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FORM 10-Q
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: March 31, 1997
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 April 30, 1997
- --------------------- --------------
No par value 1,000 shares
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<PAGE>
ARIZONA CHARLIE'S, INC.
(A wholly owned subsidiary of Becker Gaming, Inc.)
FORM 10-Q
INDEX
PART I, FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
ARIZONA CHARLIE'S, INC.
Balance Sheets as of March 31, 1997 and
June 30, 1996...................................................
Statements of Operation and Retained Earnings
(Deficit) for the Three-Month Periods
Ended March 31, 1997 and 1996and for
the Nine-Month Periods Ended December
31, 1997 and 1996...............................................
Statements of Cash Flows for the Nine-Month
Periods Ended March 31, 1997 and 1996........................
Notes to Financial Statements........................................
SUNSET COIN, INC.
Balance Sheets as of March 31, 1997 and June
30, 1996........................................................
Statements of Income and Retained Earnings
for the Three-Month Periods Ended
March 31, 1997 and 1996 and for the Nine-Month Periods
Ended March 31, 1997 and 1996................................
Statements of Cash Flows for the Nine-Month
Periods Ended March 31, 1997 and 1996........................
Notes to Financial Statements........................................
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Arizona Charlie's, Inc...............................................
Sunset Coin, Inc.....................................................
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................
Item 6. Exhibits and Reports on Form 8-K.............................
SIGNATURE............................................................
<PAGE>
ARIZONA CHARLIE'S, INC.
(A Wholly Owned Subsidiary Of Becker Gaming, Inc. )
BALANCE SHEETS
(Dollars In Thousands)
ASSETS
March 31, June 30,
1997 1996
-------- --------
(unaudited)
Current assets:
Cash and cash equivalents ................. $ 5,355 $ 4,591
Restricted cash, in escrow account ........ 10 10
Trade and other accounts receivable ....... 444 473
Receivable from related parties .......... 2,483 1,539
Inventories ............................... 558 575
Prepaid expenses .......................... 949 1,118
-------- --------
Total current assets .................... 9,799 8,306
-------- --------
Property and equipment:
Building and improvements ................. 37,488 37,488
Furniture and equipment ................... 22,859 22,575
Land improvements ......................... 1,628 1,628
-------- --------
61,975 61,691
Less, accumulated depreciation ........... (18,371) (16,218)
-------- --------
43,604 45,473
Land ...................................... 208 208
-------- --------
Net property and equipment ............ 43,812 45,681
-------- --------
Other assets:
Receivable from related party, noncurrent.. 210 987
Deposits and other ........................ 562 460
Note receivable from related party......... 4,416 4,416
Financing costs, less accumulated
amortization of $1,782 at March 31,
1997 and $1,366 June 30, 1996 ............. 2,091 2,507
-------- --------
Total other assets ................... 7,279 8,370
-------- --------
Total assets .......................... $ 60,890 $ 62,357
======== ========
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
March 31, June 30,
1997 1996
-------- --------
(unaudited)
Current liabilities:
Trade accounts payable .................... $ 990 $ 1,452
Accounts payable to related parties ....... 4 4
Accrued expenses .......................... 5,843 3,323
Management fees due Becker Gaming, Inc. ... 5,187 4,682
Notes payable ............................. 190 110
Notes payable to related party ............ 3,150 2,250
Current portion of obligations
under capital leases .................... 13 15
Long-term debt classified as current due
to default under covenants .............. 55,000 55,000
-------- --------
Total current liabilities ......... 70,377 66,836
Subordinated notes payable to prior
stockholders ............................... 5,000 5,000
Obligations under capital leases,
less current portion ....................... 14 22
-------- --------
Total liabilities ................. 75,391 71,858
-------- --------
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, no par value,
2,500 shares authorized, 1,000
shares issued and outstanding ............. 469 469
Retained earnings (deficit) ................ (14,970) (9,970)
-------- --------
Total stockholders' equity
(deficit) ......................... (14,501) (9,501)
-------- --------
Total liabilities and
stockholders' equity (deficit) .... $ 60,890 $ 62,357
======== ========
The accompanying notes are an integral part of these financial statements.
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<PAGE>
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 March 31,
1997 1996
-------- --------
Revenues:
Gaming ....................................... $ 11,837 $ 13,454
Food and beverage ............................ 3,297 3,436
Hotel ........................................ 854 844
Gift shop .................................... 135 150
Management fee from affiliates ............... 653 729
Other ........................................ 175 338
-------- --------
Gross revenues ........................... 16,951 18,951
Less, promotional allowances ................... (1,985) (2,033)
-------- --------
Net revenues ............................. 14,966 16,918
-------- --------
Operating expenses:
Gaming ....................................... 3,218 3,445
Food and beverage ............................ 3,922 4,164
Hotel ........................................ 421 428
Gift shop .................................... 137 119
Advertising and promotion .................... 1,100 1,097
General and administrative ................... 3,996 4,423
Management fee - Becker Gaming, Inc. ......... 817 912
Rent expense paid to related party ........... 55 54
Depreciation and amortization ................ 864 889
-------- --------
Total operating expenses ................. 14,530 15,531
-------- --------
Operating income (loss)................... 436 1,387
-------- --------
Other income (expenses):
Gain (loss) on sale of assets ................. (1) --
Interest income .............................. 67 74
Interest expense ............................. (1,814) (1,808)
Other, net ................................... 22 16
-------- --------
Total other expenses ..................... (1,726) (1,718)
-------- --------
Income (loss) before taxes ............... (1,290) (331)
Provision for income tax ....................... -- --
-------- --------
Net (loss) income ......................... ($ 1,290) ($ 331)
Retained earnings (deficit),
beginning of period .......................... (13,681) (8,644)
-------- --------
Retained earnings (deficit),
end of period ............................... ($14,971) ($ 8,975)
======== ========
<PAGE>
Nine Months Ended March 31,
1997 1996
-------- --------
Revenues:
Gaming ....................................... $ 36,362 $ 39,988
Food and beverage ............................ 10,445 9,807
Hotel ........................................ 2,540 2,337
Gift shop .................................... 404 457
Management fee from affiliates ............... 2,021 1,454
Other ........................................ 711 852
-------- --------
Gross revenues .......................... 52,483 54,895
Less, promotional allowances .................. (6,479) (5,647)
-------- --------
Net revenues ............................. 46,004 49,248
-------- --------
Operating expenses:
Gaming ....................................... 9,658 11,092
Food and beverage ............................ 12,505 12,054
Hotel ........................................ 1,325 1,243
Gift shop .................................... 387 353
Advertising and promotion .................... 3,708 3,392
General and administrative ................... 12,975 14,147
Management fee - Becker Gaming, Inc. ......... 2,526 2,674
Rent expense paid to related party ........... 167 164
Depreciation and amortization ................ 2,583 2,668
-------- --------
Total operating expenses ................. 45,834 47,787
-------- --------
Operating income (loss)................... 170 1,461
-------- --------
Other income (expenses):
Gain (loss) on sale of assets ................ (1) (10)
Interest income .............................. 204 218
Interest expense ............................. (5,435) (5,283)
Other, net ................................... 61 50
-------- --------
Total other expenses ..................... (5,171) (5,025)
-------- --------
Income (loss) before taxes ............... (5,001) (3,564)
Provision for income tax ....................... -- --
-------- --------
Net (loss) income ........................ ($ 5,001) ($ 3,564)
Retained earnings (deficit),
beginning of period .......................... (9,970) (5,411)
-------- --------
Retained earnings (deficit),
end of period ................................ ($14,971) ($ 8,975)
======== ========
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
ARIZONA CHARLIE'S, INC.
