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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT of 1934 [NO FEE REQUIRED]
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Commission file number 33-75806
CAPITOL QUEEN & CASINO, INC.
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MISSOURI 43-1652885
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
740 South Decatur Boulevard
Las Vegas, Nevada 89107
(Address of Principal Executive Offices)
Registrant's telephone number: (702) 258-5200
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
12% First Mortgage Notes due November 15, 2000, Series B
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _______
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K: _______
The aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant at September 15, 1996 was $0. The
number of shares of the Registrant's Common Stock
outstanding as of September 15, 1996 was 100.
DOCUMENTS INCORPORATED BY REFERENCE
Specified exhibits listed in Part IV of this report are
incorporated by reference
to the Registrant's Statement on Form S-4 (33-75806) previously
filed.
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Item 1. Business
Capitol Queen & Casino, Inc. ("CQC" or the "Company") was formed to
develop, construct, own and operate the Capitol Queen riverboat casino in
Jefferson City, Missouri, where it was granted a three-year exclusive franchise
by the city pursuant to a Riverfront Development Agreement dated as of September
1, 1992 (the "Development Agreement"), subject to state licensing to operate a
gaming facility. CQC commenced development and construction work on the Capitol
Queen in November 1993. The riverboat was completed and is being stored by the
builder. CQC also acquired the necessary permits from the United States Army
Corps of Engineers for its land-based development and performed certain initial
dredging and other site preparation work. Funding for the Capitol Queen project
was raised in November 1993 through the sale of the Company's 12% First Mortgage
Notes due November 15, 2000 (the "CQC Notes") and the concurrent sale of common
stock purchase warrants (the "Warrants") by the Company's parent corporation,
Becker Gaming, Inc. ("BGI"), which contributed the net proceeds from such sale
to the Company.
On September 28, 1994, the Missouri Gaming Commission (the "Commission")
denied, without investigative review, the Company's application for a gaming
license and prohibited the Company from reapplying for a license for two years.
The Commission's ruling was based on a finding that the Company failed to
disclose material and substantive information on its gaming license application
relating to a Purchase Agreement dated September 20, 1993, pursuant to which BGI
agreed to issue promissory notes aggregating $5,925,000 in principal amount to
various people in Missouri in consideration for development services provided by
them in connection with the Capitol Queen project. The Purchase Agreement was
rescinded by the parties in early 1995.
The Company believes its Missouri application was complete and accurate.
Moreover, the Company fully disclosed the existence and terms of the Purchase
Agreement, as well as the services rendered by the persons to be compensated, in
post- application filings and communications with the Missouri Gaming
Commission's staff. The Company also disclosed these matters to the Nevada
gaming authorities, who investigated and conducted public hearings on these and
other issues relating to applications for licenses and approvals, all of which
were unanimously granted to the Company in May 1994. The Nevada gaming
authorities most recently reexamined the issue in connection with Becker Gaming
Group and Innerout, Inc.'s applications for licenses at Charlie's Bar Down
Under, which were unanimously granted in March 1995. The Company's then audited
financial statements and public documents filed with the Securities and Exchange
Commission, all of which were submitted to the Missouri Gaming Commission, also
made these disclosures. Management believes that, based on the foregoing, the
Commission's ruling was and remains without basis. Accordingly, the Company
challenged the ruling through administrative and judicial channels, which
challenges have been largely successful.
See "Item 3. - Legal Proceedings".
Notwithstanding its efforts to seek redress of the Commission's ruling,
in December 1994, the Company, with the approval of the holders of the CQC
Notes, adopted a two-step plan (the "Repayment Plan") to repay the CQC Notes and
any accrued and unpaid interest thereon. The first step, effected in January
1995, involved the repurchase of $20,000,000 principal amount of the CQC Notes
and the payment of accrued and unpaid interest thereon with proceeds then
remaining in the Capitol Queen project escrow account. The second step of the
Repayment Plan, not yet effected, required the Company, by March 31, 1995, to
sell its riverboat, land site and other projects assets and to use the net
proceeds realized upon the sale of such assets to offer to repurchase additional
CQC Notes.
The Company has actively marketed its riverboat and other assets for sale
and continues to do so. Notwithstanding the Company's failure to effect the
second step of the Repayment Plan to date, the holders of the CQC Notes have not
indicated any current intention to exercise any remedies they may have under the
CQC Indenture or otherwise as a result of such default. Under the CQC Indenture,
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. An aggregate of $20,000,000 principal amount of CQC Notes
are outstanding. If CQC Notes were to be accelerated, the Company (and Arizona
Charlie's, Inc. ("AC"), a sister company which has unconditionally and fully
guaranteed the payment of the CQC Notes) would not be able to pay such CQC
Notes, absent a large capital infusion, which is not expected to be available.
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 the Company'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. To avoid the cost and uncertainty of litigation, however, the Company
and Jefferson City in June 1996 entered into an agreement pursuant to which the
Development Agreement was rescinded and Jefferson City refunded $300,000 of the
$400,000 the Company had paid to the City pursuant to the Agreement.
Item 2. Properties
CQC owns a site located across the Missouri River from the State capitol
in Jefferson City, Missouri, on which CQC had intended to construct the Capitol
Queen Square. The site, which was originally 80 acres, currently consists of
approximately 65 to 75 acres as a result of land lost to the Missouri River
during major flooding in the Midwest in 1993 and 1994. CQC has completed
construction of a riverboat casino that was to be located adjacent to the land
site. The riverboat vessel is approximately 218 feet long and 62 feet wide
providing approximately 26,000 square feet of interior space for up to
approximately 1,600 passengers.
Item 3. Legal Proceedings
The Company is a party to various lawsuits relating to routine matters
incidental to their respective businesses, in addition to the litigation
discussed below. Based on the amounts and issues 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,
cash flows, or financial condition of the Company.
On October 31, 1994, CQC and BGI petitioned the Cole County, Missouri
Circuit Court in Jefferson City for a writ of mandamus with respect to the
ruling of the Missouri Gaming Commission. In response to the petition, the
Circuit Court issued an order declaring that by denying CQC's application for a
riverboat gaming license without first conducting an investigation and by
deliberating in a closed session, the Missouri Gaming Commission had violated
Missouri gaming and open meeting laws. The Circuit 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 Circuit Court ordered the Commission to show cause within
30 days why the preliminary writ should not be made permanent.
In response to the Circuit Court's order to show cause, the Commission
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 of
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 to show
cause. On December 23, CQC moved to dismiss the appeal on the ground 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, and on April 30, 1996, a three-judge panel of that Court ruled
that mandamus was not the proper vehicle for challenging the Commission's
decision. The Court of Appeals ruled that CQC may obtain judicial review only
after an administrative proceeding. The Court of Appeals also ruled that the
Missouri statutes did not prohibit the Commission from denying a license without
conducting an investigation, and that the claim that the Commission broke its
promise not to deny a license without first investigating should be raised in a
breach of contract action, not a mandamus petition. The Court of Appeals did not
address the merits; that is, it did not decide whether the Commission acted
arbitrarily or whether its decision was justified or a breach of its promises.
While CQC has asked the Missouri Supreme Court to review the Circuit Court's
decision, its ruling had immediate consequences for two reasons. First, a
Missouri Circuit Court in a separate action (discussed below) voided the
Commission's decision for the independent reason that it was made in violation
of Missouri's open meeting law. Second, after the decision in the open meeting
law case, CQC notified the Commission that it was withdrawing its application.
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. On April 30, 1996, the hearing officer
reversed himself, recused himself, and asked the Commission to appoint another
hearing officer. To date, the Commission has not acted on this request. Hearing
dates have been vacated by stipulation, and, after the Circuit Court's orders
voiding the Commission's decision appeared to make the administrative proceeding
premature, the hearing was postponed indefinitely. The withdrawal of CQC's
application has since rendered the administrative hearing moot.
On March 23, 1995, the Missouri Attorney General filed misdemeanor charges
against CQC and Bruce Becker alleging they knowingly made false statements on
CQC's gaming license application. CQC and Mr. Becker vehemently denied the
charges and launched a vigorous defense. On July 25, 1995, the Circuit Court for
St. Louis County, Missouri, dismissed the charges, ruling that they did not
state an offense, that the Attorney General lacked authority to bring them, and
that they were filed after the statute of limitations had expired. On July 28,
1995, the Attorney General filed an appeal in the Missouri Court of Appeals for
the Eastern District. CQC's and Bruce Becker's motions to dismiss the appeals as
untimely filed were summarily denied on August 14, 1995. On April 16, 1996, in a
2-1 decision, a panel of the Missouri Court of Appeals reversed the Circuit
Court's dismissal. The Missouri Supreme Court has exercised its discretion to
review the case. The case has been briefed and the court is expected to schedule
arguments in the next few months. These charges are not expected to have a
material adverse effect on BGI or CQC.
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, 1995, 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, 1995, 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 Circuit Court heard the motion for summary
judgment on December 19, 1995. In an order issued on April 23, 1996, the Circuit
Court rejected the Commission's arguments and granted CQC's motion, ruling that
the Commission had violated the open meeting law and declaring the Commission's
order to be void. The Commission did not appeal the decision, and the time for
doing so has expired. Therefore, the decision declaring the Commission's order
to be void is final. As a result, notwithstanding the other related actions
discussed above, there no longer exists any denial of licenses by the
Commission.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters
There is no established public trading market for the Company's Common
Stock, all of which is held by BGI. The Company has not declared or paid any
cash dividends on its Common Stock and does not anticipate the payment of cash
dividends in the foreseeable future.
Item 6. Selected Financial Data
Capitol Queen and Casino, Inc. Selected Financial Data
Years Ended June 30,
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Income Statement Data:
Operating revenues .............................. $ -- $ --
Operating loss .................................. (4,996) (1,388)
Net loss before extraordinary item .............. (7,785) (5,386)
Extraordinary item-loss early retirement
of debt (1) ................................. -- (4,089)
Net loss ........................................ (7,785) (9,475)
Net loss per share before extraordinary item .... (77,850) (53,860)
Extraordinary item-loss on early
retirement of debt .......................... -- (40,890)
Net loss per share (2) .......................... (77,850) (94,750)
Other Data:
Interest expenses, net of amounts capitalized ... 2,789 4,608
Capital expenditures ............................ -- 1,724
Balances Sheet Data:
Unrestricted cash and cash equivalents .......... $ -- $ 45
Cash in restricted escrow account ............... 30 30
Total assets .................................... 8,449 12,986
Long-term obligations (3) ....................... -- --
Stockholders' equity (deficit) (4) .............. (14,058) (6,273)
</TABLE>
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Income Statement Data:
Operating revenues .............................. $ -- $ --
Operating loss .................................. (7,094) --
Net loss before extraordinary item .............. (9,530) --
Extraordinary item-loss early retirement
of debt (1) ................................. -- --
Net loss ........................................ (9,530) --
Net loss per share before extraordinary item .... (95,300) --
Extraordinary item-loss on early
retirement of debt .......................... -- --
Net loss per share (2) .......................... (95,300) --
Other Data:
Interest expenses, net of amounts capitalized ... 3,091 --
Capital expenditures ............................ 11,212 --
Balances Sheet Data:
Unrestricted cash and cash equivalents .......... $ 33 $ --
Cash in restricted escrow account ............... 24,929 --
Total assets .................................... 37,412 --
Long-term obligations (3) ....................... -- --
Stockholders' equity (deficit) (4) .............. 3,202 --
</TABLE>
- ----------
(1) During 1995, CQC retired $20,000 principal amount of the CQC notes at 101%
of such principal amount plus accrued and unpaid interest. CQC incurred an
extraordinary loss of approximately $4,089, reflecting the premium paid to
retire the debt of $200 and the write-off of related, unamortized debt
issue costs and original issue discount in the aggregate of $3,889. No tax
benefit was available or recognized.
(2) The number of shares used in the computation of loss per share of common
stock was 100 for each of the four years in the period ended June 30,
1996. Common stock of 1,000 shares were authorized at a $1.00 par value,
but 100 shares were issued and outstanding.
(3) At June 30, 1996, 1995 and 1994, $17,526, $17,118 and $33,164, respectively
of CQC notes (net of unamortized original issue discount of $2,474, $2,882
and $6,836, respectively) was classified as current due to CQC's default of
the Indenture governing the CQC Notes.
(4) The ability of CQC to pay dividends is restricted under the
CQC Indenture.
Arizona Charlie's, Inc. Selected Financial Data
Years Ended June 30,
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Income Statement Data:
Operating revenues .................... $ 63,301 $ 57,082 $ 46,447
Operating income ...................... 2,199 1,058 5,105
Net income (loss) ..................... (4,559) (4,936) 1,134
Net income (loss) per share (1) ....... (4,559) (4,936) 1,134
Other Data:
Interest expense, net of amounts
capitalized .......................... 7,095 6,574 4,763
Capital expenditures .................. 190 24,253 11,379
Distributions to stockholders (2) ..... -- -- 5,317
Balance Sheet Data:
Unrestricted cash and cash
equivalents .......................... $ 4,591 $ 5,404 $ 4,014
Cash in escrow account restricted
for construction ..................... 10 10 3,613
Total assets .......................... 62,357 65,273 67,915
Long-term obligations (3)
Long-term debt (4) (5) ............ 5,000 60,000 60,000
Capitalized lease obligation ...... 22 4 1
Stockholder's equity (deficit) ........ (9,501) (4,942) (6)
</TABLE>
<TABLE>
<CAPTION>
1993 1992
------- -------
<S> <C> <C>
Income Statement Data:
Operating revenues ............................... $45,880 $42,278
Operating income ................................. 6,032 4,262
Net income (loss) ................................ 4,585 2,551
Net income (loss) per share (1) .................. 4,585 2,551
Other Data:
Interest expense, net of amounts
capitalized ..................................... 1,440 1,877
Capital expenditures ............................. 1,067 924
Distributions to stockholders (2) ................ 2,140 2,400
Balance Sheet Data:
Unrestricted cash and cash equivalents ........... $ 3,528 $ 3,225
Cash in escrow account restricted for
construction .................................... -- --
Total assets ..................................... 27,184 26,896
Long-term obligations (3)
Long-term debt (4) (5) .......................... -- 16,976
Capitalized lease obligation .................... 778 1,089
Stockholder's equity (deficit) ................... 5,953 3,508
</TABLE>
- ----------
(1) The number of shares used in the computation of earnings (loss) per share
of common stock was 1,000 for each of the five years in the period ended
June 30, 1996. A total of 2,500 shares of common stock are authorized at
no par value, 1,000 shares of which are issued and outstanding.
