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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: September 30, 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 October 31, 1995
- --------------------- --------------
$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 September 30, 1995 and June 30, 1994...............1
Statements of Loss Incurred During the Development Stage for the
Three-Month Periods Ended September 30, 1995 and 1994, and
for the period from January 20, 1993 (the date of inception)
through September 30, 1995...........................................2
Statements of Cash Flows for the Three-month Periods Ended
September 30, 1995 and 1994 and for the period from January 20,
1993 (the date of inception) through September 30, 1995..............3
Notes to Financial Statements............................................4
ARIZONA CHARLIE'S, INC.
Balance Sheets as of September 30, 1995 and June 30, 1994 ...............9
Statements of Income and Retained Earnings (Deficit) for the
Three-Month Periods Ended September 30, 1995 and 1994...............10
Statements of Cash Flows for the Three-month Periods Ended
September 30, 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..................................................20
PART II. OTHER INFORMATION
Item 1 Legal Proceedings....................................................23
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
September 30, June 30,
1995 1995
------- -------
(Unaudited)
Current assets:
Cash and cash equivalents ..................... $ 3 $ 45
Restricted cash, in escrow account ........... 30 30
------- -------
Total current assets ...................... 33 75
------- -------
Other assets:
Assets held for sale .......................... 12,146 12,146
Financing costs, net of accumulated
amortization of $245 at September 30,
1995 and $212 a June 30, 1995 .............. 672 705
Deposits and other assets ..................... 60 60
------- -------
Total other assets ........................ 12,878 12,911
------- -------
Total assets ................................... $12,911 $12,986
======= =======
LIABILITIES & STOCKHOLDER'S EQUITY(DEFICIT)
September 30, June 30,
1995 1995
-------- --------
(Unaudited)
Current liabilities:
Accounts payable ................................ $ 38 $ 142
Advances from related parties ................... 632 404
Accrued interest ................................ 947 395
Notes payable to related parties ................ 1,200 1,200
Long-term debt classified as current,
net of unamortized original issue discount
of $2,749 and $2,882, respectively ............ 17,251 17,118
-------- --------
Total liabilities ........................ 20,068 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 .... (19,889) (19,005)
-------- --------
Total stockholder's equity (deficit) ........ (7,157) (6,273)
-------- --------
Total liabilities and stockholder's
equity(deficit) ......................... $ 12,911 $ 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 September 30,
1995 1994
------- -------
Revenues ......................... $- $-
Operating expenses:
Amortization of financing and
other costs .................. 33 336
Abandonment loss ............... -- --
Development costs .............. 165 293
------- -------
Total operating expenses ... 198 629
------- -------
Operating loss ................... (198) (629)
Other income (expenses):
Interest income ................ -- 272
Interest expense ............... (686) (1,227)
Interest capitalized ........... -- --
------- -------
Total other income (expense) ..... (686) (955)
------- -------
Net loss before extraordinary item (884) (1,584)
Extraordinary item:
Loss on early retirement of
debt(no income tax benefit
available) ................... -- --
------- -------
Net loss ......................... $ (884) $(1,584)
======= =======
January 20, 1993
(The Date Of
Inception)
Through
September 30,
1995
--------------------
Revenues ......................... $-
Operating expenses:
Amortization of financing and
other costs .................. 1,274
Abandonment loss ............... 6,034
Development costs .............. 1,372
--------
Total operating expenses ... 8,680
--------
Operating loss ................... (8,680)
Other income (expenses):
Interest income ................ 1,265
Interest expense ............... (9,068)
Interest capitalized ........... 683
--------
Total other income (expense) ..... (7,120)
--------
Net loss before extraordinary item (15,800)
Extraordinary item:
Loss on early retirement of
debt(no income tax benefit
available) ................... (4,089)
--------
Net loss ......................... $(19,889)
========
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)
Three Months Ended
September 30,
1995 1994
------- -------
Cash flows from development stage activities:
Net loss ........................................ $ (884) $(1,584)
Adjustments to reconcile net loss
to net cash provided by used in
development stage activities:
Amortization of financing and other costs ..... 33 69
