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FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-----------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 33-75806
CAPITOL QUEEN & CASINO, INC.
----------------------------
(Exact name of registrant as specified in its charter)
Nevada 43-1652885
------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporations or organization) Identification No.)
740 S. Decatur
Las Vegas, Nevada 89107
----------------- -----
(Address of principal (Zip Code)
executive offices)
(702) 258-5200
--------------
(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former name, former address and former fiscal year if
changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the lastest practicable date.
Outstanding at
Class of common stock January 31, 1996
- --------------------- --------------
$1.00 par value 100 shares
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CAPITOL QUEEN & CASINO, INC.
(A wholly owned subsidiary of Becker Gaming, Inc.)
FORM 10-Q/A
INDEX
PART I, FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Page
CAPITOL QUEEN & CASINO, INC.
Balance Sheets as of June 30, 1995 and December
31, 1995........................................................1
Statements of Loss Incurred During the
Development Stage for the Three-Month Periods
Ended December 31, 1995 and 1994 and
for the Six-Month Periods Ended Decmeber 31,
1995 and 1994 and for the period from
January 20, 1993 (the date of inception)
through December 31, 1995.......................................2
Statements of Cash Flows for the Six-Month
Periods Ended December 31, 1995 and 1994
and for the period from January 20,
1993 (the date of inception) through
December 31, 1995...............................................3
Notes to Financial Statements...................................4
ARIZONA CHARLIE'S, INC.
Balance Sheets as of June 30, 1995 and
December 31, 1995...............................................9
Statements of Income and Retained Earnings
(Deficit) for the Three-Month Periods Ended
December 31, 1995 and 1994
and for Six-Month Periods Ended December 31,
1995 and 1994..................................................10
Statements of Cash Flows for the Six-Month
Periods Ended December 31, 1995 and 1994.......................11
Notes to Financial Statements..................................12
Item 2. Management's Discussion and Analysis of Financial
....Condition and Results of Operations
Capitol Queen & Casino, Inc....................................18
Arizona Charlie's, Inc. .......................................19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................25
Item 6. Exhibits and Reports on Form 8-K.......................27
SIGNATURES.....................................................28
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CAPITOL QUEEN & CASINO, INC.
(A Development Stage Company And A Wholly Owned
Subsidiary of Becker Gaming, Inc.)
BALANCE SHEETS
(Dollars In Thousands, Except Share Data)
ASSETS
December 31, June 30,
1995 1995
------- -------
(Unaudited)
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 ................................... 11,834 12,146
Financing costs, net of accumulated
amortization of $278 at December 31,
1995 and $212 at June 30, 1995 ....................... 639 705
Deposits and other assets .............................. 60 60
------- -------
Total other assets ................................. 12,533 12,911
------- -------
Total assets ....................................... $12,563 $12,986
------- -------
------- -------
LIABILITIES & STOCKHOLDER'S EQUITY(DEFICIT)
December 31, June 30,
1995 1995
-------- --------
(Unaudited)
Current liabilities:
Accounts payable .................................... $ -- $ 142
Advances from related parties ....................... 1,057 404
Accrued interest .................................... 1,542 395
Notes payable to related parties .................... 1,200 1,200
Long-term debt classified as current,
net of unamortized original issue discount
of $2,615 and $2,882, respectively ................ 17,385 17,118
-------- --------
Total liabilities ............................ 21,184 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 ........ (21,353) (19,005)
-------- --------
Total stockholder's equity (deficit) ............ (8,621) (6,273)
-------- --------
Total liabilities and stockholder's
equity(deficit) .............................. $ 12,563 $ 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)
(Unaudited)
Three Months Ended December 31,
1995 1994
------- -------
Revenues ......................... $- $-
Operating expenses:
Amortization of financing and
other costs .................. 33 333
Abandonment loss ............... -- --
Development costs .............. 702 307
------- -------
Total operating expenses ... 735 640
------- -------
Operating loss ................... (735) (640)
Other income (expenses):
Interest income ................ -- 283
Interest expense ............... (729) (1,227)
Interest capitalized ........... -- --
------- -------
Total other income (expense) ..... (729) (944)
------- -------
Net loss before extraordinary item
(1,464) (1,584)
------- -------
Extraordinary item:
Loss on early retirement of
debt (no income tax benefit
available) ................... -- --
------- -------
Net loss ...................... $(1,464) $(1,584)
======= =======
For The Period
January 20, 1993
(The Date Of
Inception)
Six Months Through
Ended December 31, December 31,
1995 1994 1995
-------- -------- ------------------
Revenues ........................... $- $- $-
Operating expenses:
Amortization of financing and .... 66 670 1,307
other costs .................... -- -- 6,034
Abandonment loss ................. 868 600 2,074
Development costs ................ -- -- --
934 1,270 9,415
Total operating expenses ..... -- -- --
(934) (1,270) (9,415)
Operating loss
Other income (expenses): ........... -- 555 1,265
Interest income .................. (1,415) (2,453) (9,797)
Interest expense ................. -- -- 683
Interest capitalized ............. -- -- --
(1,415) (1,898) (7,849)
Total other income (expense) ....... -- -- --
Net loss before extraordinary item . (2,349) (3,168) (17,264)
-------- -------- ------------------
Extraordinary item:
Loss on early retirement of
debt (no income tax benefit ...
available) .................... -- -- (4,089)
-------- -------- ------------------
Net loss ........................ $ (2,349) $ (3,168) $ (21,353)
======== ======== ==================
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 Thousands)
(Unaudited)
Six Months Ended
December 31,
1995 1994
------- -------
Cash flows from development stage activities:
Net loss .................................... $(2,349) $(3,168)
Adjustments to reconcile net loss
to net cash provided by (used in)
development stage activities:
Amortization of financing and other costs ... 66 134
Amortization of original issue discount ..... 267 536
Abandonment loss ............................ -- --
Extraordinary loss on retirement of debt .... -- --
Increase in accounts payable
and accruals, net of amounts
for capital expenditures ................... 1,005 5
Increase in advances from related parties ... 653 40
------- -------
Total adjustments ..................... 1,991 715
------- -------
Net cash used in development
stage activities .................... (358) (2,453)
------- -------
Cash flows from investing activities:
Capital expenditures, net of
construction accounts payable .............. -- (1,639)
Decrease in deposits and other assets ....... 313 12
Capitalization of preopening costs .......... -- --
Development costs ........................... -- --
Net (additions to) reductions
in restricted cash equivalents ........... -- 4,334
------- -------
Net cash provided by
(used in) investing activities ........ 313 2,707
------- -------
Cash flows from financing activities:
Principal payments on First
Mortgage Notes ........................... -- --
Proceeds from issuance of First
Mortgage Notes, net of financing costs ... -- --
Proceeds from borrowings under
notes payable to related parties ........ -- --
Equity contribution from Becker Gaming, Inc. --
relating to sale of warrants ........... -- --
------- -------
Net cash provided by financing activities -- --
------- -------
Net (decrease) increase in
cash and cash equivalents .......... (45) 254
Cash and cash equivalents,
beginning of period ...................... 45 33
------- -------
Cash and cash equivalents,
end of period ............................ -- $ 287
------- -------
------- -------
Supplemental cash flow disclosures:
Interest paid, net of amounts capitalized ... $- $ 2,400
------- -------
------- -------
Original issue discount that
did not affect cash ...................... $- $-
------- -------
------- -------
Equity contribution by Becker Gaming
that did not affect cash ................. $- $-
------- -------
------- -------
For The Period
January 20, 1993
(The Date Of
Inception)
Through
December 31,
1995
--------
Cash flows from development stage activities:
Net loss ................................... $(21,353)
Adjustments to reconcile net loss
to net cash provided by (used in)
development stage activities:
Amortization of financing and other costs .. 1,307
Amortization of original issue discount .... 1,766
Abandonment loss ........................... 6,034
Extraordinary loss on retirement of debt ... 4,089
Increase in accounts payable
and accruals, net of amounts
for capital expenditures .................. 1,553
Increase in advances from related parties .. 1,045
--------
Total adjustments .................... 15,794
--------
Net cash used in development
stage activities ................... (5,559)
--------
Cash flows from investing activities:
Capital expenditures, net of
construction accounts payable ............. (12,936)
Decrease in deposits and other assets ...... 253
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 ....... (13,607)
--------
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 provided by financing activities 19,166
--------
Net (decrease) increase 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 THE FINANCIAL STATEMENTS
----------
1) Basis of Presentation:
Capitol Queen & Casino, Inc. ("CQC") is wholly owned subsidiary of Becker
Gaming, Inc. ("BGI"). The accompanying financial statements of CQC have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instruction to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments and normal
recurring accruals considered necessary for a fair presentation have been
included. Operating results for the three and six-month periods ended December
31, 1995 are not necessarily indicative of the results that may be expected for
the year ended June 30, 1996. The unaudited financial statements should be read
in conjunction with the financial statements and footnotes included in CQC's
annual report on Form 10-K for the year ended June 30, 1995.