(A Wholly Owned Subsidiary Of Becker Gaming, Inc.)
STATEMENTS OF CASH FLOWS
(Dollars In Thousands)
(Unaudited)
Nine Months Ended March 31,
1997 1996
-------- --------
Cash flows from operating activities:
Net income (loss) .................................. ($ 5,001) ($ 3,564)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization ...................... 2,583 2,668
Provision for losses on related
party receivables ................................. 175 1,239
(Gain) loss on sale of equipment ................... 1 11
(Increase) decrease in operating assets:
Receivables ........................................ 29 (2,203)
Inventories ........................................ 17 78
Prepaid expenses ................................... 169 137
Deposits and other ................................. (102) 85
Increase (decrease) in operating liabilities:
Accounts payable ................................... (462) 63
Accrued expenses ................................... 2,520 1,342
Management fees due to Becker Gaming, Inc. ......... 2,526 2,674
-------- --------
Total adjustments ............................... 7,456 6,094
-------- --------
Net cash provided by operating activities ...... 2,455 2,530
-------- --------
Cash flows from investing activities:
Capital expenditures ............................... (305) (271)
Increase in receivable from related party...........
Increase in receivable from Becker Gaming, Inc. .... (372) --
Increase in management fee receivable from Becker
Gaming, Inc. ....................................... (2,021) (1,454)
Payments from related party receivable.............. 30 --
Proceeds from assets sales ......................... 7 12
-------- --------
Net cash provided by
investing activities ......................... (2,661) (1,713)
-------- --------
Cash flows from financing activities:
Proceeds from borrowing under payables.............. 190 75
Proceeds from related party notes payable........... 900 --
Principal payments on notes payable ................ (110) --
Payments under capital lease obligations ........... (10) (4)
-------- --------
Net cash provided by
financing activities ......................... 970 (71)
-------- --------
Net increase in cash and cash equivalents ....... 764 888
Cash and cash equivalents, beginning of the period ..... 4,591 5,404
-------- --------
Cash and cash equivalents, end of the period ........... $ 5,355 $ 6,292
======== ========
Supplemental cash flow disclosures:
Interest paid, net of amount capitalized ........... $ 5,435 $ 5,282
======== ========
Income taxes paid .................................. $- $-
======== ========
Capital lease obligations incurred ................. $- $-
======== ========
The accompanying notes are an integral part of these financial statements.
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<PAGE>
ARIZONA CHARLIE'S, INC.
(A Wholly Owned Subsidiary Of Becker Gaming, Inc.)
NOTES TO FINANCIAL STATEMENTS
-------------
1) Basis of Presentation:
Arizona Charlie's, Inc. ("AC" or the "Company") 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 nine-month periods ended March 31,
1997 are not necessarily indicative of the results that may be expected for the
year ended June 30, 1997. 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, 1996.
2) Missouri Gaming License, Default Under Indebtedness,
Management's Plans, and Going Concern:
AC has guaranteed the payment of principal of and interest on the 12% First
Mortgage Notes due November 15, 2000 (the "CQC" Notes") issued by Capitol Queen
& Casino, Inc. ("CQC"). An aggregate of $20,000,000 in principal amount and
$3,600,000 in past due interest are outstanding on the CQC Notes at March 31,
1997. CQC was formed to develop, own and operate the "Capitol Queen" riverboat
casino and related land-based facilities 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"). At the time
CQC was notified of the Commission's decision, construction of the riverboat
under contract with a shipbuilder was substantially completed. CQC had also
obtained the necessary permits for the land-based development portion of the
project and performed certain dredging and other site preparation work.
Immediately following the Commission's decision, Management temporarily
suspended further development of the Capitol Queen project, pending an appeal of
the decision and legal remedies potentially available to the Company.
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. Management ultimately determined to
abandon the project and is currently looking for alternative uses for the
riverboat, including opportunities to sell or lease it to another operator.
<PAGE>
2) Missouri Gaming License, Default Under Indebtedness,
Management's Plans, and Going Concern, Continued:
CQC financed the Capitol Queen project through the issuance of $40,000,000 in
principal amount of CQC Notes. As of January 1, 1995, the Indenture (the "CQC
Indenture") governing the CQC Notes 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 CQC
Notes (plus accrued and unpaid interest) was completed on January 17, 1995, with
unexpended funds from the project escrow account, and an aggregate of
$20,000,000 principal amount of the CQC Notes remain 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, and
CQC is thus in default of the amended covenants.
