lawyers to discuss confidential information and litigation.
The motion for summary judgment was heard on December 19, 1995, and taken under
submission by the court.
In January 1995, CQC engaged in settlement discussions initiated by the
Missouri Attorney General's office, legal counsel for the Commission, with
respect to the civil matters involving the Commission. The discussions, which
terminated in March 1995, were resumed in August 1995 and were expanded to
include the misdemeanor charges filed by the Missouri Attorney General. While
CQC and its lawyers continue to seek a negotiated settlement to the disputes
with the Commission and the Attorney General, the discussions have again been
terminated by the Attorney General's office.
At the time CQC was notified of the Staff's position, construction of the
riverboat contemplated under the project being developed by CQC was almost
completed. CQC had also obtained the necessary permits for the land-based
development portion of the project and had performed certain dredging and other
site preparation work. In August 1994, CQC suspended all further land site
development activity pending resolution of the review of its license
application. Management of CQC believes that the Commission's subsequent ruling
in September 1994 makes further development of the project not feasible because
of significant delays in the ability to operate the riverboat casino, either
through appeal of the decision or expiration of the two-year probation period.
Accordingly, on September 29, 1994, management decided to suspend further
development of the Capitol Queen project. As a result of that decision, costs
associated with the development of the project which had been deferred during
the development stage were written-off in the fourth quarter of the fiscal year
ended June 30, 1994, and the land site and riverboat were written down to their
estimated net realizable value.
Prior to its suspension, CQC had financed the Capitol Queen project
through the issuance of $40 million in principal amount of the 12% First
Mortgage Notes due November 15, 2000. As of January 1, 1995, the CQC Indenture
was amended to (i) eliminate CQC's obligation to construct and open the Capitol
Queen and (ii) permit a two-step purchase of the CQC Notes at 101% of principal
plus accrued and unpaid interest from a sale of assets. The repurchase of
$20,000,000 principal amount of the CQC Notes (plus accrued and unpaid interest
thereon) was completed on January 17, 1995 with funds from the project escrow
account and an aggregate of $20,000,000 principal amount of the CQC Notes
remained outstanding. However, the dates by which CQC previously agreed with the
holders of the CQC Notes to effect the sale of its assets and repurchase the
remaining CQC Notes have passed. The CQC Notes outstanding require annual
interest payments of $2,400,000, payable in equal installments semi-annually on
May 15 and November 15. CQC was not able to make its scheduled interest payment
of $1,200,000 on November 15, 1995, and AC did not have available funds to
advance on behalf of CQC. Management of AC and CQC are currently undergoing
discussions with an informal committee representing the holders of the AC Notes
and CQC Notes regarding a proposed restructuring plan, however, an agreement has
not yet been reached.
CQC had entered into an Asset Purchase Agreement dated April 10, 1995 for
the sale of its assets to Aerie Riverboat Casinos of Missouri, Inc. at a
purchase price of $18,000,000. However, the consummation of the Aerie purchase
agreement was subject to the satisfaction of several conditions which could not
be satisfied timely, including, among others, that Jefferson City consent to the
assignment of the Development Agreement, that Aerie be found preliminary
suitable to hold a Missouri Gaming license and that riverboat gaming is legally
permitted in Jefferson City. As a result, the agreement with Aerie was
terminated without penalty when the expiration date of December 31, 1995 passed.
CQC is currently pursuing offers on its riverboat assets from prospective
buyers.
On November 7, 1995, voters in Jefferson City rejected an ordinance
permitting riverboat gambling, reversing the vote of an earlier election in
which Jefferson City voters approved riverboat gambling. Because CQC's
Development Agreement with Jefferson City was entered into pursuant to the
earlier ordinance permitting riverboat gambling, the Company believes that as a
matter of law the 1995 election does not affect the validity of the Development
Agreement. However, it has not yet been determined whether Jefferson City will
honor the Agreement in light of the election without litigation to uphold CQC's
position. CQC is exploring its legal options in the event Jefferson City
declines to honor the Development Agreement, but has not reached any decision. A
final judicial determination that the 1995 vote abrogates the Development
Agreement would have a material adverse effect on CQC and its ability to sell
its assets.
