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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 1998
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
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(State or other jurisdiction of (I.R.S. Employer
incorporations or organization) Identification No.)
2605 S. Decatur, Suite 218
Las Vegas, Nevada 89102
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(Address of principal (Zip Code)
executive offices)
(702) 579-0235
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year if
changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of common stock January 31, 1999
- --------------------- --------------
$1.00 par value 100 shares
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The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this Form 10-Q
and other materials filed or to be filed by the Company with the Securities and
Exchange Commission (as well as information included in oral statements or other
written statements made or to be made by the Company) contains statements that
are forward-looking, such as statements relating to plans for future expansion
and oth er business development activities as well as other capital spending,
financing sources and the effects of regulation (including gaming and tax
regulation) and competition. Such forward-looking information involves important
risks and uncertainties that could significantly affect anticipated results in
the future and, accordingly, such results may differ from those expressed in any
forward-looking statements made by or on behalf of the Company. These risks and
uncertainties include, but are not limited to, those relating to development and
construction activities, dependence on existing management, debt service
(including sensitivity to fluctuations in interest rates), domestic economic
conditions, changes in federal or state tax laws or the administration of such
laws and changes in gaming laws or regulations (including the legalization of
gaming in certain jurisdictions).
<PAGE>
CAPITOL QUEEN & CASINO, INC.
(A wholly owned subsidiary of Becker Gaming, Inc.)
FORM 10-Q
INDEX
PART I, FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
CAPITOL QUEEN & CASINO, INC.
- ----------------------------
Balance Sheets as of December 31, 1998 and June
30, 1998........................................................6
Statements of Loss Incurred During the Development
Stage for the Three-Month Periods Ended December
31, 1998 and 1997 and for the Six-Month Periods
Ended Decmeber 31, 1998 and 1997 and for the period
from January 20, 1993 (the date of inception)
through December 31, 1998.......................................7
Statements of Cash Flows for the Six-Month
Periods Ended December 31, 1998 and 1997 and
for the period from January 20, 1993 (the date of
inception) through December 31, 1998............................9
Notes to Financial Statements...................................11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Capitol Queen & Casino, Inc.....................................14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................17
Item 6. Exhibits and Reports on Form 8-K........................18
SIGNATURES......................................................19
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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,
1998 1998
------- -------
(Unaudited)
Current assets:
Restricted cash, in escrow account .................... $ 7 $ 33
------- -------
Total current assets ............................... 7 33
------- -------
Other assets:
Assets held for sale ................................... 3,454 6,254
Financing costs, net of accumulated
amortization of $649 at December 31,
1998 and $580 at June 30, 1998 ....................... 268 337
------- -------
Total other assets ................................. 3,722 6,591
------- -------
Total assets ....................................... $ 3,729 $ 6,624
======= =======
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
December 31, June 30,
1998 1998
-------- --------
(Unaudited)
Current liabilities:
Advances from related parties ....................... $ -- 14
-------- --------
Total current liabilities .................... -- 14
-------- --------
Prepetition liabilities subject to compromise:
Advances from related parties ....................... 178 1,440
Accrued interest .................................... 7,853 8,042
Notes payable to related parties .................... -- 1,200
Long-term debt classified as current due to default
under covenants, net of unamortized original issue
discount of $1,311 and $1,593, respectively ....... 17,189 18,407
-------- --------
Total prepetition liabilities subject to compromise 25,220 29,089
-------- --------
Total liabilities ............................ 25,220 29,103
-------- --------
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, $1.00 par value, 1,000 shares
authorized, 100 shares issued and outstanding ...... -- --
Additional paid-in capital .......................... 14,232 12,732
Deficit accumulated during development stage ........ (35,723) (35,211)
-------- --------
Total stockholders' equity (deficit) ............ (21,491) (22,479)
-------- --------
Total liabilities and stockholders'
equity (deficit) ............................. $ 3,729 $ 6,624
======== ========
The accompanying notes are an integral part of these financial statements.