2) Denial of Missouri Gaming License Application of
Capitol Queen & Casino, Inc.:
Sunset Coin, Inc. ("SC"), a wholly owned subsidiary of BGI, has guaranteed
12% First Mortgage Notes due November 15, 2000, of Arizona Charlie's, Inc.
("AC"), another wholly owned subsidiary of BGI, until such time as AC completes
an expansion of its casino facilities (which it has done) and obtains a
specified fixed charge coverage ratio, as defined in the indenture governing the
AC First Mortgage Notes (the "AC Notes"). AC, in turn, has guaranteed the 12%
First Mortgage Notes (the "CQC Notes") due November 15, 2000 of Capitol Queen &
Casino, Inc., another wholly owned subsidiary of BGI, until such time as CQC is
licensed to conduct gaming in Missouri.
CQC was formed to develop, own and operate the "Capitol Queen" riverboat
casino in Jefferson City, Missouri. On September 28, 1994, CQC was notified that
its application for a gaming license was rejected by the Missouri Gaming
Commission (the "Commission"). Under the Commission's order, CQC, its principal
owners and affiliated companies cannot reapply for a gaming license in Missouri
prior to September 28, 1996.
The Commission's decision was based on an August 1994 recommendation of
its staff (the "Staff") that CQC's license application be denied without an
investigative review because CQC knowingly failed to disclose material,
substantive information in the application. The Commission did not find that CQC
knowingly failed to disclose information, but did find that the application
contained omissions of a substantive and material nature. Management of CQC
believes that its application was complete and accurate. Moreover, CQC has fully
disclosed the information cited by the Staff in post-application filings, other
public documents and communications with the Staff, all of which management
considers to be part of the licensing and related investigative process. Based
on the advice of legal counsel, CQC believes that the Commission acted outside
its authority in rejecting the application without a formal investigation.
On October 31, 1994, CQC petitioned the Cole County Circuit Court in
Jefferson City for a writ of mandamus. In response to the petition, the court
issued an order declaring that by denying CQC's application without first
conducting an investigation and by deliberating in a closed session, the
Commission had violated Missouri gaming and open meeting laws. The court issued
a preliminary writ of mandamus declaring the Commission's decision void and
ordering the Commission to immediately commence a full investigation and
thereafter to act on CQC's application. The court ordered the Commission to show
cause within thirty days why the preliminary writ should not be made permanent.
Initially, the Commission did not respond directly to the Circuit Court's
order to show cause, but instead filed two actions, both unsuccessful, in the
Missouri Court of Appeals for the Western District. On November 16, 1994, the
Commission petitioned the Court of Appeals for a writ of prohibition against the
Circuit Court, contending, among other things, that CQC was not entitled to
judicial relief because it had not exhausted its administrative remedy of an
evidentiary hearing before the Commission. The Court of Appeals initially issued
a preliminary writ in prohibition staying further proceedings in the Circuit
Court. However, in an opinion issued on April 18, 1995, the Court of Appeals
concluded that its preliminary writ of prohibition had been improvidently
granted, quashed the preliminary writ, and denied the Commission's request for a
permanent writ, relegating the Commission to its remedies in the Circuit Court.
On December 13, 1994, the Commission also filed an appeal of the Circuit Court's
order. On December 23, CQC moved to dismiss the appeal on the grounds that the
preliminary writ of mandamus was not a final order and therefore was not
appealable. On January 5, 1995, the Court of Appeals granted CQC's motion and
dismissed the appeal.
On June 26, 1995, the Circuit Court issued a peremptory (permanent) writ of
mandamus similar to the preliminary writ, declaring the Commission's order void
and ordering the Commission to proceed with an investigation of CQC's
application "with all deliberate speed." On July 21, 1995, the Commission
appealed the Circuit Court's decision to the Missouri Court of Appeals for the
Western District. That appeal is pending.
On November 1, 1994, concurrent with its efforts to obtain judicial
relief, CQC (with BGI as a co-party) requested an administrative hearing
pursuant to the Missouri gaming statutes, under which a denied applicant may
request an evidentiary hearing before a Commission appointed hearing officer.
The hearing officer's decision is subject to review by the Commission, and the
Commission's decision is in turn subject to judicial review. The Commission
filed an answer on November 29, alleging, among other things, that CQC is not
entitled to an administrative hearing because CQC had not been investigated. On
December 22, because the Commission had not appointed a hearing officer or
otherwise responded to CQC's request for a hearing, CQC moved the Commission to
appoint a hearing officer and establish a procedural schedule. The Commission
did not respond to this motion. However, in March 1995, CQC's counsel was
notified by a member of the Commission's staff that he had been appointed
hearing officer in the case. Because this person appears to have participated in
the staff's recommendation that CQC's license be denied, CQC moved on March 31
for the appointment of an impartial, independent hearing officer. The
Commission's attorney filed a response in opposition to this motion on April 12,
but the Commission has not responded to it. Instead, on August 10, 1995, the
hearing officer issued an order proclaiming his ability to proceed impartially
and purporting to deny the motion. Hearing dates have been vacated by
stipulation, and, after the Circuit Court's order voiding the Commission's
decision appeared to make the administrative proceeding premature, postponed
indefinitely.
On March 24, 1995, CQC filed an action against the Commission in the Cole
County, Missouri, Circuit Court, alleging that the Commission had violated
Missouri's open meeting law by deliberating in a closed session before issuing
its decision denying CQC's license. The petition requested an order voiding the
Commission's decision. On March 27, as a protective measure against possible
arguments that Cole County is not the proper venue, CQC filed a substantively
identical action in the St. Louis County Circuit Court. In April, the Commission
filed answers to both complaints denying that it had violated the open meeting
law. On June 1, CQC moved for summary judgment in the Cole County case. In its
response, the Commission stated that it "did not deliberately intend to
circumvent" the open meeting law but had deliberated in closed session based on
erroneous advice of counsel. The Commission argued that the closed session could
nevertheless be justified under statutory exceptions allowing agencies to meet
privately with their lawyers to discuss confidential information and litigation.
The motion for summary judgment was heard on December 19, 1995, and taken under
submission by the court.
In January 1995, CQC engaged in settlement discussions initiated by the
Missouri Attorney General's office, legal counsel for the Commission, with
respect to the civil matters involving the Commission. The discussions, which
terminated in March 1995, were resumed in August 1995 and were expanded to
include the misdemeanor charges filed by the Missouri Attorney General. While
CQC and its lawyers continue to seek a negotiated settlement to the disputes
with the Commission and the Attorney General, the discussions have again been
terminated by the Attorney General's office.