(2) Because AC elected to be treated as an S corporation for the most of 1994,
and all of fiscal 1993 and 1992, a substantial portion of its income in
past years was distributed to its stockholders. In December 1993, AC
distributed $5,000 of previously taxed retained earnings to its
stockholders. This amount was loaned back to AC in exchange for
stockholder notes. Effective January 1, 1994, AC terminated its S
corporation tax status. The ability of AC to pay dividends is restricted
by the Indenture governing its 12% First Mortgage Notes due November 15,
2000 of (the "AC Notes"). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations_Arizona Charlie's,
Inc._General
(3) Includes subordinated notes to stockholders, non-current obligations under
capital leases, and excludes current maturities. At June 30, 1993,
approximately $16,900 of bank debt was classified as current, as it was
due and payable. See Management's Discussion and Analysis of Financial
Condition and Results of Operations_Arizona Charlie's, Inc._General and
"Notes to Financial Statements__Arizona Charlie's, Inc._ Long Term Debt."
(4) At June 30, 1996, $55,000 of AC Notes was classified as current due to
certain technical defaults of the AC Indenture. See Notes 2 and 6 of AC's
Notes to Financial Statements.
(5) At June 30, 1993, approximately $16,900 of bank debt of AC was classified
as current as it was due and payable. Such amount was paid off from a
portion of the proceeds from the sale of the AC Notes in November, 1993.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Analysis of Development Stage Activities for the period January 20,
1993 (the date of inception) through June 30, 1996
CQC was organized on January 20, 1993 for the purpose of developing,
constructing, owning and operating the Capitol Queen. Since inception, CQC's
activities have been limited to, in addition to the financing transaction
described below, the acquisition of a land site in Jefferson City, Missouri and
the rights to develop the Capitol Queen thereon, the preparation and prosecution
of applications to become licensed to own and operate the Capitol Queen in
Missouri and for all other required permits and approvals, the preparation of
preliminary design plans, drawings and budgets for the project, construction of
a riverboat vessel and other pre-opening development activities. As of August
1994, CQC suspended the development of the Capitol Queen, other than completion
of the riverboat. As a result of a September 28, 1994 ruling by the Missouri
Gaming Commission denying CQC's license application, CQC subsequently terminated
the Capitol Queen project and is currently marketing its assets for sale. Such
assets include its riverboat and the Jefferson City land site.
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 with funds remaining in the project escrow account and the net proceeds
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 at a total cost of $20,200,000.
At June 30, 1996, approximately $30,000 remained in the 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 payments of $1,200,000 on each of
November 15, 1995 and May 15, 1996. AC does not have available funds to advance
on behalf of CQC. The management of AC and CQC are currently in 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. "Aerie" 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 preliminarily
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 to any party when the expiration date of December 31,
1995 passed. CQC is actively marketing its riverboat assets to prospective
buyers.
During the period from inception through June 30, 1996, CQC had total
operating expenses of $13,478,000 consisting primarily of an abandonment loss of
$10,426,000 arising from the denial of the company's license application and
management's subsequent decision to terminate the Capitol Queen project and sell
its assets. At June 30, 1996, CQC wrote-down the cost of the riverboat assets to
their net realizable value based on estimates provided by a shipbuilder and
marine brokers which resulted in an abandonment loss of $4,392,000 in the
current fiscal year. Also included in operating expenses are amortization
expense of $1,341,000 associated with debt issue costs and $1,711,000 of project
development costs. For the same period, CQC incurred $11,171,000 of interest
cost, of which $683,000 was capitalized by CQC as required by generally accepted
accounting principles, as part of the riverboat construction. CQC earned
interest income of $1,265,000 for the period from inception to June 30, 1996.
Liquidity and Capital Resources
For the period from inception through June 30, 1996, net cash used by
development stage activities was $5,246,000. Cash flows used by investing
activities for the period was $13,920,000 which included $12,936,000 of capital
expenditures related to the construction of the riverboat and acquisition of the
Jefferson City land site. At August 31, 1996, CQC had expended a total of
approximately $21,400,000 on the development and construction of the Capitol
Queen.
CQC's obligations consist of the $20,000,000 in principal amount of the
outstanding CQC Notes. 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 accrued interest
thereon. Moreover, CQC because it has not yet effected the sale of its assets,
is in default of the CQC Indenture. 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. CQC
is not expected to engage in any activities after the sale of its assets,
although it may continue to pursue legal relief with respect to the injury
caused by the ruling of Missouri Gaming Commission. The cost of pursuing such
relief is expected to be borne by BGI.
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 departmental operating losses, even in periods where
individual restaurants or bars report operating profits. 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. See "Notes to Financial Statements - Arizona Charlie's, Inc. -
Summary of Significant Accounting Policies." The estimated costs of providing
such promotional allowances have been classified as gaming expenses through
interdepartmental allocations as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Hotel ......... $ 261 $ 164 $ 119
Food & Beverage 3,824 2,260 2,005
----- ----- -----
$4,085 $2,424 $2,124
====== ====== ======
</TABLE>
On November 18, 1993, AC issued of $55,000,000 in principal amount of 12%
First Mortgage Notes due November 15, 2000 (the "AC Notes"), which resulted in
net proceeds of approximately $51,100,000. A portion of the net proceeds was
used to retire approximately $16,900,000 in bank debt plus accrued interest of
$500,000. The balance of approximately $33,700,000 was initially deposited into
a restricted escrow account and subsequently was used to fund the expansion and
enhancement of Arizona Charlie's (the "Expansion") through the addition of new
casino space, hotel rooms, specialty restaurants and banquet/meeting room
facilities, and the expansion of existing restaurants, entertainment and other
facilities. See "Notes to Financial Statements - Arizona Charlie's, Inc. -
Long-Term Debt." AC commenced construction of the Expansion in January 1994. The
Expansion was completed in February 1995 at an under-budget cost of
approximately $35,632,000.
Concurrent with the private placement of the AC Notes, Capitol Queen &
Casino, Inc. a sister company, issued $40,000,000 in principal amount of 12%
First Mortgage Notes due November 15, 2000, $20,000,000 in principal of which
currently remain outstanding (the "CQC Notes"). The Company has unconditionally
and fully guaranteed the payment of all principal of and interest on the CQC
Notes. CQC currently does not have any means to pay amounts owing on the CQC
Notes. See "Liquidity and Capital Resources. AC, which now operates as a "C"
corporation, was operated as an "S" corporation through December 31, 1993. See
"Notes to Financial Statements - Arizona Charlie's Inc. - Summary of Significant
Accounting Policies - Income Taxes." In anticipation of the termination of S
corporation status, in December 1993, AC distributed to its stockholders an
aggregate of $5,000,000 of retained earnings on which the stockholders had
previously paid federal income taxes. This amount was loaned back to AC in full
in exchange for subordinated stockholder notes in the principal amount of such
distributions, which AC stockholder notes bear interest payable monthly at the
annual rate of 10.0% and mature in January 2001. See "Notes to Financial
Statements - Arizona Charlie's, Inc. - Related Party Transactions."
Results of Operations
Years Ended June 30,
(dollars in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
Gaming ........................ $ 52,831 $ 47,466 $ 38,955
Food/beverage ................. 13,204 10,647 8,459
Hotel ......................... 3,208 2,614 1,219
Bowling ....................... -- -- 251
Gift Shop ..................... 590 577 535
Management fees from Affiliates -- -- 281
Other (1) ..................... 1,145 912 399
----- --- ---
Gross revenues ................... 70,978 62,216 50,099
Less, promotional allowances (2) . (7,677) (5,134) (3,652)
------ ------ ------
Net revenues .................. 63,301 57,082 46,447
Total operating expenses ...... 61,102 56,024 41,342
------ ------ ------
Total operating income ........ $ 2,199 $ 1,058 $ 5,105
======== ======== ========
</TABLE>
- -----------
(1) Includes primarily revenues from entertainment cover charges, PBX
operations (hotel switchboard and room telephone system) and commissions on
automated teller machines located in the casino.
(2) Amounts represent the retail value of rooms, food, beverage and other
promotional allowances provided to customers without charge.
Comparison of fiscal years ended June 30, 1996, 1995 and 1994. Despite
increased revenues for fiscal 1996 and fiscal 1995, results from operations for
both periods were lower than the prior year as the result of increased operating
expenses, primarily due to additional slot promotion expenses, payments under
its guarantee of the CQC Notes, management fees, and the addition of staff
personnel, equipment and related operating expenses transferred to AC from BGI.
The increased revenues for fiscal 1996 reflect a full year of operations with
expanded casino-hotel facilities, while the increased revenues for fiscal 1995
reflect a partial year of operations with the expanded facilities. The Expansion
added new gaming machines and table games, an expanded race and sports book, a
new hotel tower, a remodeled coffee shop, two new specialty restaurants and a
new delicatessen, an expanded buffet room, a remodeled floor-level entertainment
lounge and new second-floor showroom/banquet facility.
AC's net revenues increased to $63,301,000 for fiscal 1996, from
$57,082,000 for fiscal 1995 and $46,447,000 for fiscal 1994. Operating expenses,
including depreciation and amortization, increased to $61,102,000 for fiscal
1996, from $56,024,000 and $41,342,000 for the two preceding fiscal years. As a
result, operating income for fiscal 1996 was $2,199,000, with a corresponding
net operating margin of 3.5%. Operating income for fiscal 1995 and fiscal 1994
was $1,058,000 and $5,105,000, respectively, resulting in operating margins for
such years of 1.9% and 11.0%. The increase in operating expenses and resulting
decline in operating margin for fiscal 1996 resulted principally from increased
gaming department expense, amounting to $3,253,000, costs attributable to CQC in
the amount of $601,000, and the addition of staff personnel, equipment and
related operating expenses transferred to AC. The increase in operating expenses
and resulting decline in operating margin for fiscal 1995 resulted principally
from costs attributable to the CQC Notes guarantee ($1,592,000 including the
write-off of advances which were used by CQC to pay interest on the CQC Notes),
and increased salaries and wages reflecting higher department staffing
requirements, increased advertising and promotional cost and the additional
expense of a management fee payable to BGI. Other increased expenses for fiscal
1995 include additional depreciation and amortization expense resulting from the
addition of the new assets created in the Expansion.
For fiscal 1996, AC had total gaming revenues of $52,831,000, as compared
to $47,466,000 and $38,955,000 for fiscal 1995 and 1994, respectively. The
increases (11.3% and 21.8% for fiscal 1996 and 1995, respectively) are primarily
attributable to increases in gaming machine revenues of 11.1% and 21.0% for such
years to $44,612,000 and $40,140,000 from $33,173,000 for fiscal 1994. The
increase for fiscal 1996 is primarily the result of increased levels of play by
patrons in response to additional slot promotional events. The increase for
fiscal 1995 reflects the additional revenue generated from 665 gaming machines
added during that year. Revenues from table games were $4,872,000, $4,829,000
and $4,070,000 for fiscal 1996, 1995 and 1994, respectively. The table games
revenue increase for fiscal 1995 reflect an increase of five table games in that
year. Other gaming revenues, consisting of revenues from bingo, poker and the
race and sports book, increased by 34.0% and 45.8% for fiscal 1996 and 1995
respectively, to $3,346,000 for fiscal 1996 and $2,497,000 for fiscal 1995 from
$1,713,000 for fiscal 1994. The increases were largely a result of the added
pari-mutual race facilities and increased sports book revenues from the expanded
race and sports book facility. For fiscal 1996, 1995 and 1994, 84.4%, 84.6% and
85.2%, respectively, of gaming revenues were attributable to gaming machine
play, compared to 9.2%, 10.2% and 10.4%, respectively, attributable to table
games and 6.3%, 5.2% and 4.4%, respectively, attributable to other gaming
revenues.
Food and beverage revenues increased 24.0% to $13,204,000 for fiscal 1996,
after increasing 25.9% to $10,647,000 for fiscal 1995 from $8,459,000 for fiscal
1994. The fiscal 1996 increase is due to increased complimentary sales in the
food and beverage department. Such sales are included in revenues at retail
value and are then deducted as a promotional allowance. Increased complimentary
sales in food and beverage departments are the result of casino promotion and
marketing efforts designed to attract, reward and retain qualified patrons. The
fiscal 1995 increase resulted from the addition of two specialty restaurants, a
delicatessen and a remodeled coffee shop during the second and third quarters of
fiscal 1995
Hotel revenues increased to $3,208,000 for fiscal 1996, from $2,614,000 and
$1,219,000 for fiscal 1995 and 1994, respectively. The 22.7% increase for fiscal
1996 is the result of an increase in average occupancy rate from 84.3% to 86.9%
and an increase in the average room rate from $37.27 to $39.81. The 114.4%
increase for fiscal 1995 is attributable to the opening of 150 new rooms
(including eight suites) in the new hotel tower in September 1994.
With the elimination of the bowling alley in December 1993, AC had no
bowling revenues for fiscal years 1996 and 1995, compared to $251,000 for fiscal
1994. Gift shop revenues increased 2.3% to $590,000 in fiscal 1996 and 7.9% to
$577,000 in fiscal 1995 due primarily to the remodeling and expansion of the
gift shop area, which was reopened in January 1995. Also, other revenues
increased $233,000 or 25.6% during fiscal 1996 and $513,000 or 128.6% during
fiscal 1995 as a result of increases in entertainment cover charge revenues
attributable to the addition of a new showroom facility that opened in December
1994.
Gaming expenses increased by 21.2% to $18,612,000 for fiscal 1996. The
increased expense includes higher slot promotional expense of $638,000; higher
gaming tax and license fees of $406,000; increased salary and wages of $468,000
and the additional expense of a newly created casino marketing department
totaling $479,000. Gaming expenses increased by 31.5% to $15,359,000 for fiscal
1995 from $11,681,000 for fiscal 1994. The higher levels of expense reflect
additional staffing associated with the expansion of gaming facilities. Gaming
expenses represented 35.2%, 32.4% and 30.0% of gaming revenues for fiscal 1996,
1995 and 1994, respectively. Management anticipates that these costs will
stabilize as a percentage of revenue in fiscal 1997 as the expanded facilities
are expected to generate higher customer volumes and efficiencies from the
Expansion are expected to be realized.
Food and beverage expenses increased 9.9% to $12,511,000 for fiscal 1996
from $11,388,000 for fiscal 1995 due to salary and wage increases associated
with increasing the hours of operation at one specialty restaurant and normal
salary and wage increases for food and beverage employees which comprise
approximately 33.0% of AC's total work force. Food and beverage expenses
increased 35.7% to $11,388,000 for fiscal 1995 from $8,389,000 for fiscal 1994
due primarily to the additional staffing requirements for the newly remodeled
coffee shop, new specialty restaurants, new delicatessen, and expanded buffet
room.
Hotel expenses increased 2.6% to $1,413,000 for fiscal 1996 from
$1,377,000 for fiscal 1995 as a result of normal salary and wage increases.
Hotel expenses increased to $1,377,000 for fiscal 1995 from $714,000 for fiscal
1994 due primarily to additional staffing required by the new hotel tower.
However, net contribution by the hotel department (hotel revenues less hotel
operating expenses) improved to $1,795,000 for fiscal 1996 from $1,237,000 for
fiscal 1995 and $505,000 for fiscal 1994.