The remaining CQC Notes 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 payments of $1,200,000 on each of November 15,
1995, May 15, 1996 and November 15, 1996 and will not have funds available to
make the May 15, 1997 interest payment. AC does not have funds available to
advance on behalf of CQC at March 31, 1997. AC is restricted from selling assets
under the covenants governing its 12% First Mortgage Notes due November 15, 2000
(the "AC Notes") and management believes that access to additional capital from
other sources is restricted as a result of the above-described circumstances. AC
does not have sufficient financial resources to satisfy its guarantee obligation
with respect to the CQC Notes. However, in January 1997 Management has taken
steps to increase profitably and generate additional cash flow at AC, including
down-sizing employee staffing levels and associated payroll costs in certain
departments. Other operating departments have been combined to eliminate
supervisory and management positions. Such down-sizing and eliminations which
took place in February and March are partially reflected in the 1997 three-month
period. Also, the existing restaurants and food facilities are being analyzed to
determine if the current pricing structures are meeting the overall goals of
attracting a sufficient number of casino patrons as designed. As such, beginning
in April 1997, new value priced menus have been implemented in the Chinese
restaurant. The Sportsbook deli is being expanded to include a mini-food court
area which in addition to the present deli-style sandwiches will offer grilled
items as well as Mexican Style fast food items. Entertainment events including
headliner concerts, lounge acts, and professional boxing matches are being
re-evaluated to determine if these events attract the necessary casino patrons
desired. Also beginning in April 1997, a slot player club and automated slot
reporting system was purchased and is currently being installed to attract new
patrons and help retain existing patrons. However, no assurance can be made
regarding the future performance of AC. Such performance may be affected or
influenced by prevailing economic conditions and financial, business and
competitive factors, many which are beyond AC's control.
<PAGE>
2) Missouri Gaming License, Default Under Indebtedness,
Management's Plans, and Going Concern, Continued:
As of March 31, 1997, AC is in default of certain debt covenants under the
Indenture (the "AC Indenture") governing the AC Notes. These covenant violations
include (i) a failure to meet a minimum fixed charge coverage ratio, as defined
in the AC Indenture, and (ii) advances by AC to BGI in excess of amounts
permitted under the AC Indenture. Such advances remain outstanding at March 31,
1997. In addition, beginning with the quarter ending December 31, 1995, AC has
not met the minimum tangible net worth requirement, set forth in the AC
Indenture. Under the terms of the AC Indenture, AC is required to offer to buy
back $27,500,000 of the outstanding AC Notes at March 31, 1997 due to the
failure to meet this covenant, and such amount shall increase by $5,500,000 each
fiscal quarter so long as AC is in default of the covenant. AC has not made such
offer and does not intend to do so while the discussions with the Bondholder
Committee described below are in process. As a result of these covenants
defaults, the AC Notes have been classified as currently payable in the
accompanying financial statements.
The AC Notes are not subject to mandatory redemption, except upon a change of
control, decline in tangible net worth, or certain assets sales, all as defined
in the Indenture. The Company has the option to redeem the AC Notes at a premium
of 106% beginning on November 15, 1997, declining to par value on November 15,
1999.
In connection with its guarantee of the CQC Notes, the CQC Indenture imposes
certain restrictive covenants on the Company, including minimum cash flow and
net worth requirements and restrictions on additional borrowings and
distributions of earnings.
CQC continues to market its riverboat assets to prospective buyers and
management is continuing its discussions with an informal committee representing
the holders of the AC Notes and CQC notes (the "Bondholder Committee") regarding
a proposed restructuring plan. Based on current market conditions, management
does not expect that CQC will generate sufficient funds through the sale of its
assets to repurchase all of the outstanding CQC Notes. The proposed
restructuring plan therefore contemplates the issuance of additional AC Notes to
fulfill AC's guarantee obligation for remaining principal and accrued interest
of the CQC Notes after applying sale proceeds. However, no satisfactory offers
for the riverboat are currently available, and no agreement has been reached
with the Bondholder Committee regarding the proposed restructuring plan.
Accordingly, these matters raise substantial doubt about the ability of AC to
continue as a going concern. The final outcome of these matters is not presently
determinable and the March 31, 1997 financial statements of AC do not include
any adjustment that might result from the outcome of this uncertainty.
Management of AC has taken several steps to overcome the substantial doubt as to
its ability to continue as a going concern including reducing expenses as
previously described, eliminating costs associated with the maintenance and
operation of the BGI airplane that was sold in July, 1996, the on-going attempts
to sell the CQC riverboat and use the proceeds to retire indebtedness, pursuit
of new business development activities to strengthen BGI's position in the
gaming market, and continuing negotiations with an informal committee
representing the holders of the AC Notes and CQC Notes to reach a favorable
restructure of such Notes.
================================================================================
<PAGE>
SUNSET COIN, INC.
(A Wholly Owned Subsidiary Of Becker Gaming, Inc.)