At the time CQC was notified of the Staff's position, construction of the
riverboat contemplated under the project being developed by CQC was almost
completed. CQC had also obtained the necessary permits for the land-based
development portion of the project and had performed certain dredging and other
site preparation work. In August 1994, CQC suspended all further land site
development activity pending resolution of the review of its license
application. Management of CQC believes that the Commission's subsequent ruling
in September 1994 makes further development of the project not feasible because
of significant delays in the ability to operate the riverboat casino, either
through appeal of the decision or expiration of the two-year probation period.
Accordingly, on September 29, 1994, management decided to suspend further
development of the Capitol Queen project. As a result of that decision, costs
associated with the development of the project which had been deferred during
the development stage were written-off in the fourth quarter of the fiscal year
ended June 30, 1994, and the land site and riverboat were written down to their
estimated net realizable value.
Prior to its suspension, CQC had financed the Capitol Queen project
through the issuance of $40 million in principal amount of the 12% First
Mortgage Notes due November 15, 2000. As of January 1, 1995, the CQC Indenture
was amended to (i) eliminate CQC's obligation to construct and open the Capitol
Queen and (ii) permit a two-step purchase of the CQC Notes at 101% of principal
plus accrued and unpaid interest from a sale of assets. The repurchase of
$20,000,000 principal amount of the CQC Notes (plus accrued and unpaid interest
thereon) was completed on January 17, 1995 with funds from the project escrow
account and an aggregate of $20,000,000 principal amount of the CQC Notes
remained outstanding. However, the dates by which CQC previously agreed with the
holders of the CQC Notes to effect the sale of its assets and repurchase the
remaining CQC Notes have passed. The CQC Notes outstanding require annual
interest payments of $2,400,000, payable in equal installments semi-annually on
May 15 and November 15. CQC was not able to make its scheduled interest payment
of $1,200,000 on November 15, 1995, and AC did not have available funds to
advance on behalf of CQC. Management of AC and CQC are currently undergoing
discussions with an informal committee representing the holders of the AC Notes
and CQC Notes regarding a proposed restructuring plan, however, an agreement has
not yet been reached.
CQC had entered into an Asset Purchase Agreement dated April 10, 1995 for
the sale of its assets to Aerie Riverboat Casinos of Missouri, Inc. at a
purchase price of $18,000,000. However, the consummation of the Aerie purchase
agreement was subject to the satisfaction of several conditions which could not
be satisfied timely, including, among others, that Jefferson City consent to the
assignment of the Development Agreement, that Aerie be found preliminary
suitable to hold a Missouri Gaming license and that riverboat gaming is legally
permitted in Jefferson City. As a result, the agreement with Aerie was
terminated without penalty when the expiration date of December 31, 1995 passed.
CQC is currently pursuing offers on its riverboat assets from prospective
buyers.
On November 7, 1995, voters in Jefferson City rejected an ordinance
permitting riverboat gambling, reversing the vote of an earlier election in
which Jefferson City voters approved riverboat gambling. Because CQC's
Development Agreement with Jefferson City was entered into pursuant to the
earlier ordinance permitting riverboat gambling, the Company believes that as a
matter of law the 1995 election does not affect the validity of the Development
Agreement. However, it has not yet been determined whether Jefferson City will
honor the Agreement in light of the election without litigation to uphold CQC's
position. CQC is exploring its legal options in the event Jefferson City
declines to honor the Development Agreement, but has not reached any decision. A
final judicial determination that the 1995 vote abrogates the Development
Agreement would have a material adverse effect on CQC and its ability to sell
its assets.
CQC is not expected to generate sufficient funds through the sale of its
assets to repurchase all of the outstanding CQC Notes. AC, pursuant to its
guarantee of the CQC Notes, will be liable for the principal of, and interest
on, any remaining outstanding CQC Notes. AC is restricted from selling assets
under the covenants governing the AC Notes, and management believes that access
to additional capital from other sources is restricted as a result of the
above-described circumstances. As a result, management does not believe that AC
(nor SC, as guarantor of the AC Notes) would have sufficient resources to
satisfy such obligation, should it be necessary.
================================================================================
ARIZONA CHARLIE'S, INC.
(A Wholly Owned Subsidiary Of Becker Gaming, Inc. )
BALANCE SHEETS
(Dollars In Thousands)
ASSETS
December 31, June 30,
1995 1995
-------- --------
(unaudited)
Current assets:
Cash and cash equivalents ................. $ 4,952 $ 5,404
Restricted cash, in escrow account ........ 10 10
Trade and other accounts receivable ....... 581 658
Management fee receivable -
Becker Gaming Inc. ...................... 725 --
Receivable from related parties .......... 1,681 820
Notes receivable from related party ....... 4,416 4,416
Inventories ............................... 669 661
Prepaid expenses .......................... 756 1,162
-------- --------
Total current assets .................... 13,790 13,131
-------- --------
Property and equipment:
Building and improvements ................. 37,485 37,485
Furniture and equipment ................... 22,516 22,609
Land improvements ......................... 1,628 1,628
-------- --------
61,629 61,722
Less, accumulated depreciation ........... (14,764) (13,572)
-------- --------
46,865 48,150
Land ...................................... 208 208
-------- --------
Net property and equipment ............ 47,073 48,358
-------- --------
Other assets:
Receivable from related party, noncurrent.. -- 240
Deposits and other ........................ 432 551
Financing costs, less accumulated
amortization of $1,156 at December 31,
1995 and $329 June 30, 1995 .............. 2,717 2,993
-------- --------
Total other assets ................... 3,149 3,784
-------- --------
Total assets .......................... $ 64,012 $ 65,273
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
December 31, June 30,
1995 1995
-------- --------
(unaudited)
Current liabilities:
Trade accounts payable .................... $ 1,535 $ 1,449
Accounts payable to related parties ....... 5 3
Accrued expenses .......................... 3,343 3,097
Management fees due Becker Gaming, Inc. ... 5,049 3,287
Notes payable ............................. 0 121
Notes payable to related party ............ 2,250 2,250
Current portion of obligations
under capital leases .................... 3 4
-------- --------
Total current liabilities ......... 12,185 10,211
Long-term debt, less current portion ......... 55,000 55,000
Subordinated notes payable to prior
stockholders ............................... 5,000 5,000
Obligations under capital leases,
less current portion ....................... 2 4
-------- --------
Total liabilities ................. 72,187 70,215
-------- --------
Commitments and contingencies
Stockholder's equity (deficit):
Common stock, no par value,
2,500 shares authorized, 1,000
shares issued and outstanding ............. 469 469
Retained earnings (deficit) ................ (8,644) (5,411)
-------- --------
Total stockholder's equity
(deficit) ......................... (8,175) (4,942)
-------- --------
Total liabilities and
stockholder's equity (deficit) .... $ 64,012 $ 65,273
======== ========
The accompanying notes are an integral part of these financial statements.
================================================================================
ARIZONA CHARLIE'S, INC.
(A Wholly Owned Subsidiary Of Becker Gaming, Inc.)