CQC is not expected to generate sufficient funds through the sale of its
assets to repurchase all of the outstanding CQC Notes. AC, pursuant to its
guarantee of the CQC Notes, will be liable for the principal of, and interest
on, any remaining outstanding CQC Notes. AC is restricted from selling assets
under the covenants governing the AC Notes, and management believes that access
to additional capital from other sources is restricted as a result of the
above-described circumstances. As a result, management does not believe that AC
(nor SC, as guarantor of the AC Notes) would have sufficient resources to
satisfy such obligation, should it be necessary.
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
----------
Arizona Charlie's, Inc.
General
- -------
AC's revenues are derived largely from gaming activities at its Arizona
Charlie's casino-hotel, and, to a lessor extent, from food and beverage,
lodging, entertainment and retail sales. AC generally views its non- casino
operations as complementary to its core casino operations. Accordingly, it
utilizes entertainment primarily as a casino marketing tool. Further, AC
maintains food and beverage pricing structures designed to benefit casino
volumes, often resulting in department operating losses. AC seeks to maximize
profits from its hotel operations, however, while maintaining attractive room
rental rates. Gaming revenues represent the net win from gaming wins and losses.
The retail value of accommodations, food and beverage provided to customers
without charge is included in gross revenues and deducted as promotional
allowance.
Results of Operations for the three and six months ended
December 31, 1995 and 1994
----------
Results from operations at AC decreased for both the three-month and
six-month periods ended December 31, 1995 compared to the same periods in 1994
despite increased revenues as a result of increased operating expenses in the
more recent periods. The increased revenues and expenses reflected the openings
of new and expanded facilities at Arizona Charlie's from September 1994 through
January 1995. In addition, the increase in expenses for the 1995 periods
reflects increased slot promotional activity, costs accrued and payments made on
behalf of CQC, and the addition of staff personnel, equipment and related
operating expenses transferred to AC from BGI.
Net revenues at AC increased by $3,584,000, or 26.8%, from $13,367,000 to
$16,951,000 for the three-month period ended December 31, 1995 compared to the
three-month period ended December 31, 1994. In the same period-to-period
comparison, operating expenses, including depreciation and amortization,
increased by 30.5% to $17,258,000 from $13,230,000. This resulted in a $444,000
decrease in operating income from $137,000 to an operating loss of $307,000 for
the more recent period.
Net revenues at AC increased by $7,446,000, or 29.8%, from $24,422,000 to
$32,422,000 million for the six-month period ended December 31, 1995 compared to
the six-month period ended December 31, 1994. In the same period- to- period
comparison, operating expenses, including depreciation and amortization,
increased by 39.6% to $33,848,000 from $24,249,000. This resulted in a
$2,153,000 decrease in operating income from $727,000 to an operating loss of
$1,426,000 for the more recent period.
The largest portion of the revenue increase for the three-month period
ended December 31, 1994 is attributable to gaming revenues, specifically, gaming
machine revenues, which increased 26.6% from $8,976,000 to $11,365,000,
reflecting greater revenue generated by an average of 177additional slot
machines in the latter period. Revenues from table games also increased from
$1,147,000 to $1,267,000 during the three-month period and can be attributed to
the raising of betting limits, establishing higher credit limits to qualified
customers and the operation of a three table poker room which was open for only
two months of the 1994 quarter. Bingo revenues also increased by $102,000 for
the three-month period ended December 31, 1995 when compared to the same period
of the prior year as a result of lower than normal payouts.