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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,
1998 1997
------- -------
Revenues ......................... $- $-
Operating expenses:
Amortization of financing and
other costs .................. 34 34
Abandonment loss and write-downs
of assets held for sale 2,800 --
Development costs .............. 6 47
------- -------
Total operating expenses ... 2,840 81
------- -------
Operating loss ................... (2,840) (81)
Other income (expenses):
Interest income ................ -- 1
Interest expense (contractual
interest of $715 for the three-
months ended December 31, 1998,
$1,687 for the six-months
ended December 31, 1998 and
$20,078 for the period from
January 20, 1993 (the date of
inception)through December
31, 1998 ..................... (143) (915)
Interest capitalized ........... -- --
------- -------
Total other income (expense) ..... (143) (914)
------- -------
Loss before reorganization
items and extraordinary items... (2,983) (995)
Reorganization items ............. -- --
------- -------
Loss before extraordinary items .. (2,983) (995)
Extraordinary item:
Loss on early retirement of
debt (no income tax benefit
available) ................... -- --
Gain on extinguishment of
indebtedness to related party. -- --
------- -------
Net loss ...................... $(2,983) $(995)
======= =======
<PAGE>
For The Period
January 20, 1993
(The Date Of
Inception)
Six Months Through
Ended December 31, December 31,
1998 1997 1998
-------- -------- ------------------
Revenues ........................... $- $- $-
Operating expenses:
Amortization of financing and
other costs .................... 68 67 1,677
Abandonment loss and write-downs
of assets held for sale ........ 2,800 -- 14,726
Development costs ................ 60 126 2,257
-------- -------- ------------------
Total operating expenses ..... 2,928 193 18,660
-------- -------- ------------------
Operating loss (2,928) (193) (18,660)
Other income (expenses):
Interest income .................. -- 1 1,267
Interest expense (contractual
interest of $715 for the three-
months ended December 31, 1998,
$1,687 for the six-months ended
December 31, 1998 and $20,078 for
the period from January 20, 1993
(the date of inception)
through December 31, 1998 ...... (281) (1,805) (17,601)
Interest capitalized ............. -- -- 683
-------- -------- ------------------
Total other income (expense) ....... (281) (1,804) (15,651)
Loss before reorganization
items and extraordinary items... (3,209) (1,997) (34,311)
Reorganization items ............. -- -- (20)
-------- -------- ------------------
Loss before extraordinary items .. (3,209) (1,997) (34,331)
Extraordinary item:
Loss on early retirement of
debt (no income tax benefit ...
available) .................... -- -- (4,089)
-------- -------- ------------------
Gain on extinguishment of
indebtedness to related party. 2,697 -- 2,697
-------- -------- ------------------
Net loss ........................ $ (512) $ (1,997) $ (35,723)
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The accompanying notes are an integral part of these financial statements.
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<PAGE>
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,
1998 1997
------- -------
Cash flows from development stage activities:
Net income (loss)............................. $ (512) $(1,997)
Adjustments to reconcile net loss
to net cash provided by (used in)
development stage activities:
Amortization of financing and other costs ... 68 67
Amortization of original issue discount ..... 281 240
Extraordinary gain on extinguishment of
indebtedness to related party ............ (2,697) --
Abandonment losses and write-downs of assets
held for sale ........................... 2,800 --
Extraordinary loss on retirement of debt .... -- --
Increase (decrease) in accounts payable and
accruals, net of amounts for capital
expenditures .................... -- 1,565
Increase in advances from related parties ... 34 126
------- -------
Total adjustments ..................... 486 1,998
------- -------
Net cash used in development
stage activities .................... (26) 1
------- -------
Cash flows from investing activities:
Capital expenditures, net of construction
accounts payable ......................... -- --
Deposits and other assets ....................