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
(Dollars In Thousands)
(unaudited)
Three Months Ended December 31,
1995 1994
-------- --------
Revenues:
Gaming ....................................... $ 13,642 $ 10,973
Food and beverage ............................ 3,390 2,519
Hotel ........................................ 771 708
Gift shop .................................... 153 143
Management fee from affiliates ............... 725 --
Other ........................................ 215 172
-------- --------
Gross revenues ........................... 18,896 14,515
Less, promotional allowances ................... (1,945) (1,148)
-------- --------
Net revenues ............................. 16,951 13,367
-------- --------
Operating expenses:
Gaming ....................................... 4,100 2,955
Food and beverage ............................ 4,140 3,310
Hotel ........................................ 417 413
Gift shop .................................... 127 105
Advertising and promotion .................... 1,145 1,116
General and administrative ................... 4,876 3,624
Management fee - Becker Gaming, Inc. ......... 906 723
Rent expense paid to related party ........... 54 46
Depreciation and amortization ................ 893 938
-------- --------
Total operating expenses ................. 16,658 13,230
-------- --------
Operating income ......................... 293 137
-------- --------
Other income (expenses):
Gain(Loss) on sale of assets ................. (14) --
Interest income .............................. 75 151
Interest expense ............................. (1,762) (1,821)
Interest capitalized ......................... -- 168
Other, net ................................... 10 --
-------- --------
Total other expenses ..................... (1,691) (1,502)
-------- --------
Income (loss) before taxes ............... (1,398) (1,365)
Provision for income tax ....................... -- --
-------- --------
Net (loss)income ......................... ($ 1,398) ($ 1,365)
Retained earnings (deficit),
beginning ofperiod ............................. (7,246) (950)
-------- --------
Retained earnings (deficit),
end of period .................................. ($ 8,644) ($ 2,315)
======== ========
Six Months Ended December 31,
1995 1994
-------- --------
Revenues:
Gaming ....................................... $ 26,533 $ 20,610
Food and beverage ............................ 6,463 4,684
Hotel ........................................ 1,493 1,146
Gift shop .................................... 307 264
Management fee from affiliates ............... 725 --
Other ........................................ 515 262
-------- --------
Gross revenues .......................... 36,036 26,966
Less, promotional allowances .................. (3,614) (1,990)
-------- --------
Net revenues ............................. 32,422 24,976
-------- --------
Operating expenses:
Gaming ....................................... 7,638 5,568
Food and beverage ............................ 8,015 6,084
Hotel ........................................ 816 728
Gift shop .................................... 234 211
Advertising and promotion .................... 2,321 1,890
General and administrative ................... 9,674 6,695
Management fee - Becker Gaming, Inc. ......... 1,763 1,343
Rent expense paid to related party ........... 108 93
Depreciation and amortization ................ 1,779 1,637
-------- --------
Total operating expenses ................. 32,348 24,249
-------- --------
Operating income ......................... 74 727
-------- --------
Other income (expenses):
Gain(Loss) on sale of assets ................. (11) --
Interest income .............................. 144 395
Interest expense ............................. (3,475) (3,638)
Interest capitalized ......................... -- 676
Other, net ................................... 35 --
-------- --------
Total other expenses ..................... (3,307) (2,567)
-------- --------
Income (loss) before taxes ............... (3,233) (1,840)
Provision for income tax ....................... -- --
-------- --------
Net (loss)income ......................... ($ 3,233) ($ 1,840)
Retained earnings (deficit),
beginning of period ............................ (5,411) (475)
-------- --------
Retained earnings (deficit),
end of period .................................. ($ 8,644) ($ 2,315)
======== ========
The accompanying notes are an integral part of these financial statements.
================================================================================
ARIZONA CHARLIE'S, INC.
(A Wholly Owned Subsidiary Of Becker Gaming, Inc.)
STATEMENTS OF CASH FLOWS
(Dollars In Thousands)
(Unaudited)
Six Months Ended December 31,
1995 1994
-------- --------
Cash flows from operating activities:
Net income (loss) .................................. ($ 3,233) ($ 1,840)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization ...................... 1,779 1,637
Provision for losses on related
party receivables ................................. 2,152 --
(Gain) loss on sale of equipment ................... 11 (2)
(Increase) decrease in operating assets:
Receivables ........................................ (2,728) 559
Inventories ........................................ (8) (133)
Prepaid expenses ................................... 406 (7)
Deposits and other ................................. (13) (50)
Increase (decrease) in operating liabilities:
Accounts payable, net of amounts for
capital expenditures .............................. 88 (148)
Accrued expenses ................................... 246 728
Management fees due to Becker Gaming, Inc. ......... 1,762 1,343
-------- --------
Total adjustments ............................... 3,695 3,927
-------- --------
Net cash provided by operating activities ...... 462 2,087
-------- --------
Cash flows from investing activities:
Capital expenditures, net of amounts in
accounts payable .................................. (77) (19,448)
Increase in receivable from Becker Gaming, Inc. .... -- (3,000)
Increase in management fee receivable from Becker
Gaming, Inc. ....................................... (725) --
Net (additions to) reductions in restricted cash
equivalents ........................................ -- 19,905
Proceeds from assets sales ......................... 12 --
-------- --------
Net cash provided by (used in)
investing activities ......................... (790) (2,543)
-------- --------
Cash flows from financing activities:
Proceeds from borrowing under notes payable ........ -- 1,000
Principal payments on notes payable ................ (121) (120)
Payments under capital lease obligations ........... (3) (14)
-------- --------
Net cash provided by (used in)
financing activities ......................... (124) 866
-------- --------
Net increase in cash and cash equivalents ....... (452) 410
Cash and cash equivalents, beginning of the period ..... 5,404 4,014
-------- --------
Cash and cash equivalents, end of the period ........... $ 4,952 $ 4,424
======== ========
Supplemental cash flow disclosures:
Interst paid, net of amount capitalized ............ $ 3,558 $ 3,558
======== ========
Income taxes paid .................................. -- $ 136
======== ========
Capital lease obligations incurred ................. -- $ 9
======== ========
The accompanying notes are an integral part of these financial statements.
================================================================================
ARIZONA CHARLIE'S, INC.
(A Wholly Owned Subsidiary of Becker Gaming, Inc.)
NOTES TO THE FINANCIAL STATEMENTS
----------
1) Basis of Presentation:
Arizona Charlie's, Inc. ("AC") is a wholly owned subsidiary of Becker
Gaming, Inc. ("BGI"). The accompanying financial statements of AC have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments and normal
recurring accruals considered necessary for a fair presentation have been
included. Operating results for the three and six-month periods ended December
31, 1995 are not necessarily indicative of the results that may be expected for
the year ended June 30, 1996. The unaudited financial statements should be read
in conjunction with the financial statements and footnotes included in AC's
annual report on Form 10-K for the year ended June 30, 1995.
2) Denial of Missouri Gaming License Application of
Capitol Queen & Casino, Inc.:
Sunset Coin, Inc. ("SC"), a wholly owned subsidiary of BGI, has guaranteed
12% First Mortgage Notes due November 15, 2000, of Arizona Charlie's, Inc.,
another wholly owned subsidiary of BGI, until such time as AC completes an
expansion of its casino facilities (which it has done) and obtains a specified
fixed charge coverage ratio, as defined in the indenture governing the AC First
Mortgage Notes (the "AC Notes"). AC, in turn, has guaranteed the 12% First
Mortgage Notes (the "CQC Notes") due November 15, 2000 of Capitol Queen &
Casino, Inc. ("CQC"), another wholly owned subsidiary of BGI, until such time as
CQC is licensed to conduct gaming in Missouri.
CQC was formed to develop, own and operate the "Capitol Queen" riverboat
casino in Jefferson City, Missouri. On September 28, 1994, CQC was notified that
its application for a gaming license was rejected by the Missouri Gaming
Commission (the "Commission"). Under the Commission's order, CQC, its principal
owners and affiliated companies cannot reapply for a gaming license in Missouri
prior to September 28, 1996.