The largest portion of the increase in revenues for the six-month period
ended December 31, 1995 is attributable to gaming revenues which increased 28.7%
from $20,610,000 to $26,533,000. Specifically, gaming machine revenues increased
$4,941,000 or 28.5% from $17,354,000 to $22,295,000. Revenues from table games
increased $351,000 or 16.9%, from $2,084,000 to $2,435,000, and revenues from
the race & sports book increased $285,000, or 21.4%, from $1,328,000 to
$1,613,000. These increases are the result of an additional 399 slot machines, 5
table games and an expanded race & sports book facility that offers pari-mutual
wagering. Bingo revenues also increased by $111,000 during the six-month period
ended December 31, 1995 compared to the same period of the prior year as a
result of lower than normal payouts.
Food & Beverage revenues increased 34.6% from $2,519,000 to $3,390,000
during the three-month period ended December 31, 1995 compared to the same
period in the prior year reflecting full operation of the two specialty
restaurants, Chin's and the Yukon Grill which opened in December of 1994. For
the six-month period ended December 31, 1995, food & beverage revenues increased
$1,779,000 or 38.0% from $4,684,000 to $6,463,000 when compared to the six-month
period of the prior year, also reflecting the additional revenues from the two
specialty restaurants.
Hotel revenues increased 8.9% from $708,000 to $771,000 during the three
months ended December 31, 1995 compared to the same three-month period in 1994.
The increased revenue is due to a slight increase in room rates combined with a
small increase in occupancy. During the six-month period ended December 31,
1995, hotel revenues increased by $347,000 or 30.3% from $1,146,000 to
$1,493,000 compared to the same six-month period of 1994. The increased revenue
is largely due to the addition of 158 rooms that were opened in September of
1994.
Gift shop revenues increased 7.0% from $143,000 to $153,000 during the
three-month period ended December 31, 1995 compared to the same period in 1994.
During the six-month period ended December 31, 1995, gift shop revenues
increased $43,000, or 16.3%, from $264,000 to $307,000 compared to the same
period in 1994. The increases are primarily due to the relocation and
enlargement of the gift shop in January 1995.
Other revenues which principally include entertainment cover charges, ATM
commissions, and revenues from PBX and banquets, increased 25.0% from $172,000
to $215,000 for the three-month period ended December 31, 1995 compared to the
same period in 1994. During the six month period ended December 31, 1995, other
revenues increased by $253,000 or 96.6% from $262,000 to $515,000 compared to
the same six-month period of 1994. The increases for the 1995 periods reflect
higher entertainment cover charge and banquet revenues resulting from the
addition of the showroom and the banquet facilities which opened in December
1994.
Gaming expenses increased by $1,145,000 and $2,070,000, or 38.8% and 37.2%,
from $2,955,000 and $5,568,000 to $4,100,000 and $7,638,000, respectively, for
the three-month and six-month periods ended December 31, 1995 as compared to the
same periods in 1994. The higher levels of expense for the 1995 three-month
period reflect additional slot promotional payouts totaling $727,000 made in
connection with two casino promotions held in October and December 1995. Other
increased expense includes higher gaming tax and license fees totaling $124,000
which are associated with the increased gaming revenues and the addition of a
casino promotions department in September 1995. Such departmental expenses
include additional salaries and wages and certain costs associated with Company-
sponsored promotional events for premium players totaling $159,000. In August
1995, the Company added a "Let it Ride the Tournament" table game. Associated
fees payable to the manufacturer of the game totaled $56,000 for the three-
month period ended December 31, 1995. For the 1995 six- month period, increased
expenses include slot promotional expense of $1,086,000, higher gaming tax and
licenses fees of $401,000 along with the additional expense of the newly created
casino marketing department and costs associated with the "Let it Ride" table
games. As a result, gaming expenses represented 30.1% and 28.8% of gaming
revenues for the three-month and six-month periods ended December 31, 1995
compared to 26.9% and 27.0% of the gaming revenues for the same periods in 1994.