Amortization of original issue discount ....... 134 267
Abandonment loss .............................. -- --
Accounts payable and accruals ................. -- --
Increase in accounts payable and accruals,
amounts net of for capital expenditures ...... 448 961
Increase (decrease)in advances from related
parties ...................................... 227 (12)
------- -------
Total adjustments ......................... 842 1,285
------- -------
Net cash used in development stage
activities .............................. (42) (299)
------- -------
Cash flows from investing activities:
Capital expenditures, net of construction
accounts payable ............................. -- (520)
Decrease in deposits and other assets ........... -- 12
Capitalization of preopening costs .............. -- --
Development costs ............................... -- --
Net (additions to) reductions in restricted
cash equivalents ............................. -- 1,489
------- -------
Net cash provided by (used in) investing
activities .............................. -- 981
------- -------
Cash flows from financing activities:
Principal payments on First Mortgage Note ....... -- --
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 ............................. (42) 682
Cash and cash equivalents, beginning of period .... 45 33
------- -------
Cash and cash equivalents, end of period .......... $ 3 $ 715
======== ========
Supplemental cash flow disclosures:
Interest paid, net of amounts capitalized ....... $- $-
======== ========
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
Sptember 30,
1995
-----------------
Cash flows from development stage activities:
Net loss ........................................ $(19,889)
Adjustments to reconcile net loss
to net cash provided by used in
development stage activities:
Amortization of financing and other costs ..... 1,274
Amortization of original issue discount ....... 1,633
Abandonment loss .............................. 6,034
Accounts payable and accruals ................. 4,089
Increase in accounts payable and accruals,
amounts net of for capital expenditures ...... 997
Increase (decrease)in advances from related
parties ...................................... 619
--------
Total adjustments ......................... 14,646
--------
Net cash used in development stage
activities .............................. (5,243)
--------
Cash flows from investing activities:
Capital expenditures, net of construction
accounts payable ............................. (12,936)
Decrease in 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 Note ....... (20,200)
Proceeds from issuance of First Mortgage Notes,
net of financing costs ....................... 30,666
Proceeds from borrowings under notes payable to . 1,200
related parties
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 ............................. 3
Cash and cash equivalents, beginning of period .... --
--------
Cash and cash equivalents, end of period .......... $ 3
========
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) 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-month period September 30, 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. AC, in turn, has guaranteed the 12% First Mortgage
Notes (the "CQC Notes") due November 15, 2000 of CQC, 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.
A hearing on the motion for summary judgment has been set for December 19. 1995.
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 (the "CQC Notes"). The CQC Notes are
guaranteed by Arizona Charlie's', Inc. ("AC"), another wholly owned subsidiary
of BGI. 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 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 million 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 second step contemplates the sale of
CQC's assets and the use of the proceeds therefrom to repurchase the $20 million
principal amount of CQC Notes remaining outstanding at a purchase price of 101%
of principal plus accrued and unpaid interest. CQC's assets consist principally
of its riverboat, the Jefferson City land site, and development rights under a
Riverboat Development Agreement (the "Development Agreement") entered into with
Jefferson City.
CQC has entered into an Asset Purchase Agreement for the sale of its
assets to Aerie Riverboat Casinos of Missouri, Inc. ("Aerie"). The agreement is
subject to several contingencies, one being the approval of the Jefferson City
city council, which as yet has not voted on the issue.
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. Moreover, Aerie is not expected to proceed with the purchase of CQC
assets unless the vote can be nullified or is found to be not applicable to a
project the development of which is the subject of a pre-existing contract with
a given municipality, such as the Capitol Queen is under the Development
Agreement. CQC is exploring its legal options in the event Jefferson City
declines to honor the Development Agreement, but has not reached any decision.