Other departmental expenses increased by 5.6% to $475,000 for fiscal 1996
from $450,000 for fiscal 1995 due to increased costs of inventory items in the
gift shop, combined with normal salary and wage increases. Other departmental
expenses decreased by 46.7% to $450,000 for fiscal 1995 from $845,000 for fiscal
1994 due primarily to the scale-down and termination of bowling operations.
General and administrative expenses increased by 15.0% to $17,660,000 for
fiscal 1996 from $15,358,000 for fiscal 1995. The increases resulted from
additional staffing in the accounting, payroll, personnel and technical services
departments and the transfer of executive personnel (and related departmental
costs) in March 1995 to the Company from BGI. Other expenses transferred from
BGI to the Company include maintenance and other operating expenses associated
with an airplane and two boats. The airplane was sold in July 1996. Other
general and administrative expenses included payments made on behalf of CQC in
the amount of $601,000 for fiscal 1996 compared to $1,592,000 for fiscal 1995.
The Company accrued management fees payable to BGI of $1,396,000, $3,099,000 and
$188,000 for fiscal 1996, 1995 and 1994, respectively. Due to a 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 the Company in the future. Accordingly, in late March 1995, BGI
transferred approximately 40 employees involved in accounting and administrative
functions from BGI to AC. In connection with this transfer, in October 1995, the
Company temporarily reduced the amount of the Company's management fee to 1.0%
of the Company's gross revenues (previously 5.0% of gross revenues) based on the
reduction in services it will receive from BGI in the future. See Note 9 of the
Company's Notes to Financial Statements.
General and administrative expenses increased by 10.7% to $15,358,000 for
fiscal 1995 from $13,867,000 for fiscal 1994 due to additional staffing in the
cage, security, data processing, entertainment, porter, engineering, accounting
and transportation departments. Personnel in these departments were added to
support the expanded facility. As a percentage of net revenues, general and
administrative expenses were 27.9%, 26.9% and 29.9% for fiscal 1996, 1995 and
1994 respectively.
Advertising and promotion expenses were $4,726,000 for fiscal 1996, as
compared to $3,837,000 for fiscal 1995. The increase of $889,000, or 23.1% is
due to additional television advertising of $466,000, new casino related
promotions of $166,000, and salary and wage increases of $116,000. The
additional advertising and promotions were conducted in an effort to increase
casino patronage and compete with other "locals" casinos opened in western Las
Vegas in fiscal 1995, including Texas Station and Santa Fe Casino. Advertising
and promotion expenses were $3,837,000 for fiscal 1995, as compared to
$3,093,000 for fiscal 1994. The increase of $744,000, or 24.1%, reflects
increased newspaper and television advertising undertaken to gain market
recognition for the newly expanded facility. Management anticipates that it will
maintain advertising expenditures at the 1996 level in order to continue
attracting customers and to promote the entertainment events in its expanded
facilities.
Depreciation and amortization expense increased by 3.5% to $3,491,000 for
fiscal 1996 from $3,373,000 for fiscal 1995. This increase is attributable to
additional depreciation expense associated with the newer expansion assets.
Depreciation and amortization expense increased by 51.8% to $3,373,000 for
fiscal 1995 from $2,222,000 for fiscal 1994. The increase is due primarily to
additional depreciation expenses associated with the new expansion assets placed
in service.
AC had other expenses (net of other income) of $6,758,000 for fiscal 1996
compared to $5,994,000 and $3,971,000 for fiscal years 1995 and 1994. The fiscal
1996 increase of $764,000 is due to a reduction of capitalized interest in the
amount of $676,000 and a decrease of interest income of $294,000 partially
offset by a decrease of interest expense in the amount of $155,000 and a
decrease in other income of $51,000. For fiscal 1995, the increased expense of
$2,023,000 is attributable to an increase in interest expense from $5,223,000 to
$7,250,000, due primarily to the AC Notes, which were outstanding for all of the
fiscal 1995 but less than eight months for fiscal 1994.
Income Taxes
As a result of the termination of its election to be treated as an S
corporation, AC is liable (as part of the BGI consolidated group) 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. See "Notes to Financial Statements - Arizona Charlie's, Inc. -
Summary of Significant Accounting Policies - Income Taxes; - Related Party
Transactions." Since terminating its S corporation status, AC generated a net
operating loss for income tax purposes of approximately $9,174,000. Due to low
operating margins and high interest cost and depreciation costs, management does
not anticipate that AC will generate taxable income in the foreseeable future.
Liquidity and Capital Resources
<TABLE>
<CAPTION>
As of or for the years ended June 30,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash and cash equivalents ........... $ 4,591 $ 5,404 $ 4,014
Working capital (deficit) (1) ....... (58,530) 2,920 2,511
Cash provided by operating activities 1,639 2,772 5,876
Cash used for investing activities .. (2,240) (3,401) (37,180)
Cash provided by (used for)
financing activities .............. (212) 2,019 31,790
</TABLE>
- ----------
(1) At June 30, 1996, the AC Notes are reflected as a current liability in the
amount of $55,000 due to default under Covenants.
For fiscal 1996, cash provided by operating activities decreased to
$1,639,000 from $2,772,000 for fiscal 1995. The decrease is attributable to a
reduction in operating income, prior to consideration of management fees and
other non-cash items, and changes in operating assets and operating liabilities.
For fiscal, 1995, cash provided by operating activities decreased to $2,772,000
from $5,876,000 for fiscal 1994. The decrease is attributable to a decrease in
net income of $6,070,000 for fiscal 1995 which was partially offset by (i) an
increase in operating assets of $926,000 for fiscal 1995 compared to a decrease
in operating assets of $874,000 for fiscal 1994, reflecting primarily increases
in pre-paid gaming taxes and other receivables for fiscal 1995, (ii) a net
increase in operating liabilities of $3,671,000 for fiscal 1995 compared to an
increase of $1,669,000 for fiscal 1994, due to the accrual of management fees
payable to BGI and interest on the AC Notes, and (iii) an increase in
depreciation and amortization expense of $1,151,000 for fiscal 1995.
Cash flows used in investing activities for fiscal 1996 were $2,240,000
compared to $3,401,000 for fiscal 1995. The decrease is due to (i) a reduction
in cash advances to BGI resulting in decreased receivables from BGI of
$4,154,000, (ii) a reduction in notes issued to CQC of $1,200,000, and (iii) a
reduction in capital expenditures of $24,063,000 (reflecting the completion of
the majority of the construction of the expanded facility in fiscal 1995),
partially offset by a $26,102,000 net reduction in restricted cash which was
utilized for the expansion in fiscal 1995). Cash flows from investing and
financing activities for fiscal 1995 were significantly impacted by the November
1993 issuance of the AC Notes. In fiscal 1994, approximately $26,112,000 in
proceeds remained in a restricted escrow account to fund Expansion construction.
Pending such use, amounts held in the restricted escrow account were invested in
interest bearing securities. See "Notes to Financial Statements - Arizona
Charlie's, Inc. - Long-Term Debt." In fiscal 1995, cash flows used in investing
activities for fiscal 1995 includes $24,253,000 of capital expenditures,
virtually all of which relates to the Expansion.
Cash flows provided by financing activities for fiscal 1996 decreased to
($212,000) from $2,019,000 for fiscal 1995. The decrease is due to a reduction
of proceeds from borrowing, marginally offset by an decrease in principal
payments on notes and an increase in payments under capital lease obligations.
Financing activities for fiscal 1995 reflect proceeds from loans from related
parties in the amount of $2,250,000, and principal payments of notes.
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 the Company 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.
The AC Notes are reflected as a current liability at June 30, 1995 as a
result of the above defaults. AC's long-term obligations, approximately
$5,022,000 at June 30, 1996, 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 and the stockholder notes, respectively.
In addition, AC is expected to have annual capital expenditure requirements of
approximately $600,000.
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. 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 accrued interest thereon. See "Business - Capitol
Queen & Casino, Inc." 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 accrued 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 accrued 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 and the CQC Notes are accelerated,
substantial doubt exists about AC's ability to continue as a going concern. See
"Notes to Financial Statements - Arizona Charlie's, Inc. - CQC Gaming License,
Default Under Indebtedness Management's Plans, and 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.
Competitive Environment
Various forms of casino-style gaming have been legalized in numerous new
jurisdictions within the past few years, including casino riverboats,
limited-stakes frontier town gambling, full-scale casinos on Indian
reservations, card rooms and video lottery terminals, which resemble AC's gaming
machines. In addition, several major casino-hotels were completed and opened in
Las Vegas in the past year, continuing the transformation of Las Vegas into an
entertainment destination offering much more than gaming. Management expects the
legalization of gaming to continue to spread and that Las Vegas will continue to
experience at least limited expansion. See "Item 1. Business - Market and
Competition."
To date, casino revenues at Arizona Charlie's (and for Las Vegas
generally) have continued to grow despite the spread of legalized gaming.
Moreover, management believes that AC has and will continue to benefit from the
expansion of the Las Vegas market, which has resulted in continued growth in the
residential population, from which AC generates the majority of its revenues.
There can be no assurance, however, that the spread of legalized gaming, or the
construction of new casino-hotels in Las Vegas, will not have an adverse impact
on future revenues.
Inflation
AC believes that its results of operations are not dependent upon, or
materially affected by, the rate of inflation.
Item 8. Financial Statements and Supplementary Data
The Index to Financial Statements and Schedules appears at page F-1
hereof, the Report of Registrant's Independent Auditors appears at page F-2
hereof, and the Financial Statements and Notes to Financial Statements of the
Registrant and AC appear at page F-3 through F-17 hereof and page F-18 through
F-36 hereof, respectively.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Not applicable.
PART III
Item 10. Director and Executive Officers of the Registrant
The following table sets forth certain information with respect to the
directors and executive officers of the Company and each of its subsidiaries.
Bruce F. Becker has served as President, Chief Executive Officer,
Treasurer, Sole Director of the Company since its inception. He has served each
of the Nevada subsidiaries as President and Chief Executive Officer since July
1989. Mr. Becker has also served as President, Chief Executive Officer, director
and Chairman of CQC since its inception in January 1993 and President, Chief
Executive Officer and Chairman of the Board of Directors of SC and BGG since
their inceptions in 1984, 1980 and 1986, respectively. Mr. Becker also sits on
the Board of Directors of the Nevada Resort Owners Association.
Barry W. Becker has served as Secretary of the Company since its inception.
He has served each Nevada subsidiary as a Director since their respective
inceptions and as Secretary since July 1989. Mr. Becker is also the Sales
Manager for Becker Enterprises, a Becker family-owned company which purchases,
sells and leases residential and commercial property. He is a past president of
the Southern Nevada Builders Association and serves the community as a member on
the Board of Directors of the Rotary Club, Las Vegas Chamber of Commerce, Boys
Club of Clark County and the Boy Scouts of America. Mr. Becker was appointed by
the then Governor of the State of Nevada to the State Environment Commission and
was an Environmental Commissions Representative on the State Multiple Use
Advisory Land Committee.
Item 11. Executive Compensation
The Company was incorporated on January 20, 1993. No compensation was paid
by the Company for services rendered to the Company during the fiscal years
ended June 30, 1994, 1995 or 1996.
Compensation of Directors
The directors of the Company do not receive any compensation for serving in
such capacities.
<TABLE>
<CAPTION>
Name Age Position(s) Held
---- --- ----------------
<S> <C> <C>
Bruce F. Becker 45 President, Chief Executive
Officer, Treasurer and Sole
Director
Barry W. Becker 51 Secretary
</TABLE>
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The Company is a wholly owned subsidiary of Becker Gaming, Inc.
Accordingly, there are no sole beneficial owners of the company's common stock.
Item 13. Certain Relationships and Related Transactions
AC has unconditionally and fully guaranteed the payment of principal of
and interest on the CQC Notes until such time as CQC is licensed to open and
operate its riverboat casino in Jefferson City, Missouri. Absent the elimination
of such requirements upon the consent of the holders of a majority in principal
amount of the outstanding CQC Notes, the holders of 25% in principal amount of
the outstanding CQC Notes will be entitled to accelerate the payment of the CQC
Notes. If payment of the CQC Notes were to be accelerated, CQC would be required
to pay the principal of and interest on the CQC Notes out of its cash funds and
any funds it may realize from the sale of its assets, including but not limited
to, the riverboat, the land site and, possibly, its development rights in
Jefferson City, the value of which likely will be adversely affected by the
acceleration of the CQC Notes. No assurance can be given that such funds will be
sufficient to repay the CQC Notes and accrued interest thereon. To the extent
not sufficient, AC will be obligated under its guarantee of the CQC Notes to
fund the shortfall, which may require it to borrow funds or sell assets, to the
extent permitted under the AC Indenture. See "Item 1. Business - Capitol Queen &
Casino, Inc." Similarly, SC has fully and unconditionally guaranteed the payment
of principal of and interest on the AC Notes until such time as the Expansion is
completed and AC has achieved a specified fixed charge coverage ratio.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K
The following are filed as part of this Report:
(a)1. Financial Statements
An Index to Financial Statements appears at page F-1
hereof
(b)2. Financial Statement Schedules
An Index to Financial Statement Schedules appears at
page F-1 hereof
(a)3. Exhibits
2.1 Agreement of Reorganization dated November 16, 1993,
by and among Becker Gaming, Inc. ("BGI"), Arizona
Charlie's, Inc. ("Arizona Charlie's"), Sunset
Coin, Inc. ("Sunset Coin"), Becker Gaming Group, Inc.
("Becker Gaming Group"), Capitol Queen & Casino, Inc.