The Commission's decision was based on an August 1994 recommendation of
its staff (the "Staff") that CQC's license application be denied without an
investigative review because CQC knowingly failed to disclose material,
substantive information in the application. The Commission did not find that CQC
knowingly failed to disclose information, but did find that the application
contained omissions of a substantive and material nature. Management of CQC
believes that its application was complete and accurate. Moreover, CQC has fully
disclosed the information cited by the Staff in post-application filings, other
public documents and communications with the Staff, all of which management
considers to be part of the licensing and related investigative process. Based
on the advice of legal counsel, CQC believes that the Commission acted outside
its authority in rejecting the application without a formal investigation.
On October 31, 1994, CQC petitioned the Cole County Circuit Court in
Jefferson City for a writ of mandamus. In response to the petition, the court
issued an order declaring that by denying CQC's application without first
conducting an investigation and by deliberating in a closed session, the
Commission had violated Missouri gaming and open meeting laws. The court issued
a preliminary writ of mandamus declaring the Commission's decision void and
ordering the Commission to immediately commence a full investigation and
thereafter to act on CQC's application. The court ordered the Commission to show
cause within thirty days why the preliminary writ should not be made permanent.
Initially, the Commission did not respond directly to the Circuit Court's
order to show cause, but instead filed two actions, both unsuccessful, in the
Missouri Court of Appeals for the Western District. On November 16, 1994, the
Commission petitioned the Court of Appeals for a writ of prohibition against the
Circuit Court, contending, among other things, that CQC was not entitled to
judicial relief because it had not exhausted its administrative remedy of an
evidentiary hearing before the Commission. The Court of Appeals initially issued
a preliminary writ in prohibition staying further proceedings in the Circuit
Court. However, in an opinion issued on April 18, 1995, the Court of Appeals
concluded that its preliminary writ of prohibition had been improvidently
granted, quashed the preliminary writ, and denied the Commission's request for a
permanent writ, relegating the Commission to its remedies in the Circuit Court.
On December 13, 1994, the Commission also filed an appeal of the Circuit Court's
order. On December 23, CQC moved to dismiss the appeal on the grounds that the
preliminary writ of mandamus was not a final order and therefore was not
appealable. On January 5, 1995, the Court of Appeals granted CQC's motion and
dismissed the appeal.
On June 26, 1995, the Circuit Court issued a peremptory (permanent) writ of
mandamus similar to the preliminary writ, declaring the Commission's order void
and ordering the Commission to proceed with an investigation of CQC's
application "with all deliberate speed." On July 21, 1995, the Commission
appealed the Circuit Court's decision to the Missouri Court of Appeals for the
Western District. That appeal is pending.
On November 1, 1994, concurrent with its efforts to obtain judicial
relief, CQC (with BGI as a co-party) requested an administrative hearing
pursuant to the Missouri gaming statutes, under which a denied applicant may
request an evidentiary hearing before a Commission appointed hearing officer.
The hearing officer's decision is subject to review by the Commission, and the
Commission's decision is in turn subject to judicial review. The Commission
filed an answer on November 29, alleging, among other things, that CQC is not
entitled to an administrative hearing because CQC had not been investigated. On
December 22, because the Commission had not appointed a hearing officer or
otherwise responded to CQC's request for a hearing, CQC moved the Commission to
appoint a hearing officer and establish a procedural schedule. The Commission
did not respond to this motion. However, in March 1995, CQC's counsel was
notified by a member of the Commission's staff that he had been appointed
hearing officer in the case. Because this person appears to have participated in
the staff's recommendation that CQC's license be denied, CQC moved on March 31
for the appointment of an impartial, independent hearing officer. The
Commission's attorney filed a response in opposition to this motion on April 12,
but the Commission has not responded to it. Instead, on August 10, 1995, the
hearing officer issued an order proclaiming his ability to proceed impartially
and purporting to deny the motion. Hearing dates have been vacated by
stipulation, and, after the Circuit Court's order voiding the Commission's
decision appeared to make the administrative proceeding premature, postponed
indefinitely.
On March 24, 1995, CQC filed an action against the Commission in the Cole
County, Missouri, Circuit Court, alleging that the Commission had violated
Missouri's open meeting law by deliberating in a closed session before issuing
its decision denying CQC's license. The petition requested an order voiding the
Commission's decision. On March 27, as a protective measure against possible
arguments that Cole County is not the proper venue, CQC filed a substantively
identical action in the St. Louis County Circuit Court. In April, the Commission
filed answers to both complaints denying that it had violated the open meeting
law. On June 1, CQC moved for summary judgment in the Cole County case. In its
response, the Commission stated that it "did not deliberately intend to
circumvent" the open meeting law but had deliberated in closed session based on
erroneous advice of counsel. The Commission argued that the closed session could
nevertheless be justified under statutory exceptions allowing agencies to meet
privately with their lawyers to discuss confidential information and litigation.
The motion for summary judgment was heard on December 19, 1995, and taken under
submission by the court.
In January 1995, CQC engaged in settlement discussions initiated by the
Missouri Attorney General's office, legal counsel for the Commission, with
respect to the civil matters involving the Commission. The discussions, which
terminated in March 1995, were resumed in August 1995 and were expanded to
include the misdemeanor charges filed by the Missouri Attorney General. While
CQC and its lawyers continue to seek a negotiated settlement to the disputes
with the Commission and the Attorney General, the discussions have again been
terminated by the Attorney General's office.
At the time CQC was notified of the Staff's position, construction of the
riverboat contemplated under the project being developed by CQC was almost
completed. CQC had also obtained the necessary permits for the land-based
development portion of the project and had performed certain dredging and other
site preparation work. In August 1994, CQC suspended all further land site
development activity pending resolution of the review of its license
application. Management of CQC believes that the Commission's subsequent ruling
in September 1994 makes further development of the project not feasible because
of significant delays in the ability to operate the riverboat casino, either
through appeal of the decision or expiration of the two-year probation period.
Accordingly, on September 29, 1994, management decided to suspend further
development of the Capitol Queen project. As a result of that decision, costs
associated with the development of the project which had been deferred during
the development stage were written-off in the fourth quarter of the fiscal year
ended June 30, 1994, and the land site and riverboat were written down to their
estimated net realizable value.
Prior to its suspension, CQC had financed the Capitol Queen project
through the issuance of $40 million in principal amount of the 12% First
Mortgage Notes due November 15, 2000. As of January 1, 1995, the CQC Indenture
was amended to (i) eliminate CQC's obligation to construct and open the Capitol
Queen and (ii) permit a two-step purchase of the CQC Notes at 101% of principal
plus accrued and unpaid interest from a sale of assets. The repurchase of
$20,000,000 principal amount of the CQC Notes (plus accrued and unpaid interest
thereon) was completed on January 17, 1995 with funds from the project escrow
account and an aggregate of $20,000,000 principal amount of the CQC Notes
remained outstanding. However, the dates by which CQC previously agreed with the
holders of the CQC Notes to effect the sale of its assets and repurchase the
remaining CQC Notes have passed. The CQC Notes outstanding require annual
interest payments of $2,400,000, payable in equal installments semi-annually on
May 15 and November 15. CQC was not able to make its scheduled interest payment
of $1,200,000 on November 15, 1995, and AC did not have available funds to
advance on behalf of CQC. Management of AC and CQC are currently undergoing
discussions with an informal committee representing the holders of the AC Notes
and CQC Notes regarding a proposed restructuring plan, however, an agreement has
not yet been reached.
CQC had entered into an Asset Purchase Agreement dated April 10, 1995 for
the sale of its assets to Aerie Riverboat Casinos of Missouri, Inc. at a
purchase price of $18,000,000. However, the consummation of the Aerie purchase
agreement was subject to the satisfaction of several conditions which could not
be satisfied timely, including, among others, that Jefferson City consent to the
assignment of the Development Agreement, that Aerie be found preliminary
suitable to hold a Missouri Gaming license and that riverboat gaming is legally
permitted in Jefferson City. As a result, the agreement with Aerie was
terminated without penalty when the expiration date of December 31, 1995 passed.