In any event, CQC does not anticipate it will consummate its agreement with
Aerie before December 31, 1995, at which time CQC may terminate the Development
Agreement without penalty. 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
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
September 30, June 30,
1995 1995
-------- --------
(Unaudited)
Current assets:
Cash and cash equivalents .................... $ 6,571 $ 5,404
Restricted cash, in escrow account ........... 10 10
Trade and other accounts receivable .......... 405 658
Receivables from related parties party ....... 1,511 820
Notes receivable from related ................ 4,416 4,416
Inventories .................................. 602 661
Prepaid expenses ............................. 969 1,162
-------- --------
Total current assets ...................... 14,484 13,131
-------- --------
Property and equipment:
Building and improvements .................... 37,488 37,485
Furniture and equipment ...................... 22,498 22,609
Land improvements ............................ 1,628 1,628
-------- --------
61,614 61,722
Less, accumulated depreciation ............... (14,129) (13,572)
-------- --------
47,485 48,150
Land ........................................ 208 208
-------- --------
Net property and equipment ................ 47,693 48,358
-------- --------
Other assets:
Receivables from related party, noncurrent ... -- 240
Deposits and other ........................... 536 551
Financing costs, less
accumulated amortization
of $1,018 at September 30, 1995 and
$880 at June 30, 1995 ..................... 2,855 2,993
-------- --------
Total other assets ..................... 3,391 3,784
-------- --------
Total assets ............................ $ 65,568 $ 65,273
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
September 30, June 30,
1995 1995
-------- --------
(Unaudited)
Current liabilities:
Trade accounts payable ....................... $ 2,444 $ 1,449
Accounts payable to related parties ........... 3 3
Accrued expenses .............................. 3,417 3,097
Management fees due Becker Gaming, Inc. ....... 4,144 3,287
Notes payable ................................. 81 121
Notes payable to related party ................ 2,250 2,250
Current portion of obligations
under capital leases ...................... 3 4
-------- --------
Total current liabilities .............. 12,342 10,211
Long-term debt .................................. 55,000 55,000
Subordinated notes payable to
former stockholders ........................ 5,000 5,000
Obligations under
capital leases,
less current portion ....................... 3 4
-------- --------
Total liabilities ..................... 72,345 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) ................ (7,246) (5,411)
-------- --------
Total stockholder's
equity (deficit) ....................... (6,777) (4,942)
-------- --------
Total liabilities and
stockholder's equity (deficit) ......... $ 65,568 $ 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 September 30,
1995 1994
-------- --------
Revenues:
Gaming ................................... $ 12,891 $ 9,637
Food and beverage ........................ 3,033 2,165
Hotel .................................... 722 439
Gift shop ................................ 155 120
Other .................................... 299 90
-------- --------
Gross revenues ....................... 17,100 12,451
Less, promotional allowances ............... (1,668) (842)
-------- --------
Net revenues ......................... 15,432 11,609
-------- --------
Operating expenses:
Gaming ................................... 3,539 3,034
Food and beverage ........................ 3,835 2,353
Hotel .................................... 398 315
Gift shop ................................ 107 99
Advertising and promotion ................ 1,176 782
General and administrative ............... 4,798 3,071
Management fee - Becker Gaming, Inc. ..... 857 620
Rent expense paid to related party ....... 54 46
Depreciation and amortization ............ 886 699
-------- --------
Total operating expenses ............. 15,650 11,019
-------- --------
Operating income (loss) .............. (218) 590
-------- --------
Other income (expenses):
Interest income .......................... 69 244
Interest expense ......................... (1,714) (1,816)
Interest capitalized ..................... -- 507
Other, net ............................... 28 --
-------- --------
Total other income (expenses) ........ (1,617) (1,065)
-------- --------
Loss before income taxes ............. (1,835) (475)
Provision for income tax ................... -- --
-------- --------
Net loss ............................. (1,835) (475)
Retained earnings(deficit), beginning of
period ................................ (5,411) (475)
-------- --------
Retained earnings(deficit), end of period .. $ (7,246) $ (950)
======== ========
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)
Three Months Ended September 30,
1995 1994
-------- --------
Cash flows from operating activities:
Net loss ....................................... ($ 1,835) ($ 475)
Adjustments to reconcile net income
(loss) to net cash provided by operating
activities:
Provision for losses on related party
receivables ................................. 1,149 --
Depreciation and amortization ................ 886 699
(Gain) loss on sale of equipment ............. -- 2
(Increase) decrease in operating assets:
Receivables .................................. (1,358) 234
Inventories .................................. 59 (74)
Prepaid expenses ............................. 193 35
Deposits and other ........................... 15 (74)
Increase (decrease) in operating liabilities:
Accounts payable, net of amounts for capital
expenditures ................................ 995 (655)
Management fees due to Becker Gaming, Inc. ... 857 620
Accrued expenses ............................. 320 1,655
-------- --------
Total adjustments .......................... 3,116 2,442
-------- --------
Net cash provided by operating activities .. 1,281 1,967
-------- --------
Cash flows from investing activities:
Capital expenditures, net of amounts in
accounts payable ............................ (74) (12,308)
Increase in related party receivables ........ -- (1,848)
Net (additions to) reductions in
restricted cash equivalents ................. -- 12,126
Proceeds from assets sales .................... 2 --
Net cash used in investing activities ...... (72) (2,030)
-------- --------
Cash flows from financing activities:
Principal payments on notes payable .......... (40) (60)
Proceeds from subordinated notes payable to
stockholders ................................ -- (9)
Payments under capital lease obligations ..... (2) --
Net cash used in financing activities ...... (42) (69)
-------- --------
Net increase (decrease) in cash and cash
equivalents .............................. 1,167 (132)
Cash and cash equivalents, beginning of the period 5,404 4,014
-------- --------
Cash and cash equivalents, end of the period ..... $ 6,571 $ 3,882
======== ========
Supplemental cash flow disclosures:
Interest paid, net of amounts capitalized ... $ 129 $ 132
======== ========
Income taxes paid ........................... $ 0 $ 136
======== ========
Capital lease obligations incurred .......... $ 0 $ 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 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-month period September 30, 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 AC, 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. 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.