BALANCE SHEETS
(Dollars In Thousands)
ASSETS
March 31, June 30,
1997 1996
------- -------
(Unaudited)
Current assets:
Cash ................................................... $ 648 $ 1,122
Current portion of notes receivable .................... 99 117
Note receivable from related party ..................... 3,150 2,250
Other receivables ...................................... 303 274
Prepaid expenses ....................................... 21 46
------- -------
Total current assets ............................... 4,221 3,809
------- -------
Property and equipment:
Building and leasehold improvements .................... 174 174
Furniture, fixtures and equipment ...................... 3,012 2,885
------- -------
3,186 3,059
Less, accumulated depreciation ......................... (1,548) (1,370)
------- -------
Net property and equipment ......................... 1,638 1,689
------- -------
Other assets:
Notes receivable, less current
portion .............................................. 161 194
Advances to related parties ............................ 236 111
Other assets, less accumulated
amortization of $34 at March 31, 1997,
and $24 at June 30, 1996 ............................ 78 88
------- -------
Total assets ....................................... $ 6,334 $ 5,891
======= =======
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, June 30,
1997 1996
------ ------
(Unaudited)
Current liabilities:
Trade accounts payable ................................. $ 2 $ 44
Accrued expenses ....................................... 770 608
Current portion of long term debt ...................... 325 279
------ ------
Total current liabilities ......................... 1,097 931
Long-term liabilities:
Long-term debt, less current portion .................. 333 502
Subordinated notes payable to
former stockholders ................................. 3,000 3,000
------ ------
Total liabilities .................................. 4,430 4,433
------ ------
Commitments and contingencies
Stockholders' equity:
Common stock, no par value, 2,500
shares authorized, 400 shares
issued and outstanding ................................. 27 27
Retained earnings ........................................ 1,877 1,431
------ ------
Total stockholders' equity ......................... 1,904 1,458
------ ------
Total liabilities and stockholders'
equity ............................................. $6,334 $5,891
====== ======
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
SUNSET COIN, INC.
(A Wholly Owned Subsidiary of Becker Gaming, Inc.)
STATEMENTS OF INCOME AND RETAINED EARNINGS
(Dollars in Thousands)
Three Months Ended March 31,
1997 1996
------- -------
Revenues:
Slot route:
From locations controlled
by related parties ........... $ 614 $ 607
Other ........................... 30 38
Slot service fees:
From related parties ............ 21 24
Other ........................... 8 8
------- -------
Total revenues ................ 673 677
Operating expenses:
Slot route and service ............. 313 324
General and administrative ......... 8 4
Management fee - Becker Gaming, Inc. 34 34
Depreciation and amortization ...... 73 75
------- -------
Total operating expenses ........ 428 437
------- -------
Operating income ....................... 245 240
------- -------
Other income (expense):
Interest income .................... 48 44
Interest expense ................... (89) (96)
Other income ....................... 81 24
------- -------
Total other income (expense) .... 40 (28)
------- -------
Net income before income tax ........... 285 212
Provision for income tax ............... (73) (72)
------- -------
Net income ............................. 212 140
Retained earnings,
beginning of period .................... 1,665 1,273
------- -------
Retained earnings, end of
period ................................. $ 1,877 $ 1,413
======= =======
<PAGE>
Nine Months Ended March 31,
1997 1996
------- -------
Revenues:
Slot route:
From locations controlled
by related parties ........... $ 1,789 $ 1,750
Other ........................... 97 112
Slot service fees:
From related parties ............ 63 72
Other ........................... 25 25
------- -------
Total revenues ................ 1,974 1,959
Operating expenses:
Slot route and service ............. 1,000 939
General and administrative ......... 38 31
Management fee - Becker Gaming, Inc. 104 102
Depreciation and amortization ...... 215 224
------- -------
Total operating expenses ........ 1,357 1,296
------- -------
Operating income ....................... 617 663
------- -------
Other income (expense):
Interest income .................... 143 126
Interest expense ................... (274) (298)
Other income ....................... 129 59
------- -------
Total other income (expense) .... (2) (113)
------- -------
Net income before income tax .......... 615 550
Provision for income tax ............... (169) (187)
------- -------
Net income ............................. 446 363
Retained earnings,
beginning of period .................... 1,431 1,050
------- -------
Retained earnings,
end of period .......................... $ 1,877 $ 1,413
======= =======
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
SUNSET COIN, INC.
(A Wholly Owned Subsidiary of Becker Gaming, Inc.)
STATEMENTS OF CASH FLOWS
(Dollars In Thousands)
(Unaudited)
Nine Months Ended March 31,
1997 1996
------- -------
Cash flows from operating activities:
Net income ........................ $ 446 $ 363
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization .... 215 224
Gain on sales of equipment ....... -- 13
(Increase) decrease in operating assets:
Other receivables ................. (30) (11)
Prepaid expenses .................. 23 23
Increase (decrease) in operating liabilities:
Accounts payable ................. (43) (69)
Accrued expenses ................. 161 310
------- -------
Total adjustments ............ 326 490
------- -------
Net cash provided by
operating activities ........ 772 853
------- -------
Cash flows from investing activities:
Capital expenditures ............... (150) (324)
Proceeds from sales of equipment ... -- 12
Increase in related
party notes receivable ........... (900) --
Increase in advances
to related parties ............... (125) (32)
Increase in notes receivable ....... (25) --
Repayments of notes receivable ..... 76 63
------- -------
Net cash used in
investing activities ........ (1,124) (281)
------- -------
Cash flows from financing activities:
Proceeds from notes payable ....... 159 157
Principal payments on notes payable (281) (222)
------- -------
Net cash (used in) provided by
financing activities ........ (122) (65)
------- -------
Net increase in cash .......... (474) 507
Cash, beginning of period ............. 1,122 506
------- -------
Cash, end of period ................... $ 648 $ 1,013
======= =======
Supplemental cash flow disclosures:
Interest paid ..................... $ 274 $ 298
======= =======
Income taxes paid ................. $- $-
======= =======
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
SUNSET COIN, INC.
(A wholly owned subsidiary of Becker Gaming, Inc.)
NOTES TO FINANCIAL STATEMENTS
--------------------
1) Basis of Presentation:
Sunset Coin, Inc. ("SC" or the "Company") is a 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 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 month and
nine-month periods ended March 31, 1997 are not necessarily indicative of the
results that may be expected for the year ended June 30, 1997. The accompanying
unaudited financial statements and footnotes should be read in conjunction with
the financial statements included in the Company's annual report on Form 10-K
for the year ended June 30, 1996.