CQC is currently pursuing offers on its riverboat assets from prospective
buyers.
On November 7, 1995, voters in Jefferson City rejected an ordinance
permitting riverboat gambling, reversing the vote of an earlier election in
which Jefferson City voters approved riverboat gambling. Because CQC's
Development Agreement with Jefferson City was entered into pursuant to the
earlier ordinance permitting riverboat gambling, the Company believes that as a
matter of law the 1995 election does not affect the validity of the Development
Agreement. However, it has not yet been determined whether Jefferson City will
honor the Agreement in light of the election without litigation to uphold CQC's
position. CQC is exploring its legal options in the event Jefferson City
declines to honor the Development Agreement, but has not reached any decision. A
final judicial determination that the 1995 vote abrogates the Development
Agreement would have a material adverse effect on CQC and its ability to sell
its assets.
CQC is not expected to generate sufficient funds through the sale of its
assets to repurchase all of the outstanding CQC Notes. AC, pursuant to its
guarantee of the CQC Notes, will be liable for the principal of, and interest
on, any remaining outstanding CQC Notes. AC is restricted from selling assets
under the covenants governing the AC Notes, and management believes that access
to additional capital from other sources is restricted as a result of the
above-described circumstances. As a result, management does not believe that AC
(nor SC, as guarantor of the AC Notes) would have sufficient resources to
satisfy such obligation, should it be necessary.
3) Relationship To Becker Gaming, Inc.:
Due to the decision to suspend development of CQC's riverboat casino
project and sell its assets, the majority of BGI's management and administrative
services are anticipated to benefit AC in the future. Accordingly, in late March
1995, BGI transferred approximately 40 employees involved in accounting and
administrative functions from BGI to AC. These employees were originally
employees of AC and were transferred to BGI in June 1994, when the
Reorganization became effective. The Company has reviewed the amount of the BGI
management fee (currently 5% of gross revenues) and determined that effective
October 1, 1995 an amount equal to 4% of gross revenues will be returned to AC
from BGI for the services that AC provides for BGI's subsidiaries as mentioned
above.
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Capitol Queen & Casino, Inc.
Analysis of Development Stage Activities for the period July 1, 1995 through
December 31, 1995
CQC was organized on January 20, 1993 for the purpose of developing,
constructing, owning and operating the Capitol Queen riverboat casino. 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 has 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 proposes
to sell its assets. Such assets include its riverboat, Jefferson City land site,
the Riverfront Development Agreement with Jefferson City and certain permits.
As of January 1, 1995, the CQC Indenture was amended to (i) eliminate CQC's
obligation to construct and open the Capitol Queen and (ii) permit a two-step
purchase of the CQC Notes at 101% of principal plus accrued and unpaid interest
from a sale of assets. The repurchase of $20,000,000 principal amount of the CQC
Notes (plus accrued and unpaid interest thereon) was completed on January 17,
1995 with funds from the project escrow account and an aggregate of $20,000,000
principal amount of the CQC Notes remained outstanding. However, the dates by
which CQC previously agreed with the holders of the CQC Notes to effect the sale
of its assets and repurchase the remaining CQC Notes have passed. The CQC Notes
outstanding require annual interest payments of $2,400,000, payable in equal
installments semi-annually on May 15 and November 15. CQC was not able to make
its scheduled interest payment of $1,200,000 on November 15, 1995, and AC did
not have available funds to advance on behalf of CQC. Management of AC and CQC
are currently undergoing discussions with an informal committee representing the
holders of the AC Notes and CQC Notes regarding a proposed restructuring plan,
however, an agreement has not yet been reached.
CQC had entered into an Asset Purchase Agreement dated April 10, 1995 for
the sale of its assets to Aerie Riverboat Casinos of Missouri, Inc. at a
purchase price of $18,000,000. However, the consummation of the Aerie purchase
agreement was subject to the satisfaction of several conditions which could not
be satisfied timely, including, among others, that Jefferson City consent to the
assignment of the Development Agreement, that Aerie be found preliminary
suitable to hold a Missouri Gaming license and that riverboat gaming is legally
permitted in Jefferson City. As a result, the agreement with Aerie was
terminated without penalty when the expiration date of December 31, 1995 passed.
CQC is currently pursuing offers on its riverboat assets from prospective
buyers.
During the period from July 1, 1995 through December 31, 1995, CQC had
total operating expenses of $934,000 consisting primarily of amortization
expenses of $66,000 associated with debt issue costs and $868,000 of other
operating costs. Other operating costs include a write-off of $312,000 of costs
for architectural plans and dredging costs and approximately $200,000 of costs
associated with the November 8, 1995 election campaign. For the same period, CQC
incurred $1,415,000 of interest cost, of which none was capitalized due to the
decision to suspend development of the riverboat project.
Liquidity and Capital Resources
- -------------------------------
For the period July 1, 1995 through December 31, 1995, net cash used by
development stage activities was $358,000. At December 31, 1995, CQC had
expended a total of approximately $21,200,000 on the development and
construction of the Capitol Queen.
CQC's long-term 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 and the recent vote in
Jefferson City. 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 lessor extent, from food and beverage,
lodging, entertainment and retail sales. AC generally views its non- casino
operations as complementary to its core casino operations. Accordingly, it
utilizes entertainment primarily as a casino marketing tool. Further, AC
maintains food and beverage pricing structures designed to benefit casino
volumes, often resulting in department operating losses. AC seeks to maximize
profits from its hotel operations, however, while maintaining attractive room
rental rates. Gaming revenues represent the net win from gaming wins and losses.
The retail value of accommodations, food and beverage provided to customers
without charge is included in gross revenues and deducted as promotional
allowance.
Results of Operations for the three and six months ended
December 31, 1995 and 1994
----------
Results from operations at AC decreased for both the three-month and
six-month periods ended December 31, 1995 compared to the same periods in 1994
despite increased revenues as a result of increased operating expenses in the
more recent periods. The increased revenues and expenses reflected the openings
of new and expanded facilities at Arizona Charlie's from September 1994 through
January 1995. In addition, the increase in expenses for the 1995 periods
reflects increased slot promotional activity, costs accrued and payments made on
behalf of CQC, and the addition of staff personnel, equipment and related
operating expenses transferred to AC from BGI.
Net revenues at AC increased by $3,584,000, or 26.8%, from $13,367,000 to
$16,951,000 for the three-month period ended December 31, 1995 compared to the
three-month period ended December 31, 1994. In the same period-to-period
comparison, operating expenses, including depreciation and amortization,
increased by 30.5% to $17,258,000 from $13,230,000. This resulted in a $444,000
decrease in operating income from $137,000 to an operating loss of $307,000 for
the more recent period.
Net revenues at AC increased by $7,446,000, or 29.8%, from $24,422,000 to
$32,422,000 million for the six-month period ended December 31, 1995 compared to
the six-month period ended December 31, 1994. In the same period- to- period
comparison, operating expenses, including depreciation and amortization,
increased by 39.6% to $33,848,000 from $24,249,000. This resulted in a
$2,153,000 decrease in operating income from $727,000 to an operating loss of
$1,426,000 for the more recent period.
The largest portion of the revenue increase for the three-month period
ended December 31, 1994 is attributable to gaming revenues, specifically, gaming
machine revenues, which increased 26.6% from $8,976,000 to $11,365,000,
reflecting greater revenue generated by an average of 177additional slot
machines in the latter period. Revenues from table games also increased from
$1,147,000 to $1,267,000 during the three-month period and can be attributed to
the raising of betting limits, establishing higher credit limits to qualified
customers and the operation of a three table poker room which was open for only
two months of the 1994 quarter. Bingo revenues also increased by $102,000 for
the three-month period ended December 31, 1995 when compared to the same period
of the prior year as a result of lower than normal payouts.