("Capitol Queen"), Charlie's Land Company ("CLC") ,
and each of Ernest A. Becker, III, Ernest A. Becker,
IV, Barry W. Becker and Bruce F. Becker
(collectively, the "Beckers").*
3.1 Articles of Incorporation of Capitol Queen.*
3.2 First Amended By-Laws of Capitol Queen.*
3.3 Articles of Incorporation of Arizona Charlie's.*
3.4 Amended and Restated By-Laws of Arizona Charlie's.*
10.1 Purchase Agreement dated November 15, 1993 among BGI, Arizona
Charlie's, Capitol Queen, Sunset Coin and the purchasers named
therein (the "Purchasers).*
10.2 Indenture dated November 15, 1993 among Capitol Queen, as issuer,
Arizona Charlie's, as guarantor, and IBJ Schroder Bank & Trust
Company ("IBJ"), as trustee.*
10.3 Deed of Trust, Assignment of Leases, Security Agreement and Fixture
Filing dated November 15, 1993 by Capitol Queen, as grantor, to
Charles W. Riley, as trustee, for the benefit of IBJ , as collateral
agent.*
10.4 Vessel Construction Agreement dated October 23, 1993
between Leevac Shipyards, Inc. and Capitol Queen, as
amended by Amendment No. 1 to Vessel Construction
Agreement dated November 15 and 17, 1993.*
10.5 Form of First Preferred Ship Mortgage Securing an
Indenture between Capitol Queen and IBJ.*
10.6 Security Agreement dated November 15, 1993 between
Capitol Queen and IBJ, as collateral agent.*
10.7 Stock Pledge Agreement dated November 15, 1993 between Capitol Queen
and IBJ, as collateral agent.*
10.8 Collateral Agency Agreement dated November 15, 1993 among Capitol
Queen and IBJ, as trustee and collateral agent.*
10.9 Disbursement and Escrow Agreement dated November 15, 1993 among
Capitol Queen and IBJ, as escrow agent, trustee and collateral
agent.*
10.10 Registration Rights Agreement dated November 15, 1993
among Capitol Queen, Arizona Charlie's and the
Purchasers.*
10.11 Form of Management Agreement to be entered into between BGI and each
of Arizona Charlie's, Capitol Queen, Sunset Coin and Becker Gaming
Group. Included at Exhibit I to Exhibit 2-1 hereof.*
10.12 Form of Tax Allocation Agreement to be entered into
between BGI and each of Arizona Charlie's, Sunset
Coin, Becker Gaming Group and Capitol Queen. Included
at Exhibit J to Exhibit 2-1 hereof.*
10.13 Letter Agreement dated September 10, 1993 among BGI, Arizona
Charlie's, Capitol Queen and Ladenburg, Thalmann & Co., Inc., as
placement agent.*
10.14 Land Purchase Option Contract dated January 4, 1993
between Linda Ann and Harvey L. McCray and Vernon M.
and Joyce G. Burkhalter, as seller, and R.Q.
Enterprises, as buyer; and Wire Transfer Order and
Closing Document dated July 26, 1993 between Arizona
Charlie's and First Interstate Bank of Nevada.*
10.15 Letter of Understanding dated January 26, 1993
between Jefftel, Inc. and JCR Hotel, Inc. and River
Queen Enterprises, Inc. and Capitol Queen.*
10.16 Purchase Agreement dated September 20, 1993 among BGI
and Cathryn Simmons, Public Issue Management, Inc.,
Byron Neal Fox and Cynthia L. Pegner, Richard Moore,
Byron Neal Fox, P.C., David Chernoff, Oscar B.
Goodman, Eckley M. Keach, Ronald E. Partee and Carol
Partee, and Fox & Partee.*
10.17 Riverfront Development Agreement dated as of
September 1, 1993 between Capitol Queen, the Company
and Jefferson City, Missouri.*
10.18 First Supplemental Indenture dated January 1, 1995 among Capitol
Queen, as issurer, Arizona Charlie's, as guarantor, and IBJ, as
trustee.
10.19 Assets Purchase agreement dated April 10, 1995 between Aerie
Riverboat Casino of Missouri, Inc., as buyer, and Capitol Queen, as
seller.
10.20 Letter agreement dated December 5, 1994 among BGI
and Cathryn Simmons, Public Issue Management, Inc.,
Byron Neal Fox and Cynthia L. Pegner, Richard Moore,
Byron Neal Fox, P.C., David Chernoff, Oscar B.
Goodman, Eckley M. Keach, Ronald E. Partee and Carol
Partee, and Fox & Partee.*
- -----------
* All Exhibits are incorporated by reference to the Company's Registration
Statement on Form S-4 (33-75806) declared effective by the Securities and
Exchange Commission on May 20, 1994.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
CAPITOL QUEEN & CASINO, INC.
Dated: September 27, 1996 By: /s/ Bruce F. Becker
--------------------------
Bruce F. Becker, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities indicated on the 27th day of September, 1996.
Signature Title
--------- -----
/s/ Bruce F. Becker
- -------------------
Bruce F. Becker President, Chief Executive Officer
(Principal Executive Officer) and Sole
Director
/s/ Jerry Griffis
- ----------------- Controller (Principal Financial and
Jerry Griffis Accounting Officer)
Supplemental Information to be Furnished With Reports Filed
Pursuant to Section 15(d) of the Act by Registrants Which Have
Not Registered Securities Pursuant to Section 12 of the Act
The Company has not and does not intend to send to its security holders
any annual report with respect to the Registrant's most recent fiscal year or
any proxy statement, form of proxy or other proxy soliciting material with
respect to a meeting of security holders.
CAPITOL QUEEN & CASINO, INC.
(A wholly owned subsidiary of
Becker Gaming, Inc.)
FORM 10-Q
INDEX
PART I, FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
CAPITOL QUEEN & CASINO, INC
Balance Sheets as of March 31, 1996 and June 30, 1995 ........
Statements of Loss Incurred During the Development Stage for the
Three-Month Periods Ended March 31, 1996 and 1995 and for the
Nine-Month Periods Ended March 31, 1996 and 1995 and for the
period from January 20, 1993 (the date of inception) through
March 31, 1996 .................................................
Statements of Cash Flows for the Nine-Month Periods Ended
March 31, 1996 and 1995 and for the period from January 20,
1993 (the date of inception) through March 31, 1996 ............
Notes to Financial Statements ..................................
ARIZONA CHARLIE'S, INC
Balance Sheets as of March 31, 1996and June 30, 1995 ..........
Statements of Income and Retained Earnings (Deficit) for the
Three-Month Periods Ended March 31, 1996 and 1995
and for Nine-Month Periods Ended March 31, 1996 and 1995 .......
Statements of Cash Flows for the Nine-Month Periods Ended
March 31, 1996 and 1995 ........................................
Notes to Financial Statements ..................................
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Capitol Queen & Casino, Inc. ...................................
Arizona Charlie's, Inc. ........................................
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .....................................
Item 6. Exhibits and Reports on Form 8-K ......................
SIGNATURES .....................................................
REPORT OF INDEPENDENT ACCOUNTANTS
----------
To the Board of Directors
Capitol Queen & Casino, Inc.
We have audited the financial statements and the financial statement schedule of
Capitol Queen & Casino, Inc. (a development stage company and a wholly owned
subsidiary of Becker Gaming, Inc.) listed in Item 14(a) of this Form 10-K. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Capitol Queen & Casino, Inc. as
of June 30, 1996 and 1995, and its loss incurred during the development stage
and its cash flows for each of the three years in the period ended June 30,
1996, and for the period from January 20, 1993 (the date of inception) through
June 30, 1996, in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
The accompanying financial statements have been prepared assuming that Capitol
Queen & Casino, Inc. will continue as a going concern. As more fully described
in Note 2, the Company is in default of debt covenants, resulting in
classification of such debt as currently payable. The Company does not have
sufficient resources to repay its indebtedness and management's plans are also
described in Note 2. These matters raise substantial doubt about the Company's
ability to continue as a going concern. The final outcome of these matters is
not presently determinable and the June 30, 1996 financial statements of the
Company do not include any adjustment that might result from the outcome of this
uncertainty.
Las Vegas, Nevada
August 9, 1996
================================================================================
CAPITOL QUEEN & CASINO, INC.
(A Development Stage Company And A Wholly Owned
Subsidiary Of Becker Gaming, Inc.)
BALANCE SHEETS
As Of June 30, 1996 And 1995
(Dollars In Thousands)
================================================================================
ASSETS
1996 1995
------- -------
Current assets:
Cash and cash equivalents ....................... $ -- $ 45
Restricted cash, in escrow account .............. 30 30
------- -------
Total current assets ......................... 30 75
------- -------
Other assets:
Assets held for sale ............................. 7,754 12,146
Financing costs, net of accumulated
amortization of $312 (1996) and
and $212 (1995), respectively .................. 605 705
Deposits and other assets ........................ 60 60
------- -------
Total other assets ........................... 8,419 12,911
------- -------
Total assets ................................ $ 8,449 $12,986
======= =======
LIABILITIES & STOCKHOLDER'S EQUITY(DEFICIT)
1996 1995
-------- --------
Current liabilities:
Accounts payable ..................................... $ -- $ 142
Accrued interest ..................................... 2,775 395
Advances from related parties ........................ 1,006 404
Notes payable to related parties ..................... 1,200 1,200
Long-term debt classified as current due to
default under covenants, net of unamortized
original issue discount of $2,474 (1996)
and $2,882 (1995) ................................ 17,526 17,118
-------- --------
Total current liabilities .................... 22,507 19,259
-------- --------
Total liabilities ............................ 22,507 19,259
-------- --------
Commitments and contingencies
Stockholder's equity (deficit):
Common stock, $1.00 par value, 1,000 shares
authorized, 100 shares issued and outstanding ..... -- --
Additional paid-in capital ......................... 12,732 12,732
Deficit accumulated during development stage ....... (26,790) (19,005)
-------- --------
Total stockholder's equity (deficit) ......... (14,058) (6,273)
-------- --------
Total liabilities and stockholder's
equity(deficit) .............................. $ 8,449 $ 12,986
======== ========
The accompanying notes are an integral part of these financial statements.
================================================================================
CAPITOL QUEEN & CASINO, INC.
(A Development Stage Company And A Wholly Owned Subsidiary
Of Becker Gaming, Inc.)
STATEMENTS OF LOSS INCURRED DURING THE DEVELOPMENT STAGE
(Dollars In Thousands)
================================================================================
For The Period
January 20, 1993
(The Date Of
Inception)
Through
Year Ended June 30, June 30,
1996 1995 1994 1996
-------- -------- -------- --------
Revenues ....................... $ -- $ -- $ -- $ --
Operating expenses:
Amortization of financing
and other costs .............. 100 202 1,039 1,341
Abandonment losses and
write-downs of assets held
for sale ...................... 4,392 -- 6,034 10,426
Development costs ............. 504 1,186 21 1,711
-------- -------- -------- --------
Total operating expenses .. 4,996 1,388 7,094 13,478
-------- -------- -------- --------
Operating loss ................. (4,996) (1,388) (7,094) (13,478)
Other income (expenses):
Interest income ............... -- 610 655 1,265
Interest expense .............. (2,789) (4,608) (3,774) (11,171)
Interest capitalized .......... -- -- 683 683
-------- -------- -------- --------
Total other expenses ........... (2,789) (3,998) (2,436) (9,223)
-------- -------- -------- --------
Net loss before
extraordinary item ............ (7,785) (5,386) (9,530) (22,701)
Extraordinary item:
Loss on early retirement
of debt (no income tax
benefit available) ........... -- (4,089) -- (4,089)
-------- -------- -------- --------
Net loss ....................... $ (7,785) $ (9,475) $ (9,530) $(26,790)
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
================================================================================
CAPITOL QUEEN & CASINO, INC.
(A Development Stage Company And A Wholly Owned
Subsidiary Of Becker Gaming, Inc.)
STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
For The Period From January 20, 1993
(The Date Of Inception) Through June 30, 1996
And For The Years Ended June 30, 1996, 1995 And 1994
(Dollars In Thousands)
-------------
================================================================================
Common Stock
--------------------------------
Shares Amount Subscribed
----------- ----------- -----------
Balances, January 20,
1993 (the date of inception) ... -- $- $-
Issuance of common stock ......... 100 -- --
----------- ----------- -----------
Balances, June 30, 1993 .......... 100 -- --
Cash contribution from Becker
Gaming, Inc. relating to sale
of warrants .................... -- -- --
Common stock subscribed .......... -- -- 788
Contribution by Becker Gaming,
Inc. relating to liability
incurred under development
agreement ...................... -- -- --
Write-off of common stock
subscribed due to abandonment
of development project ......... -- --
Net loss ......................... --
----------- ----------- -----------
Balances, June 30, 1994 .......... 100 -- --
Net loss ......................... -- -- --
----------- ----------- -----------
Balances, June 30, 1995 .......... 100 -- --
----------- ----------- -----------
Net loss ......................... -- -- --
----------- ----------- -----------
Balances, June 30, 1996 .......... 100 $- $-
=========== =========== ===========
Deficit
Accumulated
Additional During The
Paid-In Development
Capital Stage Total
-------- -------- --------
Balances, January 20,
1993 (the date of inception) ............. $- $- $-
Issuance of common stock ................... -- -- --
-------- -------- --------
Balances, June 30, 1993 .................... -- -- --
Cash contribution from Becker
Gaming, Inc. relating to sale
of warrants .............................. 7,500 -- 7,500
Common stock subscribed .................... -- -- 788
Contribution by Becker Gaming,
Inc. relating to liability
incurred under development
agreement ................................ 5,232 -- 5,232
Write-off of common stock
subscribed due to abandonment
of development project ................... (788) -- (788)
Net loss ................................... -- (9,530) (9,530)
-------- -------- --------
Balances, June 30, 1994 .................... 12,732 (9,530) 3,202
Net loss ................................... -- (9,475) (9,475)
-------- -------- --------
Balances, June 30, 1995 .................... 12,732 (19,005) (6,273)
-------- -------- --------
Net loss ................................... -- (7,785) (7,785)
-------- -------- --------
Balances, June 30, 1996 .................... $ 12,732 $(26,790) $(14,058)
======== ======== ========
The accompanying notes are an integral part of these financial statements.
================================================================================
CAPITOL QUEEN & CASINO, INC.
( A Development Stage Company And A Wholly Owned Subsidiary
Of Becker Gaming, Inc.)