Capitalization of preopening costs ........... -- --
Development costs ............................ -- --
Net (additions to) reductions in restricted
cash equivalents ......................... 26 (1)
------- -------
Net cash used in investing activities .... 26 (1)
------- -------
Cash flows from financing activities:
Principal payments on First Mortgage Notes .. (1,500) --
Proceeds from issuance of First Mortgage
Notes, net of financing costs ........... -- --
Proceeds from affiliate guarantee obligations 1,500 --
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 ............................. -- --
Cash and cash equivalents, beginning of period -- --
------- -------
Cash and cash equivalents, end of period ..... -- --
======= =======
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 ................. $- $-
======= =======
<PAGE>
For The Period
January 20, 1993
(The Date Of
Inception)
Through
December 31,
1998
--------
Cash flows from development stage activities:
Net income (loss)............................ $(35,723)
Adjustments to reconcile net loss
to net cash provided by (used in)
development stage activities:
Amortization of financing and other costs ... 1,677
Amortization of original issue discount ..... 3,070
Extraordinary gain on extinguishment of
indebtedness to related party ............ (2,697)
Abandonment losses and write-downs of assets
held for sale ........................... 14,786
Extraordinary loss on retirement of debt .... 4,089
Increase (decrease) in accounts payable and
accruals, net of amounts for capital
expenditures ............................ 8,054
Increase in advances from related parties ... 1,475
-------
Total adjustments ..................... 30,454
-------
Net cash used in development
stage activities .................... (5,269)
-------
Cash flows from investing activities:
Capital expenditures, net of construction
accounts payable ......................... (12,936)
Deposits and other assets .................... (60)
Capitalization of preopening costs .......... (340)
Development costs ........................... (553)
Net (additions to) reductions in restricted
cash equivalents ......................... (8)
-------
Net cash provided by used in investing
activities ............................. (13,897)
-------
Cash flows from financing activities:
Principal payments on First Mortgage Notes .. (21,700)
Proceeds from issuance of First Mortgage
Notes, net of financing costs ........... 30,666
Proceeds from affiliate guarantee obligation 1,500
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 ................. $ 5,233
========
The accompanying notes are an integral part of these financial statements.
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<PAGE>
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" or the "Company") is a 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 instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments and normal recurring accruals considered necessary for a fair
presentation have been included. Operating results for the three-month and
six-month periods ended December 31, 1998 are not necessarily indicative of the
results that may be expected for the year ended June 30, 1999. 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, 1998.
2) Capitol Queen & Casino, Inc. Bankruptcy Filing:
On March 17, 1998, CQC filed for bankruptcy protection in the United
States Bankruptcy Court for the District of Nevada in Las Vegas, Nevada (the
"Bankruptcy Court") under Chapter 11 of the United States Bankruptcy Code (Case
NO. 98-22172 LBR) to pursue financial reorganization of CQC and to facilitate a
sale of the Riverboat, the principal asset of CQC, to a third party. Since CQC
does not presently engage in any business operations, the Company did not
experience any material changes in its operations as a result of the bankruptcy
filing.
Interest expense on the CQC Notes (as defined in Note 3) has not been
recognized since CQC's March 17, 1998 bankruptcy petition date as it is not
probable that postpetition interest for the CQC Notes will be an allowed claim
in these proceedings.
Reorganization items presented in the statements of loss incurred
during the development stage are comprised of expenses incurred by CQC as a
result of CQC's reorganization under Chapter 11 of the Bankruptcy Code. Such
expenses consisted entirely of professional fees for the year ended June 30,
1998.
3) Long-Term Debt:
On November 18, 1993, the Company completed a private placement debt
financing of $40,000,000 principal amount of 12% First Mortgage Notes due
November 15, 2000 (the " CQC Notes"). The offering generated net proceeds of
approximately $30,666,000 (after deducting original issue discount of $7,500,000
and debt issue costs). Interest on the Notes is payable semi-annually. AC
provided a limited guarantee for the CQC Notes (which guarantee was subject to
release only upon licensing of the Capitol Queen, which is not expected) and the
CQC Notes are collateralized by a first mortgage on substantially all of the
assets of the Company. See Note 4.
The Company was unable to make the interest payments due under the CQC
Notes payable on November 15, 1995, May 15, 1996, November 15, 1996, May 15,
1997, November 15, 1997, May 15, 1998 and November 15, 1998. Past due interest,
including default interest on accrued but unpaid interest, in the amount of
$7,853,000 has been recorded in the accompanying financial statements. On March
17, 1998 CQC filed a petition for reorganization under Chapter 11 of the
Bankruptcy Code. As such, CQC has ceased accruing interest on the CQC Notes as
of March 17, 1998, as it is not probable that post-petition interest for these
notes will be an allowed claim in CQC's bankruptcy proceedings.