2) Guarantee Obligation, Management's Plans, and Going
Concern:
SC has guaranteed the payment of the $55,000,000 principal amount of and
interest on the 12% First Mortgage Notes due November 15, 2000 (the "AC Notes")
issued by Arizona Charlie's, Inc. ("AC"), another wholly owned subsidiary of
BGI. AC is in default of certain covenants under the Indenture (the "AC
Indenture") governing the AC Notes as of March 31, 1997. In addition, AC has
guaranteed the payment of principal and interest on certain mortgage notes
issued by CQC (the "CQC Notes"). An aggregate $20,000,000 in principal amount
and $3,600,000 in past due interest are outstanding on the CQC Notes at March
31, 1997. Capitol Queen & Casino, Inc. ("CQC") is a development stage company
which has abandoned its project to develop, own and operate a riverboat casino,
and is currently attempting to sell its assets to prospective buyers. Based on
current market conditions, management does not expect that CQC will generate
sufficient funds through the sale of its assets to repurchase all of the
outstanding CQC Notes. A proposed restructuring plan therefore contemplates (i)
the modification of covenants under the AC Indenture to cure the current
defaults and (ii) the issuance of additional AC Notes to fulfill AC's guarantee
obligation for remaining principal of and accrued interest on the CQC Notes
after applying sale proceeds. However, no satisfactory offers for the riverboat
are currently available, and no agreement has been reached with the holders of
the AC Notes and CQC Notes regarding the proposed restructuring plan.
<PAGE>
2) Guarantee Obligation, Management's Plans, and Going
Concern, Continued:
Should AC be unable to complete its restructuring plan, it will not have the
financial resources to repay the AC Notes and honor its guarantee obligation
under the CQC Notes. The Company would thus likely be required to honor its
guarantee obligation of the AC Notes, which the Company does not have sufficient
resources to satisfy. Accordingly, these matters raise substantial doubt about
the ability of the Company to continue as a going concern. The final outcome of
these matters is not presently determinable and the March 31, 1997 financial
statements of the Company do not include any adjustment that might result from
the outcome of this uncertainty.
Management of AC has taken several steps to overcome the substantial doubt as to
its ability to continue as a going concern including reducing expenses as
previously described, eliminating costs associated with the maintenance and
operation of the BGI airplane that was sold in July, 1996, the on-going attempts
to sell the CQC riverboat and use the proceeds to retire indebtedness, pursuit
of new business development activities to strengthen BGI's position in the
gaming market, and continuing negotiations with an informal committee
representing the holders of the AC Notes and CQC Notes to reach a favorable
restructure of such Notes.
================================================================================
<PAGE>
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 lesser 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 a promotional
allowance.
<PAGE>
Results of Operations for the three and nine-months ended
March 31, 1997 and 1996
Results from operations at AC decreased for both the three and nine-month
periods ended March 31, 1997 compared to the same periods in 1996 primarily as a
result of decreased gaming revenues in the more recent periods. Operating
expenses also decreased for both the three-month and nine-month periods ended
March 31, 1997, primarily as a result of reduced payroll expenses in the
operating departments and reduced General and Administrative expenses associated
with the maintenance and operation of the corporate airplane sold in July, 1996.
Net revenues at AC decreased by $1,952,000, or 11.5%, from $16,918,000 to
$14,966,000 for the three-month period ended March 31, 1997 compared to the
three-month period ended March 31, 1996. In the same period-to-period
comparison, operating expenses, including depreciation and amortization,
decreased by 6.4% to $14,530,000 from $15,531,000. This resulted in a $951,000
decrease in operating income from $1,387,000 to $436,000 for the more recent
period.
Net revenues at AC decreased by $3,244,000, or 6.6%, from $49,248,000 to
$46,004,000 for the nine-month period ended March 31, 1997 compared to the
nine-month period ended March 31, 1996. In the same period-to-period comparison,
operating expenses, including depreciation and amortization, decreased by 4.1%
to $45,834,000 from $47,787,000. This resulted in a $1,291,000 decrease in
operating income from $1,461,000 to $170,000 for the more recent period.
The largest portion of the revenue decrease for the three-month period
ended March 31, 1997 is attributable to gaming revenues, specifically, gaming
machine revenues, which decreased 10.4% from $11,464,000 to $10,269,000,
reflecting lower levels of play from patrons. Revenues from table games
increased 4.4% from $1,071,000 to $1,120,000 during the 1997 three-month period
and race and sports book revenues decreased $244,917 or 34.0% reflecting lesser
pari-mutuel horse race play from patrons because of the on-going dispute over
increased fees that began in November 1996, between the Nevada Pari-Mutuel
Association and both the Thoroughbred Owners of California and the California
Horse Racing Board who provide and authorize televised disseminator services to
Race & Sports books in Nevada. Until the increased fee issues are resolved,
these televised disseminator services which are popular with existing patrons
will not be available. Bingo revenues also decreased by $201,000 for the
three-month period ended March 31, 1997 when compared to the same period of the
prior year. The largest portion of the decrease in revenues for the nine-month
period ended March 31, 1997 is also attributable to gaming revenues which
decreased 9.1% from $39,988,000 to $36,362,000. Specifically, gaming machine
revenues decreased $2,711,000 or 8.0% from $33,760,000 to $31,049,000 reflecting
lesser play from patrons. Revenues from table games increased $19,000 or 0.5%,
from $3,506,000 to $3,525,000, and revenues from the race & sports book
decreased $398,000, or 17.1%, from $2,332,000 to $1,934,000 also reflecting the
aforementioned on-going dispute between the Nevada Pari-Mutuel Association and
both the Thoroughbred Owners of California and the California Horse Racing
Board. Bingo revenues also decreased by $479,000 during the nine-month period
ended March 31, 1997 compared to the same period of the prior year. Lesser play
from patrons for both the 1997 three-month and nine-month periods are the result
of increased competition from surrounding hotel/casinos that appeal to Arizona
Charlie's "local" patron base.