The largest portion of the increase in revenues for the six-month period
ended December 31, 1995 is attributable to gaming revenues which increased 28.7%
from $20,610,000 to $26,533,000. Specifically, gaming machine revenues increased
$4,941,000 or 28.5% from $17,354,000 to $22,295,000. Revenues from table games
increased $351,000 or 16.9%, from $2,084,000 to $2,435,000, and revenues from
the race & sports book increased $285,000, or 21.4%, from $1,328,000 to
$1,613,000. These increases are the result of an additional 399 slot machines, 5
table games and an expanded race & sports book facility that offers pari-mutual
wagering. Bingo revenues also increased by $111,000 during the six-month period
ended December 31, 1995 compared to the same period of the prior year as a
result of lower than normal payouts.
Food & Beverage revenues increased 34.6% from $2,519,000 to $3,390,000
during the three-month period ended December 31, 1995 compared to the same
period in the prior year reflecting full operation of the two specialty
restaurants, Chin's and the Yukon Grill which opened in December of 1994. For
the six-month period ended December 31, 1995, food & beverage revenues increased
$1,779,000 or 38.0% from $4,684,000 to $6,463,000 when compared to the six-month
period of the prior year, also reflecting the additional revenues from the two
specialty restaurants.
Hotel revenues increased 8.9% from $708,000 to $771,000 during the three
months ended December 31, 1995 compared to the same three-month period in 1994.
The increased revenue is due to a slight increase in room rates combined with a
small increase in occupancy. During the six-month period ended December 31,
1995, hotel revenues increased by $347,000 or 30.3% from $1,146,000 to
$1,493,000 compared to the same six-month period of 1994. The increased revenue
is largely due to the addition of 158 rooms that were opened in September of
1994.
Gift shop revenues increased 7.0% from $143,000 to $153,000 during the
three-month period ended December 31, 1995 compared to the same period in 1994.
During the six-month period ended December 31, 1995, gift shop revenues
increased $43,000, or 16.3%, from $264,000 to $307,000 compared to the same
period in 1994. The increases are primarily due to the relocation and
enlargement of the gift shop in January 1995.
Other revenues which principally include entertainment cover charges, ATM
commissions, and revenues from PBX and banquets, increased 25.0% from $172,000
to $215,000 for the three-month period ended December 31, 1995 compared to the
same period in 1994. During the six month period ended December 31, 1995, other
revenues increased by $253,000 or 96.6% from $262,000 to $515,000 compared to
the same six-month period of 1994. The increases for the 1995 periods reflect
higher entertainment cover charge and banquet revenues resulting from the
addition of the showroom and the banquet facilities which opened in December
1994.
Gaming expenses increased by $1,145,000 and $2,070,000, or 38.8% and 37.2%,
from $2,955,000 and $5,568,000 to $4,100,000 and $7,638,000, respectively, for
the three-month and six-month periods ended December 31, 1995 as compared to the
same periods in 1994. The higher levels of expense for the 1995 three-month
period reflect additional slot promotional payouts totaling $727,000 made in
connection with two casino promotions held in October and December 1995. Other
increased expense includes higher gaming tax and license fees totaling $124,000
which are associated with the increased gaming revenues and the addition of a
casino promotions department in September 1995. Such departmental expenses
include additional salaries and wages and certain costs associated with Company-
sponsored promotional events for premium players totaling $159,000. In August
1995, the Company added a "Let it Ride the Tournament" table game. Associated
fees payable to the manufacturer of the game totaled $56,000 for the three-
month period ended December 31, 1995. For the 1995 six- month period, increased
expenses include slot promotional expense of $1,086,000, higher gaming tax and
licenses fees of $401,000 along with the additional expense of the newly created
casino marketing department and costs associated with the "Let it Ride" table
games. As a result, gaming expenses represented 30.1% and 28.8% of gaming
revenues for the three-month and six-month periods ended December 31, 1995
compared to 26.9% and 27.0% of the gaming revenues for the same periods in 1994.
Food and Beverage expenses increased by $830,000 and $1,931,000, or 25.8%
and 31.74%, from $3,310,000 and $6,084,000 to $4,140,000 and $8,015,000,
respectively, for the three-month and six-month periods ended December 31, 1995
when compared to the same periods in 1994, as a result of increased food costs
and the additional departmental personnel required for the two new specialty
restaurants and the sports book deli that opened in December 1994. As a result,
food and beverage expenses represented 22.1% and 24.0% of food and beverage
revenues for the three-month and six-month periods ended December 31, 1995
compared to 31.4% and 29.9% of the food and beverage revenues for the same
periods in 1994. Management anticipates these costs will continue to decline as
a percentage of revenues as these facilities generate higher customer volumes
and start-up costs are eliminated.
Hotel expenses increased by $4,000 and $88,000, or 1.0% and 12.1%, from
$413,000 and $728,000 to $417,000 and $816,000, respectively, for the
three-month and six-month periods ended December 31, 1995 as compared to the
same periods in 1994, reflecting increased salaries and wages and the additional
expense associated with the operation of the newly constructed rooms and suites
during the 1995 six-month period. Net contribution by the hotel department
(hotel revenues less hotel operating expenses) was $354,000 and $677,000 for the
three-month and six-month periods ended December 31, 1995 as compared to
$295,000 and $418,000. for the same periods in 1994.
General and Administrative expenses increased by $1,252,000 and
$2,979,000, or 34.5% and 44.5%, from $3,624,000 and $6,695,000 to $4,876,000 and
$9,674,000 respectively, for the three-month and six-month periods ended
December 31, 1995 as compared to the same periods in 1994. The increases
resulted from an addition to staff (approximately 40 employees) in the
accounting, payroll, personnel and technical services departments and the
transfer of certain executive personnel in March 1995 to the Company together
with related departmental costs. Other expenses transferred from BGI to the
Company include the maintenance and other operating expenses associated with an
airplane and two boats. Other increases to General and Administrative expenses
included accrued expenses and payments made on behalf of CQC in the amounts of
$404,000 and $653,000 for the three-month and six-month ended December 31, 1995.
The Company accrued management fees payable to BGI of $905,000 and $1,763,000
during the three-month and six-month periods ended December 31, 1995.
Advertising and Promotional expenses increased by $29,000 and $431,000, or
2.6% and 22.8%, from $1,116,000 and $1,890,000 to $1,145,000 and $2,321,000
during the three-month and six-month periods ended December 31, 1995 as compared
to the same period in 1994. The increase in the six-month period is attributable
to AC's effort to maintain overall customer levels during the slower summer
months and to promote and attract customers to the newly constructed venues.
Depreciation and Amortization decreased by $45,000 and increased $142,000,
or (4.8%) and 8.7%, from $938,000 and $1,637,000 to $893,000 and $1,779,000
during the three-month and six-month periods ended December 31, 1995 when
compared to the same periods in 1994, primarily due to the disposition of an
airplane in May 1995, offset by additional depreciation expense associated with
new expansion assets placed in service during the six-month 1995 period.
AC had other expenses of $1,691,000 and $3,307,000 for the three-month and
six-month periods ended December 31, 1995 compared with $1,502,000 and
$2,567,000 for the same periods in 1994. The increases were primarily due to a
decrease in capitalized interest (other income) in the amounts of $168,000 and
$676,000 for the three-month and six-month periods ended December 31, 1995.