STATEMENTS OF CASH FLOWS
(Dollars In For The Period Thousands)
January 20, 1993
------------------
================================================================================
Year Ended June 30,
---------------------------------
1996 1995 1994
-------- -------- --------
Cash flows from development stage activities:
Net loss ................................ $ (7,785) $ (9,475) $ (9,530)
-------- -------- --------
Adjustments to reconcile net loss
to net cash used in development
stage activities:
Amortization of financing and other costs 100 202 1,039
Amortization of original issue discount . 408 834 665
Abandonment losses and write-downs of
assets held for sale ................... 4,392 -- 6,034
Extraordinary loss on retirement of debt -- 4,089 --
Increase(decrease) in accounts payable
and accruals, net of amounts for
capital expenditures ................... 2,238 (216) 765
Increase in advances from related
party payable ......................... 602 392 --
-------- -------- --------
Total adjustments ................. 7,740 5,301 8,503
-------- -------- --------
Net cash used in development
stage activities ................. (45) (4,174) (1,027)
-------- -------- --------
Cash flows from investing activities:
Capital expenditures, net of
construction accounts payable .......... -- (1,724) (11,212)
Deposits and other assets ............... -- 12 (72)
Capitalization of preopening costs ...... -- -- (340)
Development costs ....................... -- -- (553)
Net (additions to) reductions in
restricted cash equivalents ............ -- 24,898 (24,929)
-------- -------- --------
Net cash provided by (used in)
investing activities .............. -- 23,186 (37,106)
-------- -------- --------
Cash flows from financing activities:
Principal payments on First Mortgage
Notes .................................. -- (20,200) --
Proceeds from issuance of First
Mortgage Notes, net of financing costs . -- -- 30,666
Proceeds from borrowings under
notes payable to related parties ....... -- 1,200 --
Equity contribution from Becker
Gaming, Inc.relating to sale of
warrants ............................... -- -- 7,500
-------- -------- --------
Net cash (used in) provided by
financing activities .............. -- (19,000) 38,166
-------- -------- --------
Net increase (decrease) in cash
and cash equivalents .............. (45) 12 33
Cash and cash equivalents, beginning
of period ............................... 45 33 --
-------- -------- --------
Cash and cash equivalents, end of period .. $ -- $ 45 $ 33
======== ======== ========
Supplemental cash flow disclosures:
Interest paid, net of amounts capitalized $ -- $ 4,020 $ 1,787
======== ======== ========
Original issue discount that did not
affect cash ............................ $ -- $ -- $ 7,500
======== ======== ========
Equity contribution by Becker Gaming that
did not affect cash .................... $ -- $ -- $ 5,232
======== ======== ========
(The Date Of Inception)Through June 30,
---------------------------------------
1996
--------
Cash flows from development stage activities:
Net loss .................................... $(26,790)
--------
Adjustments to reconcile net loss
to net cash used in development
stage activities:
Amortization of financing and other costs ... 1,341
Amortization of original issue discount ..... 1,907
Abandonment losses and write-downs of
assets held for sale ....................... 10,426
Extraordinary loss on retirement of debt .... 4,089
Increase(decrease) in accounts payable
and accruals, net of amounts for
capital expenditures ....................... 2,787
Increase in advances from related
party payable ............................. 994
--------
Total adjustments ..................... 21,544
--------
Net cash used in development
stage activities ..................... (5,246)
--------
Cash flows from investing activities:
Capital expenditures, net of
construction accounts payable .............. (12,936)
Deposits and other assets ................... (60)
Capitalization of preopening costs .......... (340)
Development costs ........................... (553)
Net (additions to) reductions in
restricted cash equivalents ................ (31)
--------
Net cash provided by (used in)
investing activities .................. (13,920)
--------
Cash flows from financing activities:
Principal payments on First Mortgage
Notes ...................................... (20,200)
Proceeds from issuance of First
Mortgage Notes, net of financing costs ..... 30,666
Proceeds from borrowings under
notes payable to related parties ........... 1,200
Equity contribution from Becker
Gaming, Inc.relating to sale of
warrants ................................... 7,500
--------
Net cash (used in) provided by
financing activities .................. 19,166
--------
Net increase (decrease) in cash
and cash equivalents .................. --
Cash and cash equivalents, beginning of period --
--------
Cash and cash equivalents, end of period ...... $ --
========
Supplemental cash flow disclosures:
Interest paid, net of amounts capitalized ... $ 5,807
========
Original issue discount that did not
affect cash ................................ $ 7,500
========
Equity contribution by Becker Gaming that did
not affect cash ........................ $ 5,232
========
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
CAPITOL QUEEN & CASINO, INC.
(A Development Stage Company And A Wholly Owned Subsidiary
Of Becker Gaming, Inc.
NOTES TO FINANCIAL STATEMENTS
----------
1. Summary Of Significant Accounting Policies:
Basis Of Presentation
---------------------
Capitol Queen & Casino, Inc. ("CQC" or the "Company"), a development stage
company, was incorporated in Missouri on January 20, 1993, and had acquired
a franchise from the City of Jefferson City, Missouri to develop,
construct, own and operate a riverboat casino (the "Capitol Queen"),
subject to state licensure. the Company has abandoned the Capitol Queen
project, as more fully described in Note 2. Subsequent to incorporation,
the stockholders of the Company exchanged all of the outstanding stock of
the Company for common stock of a Nevada holding company, Becker Gaming,
Inc. ("BGI"), in a tax-free exchange. BGI is wholly owned by the Becker
family and serves as a holding company for the Becker family gaming
interests, which include CQC and the following wholly owned subsidiaries:
o Sunset Coin, Inc. ("SC"), a Nevada corporation which
operates a Las Vegas gaming machine route and service business.
o Becker Gaming Group ("BGG"), a Nevada corporation which (together with
its wholly owned subsidiary Innerout, Inc.) owns and operates restaurants
and bars in Las Vegas under the "Charlie's" name, each of which offers
gaming machines.
o Arizona Charlie's, Inc. ("AC"), a Nevada corporation which
operates a Las Vegas hotel and casino.
Cash Equivalents And Concentration Of Credit Risk
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. The Company has
cash on deposit with financial institutions in excess of federally insured
amounts.
Property And Equipment
----------------------
Property and equipment are recorded at cost and include interest
capitalized during the construction period. The Company's policy is to
compute depreciation using the straight-line method. No depreciation has
been recorded while the Company is in the development stage.
Debt Issue Costs
----------------
Costs associated with the issuance of debt are deferred and amortized over
the life of the related indebtedness using the effective interest method.
Federal Income Taxes
--------------------
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS 109"). Under SFAS 109, deferred tax assets and liabilities are
recognized for the expected future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under SFAS 109, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date. The Company adopted SFAS
109 at inception (January 20, 1993).
The Company is included in the consolidated federal income tax returns
filed by BGI. CQC's tax allocation is based on the amount of tax it would
incur if it filed a separate return except the Company does not receive any
benefits from carry-backs to prior years.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates,
particularly with respect to the matters described in Notes 2 and 3.
2. Missouri Gaming License, Default Under Indebtedness,
Management's Plans, and Going Concern:
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 almost 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. 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.
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.
CQC financed the Capitol Queen project through the issuance of $40,000,000
in principal amount of 12% First Mortgage Notes due November 15, 2000 (the
"CQC Notes"). As of January 1, 1995, the 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
first step repurchase of $20,000,000 principal amount of the 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 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, 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
November 15, 1995 and $1,200,000 on May 15, 1996 and AC (which has
guaranteed the CQC Notes as more fully described in Note 4) did not have
available funds to advance on behalf of CQC. Further, Management believes
that AC does not have sufficient financial resources to satisfy its
guarantee obligation with respect to the CQC Notes, particularly because AC
is in default of covenants under indebtedness AC (the "AC Notes"). In
connection with the decision to abandon the project, 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, which price exceeded the carrying value of the CQC assets.
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
its Development Agreement with CQC, that Aerie be found preliminarily
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 December 31, 1995 expiration date
passed. As more fully described in Note 3, a further write-down in the
carrying value of the riverboat was recognized in the fourth quarter of
1996, after the election in Jefferson City, the expiration of the Aerie
contract, and due to deteriorating market conditions.
CQC continues to market its riverboat assets to prospective buyers and
Management is currently undergoing 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 CQC
to continue as a going concern. The final outcome of these matters is not
presently determinable and the June 30, 1996 financial statements of the
Company do not include any adjustment that might result from the outcome of
this uncertainty.
3. Construction Project And Related Contingencies:
Capitol Queen Project
---------------------
The Capitol Queen project, as originally contemplated by the Company, was
to include the riverboat, dockside facilities, restaurants and related
ancillary facilities to be built on land acquired by the Company in July
1993. As a result of the decision to discontinue the project, all costs
associated with the design and development of the facilities were written
off in the fourth quarter of the Company's 1994 fiscal year, with the
exception of the historical cost of the land and the riverboat which was
reclassified to assets held for sale.
The Company had contracted with a shipbuilder to construct the Capitol
Queen riverboat. The total cost of the riverboat was $11,892,000, including
construction period interest and other assets. During the fourth quarter of
the year ended June 30, 1996, based on deteriorating market conditions
after the expiration of the Aerie contract, the Company recognized a loss
of $ $4,392,000 and wrote-down the carrying value of the riverboat to
$7,500,000. Such revised carrying value represents management's best
estimate of the riverboat's current net realizable value in a cash sale,
based on information obtained from shipbuilders, marine brokers, and
purchase offers made to the Company from third parties.
Jefferson City Development Agreement
------------------------------------
The Company acquired the franchise rights to operate the Capitol Queen
under a development agreement with the City of Jefferson City, Missouri
(the "Development Agreement"), beginning September 1, 1993 for a period of
seven years. The Company's rights and obligations under the Development
Agreement were contingent upon receiving a gaming license which, until the
occurrence of the events described in Note 2, management believed was
probable.
On November 7, 1995, voters in Jefferson City rejected an ordinance
permitting riverboat gambling, reversing the vote 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 matter of law the 1995 election does not affect the validity of the
Development Agreement. However, to avoid the cost and uncertainty of
litigation, CQC and Jefferson City in June 1996 entered into an agreement
pursuant to which the Development Agreement was rescinded and Jefferson
City refunded $300,000 of the $400,000 CQC had originally paid to the City
under the Development Agreement.
Other Development Agreement
---------------------------
As discussed below, the Company and BGI have each entered into additional
agreements in connection with the development of the Capitol Queen project,
which have been terminated as a result of the decision by the Missouri
Gaming Commission.
In January 1993, prior to incorporation, the stockholders of the Company
agreed that, upon being licensed in Missouri to own and operate the Capitol
Queen, the Company would issue shares of its common stock to three
individuals who assisted the then existing stockholders of the Company in
obtaining the rights to develop the Capitol Queen (the "CQC Stock
Agreement"). The aggregate amount of stock subject to the CQC Stock
Agreement represents 5.25% of the outstanding common stock of the Company,
and was subject to increase to 8.25% if the convention center required
under the Development Agreement was not constructed on land controlled by
the parties to the CQC Stock Agreement. The Company has the option to
repurchase any or all of such stock, except for 25% held by one individual,
for a period of three years from issuance at an aggregate purchase price of
$750,000 ($1,200,000 if the additional shares were issued). In addition to
the above requirements of the CQC Stock Agreement, the Company also agreed
to pay a lump-sum fee of $350,000 to two of the above individuals after
receiving a license and the commencement of operations of the Capitol
Queen.
At the time CQC was awarded the Development Agreement, and until the
occurrence of the events described in Note 2, the Company believed it was
probable it would receive a gaming license in Missouri. Accordingly, to
reflect the CQC Stock Agreement, CQC recorded subscribed stock of $788,000
(using the $750,000 value described above for 5.0% of the stock to
determine the value of the remaining 25% interest), recorded amounts
payable under the agreement for $350,000 and recorded a corresponding total
charge of $1,138,000 to development costs, to be amortized over the life of
the Development Agreement. As a result of the decision by the Missouri
Gaming Commission and the abandonment of the Capitol Queen project,
management believes that it has been relieved of these obligations.
Accordingly, the subscribed stock, the $350,000 liability and the related
deferred costs (net of amortization from September 1, 1993 to June 30,
1994) were written-off in the fourth quarter of fiscal 1994.
In September 1993, the Company's parent, BGI, agreed that it would
repurchase certain rights to acquire equity in CQC (the "Repurchase
Agreement") which it had previously granted to various parties (the
"Sellers"). The Sellers assisted BGI and the Company, through the BGI
stockholders, in obtaining the approval to develop, own and operate the
Capitol Queen in Jefferson City. Under the terms of the Repurchase
Agreement, BGI agreed to pay the Sellers an aggregate amount of $5,925,000,
payable in installments through July 1, 1997 and bearing interest at 10%
per annum from the date the Capitol Queen opens for business. BGI also
agreed that if prior to maturity, BGI proposed to sell any of its common
stock in an underwritten public offering, the Sellers may accept registered
shares in lieu of the payments required based on the public offering price
of such shares (less any underwriters discount) subject to certain
underwriter limitations.
The Repurchase Agreement provided that in the event the development,
ownership or operation of a riverboat gaming business in Jefferson City
becomes unlawful or CQC is declined a gaming license, the Repurchase
Agreement becomes null and void. At the time BGI entered the Repurchase
Agreement, and until the occurrence of the events described in Note 2, the
Company believed it was probable it would receive a gaming license in
Missouri. Accordingly, the assumption of the liability under the Repurchase
Agreement was treated as an additional investment in CQC by BGI, and the
related present value of the costs to the Sellers of $5,232,000 was
recorded as deferred development costs to be amortized over the life of the
Development Agreement.
As a result of the decision by the Missouri Gaming Commission and the
abandonment of the Capitol Queen project, BGI believes that it has been
relieved of its obligations under the Repurchase Agreement. Accordingly,
the deferred costs under the Repurchase Agreement (net of amortization from
September 1, 1993 to June 30, 1994) were written-off in the fourth quarter
of fiscal 1994.
In addition to the above, in the fourth quarter of fiscal 1994, CQC
wrote-off previously capitalized expenditures of $1,375,000 and capitalized
pre-opening expenses of $340,000 associated with the development of the
Capitol Queen project.
4. Long-Term Debt:
On November 18, 1993, the Company completed a private placement debt
financing of $40,000,000 principal amount of 12% First Mortgage Notes Due
November 15, 2000 (the " CQC Notes"). The offering generated net proceeds
of approximately $30,666,000 (after deducting original issue discount of
$7,500,000 and debt issue costs). Interest on the Notes is payable
semi-annually. The Notes are guaranteed by AC (which guarantee is subject
to release only upon licensing of the Capitol Queen, which is not expected)
and are collateralized by a first mortgage on substantially all of the
assets of the Company. The CQC Notes have been classified as currently
payable at June 30, 1996 due to anticipated acceleration upon default and
management's plans to negotiate a payoff of the indebtedness, as more fully
described in Note 2.
As also described in Note 2, the Company was unable to make the interest
payments due under the CQC Notes on November 15, 1995 and May 15, 1996.
Such past due interest in the amount of $2,400,000 has been accrued in the
accompanying financial statements.
As of January 1, 1995, CQC's obligations under the Indenture governing the
CQC Notes were amended with the requisite consent of the holders of the
holders of the CQC Notes. CQC's previous obligations to complete and open
the Capitol Queen have been eliminated and CQC has agreed to a two-step
plan to repay the CQC Notes. The first step, which was consummated on
January 17, 1995, involved the repurchase of $20,000,000 principal amount
of the CQC Notes at 101% of such principal amount plus accrued and unpaid
interest with funds held in the restricted project escrow account. The
Company incurred an extraordinary loss of approximately $4,089,000 in 1995,
reflecting the premium paid to retire the debt of $200,000 and the
write-off of related, unamortized debt issue costs and original issue
discount in the aggregate of $3,889,000.
Concurrent with the placement of the Notes, BGI sold 2,500,000 warrants
(the "Warrants") exercisable for BGI common stock for gross proceeds of
$7,500,000. The gross proceeds from the sale of the Warrants were
contributed to the Company.
The Indenture governing the CQC Notes (the "Indenture") limits the use of
the net proceeds from the offering and the sale of the Warrants to fund the
cost of the development and construction of the Capitol Queen project, the
development of a convention center in Jefferson City, Missouri and initial
interest payments. The proceeds were placed in escrow with a trustee
pending drawdowns for qualifying project expenditures. As more fully
explained in Note 2, certain of the proceeds were used in January 1995 in
connection with the first step of the plan to repay the CQC Notes. The CQC
Notes are not subject to mandatory redemption, except upon a change of
control, or other circumstances as defined in the Indenture. The Company
has the option to redeem the Notes at a premium of 106% beginning on
November 15, 1997, declining to par value on November 15, 1999. If prior to
November 15, 1997, BGI consummates an initial public offering of its common
stock, the Company may also redeem the CQC Notes, at a premium of 108%.