<PAGE>
Food and Beverage revenues decreased $139,000 or 4.0% from $3,436,000 to
$3,297,000 during the three-month period ended March 31, 1997 compared to the
same period in the prior year. The decrease in revenues is primarily due to
decreased complimentary sales in the food and beverage department reflecting
management's recent efforts to better control the costs associated with
complimentary sales through stronger player evaluation methods. Such sales are
included in revenues at retail value and are then deducted as a promotional
allowance. For the nine-month period ended March 31, 1997, food & beverage
revenues increased $638,000 or 6.1% from $9,807,000 to $10,445,000 when compared
to the nine-month period of the prior year, reflecting increased complimentary
sales in the food and beverage departments. Increased complimentary sales in the
food and beverage department are the result of casino promotion and marketing
efforts to attract, reward and retain qualified patrons.
Hotel revenues increased $10,000 or 1.2% from $844,000 to $854,000 during
the three months ended March 31, 1997 compared to the same three-month period in
1996. The increase is primarily due to a slight decrease in occupancy and an
increase in average room rates of 86.7% and $43.7, respectively, compared to
92.3% and $39.3 in the 1996 period. During the nine-month period ended March 31,
1997, hotel revenues increased by $203,000 or 8.0% from $2,337,000 to $2,540,000
compared to the same nine-month period of 1996. The increased revenue is largely
due to an increase in occupancy and average room rates of 87.3% and $43.22,
respectively, compared to 86.9% and $38.77 in the 1996 nine-month period.
Gift shop revenues decreased $15,000 or 10.0% from $150,000 to $135,000
during the three-month period ended March 31, 1997 compared to the same period
in 1996. During the nine-month period ended March 31, 1997, gift shop revenues
decreased $53,000, or 11.6%, from $457,000 to $404,000 compared to the same
period in 1996. The decreases are primarily due to reducing the hours of
operation in the 1997 periods.
Other revenues, which principally include entertainment cover charges, ATM
commissions, and revenues from PBX and banquets, decreased 48.2% from $338,000
to $175,000 for the three-month period ended March 31, 1997 compared to the same
period in 1996. During the nine month period ended March 31, 1997, other
revenues decreased by $141,000 or 16.6% from $852,000 to $711,000 compared to
the same nine-month period of 1996. The decreases reflect lower entertainment
cover charge, banquet revenues and boxing revenues resulting from fewer
concerts, banquets and boxing events that occurred in the 1997 periods.
<PAGE>
Gaming expenses decreased by $227,000 and $1,434,000, or 6.6% and 12.9%,
from $3,445,000 and $11,092,000 to $3,218,000 and $9,658,000, respectively, for
the three-month and nine-month periods ended March 31, 1997 as compared to the
same periods in 1996. The lower levels of expense for both periods reflect
reductions in staffing levels in the slot and table games departments and
decreased slot promotion expenses.
Food and Beverage expenses decreased by $242,000 and increased by
$451,000, or 5.8% and 3.6%, from $4,164,000 and $12,054,000 to $3,922,000 and
$12,505,000, respectively, for the three-month and nine-month periods ended
March 31, 1997 when compared to the same periods in 1996, as a result of lower
food costs associated with decreased Food & Beverage revenues for the 1997
three-month period, and increased food and beverage costs and an increase in
salary and wages, all associated with the increase in food & beverage revenues
during the 1997 nine-month period. As a result, food and beverage expenses
represented 118.9% and 119.7% of food and beverage revenues for the three-month
and nine-month periods ended March 31, 1997 compared to 121.2% and 122.9% of the
food and beverage revenues for the same periods in 1996.
Hotel expenses decreased by $7,000 and increased by $82,000, or 1.6% and
6.2%, from $428,000 and $1,243,000 to $421,000 and $1,325,000, respectively, for
the three-month and nine-month periods ended March 31, 1997 as compared to the
same periods in 1996, reflecting staffing reductions in the 1997 three-month
period, and additional repair and maintenance costs associated with the original
100 rooms built in 1988, the additional costs of room linens, and normal wage
and salary increases in the 1997 nine-month period. Net contribution by the
hotel department (hotel revenues less hotel operating expenses) was $433,000 and
$1,215,000 for the three-month and nine-month periods ended March 31, 1997 as
compared to $416,000 and $1,094,000 for the same periods in 1996.
General and Administrative expenses decreased by $427,000 and $1,172,000,
or 9.7% and 8.3%, from $4,423,000 and $14,147,000 to $3,996,000 and $12,975,000
respectively, for the three-month and nine-month periods ended March 31, 1997 as
compared to the same periods in 1996. The decreases resulted from a reduction in
entertainment department costs that are associated with fewer entertainment
events and lower entertainer fees and equipment rental expense. Other decreases
include reductions of staffing levels in the security, entertainment, porters
and aviation departments and a reduction in expenses associated with the
operation of a jet airplane which was sold in July 1996. The Company accrued
management fees payable to BGI of $817,000 and $2,526,000 during the three-month
and nine-month periods ended March 31, 1997.
Advertising and Promotional expenses increased by $3,000 and $316,000, or
0.3% and 8.5%, from $1,097,000 and $3,392,000 to $1,100,000 and $3,708,000
during the three-month and nine-month periods ended March 31, 1997 as compared
to the same period in 1996. Management believes that these levels of slot
promotional expenditures in both of the 1996 periods are necessary to attract
and maintain the desired customer levels, and support the other existing
facilities throughout the property. Management believes that frequent promotions
are necessary to compete with the newer hotel/casinos that are located close in
proximity to AC. These newer hotel/casinos appeal and market to the Arizona
Charlie's "local" patron base.
<PAGE>
Depreciation and Amortization decreased by $25,000 and $85,000, or 2.8%
and 3.2%, from $889,000 and $2,668,000 to $864,000 and $2,583,000 during the
three-month and nine-month periods ended March 31, 1997 when compared to the
same periods in 1996, as a result of decreased depreciation expenses associated
with older assets.
AC had other expenses of $1,726,000 and $5,171,000 for the three-month and
nine-month periods ended March 31, 1997 compared with $1,718,000 and $5,025,000
for the same periods in 1996. The increase in the 1997 nine-month period
reflects an adjustment to correct the calculation of interest associated with
the AC Notes.