A hearing on the motion for summary judgment has been set for December 19. 1995.
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.
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 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 million 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 second step contemplates the sale of
CQC's assets and the use of the proceeds therefrom to repurchase the $20 million
principal amount of CQC Notes remaining outstanding at a purchase price of 101%
of principal plus accrued and unpaid interest. CQC's assets consist principally
of its riverboat, the Jefferson City land site, and development rights under a
Riverboat Development Agreement (the "Development Agreement") with Jefferson
City.
CQC has entered into an Asset Purchase Agreement for the sale of its
assets to Aerie Riverboat Casinos of Missouri, Inc. ("Aerie"). The agreement is
subject to several contingencies, one being the approval of the Jefferson City
city council, which as yet has not voted on the issue.
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. Moreover, Aerie is not expected to proceed with the purchase of CQC
assets unless the vote can be nullified or is found to be not applicable to a
project the development of which is the subject of a pre-existing contract with
a given municipality, such as the Capitol Queen is under the Development
Agreement. CQC is exploring its legal options in the event Jefferson City
declines to honor the Development Agreement, but has not reached any decision.
In any event, CQC does not anticipate it will consummate its agreement with
Aerie before December 31, 1995, at which time CQC may terminate the Development
Agreement without penalty. 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 its 12% First Mortgage Notes due November 15, 2000
(the "AC Notes"), and management believes that access to additional capital from
other sources is restricted as a result of the above-described circumstances. 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
September 30, 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 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 has 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 is subject to the satisfaction of several conditions, 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. CQC
intended to use the net proceeds from the sale of its assets to retire
outstanding CQC Notes, with AC being obligated, as guarantor, to pay the
shortfall. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Arizona Charlie's, Inc." However, because the voters in
Jefferson City voted on November 7, 1995 to prohibit the conduct of riverboat
gaming in Jefferson City (reversing the original vote approving riverboat
gaming), CQC does not anticipate that Aerie will proceed with the purchase of
CQC Assets unless the vote can be nullified or is found to be not applicable to
a project the development of which is the subject of a pre-existing contract
with a given municipality, such as the Capitol Queen is under the Development
Agreement. CQC is exploring its legal options in the event Jefferson City
declines to honor the Development Agreement, but has not reached any decision.
In any event, CQC does not anticipate that it will consummate its agreement with
Aerie before December 31, 1995, at which time CQC may terminate the agreement
without penalty.
During the period from July 1, 1995 through September 30, 1995, CQC had
total operating expenses of $198,000 consisting primarily of amortization
expense of $33,000 associated with debt issue costs and $165,000 of other
operating costs. For the same period, CQC incurred $686,000 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 September 30, 1995, net cash used by
development stage activities was $42,000. At September 30, 1995, CQC had
expended a total of approximately $20,750,000 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-months ended September 30, 1995 and 1994
Despite increased revenues for the three-months ended September 30, 1995,
results from operations declined for the period, an compared to the same period
in the prior year, as the result of increased operating expenses, primarily due
to higher operating costs associated with operating expanded facilities. The
increase in revenues also resulted from the operation of expanded casino-hotel
facilities, which include additional gaming machines and table games, an
expanded race and sports book, remodeled coffee shop, two specialty restaurants
and a delicatessen, an expanded buffet room, a newly constructed hotel tower, a
remodeled floor-level entertainment lounge and new second-floor showroom/banquet
facility.