Food and Beverage expenses increased by $830,000 and $1,931,000, or 25.8%
and 31.74%, from $3,310,000 and $6,084,000 to $4,140,000 and $8,015,000,
respectively, for the three-month and six-month periods ended December 31, 1995
when compared to the same periods in 1994, as a result of increased food costs
and the additional departmental personnel required for the two new specialty
restaurants and the sports book deli that opened in December 1994. As a result,
food and beverage expenses represented 22.1% and 24.0% of food and beverage
revenues for the three-month and six-month periods ended December 31, 1995
compared to 31.4% and 29.9% of the food and beverage revenues for the same
periods in 1994. Management anticipates these costs will continue to decline as
a percentage of revenues as these facilities generate higher customer volumes
and start-up costs are eliminated.
Hotel expenses increased by $4,000 and $88,000, or 1.0% and 12.1%, from
$413,000 and $728,000 to $417,000 and $816,000, respectively, for the
three-month and six-month periods ended December 31, 1995 as compared to the
same periods in 1994, reflecting increased salaries and wages and the additional
expense associated with the operation of the newly constructed rooms and suites
during the 1995 six-month period. Net contribution by the hotel department
(hotel revenues less hotel operating expenses) was $354,000 and $677,000 for the
three-month and six-month periods ended December 31, 1995 as compared to
$295,000 and $418,000. for the same periods in 1994.
General and Administrative expenses increased by $1,252,000 and
$2,979,000, or 34.5% and 44.5%, from $3,624,000 and $6,695,000 to $4,876,000 and
$9,674,000 respectively, for the three-month and six-month periods ended
December 31, 1995 as compared to the same periods in 1994. The increases
resulted from an addition to staff (approximately 40 employees) in the
accounting, payroll, personnel and technical services departments and the
transfer of certain executive personnel in March 1995 to the Company together
with related departmental costs. Other expenses transferred from BGI to the
Company include the maintenance and other operating expenses associated with an
airplane and two boats. Other increases to General and Administrative expenses
included accrued expenses and payments made on behalf of CQC in the amounts of
$404,000 and $653,000 for the three-month and six-month ended December 31, 1995.
The Company accrued management fees payable to BGI of $905,000 and $1,763,000
during the three-month and six-month periods ended December 31, 1995.
Advertising and Promotional expenses increased by $29,000 and $431,000, or
2.6% and 22.8%, from $1,116,000 and $1,890,000 to $1,145,000 and $2,321,000
during the three-month and six-month periods ended December 31, 1995 as compared
to the same period in 1994. The increase in the six-month period is attributable
to AC's effort to maintain overall customer levels during the slower summer
months and to promote and attract customers to the newly constructed venues.
Depreciation and Amortization decreased by $45,000 and increased $142,000,
or (4.8%) and 8.7%, from $938,000 and $1,637,000 to $893,000 and $1,779,000
during the three-month and six-month periods ended December 31, 1995 when
compared to the same periods in 1994, primarily due to the disposition of an
airplane in May 1995, offset by additional depreciation expense associated with
new expansion assets placed in service during the six-month 1995 period.
AC had other expenses of $1,691,000 and $3,307,000 for the three-month and
six-month periods ended December 31, 1995 compared with $1,502,000 and
$2,567,000 for the same periods in 1994. The increases were primarily due to a
decrease in capitalized interest (other income) in the amounts of $168,000 and
$676,000 for the three-month and six-month periods ended December 31, 1995.
Income Taxes
- ------------
As a result of the termination of its election to be treated as an S
corporation, AC is liable for income taxes on income earned from and after
January 1, 1994. Prior to such termination, AC did not incur or pay income taxes
but distributed cash to its stockholders in amounts sufficient to pay their
income tax liability in respect to income of AC. Since terminating its S
corporation status, AC generated a net operating loss for income tax purposes of
approximately $6,000,000. Management anticipates that, upon full operation of
its expanded facilities, AC will generate taxable income and that its effective
federal income tax rate will approximate the statutory rate of 35%, prior to
consideration of the benefit from the net operating losses, which may be
utilized to offset taxable income.