In January, 1997 Management has taken steps to increase profitably and
generate additional cash flow at AC, including down-sizing employee staffing
levels and associated payroll costs in certain departments. Other operating
departments have been combined to eliminate supervisory and management
positions. Such down-sizing and eliminations which took place in February and
March are partially reflected in the 1997 three-month period. Also, the existing
restaurants and food facilities have being analyzed to determine if the current
pricing structures are meeting the overall goals of attracting a sufficient
number of casino patrons as designed. As such, beginning in April 1997, new
value priced menus have been implemented in the Chinese restaurant. The
Sportsbook deli is being expanded to include a mini-food court area which in
addition to the present deli-style sandwiches will offer grilled items as well
as Mexican Style fast food items. Entertainment events including headliner
concerts, lounge acts, and professional boxing matches are being re-evaluated to
determine if these events attract the necessary casino patrons desired. Also
beginning in April 1997, a slot player club and automated slot reporting system
was purchased and is currently being installed to attract new patrons and help
retain existing patrons. However, no assurance can be made regarding the future
performance of AC. Such performance may be affected or influenced by prevailing
economic conditions and financial, business and competitive factors, many which
are beyond AC's control.
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 $13,750,000. Management anticipates that AC will generate taxable
income and that its effective federal income tax rate will approximate the
statutory rate of 34%, prior to consideration of the benefit from the net
operating losses, which may be utilized to offset taxable income.
<PAGE>
Liquidity and Capital Resources
- -------------------------------
At March 31, 1997, AC had a working capital deficit of $60,578,000
compared to a working capital deficit of $58,530,000 at June 30, 1996. The
decrease in working capital in the amount of $2,046,000 was caused primarily by
increased accrued interest on the AC Notes and accrued management fees payable
to BGI.
For the nine-month period ended March 31, 1997, cash provided by operating
activities decreased approximately $75,000 to $2,455,000, from $2,530,000 for
the same period in 1996. The decrease in the 1997 period is primarily
attributable to the increased net loss for the current period, partially offset
by the increased accrued interest on the AC Notes.
For the nine-month period ended March 31, 1997, net cash used in investing
activities increased to $2,661,000 for the nine-month period ended March 31,
1997 compared with $1,713,000 for the same period in 1996. The increase of
$948,000 was caused primarily by a $372,000 increase in related party
receivable, an increase in management fee receivable of $567,000 and an increase
in capital expenditures of $34,000. .
Cash flows provided by financing activities for the nine-month period
ended March 31, 1997 was $970,000 compared with $71,000 for the nine-month
period ended March 31, 1996 reflecting proceeds from a related party payable.
AC's long-term obligations, approximately $5,014,000 at March 31, 1997,
consist of the stockholder notes and capitalized equipment leases. AC has annual
interest expense aggregating $6,600,000 and $500,000 with respect to the AC
Notes (classified as current due to default under covenants) and the stockholder
notes. Further, AC is expected to have annual capital expenditure requirements
of approximately $600,000.
On November 15, 1996, AC made an interest payment due on the AC Notes in
the amount of $1,100,000, an amount equal to one-third of the required due. On
December 16, 1996 another one-third of the interest due in the amount of
$1,100,000 was paid. The remainder of the interest was paid on January 15, 1997.
AC is currently in technical default under the Indenture governing the AC
Notes because it has neither maintained the required minimum level of
consolidated tangible net worth nor offered to repurchase a portion of the AC
Notes as required if such minimum level of consolidated tangible net worth is
not maintained. In addition, AC has failed to maintain the minimum consolidated
fixed charge coverage ratio required under the Indenture and has advanced funds
to BGI in excess of the amounts permitted to be so advanced under the Indenture.
As a result of such defaults, the holders of 25% or more in principal amount of
the Notes may cause the AC Notes to be accelerated, in which event they would
become immediately due and payable in full. AC does not have and is not expected
to have the resources to pay the AC Notes if they are accelerated.
<PAGE>
In addition, AC has a substantial contingent obligation resulting from its
guarantee of the CQC Notes, an aggregate of $20,000,000 in principal amount of
which remain outstanding. CQC was not able to make its scheduled interest
payments of $1,200,000 due on each of November 15, 1995, May 15, 1996 and
November 15, 1996, and will not have funds available to make the May 15, 1997
interest payment and AC does not have funds available to advance on behalf of
CQC at March 31, 1997. 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. As a result of a September 1994 ruling of the Missouri
Gaming Commission denying CQC's gaming license application, CQC has adopted a
plan to sell its assets for the purpose of repaying, to the extent possible, the
outstanding CQC Notes and past due interest thereon. There can be no assurance
that CQC will be successful in its efforts to sell its assets or, that if a sale
is effected, the proceeds will be sufficient to fully or substantially repay the
CQC Notes and past due interest thereon. To the extent any funds CQC may realize
from the sale of its assets are not sufficient to repay the CQC Notes and past
due interest thereon, AC will be obligated under its guarantee of the CQC Notes
to fund the shortfall.
Moreover, because it has not yet effected the sale of its assets, CQC is
in default of the Indenture governing the CQC Notes. As a result, the holders of
25% or more in principal amount of the CQC Notes may cause the CQC Notes to be
accelerated, in which event they would become immediately due and payable in
full. If the CQC Notes were to be accelerated, CQC would not be able to pay the
outstanding CQC Notes without an infusion of capital, which is not expected to
be available. AC would then be obligated under its guarantee to pay the CQC
Notes but is not expected to have the resources to satisfy such obligation
should it materialize. A default by AC under its guarantee would also give the
holders of 25% or more in principal amount of the AC Notes the ability to
accelerate the AC Notes. If the AC Notes or the CQC Notes are accelerated,
substantial doubt exists about AC's ability to continue as a going concern.
AC's management believes that, assuming the AC Notes and CQC Notes are not
accelerated, it has sufficient funds to meet its projected needs for financing
of existing operations and to service its debt obligations. However, AC's
ability to obtain capital, should it be required, is significantly restricted
under the Indentures governing the AC Notes and the CQC Notes. The ability of AC
to service its debt obligations (and to comply with the consolidated tangible
net worth covenant) will be dependent upon its future performance, which
performance will be influenced by prevailing economic conditions and financial,
business and competitive factors, many of which are beyond AC's control.