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 $20,000,000 principal amount of the CQC Notes at 101% of such
principal amount plus accrued and unpaid interest with funds held in the
restricted project escrow account. The Company incurred an extraordinary loss of
approximately $4,089,000 in 1995, reflecting the premium paid to retire the debt
of $200,000 and the write-off of related, unamortized debt issue costs and
original issue discount in the aggregate of $3,889,000. The second step
permitted a purchase of the CQC Notes at 101% of principal plus accrued and
unpaid interest from a sale of assets. However, the dates by which CQC
previously agreed with the holders of the CQC Notes to effect the sale of assets
and repurchase the remaining CQC Notes have passed, and CQC is thus in default
of the amended covenants.
<PAGE>
Concurrent with the placement of the Notes, BGI sold 2,500,000 warrants
(the "Warrants") exercisable for BGI common stock for gross proceeds of
$7,500,000. The gross proceeds from the sale of the Warrants were contributed to
the Company.
The Indenture governing the CQC Notes (the "Indenture") limits the use
of the net proceeds from the offering and the sale of the Warrants to fund the
cost of the development and construction of the Capitol Queen project, the
development of a convention center in Jefferson City, Missouri and initial
interest payments. The proceeds were placed in escrow with a trustee pending
drawdowns for qualifying project expenditures. As more fully explained certain
of the proceeds were used in January 1995 in connection with the first step of
the plan to repay the CQC Notes. Prior to the receipt of a notice of
acceleration on July 3, 1997, the CQC Notes were not subject to mandatory
redemption, except upon a change of control, or other circumstances as defined
in the Indenture. The Company had the option to redeem the Notes at a premium of
106% beginning on November 15, 1997, declining to par value on November 15,
1999. If prior to November 15, 1997, BGI consummated an initial public offering
of its common stock, the Company may also have redeemed the CQC Notes, at a
premium of 108%.
The Indenture contains covenants that, among other things, limit the
ability of the Company and, in certain cases, AC, to pay dividends or management
fees, or incur additional indebtedness.
4) Arizona Charlie's, Inc. Bankruptcy Filing:
On November 14, 1997, Arizona Charlie's, Inc. ("AC"), an
affiliate of CQC, filed a voluntary petition under Chapter 11 of the US
Bankruptcy Code with the Bankruptcy Court in order to provide it protection from
creditors while it attempted to negotiate a settlement with the holders of
certain debt. On June 25, 1998, the Bankruptcy Court approved a Plan of
Reorganization (the "AC Plan"). All significant terms and conditions of the AC
Plan were satisfied as of September 28, 1998, (the "Effective Date" of the AC
Plan). Upon the Effective Date, the AC Plan resulted in the transfer of sole
ownership of AC to High River Limited Partnership ("High River"), or its
designee ("Nybor"), an entity owned and controlled by Carl Icahn, a majority
owner of certain then outstanding debt of AC.
Prior to the Effective Date of the AC Plan, AC was the limited
guarantor of certain debt of CQC, as described in Note 3. On the Effective Date
of the AC Plan, Nybor made a cash payment in the amount of $1,500,000 to the
existing CQC bondholders, which, in conjunction with other requirements of the
AC Plan, will result in the discharge, cancellation and extinguishment of AC's
limited guarantee of the CQC debt. The cash payment of $1,500,000 was made and
was distributed to the holders of the CQC Notes. The cash payment has been
recognized as a partial extinguishment of the CQC notes, with no resulting gain
or loss, and as additional paid-in-capital, since AC waived all claims against
CQC in connection with the AC Plan.
As of June 30, 1998, CQC had certain advances to AC in the amount of
$1,308,000 and certain notes payable to AC in the amount of $1,200,000 plus
accrued and unpaid interest of $189,000. Upon the effective date of the AC Plan,
all such obligations to AC were immediately terminated. As such, CQC wrote-off
and recognized an extraordinary gain on extinguishment of indebtedness to AC at
September 30, 1998 in the amount of $2,697,000.