Liquidity and Capital Resources
- -------------------------------
At December 31, 1995, AC had working capital of $1,605,000 compared to
working capital of $2,920,000 at June 30, 1995. The decrease in working capital
was caused primarily by increased accruals on the AC and CQC Notes, management
fees payable to BGI, interest on the $2,250,000 short-term note payable to
Sunset Coin, Inc., and decrease in prepaid expenses offset by an increase in
receivable from related parties.
For the six-month period ended December 31, 1995, cash provided by
operating activities decreased by 77.9% to $462,000 from $2,087,000 for the same
period in 1994. The decrease is primarily attributable to a net loss of
$3,233,000 for the six-month period in 1995 compared to a net loss of $1,840,000
for the same period last year, an increase in operating assets of $2,712,000
from a decrease of $369,000 for the same period last year offset by an increase
in operating liabilities to $2,096,000 for the six-month period in 1995 from
$1,923,000 for the same period in 1994.
For the six-month period ended December 30, 1995, net cash used in
investing activities decreased by 68.9% to $790,000 from $2,543,000 for the same
period in 1994. The decrease is the result of a $19,371,000 reduction in capitol
expenditures, offset by a $19,905,000 net reduction to restricted cash. Capitol
expenditures decreased in the 1995 period because the majority of the
construction of the expanded facility was completed in the 1994 period.
Restricted cash was also reduced upon payment for the construction of the
expanded facility. Other decreases in investing activities reflect a $2,275,000
net reduction in receivables from BGI to attributable a decrease in a cash
advances to BGI from AC.
Cash flows used in financing activities for the six-month period ended
December 31, 1995 was $124,000 reflecting payments on notes payable and capital
leases. For the same period in 1994, cash flows from financing activities
provided $866,000 derived mostly from borrowing under notes payable.
AC's long-term obligations, approximately $60,000,000 at December 31,
1995, consist of the AC Notes and stockholder notes. AC has annual interest
expenses aggregating $6,600,000 and $500,000 with respect to the AC Notes and
the stockholder notes, in addition to current annual payment of $1,200,000
associated with capitalized equipment financing. Further, AC is expected to have
annual capital expenditure requirements of approximately $600,000.
AC has a substantial contingent obligation resulting from its guarantee of
the CQC Notes, $20,000,000 in principal amount of which are outstanding, as a
result of a September 28, 1994 ruling of the Missouri Gaming Commission denying
CQC's gaming license application. Because CQC does not have significant funds,
AC is obligated to pay interest on the CQC Notes, which accrues at the rate of
$2,400,000 annually. Such interest is payable semi-annually on May 15 and
November 15 of each year.
In addition, unless the holders of the CQC Notes otherwise agree, AC will
be liable for any shortfall between the proceeds from any sale of assets by CQC
and the amount required to retire the CQC Notes. Because there can be no
assurances that CQC will be able to sell its assets for an amount which will
allow it to fully or substantially repay the CQC Notes, AC's liability under its
guarantee of the CQC Notes may exceed that amount which it could support. In
addition, a default under the AC Notes and entitle the holders of 25% or more in
principal amount thereof to cause such AC Notes to become accelerated, in which
event they would become immediately due and payable in full.
On November 15, 1995, AC made an interest payment due on the AC Notes in
the amount of $1,650,000, an amount equal to 50% of the required amount due. The
remainder of the interest was paid on December 27, 1995. CQC was not able to
make its scheduled interest payment of $1,200,000, and AC did not have funds
available to advance on behalf of CQC. Management of AC and CQC are currently
undergoing discussions with an informal committee representing the holders of
the AC Notes and CQC Notes regarding a proposed restructuring plan, however, an
agreement has not yet been reached.
AC's management believes that, if not required to make any large cash
payments under its guarantee of the CQC Notes, AC has sufficient funds to meet
its projected needs for financing of existing operations and service its debt
obligations. However, AC's performance will be influenced by prevailing economic
conditions and financial, business and competitive factors, may of which are
beyond its control.
Sunset Coin, Inc.