Management of AC has taken several steps to overcome the substantial doubt
as to its ability continue as a going concern including reducing expenses as
previously described, eliminating costs associated with the maintenance and
operation of the BGI airplane that was sold in July, 1996, the on-going attempts
to sell the CQC riverboat, and use the proceeds to retire indebtedness, pursuit
of new business development activities to strengthen BGI's position in the
gaming market, and continuing negotiations with an informal committee
representing the holders of the AC Notes and CQC Notes to reach a favorable
restructure of such Notes.
<PAGE>
Sunset Coin, Inc.
- -----------------
General
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 shareholders 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 nine Becker Gaming Group ("BGG")
locations and one additional location owned by an unrelated party, which are
expected to be renewed in general course except for Charlie's Saloon (a BGG bar)
which discontinued its operations on April 21, 1996.
Results of operations for the three and nine months ended
March 31, 1997 and 1996
SC's results of operations increased for both the three and nine-month
periods ended March 31, 1997 when compared to the same periods in the prior
year. Net income before income taxes increased by 25.6% to $285,000 for the
three-month period and 10.6% to $615,000 for the nine-month period. The
increases are mainly attributable to recoveries of bad debts of $57,000 in the
latest quarter which were previously written-off in past fiscal periods.
SC's total revenues declined for the three-month period ended March 31,
1997 when compared to the same period last year by 0.6% to $673,000 due to the
conversion of one space lease location to a participating location in the more
recent period. Whereas the nine-month period ended March 31, 1997 when compared
to same period in 1996 showed a net increase in revenues by 0.8% to $1,974,000
as a result of one participating location added in the current period and the
proceeds for one location which was only open for a partial period of the prior
fiscal year. Another factor contributing to increased revenue in the current
period were the conversion of some machines to bill validator machines.
<PAGE>
The total number of gaming machines operated during both the three and
nine-month periods ended March 31, 1997 were 395 compared to 396 in the prior
year. The total number of gaming machines from the BGG locations that are
serviced by SC was 115, as compared to 130 in the same periods last year due to
the discontinued operation of the aforementioned BGG bar. Slot service fees from
BGG for the three-month and nine-month periods ended March 31, 1997 decreased to
$21,000 and $63,000, from $24,000 and $72,000 for the same periods in the prior
year.
Gaming machine route expenses for the three-month period ended March 31,
1997 decreased by 3.3% to $313,000 when compared to the same period in the prior
year reflecting decreased salaries and wages and associated payroll taxes due to
reduction in security personnel during the recent period partially offset by an
increase in repairs and maintenance of slot machines. During the nine-month
period ending March 31, 1997 gaming machine route expenses increased by 6.5% to
$1,000,000 reflecting salaries and wages and associated payroll taxes of
security personnel and repairs and maintenance of slot machines offset by
decreases in loss and damages, and automotive expenses.
General and administrative expenses for the three-month period increased by
100.0% to $8,000 from $4,000, and for the nine-month period increased by 22.6%
to $38,000 from $31,000, reflecting decreases in supplies and professional fees
for the three-month period and increased office expenses for the nine-month
period.
Management fees due to Becker Gaming, Inc. remained relatively the same
for the three-month and nine-month periods ended March 31, 1997 when compared to
the same periods in the prior year.
Depreciation and amortization decreased by 2.7% and 4.0% to $73,000 and
$215,000 for the three-month and nine-month periods ended March 31, 1997,
reflecting decreased depreciation and amortization costs associated with the
April 1996 closing of a BGG bar. SC abandoned furniture, fixtures and equipment
contained in this bar.
During the three-month period ended March 31, 1997, SC had other income
(net of other expenses) of approximately $40,000 compared to other expense, (net
of other income) of $28,000 and for the nine-month period other expenses (net of
other income) were $2,000 compared to $113,000 for the same periods in 1996.
These decreases are attributable to reduced interest expense relating to four
notes payable paid- off in various months for the previous fiscal year ended,
and the previously mentioned bad debt recovery of $57,000 in the more recent
period.
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, 1995. 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 nine-month periods ended March 31, 1997 amounted to $73,000 and
$169,000 from $72,000 and $187,000 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%.
<PAGE>
Liquidity and Capital Resources
- -------------------------------
Cash provided by operating activities for the nine-month period ended
March 31, 1997 decreased to $772,000 from $853,000 for the nine-month period
ended March 31, 1996, mostly due to a net decrease in operating liabilities of
$123,000 and depreciation and amortization of $9,000 partially offset by an
increase in net income of $83,000.
Cash flows used in investing activities for the nine-month period ended
March 31, 1997 increased to $1,124,000 from $281,000 reflecting an addition of a
note receivable from a related party of $900,000, increases in advances to
related parties and locations of $150,000 offset by purchases of slot machines
for new locations of $174,000.
Cash flows used in financing activities for the nine-months ended March
31,1997 increased by $57,000 compared to same period in the prior year due to
principal payments on notes.
Apart from its anticipated obligation with respect to the AC Notes, SC's
indebtedness includes the 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 term note at July 1, 1994, with monthly payments
through June 1998. SC was able to request advances through October 20, 1996 at
which time the Company's right to receive advances under the agreement was
terminated. In addition, SC has term notes of $563,000 due at various dates
through April 2001, having interest at prime plus 1.5%.
SC's management believes that its cash generated by operations to meet its
projected needs for existing operations will be sufficient 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's
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.
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.
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 nine-month
periods ended March 31, 1997.
<PAGE>
================================================================================
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: May 15, 1997 /S/ Bruce F. Becker
----------------- -------------------
Bruce F. Becker
President, Chief Executive
Officer(Principal Executive Officer)
Date: May 15, 1997 /S/ Jerry Griffis
---------------- -----------------
Jerry Griffis
Controller(Principal Financial and
Accounting Officer)
================================================================================
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