The Indenture contains covenants that, among other things, limit the
ability of the Company and, in certain cases, AC, to pay dividends or
management fees, or incur additional indebtedness.
5. Related-Party Transactions:
Prior to the inception of CQC and through November 18, 1993, AC advanced a
total of approximately $1,090,000 to fund development costs of CQC which
was fully repaid on November 18, 1993 with proceeds from the private
placement financing transaction. As of June 30, 1996 and 1995, the amounts
payable to AC by the Company for additional advances were $993,000 and
$392,000, respectively. The advances are non-interest bearing.
In May, 1995, CQC borrowed $1.2 million from AC in order to have funds to
make the semi-annual interest payment due on the CQC Notes. The borrowing
was executed as an uncollateralized note payable to AC due June 30, 1997,
with interest at an annual rate of 5.56%.
6. Income Taxes:
The components included in determining the provision for income taxes for
the years ended June 30, 1996, 1995, and 1994, net of extraordinary items,
are shown below:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Tax provision (benefit) at federal
income tax statutory rate ....... $(2,647,000) $(1,831,000) $(3,240,000)
Unrecognized tax benefit from net
operating losses ................ 2,574,000 1,831,000 3,240,000
Other ............................ 73,000 -- --
----------- ----------- -----------
Income tax provision .... $ -- $ -- $ --
----------- ----------- -----------
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes, and the amounts used for income tax purposes. The major
components of deferred taxes as of June 30, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Liabilities ............................ $ -- $ --
--------- ---------
Assets:
Federal net operating loss carryforwards 4,582,000 4,420,000
Accrued interest expense ............. 918,000 --
Valuation allowance for assets held
for sale ........................... 1,494,000 --
Total deferred tax assets ............ 6,994,000 4,420,000
--------- ---------
Valuation allowance .................. (6,994,000) (4,420,000)
---------- ----------
Net deferred taxes ................... $ -- $ --
--------- ---------
</TABLE>
As of June 30, 1996, the Company had a federal net operating loss
carryforward of approximately $13,478,000 which expires between 2009 and
2011.
7. Fair Value of Financial Instruments:
The estimated fair value of the Company's financial instruments have been
determined by the Company using available market information and
appropriate valuation methodologies. The carrying amounts of cash and cash
equivalents, accounts receivable, accounts payable, capital lease
obligations and notes approximate fair values due to the short-term
maturities and approximate market interest rates of these instruments.
Management is unable to determine a fair value for the outstanding
$20,000,000 principal amount ($17,526,000 carrying amount at June 30, 1996)
of 12% First Mortgage Notes due November 15, 2000 of Capitol Queen and
Casino, Inc. (the "CQC Notes"). It is not practicable to determine the fair
value of these financial instruments due to the debt covenant violations
and related uncertainties involved in negotiations with the holders of the
AC Notes and CQC Notes, as more fully discussed in Note 2.
REPORT OF INDEPENDENT ACCOUNTANTS
------------
To the Board of Directors
Arizona Charlie's, Inc.
We have audited the financial statements and the financial statement schedule of
Arizona Charlie's, Inc. (a wholly owned subsidiary of Becker Gaming, Inc.)
listed in Item 14(a) of this Form 10-K. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Arizona Charlie's, Inc. as of
June 30, 1996 and 1995, and the results of its operations and its cash flows for
each of the three years in the period ended June 30, 1996 in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
The accompanying financial statements have been prepared assuming that Arizona
Charlie's, Inc. ("AC") will continue as a going concern. As more fully described
in Note 2, AC is in default of debt covenants, resulting in the classification
of such debt as currently payable. AC is also obligated as a guarantor under
indebtedness of an affiliated company, and such indebtedness is also in default.
AC does not have sufficient resources to repay the indebtedness or honor its
guarantee on a current basis and management's plans are also described in Note
2. These matters raise substantial doubt about the ability of Arizona Charlie's,
Inc. to continue as a going concern. The final outcome of these matters is not
presently determinable and the June 30, 1996 financial statements of the Arizona
Charlie's, Inc. do not include any adjustment that might result from the outcome
of this uncertainty.
Las Vegas, Nevada
August 9, 1996
================================================================================
ARIZONA CHARLIE'S, INC.
(A Wholly Owned Subsidiary Of Becker Gaming, Inc.)
BALANCE SHEET
As Of June 30, 1996 and 1995
(Dollars In Thousands)
----------
================================================================================
ASSETS
1996 1995
-------- --------
Current assets:
Cash and cash equivalents.................... $ 4,591 $ 5,404
Restricted cash, in escrow account........... 10 10
Trade and other accounts receivable.......... 473 658
Receivable from related parties.............. 1,539 820
Notes receivable from related party.......... -- 4,416
Inventories ................................. 575 661
Prepaid expenses ............................ 1,118 1,162
-------- --------
Total current assets...................... 8,306 13,131
-------- --------
Property and equipment:
Building and improvements ................... 37,488 37,485
Furniture and equipment...................... 22,575 22,609
Land improvements ........................... 1,628 1,628
-------- --------
61,691 61,722
Less, accumulated depreciation .............. (16,218) (13,572)
-------- --------
45,473 48,150
Land ........................................ 208 208
-------- --------
Net property and equipment.............. 45,681 48,358
-------- --------
Other assets:
Receivable from related party, noncurrent.... 987 240
Deposits and other .......................... 460 551
Notes receivable from related party ......... -- 4,416
Financing costs, less accumulated
amortization of $1,366 (1996)
and $880 (1995) 2,507 2,993
-------- --------
Total other assets...................... 8,370 3,784
-------- --------
Total assets ........................... $ 62,357 $ 65,273
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
1996 1995
-------- --------
Current
liabilities:
Trade accounts payable...................... $ 1,452 $ 1,449
Construction accounts payable .............. --
Accounts payable to related parties......... 4 3
Accrued expenses ........................... 3,323 3,097
Management fees due Becker Gaming, Inc...... 4,682 3,287
Notes payable............................... 110 121
Notes payable to related party.............. 2,250 2,250
Current portion of
obligations under capital leases......... 15 4
Long-term debt classified as
current due to default
under covenants ......................... 55,000 --
-------- --------
Total current liabilities............ 66,836 10,211
Long-term debt, less current portion.......... -- 55,000
Subordinated notes payable to prior
stockholders ............................... 5,000 5,000
Obligations under capital leases,
less current portion ......... 22 4
-------- --------
Total liabilities.................... 71,858 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)................. (9,970) (5,411)
-------- --------
Total stockholder's equity
(deficit)................. (9,501) (4,942)
-------- --------
Total liabilities and
stockholder's equity (deficit)....... $ 62,357 $ 65,273
======== ========
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 OPERATIONS
(Dollars In Thousands)
================================================================================
Year Ended June 30,
------------------------------------------------
1996 1995 1994
Revenues:
Gaming ............................. $ 52,831 $ 47,466 $ 38,955
Food and beverage .................. 13,204 10,647 8,459
Hotel .............................. 3,208 2,614 1,219
Bowling ............................ - - 251
Gift shop .......................... 590 577 535
Management fee from affiliates ..... - - 281
Other .............................. 1,145 912 399
-------- -------- --------
Gross revenues ................. 70,978 62,216 50,099
Less, promotional allowances ......... (7,677) (5,134) (3,652)
-------- -------- --------
Net revenues ................... 63,301 57,082 46,447
-------- -------- --------
Operating expenses:
Gaming ............................. 18,612 15,359 11,681
Food and beverage .................. 12,511 11,388 8,389
Hotel .............................. 1,413 1,377 714
Bowling ............................ - - 387
Gift shop .......................... 475 450 458
Advertising and promotion .......... 4,726 3,837 3,093
General and administrative ......... 17,660 15,358 13,867
Payments under guarantee obligation 601 1,592 -
Management fee - Becker Gaming, Inc. 1,396 3,099 188
Rent expense paid to related party . 217 191 343
Depreciation and amortization ...... 3,491 3,373 2,222
-------- -------- --------
Total operating expenses ....... 61,102 56,024 41,342
-------- -------- --------
Operating income ............... 2,199 1,058 5,105
-------- -------- --------
Other income (expenses):
Interest income .................... 286 580 769
Interest expense ................... (7,095) (7,250) (5,223)
Interest capitalized ............... 676 460
Other, net ......................... 51 - 23
Total other expenses ........... (6,758) (5,994) (3,971)
-------- -------- --------
Net (loss)income before income tax (4,559) (4,936) 1,134
Provision for income taxes - - -
-------- -------- --------
Net (loss) income ................ $ (4,559) $ (4,936) $ 1,134
======== ======== ========
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 STOCKHOLDER'S EQUITY (DEFICIT) For The Years
Ended June 30, 1996, 1995 And 1994
(Dollars In Thousands)
================================================================================
Additional
Common Stock Paid-in
Shares Amount Capital
------ ------- ------
Balances, June 30, 1993 ............ 1,000 $ 1,513 $-
Distributions to stockholders .....
Reclassification of undistributed
earnings to additional paid-in
capital upon termination of S
corporation election .......... -- -- 732
Contribution of land from
Becker Gaming, Inc. ........... -- -- 208
Forgiveness of receivable from
Charlie's Land Company in
connection with the
Reorganization ................ -- -- (729)
Net transfer of certain assets
and liabilities to Becker
Gaming, Inc. as part of
the Reorganization ............ -- (1,044) (211)
Net income ........................ -- -- --
------ ------- ------
Balances, June 30, 1994 ............ 1,000 469 --
Net loss .......................... -- -- --
------ ------- ------
Balances, June 30, 1995 ............ 1,000 469 --
Net loss .......................... -- -- --
------ ------- ------
Balances, June 30, 1996 ............ 1,000 $ 469 $-
====== ======= ======
Retained
Earnings
(Deficit) Total
------- -------
Balances, June 30, 1993 ............ $ 4,440 $ 5,953
Distributions to stockholders ..... (5,317) (5,317)
Reclassification of undistributed
earnings to additional paid-in
capital upon termination of S
corporation election .......... (732) --
Contribution of land from
Becker Gaming, Inc. ........... -- 208
Forgiveness of receivable from
Charlie's Land Company in
connection with the
Reorganization ................ -- (729)
Net transfer of certain assets
and liabilities to Becker
Gaming, Inc. as part of
the Reorganization ............ -- (1,255)
Net income ........................ 1,134 1,134
------- -------
Balances, June 30, 1994 ............ (475) (6)
Net loss .......................... (4,936) (4,936)
------- -------
Balances, June 30, 1995 ............ (5,411) (4,942)
Net loss .......................... (4,559) (4,559)
------- -------
Balances, June 30, 1996 ............ $(9,970) $(9,501)
======= =======
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)
================================================================================
Year Ended June 30,
--------
1996 1995 1994
-------- -------- --------
Cash flows from operating activities:
Net income (loss) ............................ $ (4,559) $ (4,936) $ 1,134
-------- -------- --------
Adjustments to reconcile net income
(loss) to net provided by (used by)
operating activities:
Provision for losses on related
party receivables .......................... 601 1,592 --
Depreciation and amortization ............... 3,491 3,373 2,222
(Gain) loss on sale of equipment ............ 11 (2) (23)
(Increase) decrease in operating assets:
Receivables ................................. 185 (387) 408
Inventories ................................. 86 (108) 33
Prepaid expenses ............................ 241 (339) 433
Deposits and other .......................... (41) (92) --
Increase (decrease) in operating liabilities:
Accounts payable, net of amounts
for capital ................................ 3 (144) 633
expenditures
Accrued expenses ............................ 226 716 848
Management fees due to Becker Gaming, Inc. .. 1,395 3,099 188
-------- -------- --------
Total adjustments ......................... 6,198 7,708 4,742
-------- -------- --------
Net cash provided by operating activities . 1,639 2,772 5,876
-------- -------- --------
Cash flows from investing activities:
Note receivable issued to CQC ............... -- (1,200) --
Capital expenditures, net of amounts in
accounts payable ........................... (190) (24,253) (11,379)
Increase in receivable from Becker Gaming,
Inc ........................................ (2,065) (4,154) (300)
Net (additions to) reductions in restricted
cash equivalents .......................... -- 26,102 (26,112)
Proceeds from assets sales .................. 15 104 269
Deposits and other .......................... -- -- 342
-------- -------- --------
Net cash used in investing activities ..... (2,240) (3,401) (37,180)
-------- -------- --------
Cash flows from financing activities:
Proceeds from notes payable, net of
financing costs ............................ -- -- 51,105
Proceeds from subordinated notes payable to . -- -- 5,000
stockholders
Proceeds from borrowing under notes payable . -- 2,250 --
Principal payments on notes payable ......... (208) (199) (17,421)
Payments under capital lease obligations ...... (4) (32) (848)
Distributions to former stockholders ........ -- -- (5,317)
Payment of liability for Charlie's Land
Company .................................... -- -- (729)
-------- -------- --------
Net cash provided by (used in) financing
activities ................................. (212) 2,019 31,790
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents ................................ (813) 1,390 486
Cash and cash equivalents, beginning of
the year .................................... 5,404 4,014 3,528
-------- -------- --------
Cash and cash equivalents, end of the year .... $ 4,591 $ 5,404 $ 4,014
======== ======== ========
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 FINANCIAL STATEMENTS
----------
1. Summary Of Significant Accounting Policies:
Nature Of Operations
- --------------------
Arizona Charlie's, Inc. ("AC" or the "Company") owns and operates
a casino and related hotel in Las Vegas, Nevada.
In connection with the financing transaction more fully discussed in Note 6, the
stockholders of AC exchanged all of their stock in the Company for stock of
Becker Gaming, Inc. ("BGI") (the "Reorganization") and, effective June 1, 1994,
AC became a wholly owned subsidiary of BGI. BGI has no independent activities
other than providing management and administrative services to, and exploring
and developing business opportunities for its subsidiaries, and serves as a
holding company for AC and the following entities:
o Capitol Queen & Casino, Inc. ("CQC"), a Missouri corporation
in the development stage of construction of a riverboat casino in
Jefferson City, Missouri (the "Capitol Queen").
o Sunset Coin, Inc. ("SC"), a Nevada corporation which
operates a Las Vegas gaming machine route and service business.
o Becker Gaming Group ("BGG"), a Nevada corporation which, together with
its wholly owned subsidiary Innerout, Inc., owns and operates restaurants
and bars in Las Vegas under the "Charlie's" name, each of which offers
gaming machines.