5) Sealed Bid Sale Of Riverboat Assets:
On January 26, 1999, CQC and IBJ Whitehall Bank & Trust Company ("IBJ
Whitehall"), by and through their selling agent, Continental Plants Corp. and
Plant & Machinery, Inc, acting as a consortium collectively, ("PMI"), conducted
a sealed bid sale of the Riverboat in accordance with the sealed bid sale
procedures previously approved by the Bankruptcy Court (the "Procedures"). PMI
received two bids for the riverboat. The highest bid was from High River, an
entity owned and controlled by Carl Icahn, a majority owner of certain
outstanding debt of CQC, at a bid price of $3,200,000, inclusive of the
mandatory 5% buyers premium (the "High River Bid"). High River submitted the
initial earnest money deposit of $200,000 with its bid and the funds were then
deposited in the Bernhard & Leslie, CHTD Trust Account (the "Trust Account").
The sealed bid sale, which was subject to Bankruptcy Court approval, resulted in
a write-down of the riverboat assets based on the highest bid received in the
amount of $2,800,000 in the December 31, 1998 financial statements.
<PAGE>
On January 27, 1999, CQC and IBJ Whitehall executed a Notice of
Acceptance of the High River Bid. CQC and High River subsequently executed a
Purchase and Sale Agreement (the "Agreement") dated January 28, 1999, and High
River delivered an increased earnest money deposit of $600,000 in accordance
with the Procedures. The funds were deposited in the Trust Account.
On Friday, January 29, 1999, counsel for CQC was notified by counsel
for IBJ Whitehall that High River was requesting a continuance of hearing set
for Monday, February 1, 1999 (at which hearing counsel for CQC was to present to
the Bankruptcy Court the highest and best bid and obtain an order approving the
sale to the highest and best bidder), so High River could consider whether the
High River Bid was authorized by the proper persons. Counsel for CQC obtained a
continuance of the hearing to Wednesday, February 3, 1999 at 9:30 am.
On Tuesday, February 2, 1999, counsel for CQC received written notice
from High River's counsel confirming that High River did not intend to
consummate the purchase and sale transaction. Counsel for High River, IBJ
Whitehall and CQC subsequently negotiated and prepared an agreed-upon form of
order to present to the Bankruptcy Court at the February 3 hearing. The order
provides, in pertinent part, that CQC will retain the $800,000 earnest money
deposit as its sole and liquidated damages as a result of High River's failure
and/or refusal to purchase the Riverboat. The order was entered by the US
Bankruptcy Court on February 5, 1999.
If approved by the Bankruptcy Court, the earnest money deposit will be
utilized as follows: (i) to reimburse PMI for out of pocket expenses incurred in
connection with the marketing and sale of the Riverboat, (ii) to reimburse PMI
for monthly expenses advanced to CQC through January 1, 1999 for maintenance of
and insurance on the Riverboat, (iii) for maintenance of and insurance on the
Riverboat from and after February 1, 1999 until a sale of the Riverboat is
consummated, (iv) for legal counsel fees incurred by CQC in connection with its
Chapter 11 reorganization, and (v) for any other administrative expenses which
the Bankruptcy Court may allow and authorize CQC to pay. Upon consummation of a
sale of the Riverboat, the balance of the earnest money deposit will be
distributed in accordance with a plan of reorganization or other court order
authorizing and directing distribution of the funds.
CQC currently is in the process of working with counsel for IBJ
Whitehall and representatives of PMI to sell the Riverboat. CQC currently plans
to continue soliciting potential buyers, and negotiate a new Purchase and Sale
Agreement which can be presented to the Bankruptcy Court for approval, subject
to overbids presented in open court. Counsel for IBJ Whitehall has been advised
by counsel for High River that High River is willing to enter into an agreement
to purchase the Riverboat for $1.2 million, subject to overbids. The offer has
not been accepted or rejected to date.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Analysis of Development Stage Activities for the period January 20,
1993 (the date of inception) through December 31, 1998
CQC was organized on January 20, 1993 for the purpose of developing,
constructing, owning and operating the Capitol Queen. Since inception, CQC's
activities have been limited to, in addition to the financing transaction
described below, the acquisition of a land site in Jefferson City, Missouri and
the rights to develop the Capitol Queen thereon, the preparation and prosecution
of applications to become licensed to own and operate the Capitol Queen in
Missouri and for all other required permits and approvals, the preparation of
preliminary design plans, drawings and budgets for the project, construction of
a riverboat vessel and other pre-opening development activities. As of August
1994, CQC suspended the development of the Capitol Queen, other than completion
of the riverboat. As a result of a September 28, 1994 ruling by the Missouri
Gaming Commission denying CQC's license application, CQC subsequently terminated
the Capitol Queen project and is currently marketing its assets for sale. Such
assets include its riverboat and the Jefferson City land site.