General
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SC derives its revenues and profits largely from its gaming machine route
pursuant to participation contracts and, to a lesser extent, space leases. Under
its participation contracts, SC pays a percentage of the net win (amounts
wagered less winnings paid) from its gaming machines to the site owner. The
balance is retained by SC. Under its space leases, SC pays the site owner a
fixed space rental fee and retains all of the net win. SC gaming revenues under
participation contracts represent SC's share of the net win after payments to
the location, and under space leases represent all revenues before lease
payments, which are treated as expenses. A majority of SC's gaming machines are
installed at locations controlled by the Becker family and the contracts with
such locations are expected to be renewed as a matter of general course.
In addition to the operation of its gaming machine route, SC services
gaming machines owned by other operators for fixed service fees. Included among
its service agreements are contracts with six Becker Gaming Group ("BGG")
locations, which are expected to be renewed in general course, and one
additional location owned by an unrelated party.
Results of operations for the three and six months ended
December 31, 1995 and 1994
----------
SC's results of operations declined for the three-month and six-month
periods ended December 31, 1995 compared to the same periods in the prior year.
Revenues decreased by 7.2% to $641,000 for the three-month period and by 4.3% to
$1,281,000 for the six-month period. The decreases in revenues are attributable
to the expiration of one participation and one service fee location in the more
recent period that were not renewed, the effect of which was slightly offset by
the addition of one participation location and the conversion of another
location from a participation contract to a more favorable space lease contract.
Additional service revenues were recognized in the 1995 periods due to the
recently added BGG bar, Charlie's Bar Down Under.
The total number of gaming machines operated during the three-month and
six-month periods ended December 31, 1995 were 388 compared to 371 in the prior
year periods. The total number of gaming machines from the BGG locations that
are serviced by SC is 135 for the three-month and six-month periods of 1995
compared to 95 gaming machines for the same periods in 1994. Slot service fees
from BGG for the three-month and six-month periods ended December 31, 1995 were
$24,000 and $48,000, up from $18,000 and $36,000 for the same periods in the
prior year.
Gaming machine route expenses for the three-month and six-month periods
ended December 31, 1995 increased by 13.3% to $307,000 and by 20.9% to $614,000
when compared to the same periods in the prior year reflecting increased
salaries and wages, due to additional staffing requirements and the transfer of
management personnel from BGI to SC. Other increased expense is due to higher
automotive repair and maintenance, partially offset by a decrease in loss and
damage.
General and administrative expenses for the three-month and six-month
periods decreased by 40.0% and 22.9% to $9,000 and $27,000 from $15,000 and
$35,000, reflecting lower professional fees, donations and bad debts.
Management fees (based upon gross revenues) decreased by 13.2% and 9.5% to
$5,000 and $7,000 for the three-month and six-month periods ended December 31,
1995 when compared to the same periods in the prior year. This decrease is
attributable to lower gross revenues in the more recent periods.
Depreciation and amortization increased by 31.0% and 31.9% to $76,000 and
$149,000 for the three-month and six-month periods ended December 31, 1995
reflecting depreciation and amortization costs connected with the new BGG bar
completed in April 1995. SC purchased certain furniture, fixtures and equipment
contained in this bar.
During the three-month and six-month periods ended December 31, 1995, SC
had other expenses (net of other income) of approximately $49,000 and $86,000
compared to $37,000 and $70, 000 for the same periods in 1994. The increases are
attributable to increased interest expense relating to draws on a line of credit
to finance the furniture, fixtures and equipmentinstalled in the new BGG bar and
slot machines for the new andexisting locations.
Income Taxes
- ------------
As a result of the termination of its election to be treated as S
corporation, SC became liable for income taxes on income earned from and after
January 1, 1994. Prior to such termination, SC did not incur or pay their income
tax liability in respect to income of SC. Estimated income tax payable for the
three-month and six-month periods ended December 31, 1995 amounted to $57,000
and $115,000 from $102,000 and $183,000 in the same period in the prior year.