As a part of the Reorganization described above, the following transactions
occurred:
o The stockholders of BGI caused the ownership of the land underlying and
adjacent to Arizona Charlie's to be transferred to the Company from
Charlie's Land Company ("CLC"), an entity also then owned by the BGI
stockholders. The land was first conveyed to BGI by CLC in exchange for
BGI stock and then contributed by BGI to AC at its historical cost basis
of approximately $208,000. Concurrent with the transfer of land, AC
forgave $729,000 due the Company from CLC which arose in November 1993
when the Company paid-off CLC's mortgage on the land in contemplation of
the Reorganization.
o Certain property and equipment, consisting of aircraft and
boats with a net book value of approximately $5,254,000, accounts
payable relating to such property and equipment of approximately
$252,000, and related encumbrances in the form of capital lease
obligations totaling approximately $3,900,000, were transferred
from AC to BGI. In addition, certain prepaid expenses totaling
approximately $153,000 were transferred from AC to BGI. Such
prepaid expenses consisted primarily of insurance related to
certain personnel who were transferred from the Company to BGI in
connection with the Reorganization. The net effect of the above
transactions was to transfer net assets with a historical book
value of approximately $1,255,000.
The forgiveness of indebtedness from CLC and the transfer of net assets to BGI
are reflected as distributions to stockholders in the Company's June 30, 1994
Statement of Stockholder's Equity
(Deficit).
Subsequent to the Reorganization, certain overhead expenses of the Company
(primarily related to executive compensation), have been eliminated. However,
effective June 1, 1994, the Company is required to pay a management fee to BGI
in connection with executive services equal to a percentage of the Company's
gross operating revenues. Under the AC Indenture, no management fees will be
payable by AC until completion of AC's ongoing expansion project and such time
as AC has attained a specified fixed charge coverage ratio of 2.25 to 1.
However, such fees accrue until paid. See Note 9 of AC's Notes to Financial
Statements.
Gaming Revenue
- --------------
In accordance with industry practice, the Company recognizes as gaming revenue
the net win from gaming activities, which is the difference between gaming wins
and losses.
Promotional Allowances
- ----------------------
The retail value of hotel accommodations, food, beverage and gift shop items
provided to customers without charge is included in gross revenues and then
deducted as promotional allowances to arrive at net revenues. The estimated
costs of providing such promotional allowances have been classified as gaming
expenses through interdepartmental allocations, as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Hotel ......... $ 261 $ 164 $ 119
Food & Beverage 3,824 2,260 2,005
----- ----- -----
$4,085 $2,424 $2,124
====== ====== ======
</TABLE>
Cash Equivalents And Concentration Of Credit Risk
- -------------------------------------------------
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. The Company has cash on deposit
with financial institutions in excess of federally insured amounts.
Inventories
- -----------
Inventories are valued at the lower of cost (first-in, first-out) or market.
Property And Equipment
- ----------------------
Property and equipment are stated at cost. Maintenance and repairs are charged
to expense when incurred. Upon retirement or disposal of assets, the cost and
accumulated depreciation are eliminated from the accounts and the resulting gain
or loss is credited or charged to income, as appropriate.
Building, building improvements and land improvements are depreciated using the
straight-line method over estimated useful lives of 5 to 40 years. Furniture and
equipment are depreciated using straight-in declining balance methods over
estimated useful lives of 5 to 10 years.
Financing Costs
- ---------------
Costs associated with the issuance of debt are deferred and amortized over the
life of the related indebtedness using the effective interest method.
Preopening Expense
- ------------------
Certain preopening costs, consisting principally of personnel cost, training and
other costs directly associated with the opening of new hotel-casino or
significant expansions of the existing hotel-casino are capitalized and charged
to expense over a period not to exceed one year following the commencement of
related operations. During the year ended June 30, 1994, the Company capitalized
$27,000 of preopening costs which were amortized during the year ended June 30,
1995 after the expansion was completed. During the years ended June 30, 1996 and
1995, the Company did not capitalize any preopening costs.
Federal Income Taxes
- --------------------
Prior to January 1, 1994, the Company was taxed under Section 1362 (Subchapter
S) of the Internal Revenue Code, which provides that, in lieu of corporate
income taxes, the stockholders are taxed on their proportionate share of the
Company's taxable income or loss. Therefore, these financial statements do not
include any provision or liability for corporate income taxes for the periods
prior to December 31, 1993.
Effective January 1, 1994, the Company terminated its S corporation election and
adopted Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS 109"). Under SFAS 109 deferred tax assets and liabilities
are recognized for the expected future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
included the enactment position or results of operations.
In connection with the Reorganization, beginning June 1, 1994, the Company is
included in the consolidated federal income tax returns filed by BGI. AC's tax
allocation is based on the amount of tax it would incur if it filed a separate
return, except the Company does not receive any benefit from carrybacks to prior
years.
Reclassifications
- -----------------
Certain amounts in the 1994 and 1995 financial statements have been reclassified
to conform with the 1996 presentation.
Use of Estimates in the Preparation of Financial Statements
- -----------------------------------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates, particularly with respect to
the matters discussed in Note 2.
2.CQC Gaming License, Default Under Indebtedness, Management's Plans,
and Going Concern:
AC has guaranteed the payment of principal and interest of 12% First Mortgage
Notes due November 15, 2000 issued by CQC, of which $20,000,000 principal amount
and $2,400,000 in past-due accrued interest are outstanding at June 30, 1996.
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 almost 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.
CQC financed the Capitol Queen project through the issuance of $40,000,000 in
principal amount of 12% First Mortgage Notes due November 15, 2000 (the "CQC
Notes"). As of January 1, 1995, the 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 first step
repurchase of $20,000,000 principal amount of the 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 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, 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 November 15, 1995 and
$1,200,000 on May 15, 1996 and AC did not have available funds to advance on
behalf of CQC. AC is also in default of certain covenants under its indebtedness
(the "AC Notes", as more fully described in Note 6). 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. AC does not have sufficient
financial resources (including a guarantee of the AC Notes by SC, as more fully
described in Note 6) to repay the AC Notes on a current basis and satisfy its
guarantee obligation with respect to the CQC Notes. In connection with the
decision to abandon the project, 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, which price
exceeded the carrying value of the CQC assets. 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 its Development Agreement with CQC, that Aerie
be found preliminarily 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 December 31, 1995
expiration date passed.
CQC continues to market its riverboat assets to prospective buyers and
Management of the Company, AC and CQC are currently undergoing 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 June 30,
1996 financial statements of AC do not include any adjustment that might result
from the outcome of this uncertainty.
3.Supplemental Cash Flow Information:
The following are supplemental disclosures of cash flow information for the
years ended June 30, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest paid, net of amounts
capitalized ........................ $7,116,000 $7,115,000 $3,883,000
========== ========== ==========
Capitalized lease obligations
incurred ........................... $ 34,000 $ 9,000 $3,650,000
========== ========== ==========
Net transfer of assets and
liabilities to Becker Gaming, Inc. . $ -- $ -- $1,255,000
========== ========== ==========
Contribution of land to AC from
Becker Gaming, Inc. ................ $ -- $ -- $ 208,000
========== ========== ==========
Net transfer of assets and related
liabilities from Becker Gaming, Inc. $ -- $ 25,000 $ --
========== ========== ==========
</TABLE>
4.Accrued Expenses:
Major classes of accrued expenses consist of the following as of June 30, 1996
and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Wages payable and accrued salaries $ 811,000 $ 703,000
Accrued vacation ................. 306,000 251,000
Group insurance .................. 352,000 300,000
Gaming taxes ..................... 239,000 260,000
Payroll and other taxes .......... 405,000 381,000
Progressive slot liability ....... 88,000 94,000
Other accrued expenses ........... 128,000 93,000
Accrued interest ................. 994,000 1,015,000
------- ---------
$3,323,000 $3,097,000
========== ==========
</TABLE>
5.Notes Payable:
Notes payable consist of the following as of June 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Related parties:
Notes payable to SC with interest at 5.56%
uncollaterized and due May 1997 ............ $2,250,000 $2,250,000
Nonrelated parties:
5.96% note payable in monthly
installments of $22,352, including interest,
through January, 1997, uncollateralized .... $ 110,000 $ 121,000
----- ---------- ----------
Total notes payable ........... $2,360,000 $2,371,000
========== ==========
</TABLE>
6.Long-Term Debt:
Long-term debt consists of the following as of June 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
12% First Mortgage Notes Due November
15, 2000 (the "AC Notes") with interest
payable semiannually classified as
currently payable due to defaults under
covenants (see below) ................. $55,000,000 $55,000,000
=========== ===========
</TABLE>
On November 18, 1993, the Company completed a private placement of the AC Notes.
The offering generated net proceeds of approximately $33,684,000 (after
deducting debt issue costs of approximately $16,294,000 and $497,000 used to
repay principal and accrued interest, respectively, to a bank which was due and
payable on November 18, 1993). The AC Notes are guaranteed by SC (which
guarantee is subject to release upon completion of the Expansion which
management believes has been satisfied, and the attainment of a fixed coverage
ratio by the Company of 2.25 to 1, following the completion of the Expansion,
which has not been satisfied) and are collateralized by a first mortgage on
substantially all of assets of the Company, including the Expansion.
As of June 30, 1996, AC is in default of certain debt covenants under the
Indenture governing the AC Notes. These covenant violations include (i) a
failure to meet a minimum Fixed Charge Coverage ratio, as defined in the
Indenture, and (ii) advances by AC to Becker Gaming, Inc. which exceed amounts
allowed for under the Indenture. Such advances remain outstanding at June 30,
1996. In addition, beginning with the quarter ending December 31, 1995, AC has
not met the Minimum Tangible Net Worth requirement, defined in the AC Indenture.
Under the terms of the Indenture, AC is technically required to offer to buy
back $11,000,000 of the outstanding AC Notes at June 30, 1996 due to the failure
to meet this covenant, increasing by $5,500,000 each fiscal quarter. AC has not
made such offer and does not intend to do so while the discussions with the
Bondholder Committee are in process. As a result of these defaults under
covenants, the AC Notes have been classified as currently payable in the
accompanying financial statements. Management's plans are more fully described
in Note 2.
The Indenture governing the AC Notes (the "Indenture") limits the use of the net
proceeds from the offering to fund the cost of the Expansion. The proceeds were
placed in escrow with a trustee pending draw-downs for qualifying project
expenditures and are classified as restricted cash, in escrow account, 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.
The Indenture contains covenants that, among other things, limit the ability of
the Company and, in certain cases, SC, to pay dividends or management fees, or
incur additional indebtedness. The Indenture also requires the Expansion to be
completed in a specified manner and time frame, which management believes has
been achieved.
In connection with AC's guarantee of the CQC Notes, the Indenture governing the
CQC Notes imposes certain restrictive covenants on the Company, including
minimum cash flow and net worth requirements and restrictions on additional
borrowings and distributions of earnings.
7.Income Taxes:
During the period from January 1, 1994 (the effective termination date of the
Company's S corporation election) to June 30, 1994 and for the fiscal years
ended June 30, 1996 and 1995, the Company incurred net operating losses for
federal income tax purposes, and accordingly, these financial statements do not
include a provision for federal income taxes.
The components included in determining the provision for income taxes are shown
below for the years ended June 30, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Tax provision at federal income tax
statutory rate ............... $(1,550,000) $(1,678,000) $ 386,000
Income tax liability borne by
stockholders during period of
S corporation status ......... -- -- (538,000)
Increase (decrease) in taxes
resulting from:
Unrecognized tax benefit from
net operating losses ......... 1,489,000 1,633,000 122,000
Other ........................ 61,000 45,000 30,000
------ ------ ------
Income tax provision $ -- $ -- $ --
======= ======= =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes, and the amounts used for income tax purposes. The major components of
deferred tax liabilities and assets as of June 30, 1996 and 1995 were as
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Liabilities
Depreciation ........................... $ 542,000 $ --
----------- -----------
Assets
Allowances for bad debts ............... 745,000 541,000
Federal net operating loss carryforwards 3,119,000 1,292,000
Other .................................. -- 7,000
----------- -----------
Total deferred tax assets ..... 3,864,000 1,840,000
Valuation allowance .................... (3,322,000) (1,840,000)
---------- ----------
Net deferred taxes ............ $ -- $ --
=========== ===========
</TABLE>
As of June 30, 1996, the Company had a federal net operating loss carryforward
of approximately $9,174,000 which expires between 2009 and 2011.
8.Leases And Commitments:
The Company has entered into capital lease agreements whereby the Company leases
various equipment under three-and five-year leases which expire at various dates
through 2000.
Property and equipment includes the following property leased under capital
leases as of June 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Equipment ................... $ 43,000 $ 67,000
Less accumulated depreciation (3,000) (23,000)
------ -------
$ 40,000 $ 44,000
======== ========
</TABLE>
The Company leases office space under a 10-year operating lease, which expires
in 1998, from Charleston Heights Shopping Center ("CHSC"), a company related
through common ownership, as more fully described in Note 9.
Future minimum lease payments, by year and in the aggregate, under capital
leases and noncancellable operating leases with initial or remaining terms of
one year or more consist of the following at June 30, 1996:
<TABLE>
<CAPTION>
Capital Lease Operating Leases
------------- ----------------
<S> <C> <C>
1997 15,000 242,000
1998 11,000 226,000
1999 11,000 --
2000 10,000 --
------ ------
Total minimum lease payments .......... $ 47,000 $468,000
========
Less amount representing interest ............ 10,000
------
Present value of net minimum
lease payments . 37,000
Less current portion ......................... 15,000
------
Obligations under capital leases,
noncurrent $ 22,000
========
</TABLE>
The total rental expense under operating leases is as follows for the years
ended June 30, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Noncancellable airplane hangar
and equipment leases .... $ -- $ -- $110,000
Land and office leases ....... 217,000 191,000 344,000
------- ------- -------
$217,000 $191,000 $454,000
======== ======== ========
</TABLE>
9.Related-Party Transactions:
<TABLE>
<CAPTION>
The following balances due to or from related parties existed as of June 30,
1996 and 1995. The identified realted parties are stockholders of the Company or
affiliated companies related through common ownership.