Net revenues at AC increased by $3,823,000, or 32.9%, from $11,609,000 to
$15,432,000 for the three-month period ended September 30, 1995 compared to the
three-month period ended September 30, 1994. In the same period to period
comparison, operating expenses, including depreciation and amortization,
increased by 50.2% to $16,550,000 from $11,019,000. This resulted in a decrease
in operating income of $1,708,000 from $590,000 to a loss of $1,118,000 for the
more recent period.
Gaming Revenues increased 33.8% from $9,637,000 to $12,891,000. The
largest portion of the increase in gaming revenues is attributable to gaming
machine revenues which increased 30.4% from $8,378,000 to $10,931,000 million.
The large increase reflects an additional 655 slot machines that were added
during the expansion. Revenues from table games increased 24.8% from $936,000 to
$1,169,000. The increase in table games revenues for the three-month period
ended September 30, 1995 is primarily due to the additional 5 table games that
were added during the expansion. Reflecting greater sports play from patrons and
an expanded facility featuring pari-mutual wagering, race and sports book
revenues increased by $300,000, or 71.7%, to $718,000 from $418,000 for the
three-month period ended September 30, 1995 compared to the same period in 1994.
Bingo revenues decreased slightly by $7,000 for the three-month period ended
September 30, 1995 when compared to the same period of the prior year.
Food and Beverage revenues increased 40.1% to $3,033,000 from $2,165,000
for the three-month period ended September 30, 1995 compared to the same period
of the prior year. The increase in revenues is primarily due to the addition of
two specialty restaurants, a delicatessen, a remodeled coffee shop, an expanded
buffet and a redesigned bar and lounge.
Hotel revenues increased from $439,000 to $722,000 for the three-months
ended September 30, 1995 compared to the same period in 1994. The increase of
64.5% is primarily due to the addition of 158 new rooms.
Gift shop revenues increased from $120,000 to $155,000 for the
three-months ended September 30, 1995 compared to the same period in 1994. The
increase of 29.2% is primarily due to the remodeling and expansion of the gift
shop.
Other revenues, which include receipts from entertainment cover charges,
ATM commissions and revenues from PBX and banquets, increased from $90,000 to
$299,000 for the three-months ended September 30, 1995 compared to the same
period in the prior year. The increase of 232.2% is the result of increases in
(i) entertainment cover charge revenues attributable to the addition of a new
showroom and (ii) banquet revenues attributable to the addition of new banquet
facilities.
Gaming expenses increased by $505,000, or 16.6%, to $3,539,000 for the
three-month period ended September 30, 1995 from $3,034,000 for the same period
of the prior year reflecting primarily the additional staffing associated with
the expanded gaming facilities.
Food & Beverage expenses increased by $1,482,000, or 63.0%, to $3,835,000
for the three-month period ended September 30, 1995 from $2,353,000 for the same
period of the prior year, due primarily to the additional staffing requirements
for the new food service facilities.
Hotel expenses increased by $83,000, or 26.4%, to $398,000 for the
three-month period ended September 30, 1995 from $315,000 for the same period of
the prior year. The increase is primarily due to additional staffing and
associated costs required by the hotel expansion.
General and Administrative expenses increased by $1,727,000, or 56.2%, to
$4,798,000 for the three-month period ended September 30, 1995 from $3,071,000
for the same prior of the prior year. The increase is primarily the result of
additional staffing in the cage, security, data processing, entertainment,
porters, engineering, accounting and transportation departments, added to
support the expanded facility. The increase is also due to the provision for
losses and advances made by the AC to CQC for payment of legal and accounting
services and for the insurance and maintenance costs of CQC's riverboat. Because
of CQC's current financial condition, including that it is in default of the
covenants governing the CQC Notes, AC has provided a 100% allowance for the
cumulative, accrued and unpaid advances made to CQC through September 30, 1995.
Advertising and promotion expenses increased by $394,000, or 50.4% to
$1,176,000 for the three-month period ended September 30, 1995 from $782,000 for
the same period of the prior year reflecting increased newspaper and television
advertising undertaken to gain market recognition for the newly expanded
facility. Management believes that these increased levels of advertising and
promotional expenditures are necessary to attract and maintain the desired
customer levels, to promote the entertainment events, and support the other
existing facilities throughout the property.