Income Taxes
- ------------
As a result of the termination of its election to be treated as an S
corporation, AC is liable for income taxes on income earned from and after
January 1, 1994. Prior to such termination, AC did not incur or pay income taxes
but distributed cash to its stockholders in amounts sufficient to pay their
income tax liability in respect to income of AC. Since terminating its S
corporation status, AC generated a net operating loss for income tax purposes of
approximately $6,000,000. Management anticipates that, upon full operation of
its expanded facilities, AC will generate taxable income and that its effective
federal income tax rate will approximate the statutory rate of 35%, prior to
consideration of the benefit from the net operating losses, which may be
utilized to offset taxable income.
Liquidity and Capital Resources
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At December 31, 1995, AC had working capital of $1,605,000 compared to
working capital of $2,920,000 at June 30, 1995. The decrease in working capital
was caused primarily by increased accruals on the AC and CQC Notes, management
fees payable to BGI, interest on the $2,250,000 short-term note payable to
Sunset Coin, Inc., and decrease in prepaid expenses offset by an increase in
receivable from related parties.
For the six-month period ended December 31, 1995, cash provided by
operating activities decreased by 77.9% to $462,000 from $2,087,000 for the same
period in 1994. The decrease is primarily attributable to a net loss of
$3,233,000 for the six-month period in 1995 compared to a net loss of $1,840,000
for the same period last year, an increase in operating assets of $2,712,000
from a decrease of $369,000 for the same period last year offset by an increase
in operating liabilities to $2,096,000 for the six-month period in 1995 from
$1,923,000 for the same period in 1994.
For the six-month period ended December 30, 1995, net cash used in
investing activities decreased by 68.9% to $790,000 from $2,543,000 for the same
period in 1994. The decrease is the result of a $19,371,000 reduction in capitol
expenditures, offset by a $19,905,000 net reduction to restricted cash. Capitol
expenditures decreased in the 1995 period because the majority of the
construction of the expanded facility was completed in the 1994 period.
Restricted cash was also reduced upon payment for the construction of the
expanded facility. Other decreases in investing activities reflect a $2,275,000
net reduction in receivables from BGI to attributable a decrease in a cash
advances to BGI from AC.
Cash flows used in financing activities for the six-month period ended
December 31, 1995 was $124,000 reflecting payments on notes payable and capital
leases. For the same period in 1994, cash flows from financing activities
provided $866,000 derived mostly from borrowing under notes payable.
AC's long-term obligations, approximately $60,000,000 at December 31,
1995, consist of the AC Notes and stockholder notes. AC has annual interest
expenses aggregating $6,600,000 and $500,000 with respect to the AC Notes and
the stockholder notes, in addition to current annual payment of $1,200,000
associated with capitalized equipment financing. Further, AC is expected to have
annual capital expenditure requirements of approximately $600,000.
AC has a substantial contingent obligation resulting from its guarantee of
the CQC Notes, $20,000,000 in principal amount of which are outstanding, as a
result of a September 28, 1994 ruling of the Missouri Gaming Commission denying
CQC's gaming license application. Because CQC does not have significant funds,
AC is obligated to pay interest on the CQC Notes, which accrues at the rate of
$2,400,000 annually. Such interest is payable semi-annually on May 15 and
November 15 of each year.
In addition, unless the holders of the CQC Notes otherwise agree, AC will
be liable for any shortfall between the proceeds from any sale of assets by CQC
and the amount required to retire the CQC Notes. Because there can be no
assurances that CQC will be able to sell its assets for an amount which will
allow it to fully or substantially repay the CQC Notes, AC's liability under its
guarantee of the CQC Notes may exceed that amount which it could support. In
addition, a default under the AC Notes and entitle the holders of 25% or more in
principal amount thereof to cause such AC Notes to become accelerated, in which
event they would become immediately due and payable in full.
On November 15, 1995, AC made an interest payment due on the AC Notes in
the amount of $1,650,000, an amount equal to 50% of the required amount due. The
remainder of the interest was paid on December 27, 1995. CQC was not able to
make its scheduled interest payment of $1,200,000, and AC did not have funds
available to advance on behalf of CQC. Management of AC and CQC are currently
undergoing discussions with an informal committee representing the holders of
the AC Notes and CQC Notes regarding a proposed restructuring plan, however, an
agreement has not yet been reached.
AC's management believes that, if not required to make any large cash
payments under its guarantee of the CQC Notes, AC has sufficient funds to meet
its projected needs for financing of existing operations and service its debt
obligations. However, AC's performance will be influenced by prevailing economic
conditions and financial, business and competitive factors, may of which are
beyond its control.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Except as stated below, CQC is not a party to any legal proceedings or
aware of any threatened claims.
On October 31, 1994, CQC and BGI petitioned the Cole County Circuit Court
in Jefferson City for a writ of mandamus. In response to the petition, the court
issued an order declaring that by denying CQC's application for a riverboat
gaming license without first conducting an investigation and by deliberating in
a closed session, the Commission had violated Missouri gaming and open meeting
laws. The court issued a preliminary writ of mandamus declaring the Commission's
decision void and ordering the Commission to immediately commence a full
investigation and thereafter to act on CQC's application. The court ordered the
Commission to show cause within thirty days why the preliminary writ should not
be made permanent.
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
yet obtained and completed an evidentiary hearing before the Commission and
therefore it had not exhausted its administrative remedies. 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. That appeal is pending.
On November 1, 1994, concurrent with its efforts to obtain judicial
relief, CQC (with BGI as a co-party) requested an administrative hearing
pursuant to the Missouri gaming statutes, under which a denied applicant may
request an evidentiary hearing before a Commission-appointed hearing officer.
The hearing officer's decision is subject to review by the Commission, and the
Commission's decision is in turn subject to judicial review. The Commission
answered on November 29, alleging, among other things, that an administrative
hearing is premature 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. However, on August 10, 1995, the hearing
officer issued an order proclaiming his ability to proceed impartially and
purporting to deny the motion. Hearing dates have been vacated by stipulation,
and, after the Circuit Court's order voiding the Commission's decision appeared
to make the administrative proceeding premature, the hearing was postponed
indefinitely.
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. Each of the nine counts charged against each
defendant carries a potential penalty of $1,000 or one year in jail or both,
though CQC and Mr. Becker have been advised by counsel that in the circumstances
the possibility of jail time, even if a conviction were obtained, is remote at
best. 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 Western District. CQC's
and Bruce Becker's motions to dismiss the appeals as untimely filed were
summarily denied on August 14, 1995. 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, as a protective measure against possible
arguments that Cole County is not the proper venue, CQC filed a substantively
identical action in the St. Louis County Circuit Court. In April, the Commission
filed answers to both complaints denying that it had violated the open meeting
law. On June 1, CQC moved for summary judgment in the Cole County case. In its
response, the Commission stated that it "did not deliberately intend to
circumvent" the open meeting law but had deliberated in closed session based on
erroneous advice of counsel. The Commission argued that the closed session could
nevertheless be justified under statutory exceptions allowing agencies to meet
privately with their lawyers to discuss confidential information and litigation.
The motion for summary judgment was heard on December 19, 1995, and taken under
submission by the court.
Item 6. Exhibits and Reports on Form 8-K
No exhibits are included herein:
The Company did not file any reports on from 8-K during the Three and Six
Month periods ended December 31, 1995.
================================================================================
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Capitol Queen & Casino, Inc.
----------------------------
(Registrant)
Date: November 1, 1996 /S/ Bruce F. Becker
---------------- -------------------
Bruce F. Becker
President, Chief Executive
Officer(Principal Executive Officer)
and Sole Director
Date: November 1, 1996 /S/ Jerry Griffis
---------------- -----------------
Jerry Griffis
Controller(Principal Financial and
Accounting Officer)