June 30, 1996
-------------
Current Noncurrent Notes
Receivables Receivables Receivable
----------- ----------- -----------
<S> <C> <C> <C>
Former Stockholders of the
Company ..................... $ 14,000 $ 165,000 --
BGI ......................... 1,400,000 747,000 $ 4,416,000
Sunset Coin ................. 47,000 -- --
Becker Vending .............. -- -- --
Becker Enterprises .......... 1,000 -- --
CQC ......................... 993,000 -- 1,200,000
BGG:
Charlie's Lakeside ...... (7,000) -- --
Charlie's Bar ........... 10,000 -- --
Cantina Charlie's ....... 11,000 -- --
Cariba Charlie's ........ 13,000 75,000 --
Charlie's Saloon ........ 6,000 -- --
Charlie's Down Under .... 44,000 -- --
----------- ----------- -----------
Total ....................... 2,532,000 987,000 5,616,000
Less: Allowance for doubful
collection of amounts
due from CQC ........ (993,000) -- (1,200,000)
----------- ----------- -----------
$ 1,539,000 $ 987,000 $ 4,416,000
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Management
Fee and Subordinated
Accounts Notes Notes
Payable Payable Payable
---------- ---------- ----------
<S> <C> <C> <C>
Former Stockholders of the
Company ......................... $ 4,000 -- $5,000,000
BGI ............................. 4,682,000 -- --
Sunset Coin ..................... -- $2,250,000 --
Becker Vending .................. -- -- --
Becker Enterprises .............. -- -- --
CQC ............................. -- -- --
BGG:
Charlie's Lakeside .......... -- -- --
Charlie's Bar ............... -- -- --
Cantina Charlie's ........... -- -- --
Cariba Charlie's ............ -- -- --
Charlie's Saloon ............ -- -- --
Charlie's Down Under ........ -- -- --
---------- ---------- ----------
Total ........................... 4,686,000 2,250,000 5,000,000
Less: Allowance for doubful
collection of amounts
due from CQC ............ -- -- --
---------- ---------- ----------
$4,686,000 $2,250,000 $5,000,000
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
June 30, 1995
-------------------------------------------------------------------------------
Current Noncurrent Notes
Receivables Receivables Receivable
----------- ----------- -----------
<S> <C> <C> <C>
Former Stockholders of the
Company .......................... $ 25,000 $ 165,000 --
BGI .............................. 608,000 -- $ 4,416,000
Sunset Coin ...................... 103,000 -- --
Becker Vending ................... 10,000 -- --
Becker Enterprises ............... 1,000 -- --
CQC .............................. 392,000 -- 1,200,000
BGG:
Charlie's Lakeside ........... (7,000) -- --
Charlie's Bar ................ 6,000 -- --
Cantina Charlie's ............ 9,000 -- --
Cariba Charlie's ............. 11,000 75,000 --
Charlie's Saloon ............. 12,000 -- --
Charlie's Down Under ......... 42,000 -- --
----------- ----------- -----------
Total ............................ 1,212,000 240,000 5,616,000
Less: Allowance for doubful
collection of amounts
due from CQC ............. (392,000) -- (1,200,000)
----------- ----------- -----------
$ 820,000 $ 240,000 $ 4,416,000
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Management Fee Subordinated
and Accounts Notes Notes
Payable Payable Payable
---------- ---------- ----------
<S> <C> <C> <C>
Former Stockholders of the
Company ........................... $ 3,000 -- $5,000,000
BGI ............................... 3,287,000 -- --
Sunset Coin ....................... -- $2,250,000 --
Becker Vending .................... -- -- --
Becker Enterprises ................ -- -- --
CQC ............................... -- -- --
BGG:
Charlie's Lakeside ............ -- -- --
Charlie's Bar ................. -- -- --
Cantina Charlie's ............. -- -- --
Cariba Charlie's .............. -- -- --
Charlie's Saloon .............. -- -- --
Charlie's Down Under .......... -- -- --
---------- ---------- ----------
Total ............................. 3,290,000 2,250,000 5,000,000
Less: Allowance for doubful
collection of amounts
due from CQC .............. -- -- --
---------- ---------- ----------
$3,290,000 $2,250,000 $5,000,000
========== ========== ==========
</TABLE>
CHSC owns the land on which the Company's administrative offices are located
and, prior to the Reorganization, CLC owned the land on which the Company's
operations are located. Rent expense paid to CHSC and CLC and included in
results of operations of the Company was $217,000, $191,000 and $343,000, for
the years ended June 30, 1996, 1995 and 1994, respectively. The rental fees
include the cost of insurance, taxes and common area maintenance on the land.
Receivables from BGG, stockholders of the Company and BGI bear interest at 8.0%,
4.5% and 6.0%, respectively. Interest income from related parties was $245,000,
$168,000 and $64,000 for the years ended June 30, 1996, 1995 and 1994,
respectively.
In anticipation of the January 1, 1994 termination of the Company's S
corporation election, on December 24, 1993, the Company distributed $5,000,000
to its stockholders, representing previously taxed, undistributed income. This
distribution was immediately loaned back to the Company by the stockholders in
the form of subordinated notes payable, which bear interest at an annual rate of
10%, payable monthly, with the entire principal amount due on January 1, 2001.
Interest expense incurred under related-party notes was $508,000, $507,000 and
$266,000 for the years ended June 30, 1996, 1995 and 1994, respectively.
In May, 1995, CQC borrowed $1,200,000 from AC in order to have funds to make the
semi-annual interest payment due on the CQC Notes. The borrowing was executed as
an uncollateralized note payable to AC due May, 1996 with interest at the rate
of 5.56%. Due to the current financial condition of CQC, management has
determined that collectibility of the note, and of other advances of $301,000
(1995) and $692,000 (1996) made to CQC, is doubtful. Accordingly, provisions
were made to fully reserve the advances and note payable and losses have been
recorded in the accompanying financial statements as payments under guarantee
obligations.
The Company has loaned to BGI an aggregate of approximately $4,416,000 to fund
BGI's operating expenses from June 1994 through March 1995. The advances are
interest bearing and have been classified as non-current based on Management's
expectation for the timing of repayments from BGI. At June 30, 1996, the Company
owed BGI approximately $4,682,000 in accrued management fees. Under the terms of
the Indenture governing the AC Notes, these fees cannot be paid to BGI until a
specified fixed charge coverage ratio is achieved.
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. In connection with this transfer, in October
1995, the Company temporarily reduced the amount of the BGI management fee to a
net 1.0% of AC's gross revenues (previously 5.0% of gross revenues) based on the
reduction in services it will receive from BGI in the future.
Included in other revenues is income from management and accounting services
performed by the Company for SC and BGG of $281,000 for the year ended June 30,
1994.
The Company's president operates a sole proprietorship under the name "Becker
Vending" which places arcade, cigarette, music and other vending machines at
Arizona Charlie's. The Company provides nominal collection and accounting
services to Becker Vending in connection with these machines. The Company does
not receive any rental fee or other payment from Becker Vending in connection
with these agreements. Becker Vending retains all amounts deposited in its
vending machines. Becker Vending also sells to the Company cigarettes, candy and
similar items for resale in the Arizona Charlie's gift shop.
10.Contingencies:
The Company is subject to various litigation and claims which arise in the
ordinary course of its business. In the opinion of management, after
consultation with legal counsel, the disposition of all such pending litigation
and claims will not have a material effect on the Company's results of
operations, cash flows, or financial position.
11. Defined Contributions Plan:
The Company has adopted a 401(k) Defined Contribution Plan (the "Plan") covering
substantially all of its employees. Eligible employees may contribute up to 10%
of their annual compensation to the Plan, up to certain limits prescribed by the
Internal Revenue Service. The Company matches 25% of each eligible employee's
contributions up to a maximum of 6% of their individual earnings. In addition,
the Company contributes an amount equal to 2% of each participant's earnings.
The Plan went into effect July 1, 1990.
The Company recorded charges for contributions of $495,000, $395,000 and
$350,000 for the years ended June 30, 1996, 1995 and 1994, respectively.
12. Fair Value of Financial Instruments:
The estimated fair value of the Company's financial instruments have been
determined by the Company using available market information and appropriate
valuation methodologies. The carrying amounts of cash and cash equivalents,
accounts receivable, accounts payable, capital lease obligations and notes
payable approximate their respective fair values due to the short-term
maturities and approximate market interest rates of these instruments.
Management is unable to determine a fair value for the outstanding $55,000,000
principal amount of 12% First Mortgage Notes due November 15, 2000 of Arizona
Charlie's, Inc. (the "AC Notes") or the outstanding $20,000,000 principal amount
($17,526,000 carrying amount at June 30, 1996) of 12% First Mortgage Notes due
November 15, 2000 of Capitol Queen and Casino, Inc. (the "CQC Notes"), which are
guaranteed by AC. It is not practicable to determine the fair value of these
financial instruments due to the debt covenant violations and related
uncertainties involved in negotiations with the holders of AC Notes and CQC
Notes, as more fully discussed in Note 2.
SCHEDULE II
CAPITOL QUEEN & CASINO, INC.
VALUATION AND QUALIFYING ACCOUNTS For The Years Ended
June 30, 1996, 1995 And 1994
<TABLE>
<CAPTION>
Additions
------------------------
Balance at Charged to Charged to
Beginning Costs and Other
Description of Year Expenses Accounts
- -------------------------------------- ----------- ----------- -----------
Allowance for doubtful accounts
<S> <C> <C> <C>
Year ended June 30, 1996 ............ $ 4,420,000 $ -- $ 2,574,000
=========== =========== ===========
Year ended June 30, 1995 ............ $ 1,181,000 $ -- $ 3,239,000
=========== =========== ===========
Year ended June 30, 1994 ............ $ -- $ -- $ 1,181,000
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Balance at
End of
Description Deductions Year
- -------------------------------------- ----------- --------
<S> <C> <C>
Allowance for doubtful accounts
Year ended June 30, 1996 ............ $ -- $ 6,994,000
=========== ===========
Year ended June 30, 1995 ............ $ -- $ 4,420,000
=========== ===========
Year ended June 30, 1994 ............ $ -- $ 1,181,000
=========== ===========
</TABLE>
SCHEDULE II
ARIZONA CHARLIE'S, INC.
VALUATION AND QUALIFYING ACCOUNTS For The Years Ended
June 30, 1996, 1995 And 1994
<TABLE>
<CAPTION>
Additions
----------------------
Balance at Charged to Charged to
Beginning Costs and Other
Description of Year Expenses Accounts
----------- ------- -------- --------
<S> <C> <C> <C>
Allowance for doubtful accounts:
Year ended June 30, 1996 .............. $1,592,000 $ 601,000 $ --
========== ========== ==========
Year ended June 30, 1995 .............. $ -- $1,592,000 $ --
========== ========== ==========
Year ended June 30, 1994 .............. $ -- $ -- $ --
========== ========== ==========
Deferred Tax Asset Valuation Allowance:
Year ended June 30, 1996 .............. $1,840,000 $ -- $1,482,000
========== ========== ==========
Year ended June 30, 1995 .............. $ 213,000 $ -- $1,627,000
========== ========== ==========
Year ended June 30, 1994 .............. $ -- $ -- $ 213,000
========== ========== ==========
</TABLE>
EXHIBIT
2.1 Agreement of Reorganization dated November 16, 1993,
by and among Becker Gaming, Inc. ("BGI"), Arizona
Charlie's, Inc. ("Arizona Charlie's"), Sunset
Coin, Inc. ("Sunset Coin"), Becker Gaming Group, Inc.
("Becker Gaming Group"), Capitol Queen & Casino, Inc.
("Capitol Queen"), Charlie's Land Company ("CLC") ,
and each of Ernest A. Becker, III, Ernest A. Becker,
IV, Barry W. Becker and Bruce F. Becker
(collectively, the "Beckers").*
3.1 Articles of Incorporation of Capitol Queen.*
3.2 First Amended By-Laws of Capitol Queen.*
3.3 Articles of Incorporation of Arizona Charlie's.*
3.4 Amended and Restated By-Laws of Arizona Charlie's.*
10.1 Purchase Agreement dated November 15, 1993 among BGI, Arizona
Charlie's, Capitol Queen, Sunset Coin and the purchasers named
therein (the "Purchasers).*
10.2 Indenture dated November 15, 1993 among Capitol Queen, as issuer,
Arizona Charlie's, as guarantor, and IBJ Schroder Bank & Trust
Company ("IBJ"), as trustee.*
10.3 Deed of Trust, Assignment of Leases, Security Agreement and Fixture
Filing dated November 15, 1993 by Capitol Queen, as grantor, to
Charles W. Riley, as trustee, for the benefit of IBJ , as collateral
agent.*
10.4 Vessel Construction Agreement dated October 23, 1993
between Leevac Shipyards, Inc. and Capitol Queen, as
amended by Amendment No. 1 to Vessel Construction
Agreement dated November 15 and 17, 1993.*
10.5 Form of First Preferred Ship Mortgage Securing an
Indenture between Capitol Queen and IBJ.*
10.6 Security Agreement dated November 15, 1993 between
Capitol Queen and IBJ, as collateral agent.*
10.7 Stock Pledge Agreement dated November 15, 1993 between Capitol Queen
and IBJ, as collateral agent.*
10.8 Collateral Agency Agreement dated November 15, 1993 among Capitol
Queen and IBJ, as trustee and collateral agent.*
10.9 Disbursement and Escrow Agreement dated November 15, 1993 among
Capitol Queen and IBJ, as escrow agent, trustee and collateral
agent.*
10.10 Registration Rights Agreement dated November 15, 1993
among Capitol Queen, Arizona Charlie's and the
Purchasers.*
10.11 Form of Management Agreement to be entered into between BGI and each
of Arizona Charlie's, Capitol Queen, Sunset Coin and Becker Gaming
Group. Included at Exhibit I to Exhibit 2-1 hereof.*
10.12 Form of Tax Allocation Agreement to be entered into
between BGI and each of Arizona Charlie's, Sunset
Coin, Becker Gaming Group and Capitol Queen. Included
at Exhibit J to Exhibit 2-1 hereof.*
10.13 Letter Agreement dated September 10, 1993 among BGI, Arizona
Charlie's, Capitol Queen and Ladenburg, Thalmann & Co., Inc., as
placement agent.*
10.14 Land Purchase Option Contract dated January 4, 1993
between Linda Ann and Harvey L. McCray and Vernon M.
and Joyce G. Burkhalter, as seller, and R.Q.
Enterprises, as buyer; and Wire Transfer Order and
Closing Document dated July 26, 1993 between Arizona
Charlie's and First Interstate Bank of Nevada.*
10.15 Letter of Understanding dated January 26, 1993
between Jefftel, Inc. and JCR Hotel, Inc. and River
Queen Enterprises, Inc. and Capitol Queen.*
10.16 Purchase Agreement dated September 20, 1993 among BGI
and Cathryn Simmons, Public Issue Management, Inc.,
Byron Neal Fox and Cynthia L. Pegner, Richard Moore,
Byron Neal Fox, P.C., David Chernoff, Oscar B.
Goodman, Eckley M. Keach, Ronald E. Partee and Carol
Partee, and Fox & Partee.*
10.17 Riverfront Development Agreement dated as of
September 1, 1993 between Capitol Queen, the Company
and Jefferson City, Missouri.*
10.18 First Supplemental Indenture dated January 1, 1995 among Capitol
Queen, as issurer, Arizona Charlie's, as guarantor, and IBJ, as
trustee.
10.19 Assets Purchase agreement dated April 10, 1995 between Aerie
Riverboat Casino of Missouri, Inc., as buyer, and Capitol Queen, as
seller.
10.20 Letter agreement dated December 5, 1994 among BGI
and Cathryn Simmons, Public Issue Management, Inc.,
Byron Neal Fox and Cynthia L. Pegner, Richard Moore,
Byron Neal Fox, P.C., David Chernoff, Oscar B.
Goodman, Eckley M. Keach, Ronald E. Partee and Carol
Partee, and Fox & Partee.*
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<PERIOD-END> JUN-30-1996
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