Depreciation and Amortization increased by $187,000, or 26.8%, to $886,000
for the three-month period ended September 30, 1995 from $699,000 for the same
period in prior year, as a result of additional depreciation expenses associated
with assets added in the expansion.
Gift shop expenses increased slightly by $8,000 or 8.1% to $107,000 for the
three-month period ended September 30, 1995 compared to $99,000 for the same
period reflecting small increases in staffing and operating costs associated
with the gift shop operation.
Management fees to BGI increased by $237,000, or 38.2%, to $857,000 for the
three-month period ended September 30, 1995 from $620,000 for the same period in
the prior year. Management fees are determined based on the gross revenues of
AC. As such, increased gross revenues bring about the higher management fees.
Since inception of the management fees agreement, management fees payable to BGI
have been and continue to be accrued by AC, and may not be paid under the
Indenture governing the AC Notes until such time that AC meets a specified fixed
charged coverage ratio.
Other expense (net of other income) amounted to $1,617,000 for the
three-month period ended September 30, 1995 compared to $1,065,000 for the same
period in the prior year. The increase in expense of $552,000, or 51.8%, is the
result of a reduction of capitalized interest (other income) in the amount of
$507,000 and a decrease in interest income (other income) of $175,000, partially
offset by a decrease of interest expense (other expense) in the amount of
$102,000.
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 $5,200,000. Management anticipates that AC will generate taxable
income and that its effective federal income tax rate will approximate the
statutory rate of 34%, prior to consideration of the benefit from the net
operating losses, which may be utilized to offset taxable income.
Liquidity and Capital Resources
- -------------------------------
At September 30, 1995, AC had working capital of $2,142,000 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 Notes, management fees
payable BGI, and interest on a $2,250,000 short-term note payable to Sunset
Coin, Inc., as well as a reduction in a related party receivable.
For the three-month period ended September 30, 1995, cash provided by
operating activities decreased approximately 35% to $1,281,000 from $1,967,000
for the same period in 1994. The decrease is primarily attributable to a net
loss of $1,835,000 for the three-month period in 1995 compared to net loss of
$475,000 for the three-month period in 1994 and an increase in accounts payable
of $995,000 for three-months ended September 30, 1995 compared to decrease of
$655,000 for the same period in 1994.
For the three-month period ended September 30, 1995, net cash used in
investing activities decreased to $72,000 for the three-month period ended
September 30, 1995 compared with $2,030,000 for the same period in 1994. The
decrease was caused primarily by a $74,000 outlay for additional capital
expenditures offset by $2,000 from proceeds from equipment sale. This compares
with an increase of restricted cash of $12,126,000 offset by capital
expenditures of $12,108,000 and an increase of $1,848,000 in related party
receivable for the same period in 1994.
Cash flows provided by financing activities for the three-month periods
ended September 30, 1995 was $42,000, reflecting payments on notes payable and
capital leases. For the three-month period ended September 30, 1994, cash flows
from financing activities was $69,000.
AC's long-term obligations, approximately $60,000,000 at September 30,
1995, consist of the AC Notes, 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, in addition to current annual
payments of $1,200,000 associated with capitalized equipment financings.
Further, 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 $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, CQC has adopted a plan to
sell its assets for the purpose of repaying the Outstanding CQC Notes and
accrued interest thereon. Although CQC has entered into an agreement for the
sale of its assets at a purchase price of $18,000,000 consummation of such
agreement is subject to the satisfaction of several conditions including
preliminary suitability of a buyer and gaming being legal in Jefferson City, an
is not expected to be satisfied prior to December 31, 1995, at which date CQC
may terminate the agreement, and, as a result, the agreement is not expected to
be consummated. See "Management `s Discussion and Analysis of Financial
Condition and Results of Operations - Capitol Queen & Casino, Inc." Moreover,
because CQC does not have any significant funds, AC will be 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 by AC under its guarantee of the CQC Notes, unless cured,
may cause 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.
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, many 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.
A hearing on the motion for summary judgment has been set for December 19, 1995.
Item 6. Exhibits and Reports on Form 8-K
No exhibits are included herein:
The Company did not file any reports on form 8-K during the Three-Months
ended September 30, 1995.
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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)