These were based on an anticipated effective federal income tax rate
approximating the statutory rate of 34%.
Liquidity and Capital Resources
- -------------------------------
Cash provided by operating activities for the six-month period ended
December 31, 1995 increased to $578,000 from $466,000 for the six-month period
ended December 31, 1994, mostly due to a net increase in operating liabilities
of $208,000 and depreciation and amortization of $36,000 offset by a decrease in
revenues of $133,000.
Cash flows used in investing activities for the sixmonths ended December
31, 1995 amounted to $258,000, including repayment of notes receivable of
$39,000, a decrease in advances to related parties of $24,000, purchases of slot
machines of $285,000, and proceeds from the sale of slot machines of $12,000.
Cash flows used in financing activities for the sixmonths ended December
31, 1995 amounted to $16,000, reflecting note proceeds of $177,000 and $161,000
in principal payments on notes payable.
SC's indebtedness includes stockholder notes and notes collateralized by
its gaming equipment and other assets. The stockholder notes aggregate
$3,000,000 in principal amount, bear interest at an annual rate of 10% and
mature January 2001. The collateralized notes bear interest at annual rates of
approximately 10.89%, in the case of fixed rate loans, or at prime plus 1.5% ,
in the case of a collateralized line of credit, the outstanding aggregate
balance of which, $272,000, was converted to a note at July 1, 1994 with monthly
payments through June 1998. The fixed rate notes mature at various date through
December 1995.
In July 1994, SC entered into an agreement with a bank for a new $1.2
million non-revolving line of credit. Each advance under the line shall be
evidenced by a separate promissory note with maturity date not exceeding 66
months from the date of the respective advance giving rise to the note. Under
the agreement, SC originally could request advances through October 28, 1995
only, at which time its rights to advances under the agreement were terminated.
In December 1995, the agreement was amended making available the unused portion
of $1,200,000 until October 20, 1996. Advances under the agreement bear interest
at the bank's prime rate plus 1.5% up to 2.0%. As of December 31, 1995, the
amount outstanding under the non-revolving line of credit was $878,000. SC's
management believes that it has sufficient funds through the non-revolving line
of credit and cash generated by operations to meet its projected needs for
existing operations and limited expansion of its gaming machine route business.
Should SC determine to expand on more than a limited basis, it is likely that
further capital would be necessary. SC access to additional capital will be
significantly restricted under the AC Indenture so long as SC is a guarantor of
the AC Notes. SC has guaranteed the payment of the AC Notes, which guarantee is
subject to release upon attainment by AC of a fixed charge coverage ratio of
2.25 to 1. In connection with its guarantee, the Indenture imposes restrictions
on the distribution of earnings because
AC may have liability under its guarantee of the CQC Notes beyond that
which it could immediately support, AC may be in default of the AC Notes and SC,
as guarantor of the AC Notes, would have liability under its guarantee. Such
liability would likely exceed the amount which SC could immediately support,
including amounts available under its non-revolving line of credit.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Arizona Charlie's., and Sunset Coin, Inc., are parties to various lawsuits
relating to routine matters incidental to their respective businesses. Based on
the amounts believed to be in controversy and management's evaluation of the
merits of the claims after consultation with counsel, management does not
believe that the outcome of such litigation, in the aggregate, will have a
material adverse effect on the results of operations or financial condition of
either company.
Item 6. Exhibits and Reports on Form 8-K
No exhibits are included herein:
The Company did not file any reports on form 8-K during the Three and
Six-Month periods ended December 31, 1995.
================================================================================
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Arizona Charlie's, Inc.
-----------------------
(Registrant)
Date: November 1, 1996 /S/ Bruce F. Becker
----------------- -------------------
Bruce F. Becker
President, Chief Executive
Officer(Principal Executive Officer)
Date: November 1, 1996 /S/ Jerry Griffis
---------------- -----------------
Jerry Griffis
Controller(Principal Financial and
Accounting Officer)