As of January 1, 1995, the CQC Indenture was amended to (i) eliminate
CQC's obligation to construct and open the Capitol Queen and (ii) permit a
two-step purchase of the CQC Notes at 101% of principal plus accrued and unpaid
interest with funds remaining in the project escrow account and the net proceeds
from a sale of assets. The repurchase of $20,000,000 principal amount of the CQC
Notes (plus accrued and unpaid interest thereon) was completed on January 17,
1995 with funds from the project escrow account at a total cost of $20,200,000.
CQC incurred an extraordinary loss of approximately $4,089,000 in 1995,
reflecting the premium paid to retire the debt of $200,000 and the write-off of
related, unamortized debt issue costs and original issue discount in the
aggregate of $3,889,000. At December 31, 1998, approximately $7,000 remained in
the escrow account held by the Indenture Trustee and an aggregate of $20,000,000
principal amount of the CQC Notes remained outstanding. However, the dates by
which CQC previously agreed with the holders of the CQC Notes to effect the sale
of its assets and repurchase the remaining CQC Notes have passed.
The CQC Notes outstanding require annual interest payments of $2,400,000,
payable in equal installments semi-annually on May 15 and November 15. CQC was
not able to make its scheduled interest payments of $1,200,000 on each of
November 15, 1995, May 15, 1996, November 15, 1996, May 15, 1997, November 15,
1997, May 15, 1998 and November 15, 1998.
During the period from inception through December 31, 1998, CQC had total
operating expenses of $18,660,000 consisting primarily of an abandonment loss of
$6,034,000 arising from the denial of the company's license application and
management's subsequent decision to terminate the Capitol Queen project and sell
its assets. Also, at March, 1996, CQC wrote-down the cost of the riverboat
assets to their net realizable value based on estimates provided by a
shipbuilder and marine brokers which resulted in an abandonment loss of
$4,392,000 in the 1996 fiscal year. The cost of the riverboat was further
written down at June 30, 1998 to $6,000,000 based on recent offers received for
the riverboat, which resulted in an additional abandonment loss of $1,500,000.
The riverboat assets were to be auctioned on January 26, 1999 in a sealed bid
sale. Based upon this sealed bid, the Riverboat was further written down to
$3,200,000 resulting in an additional abandonment loss of $2,800,000. See
"Liquidity and Capital Resources". Also included in operating expenses are
amortization expense of $1,677,000 associated with debt issue costs and
$2,257,000 of project development costs. For the same period, CQC incurred
$17,601,000 of interest cost of which $683,000 was capitalized by CQC as
required by generally accepted accounting principles as part of the riverboat
construction. CQC earned interest income of $1,267,000 for the period from
inception to December 31, 1998.
<PAGE>
Liquidity and Capital Resources
- -------------------------------
For the period from inception through December 31, 1998, net cash used in
development stage activities was $5,269,000. Cash flows used in investing
activities for the period was $13,897,000, which included $12,936,000 of capital
expenditures, related to the construction of the riverboat and acquisition of
the Jefferson City land site. At December 31, 1998, CQC had expended a total of
approximately $21,900,000 on the development and construction of the Capitol
Queen project including on-going maintenance and insurance costs.
CQC's obligations consist of the $20,000,000 in principal amount of the
outstanding CQC Notes and past due interest thereon of $7,853,500 at December
31, 1998, which includes amounts accrued on unpaid interest. On March 17, 1998
CQC filed a petition for reorganization under Chapter 11 of the Bankruptcy Code.
As such, CQC has ceased accruing interest on the CQC Notes as of March 17, 1998,
as it is not probable that post-petition interest for these notes will be an
allowed claim in CQC's bankruptcy proceedings. 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. Additionally, on July 3, 1997 CQC
received a notice of acceleration from the trustee of the CQC Notes. Moreover,
CQC, because it has not paid certain interest due on its Notes and has not yet
effected the sale of its assets, is in default of the CQC Indenture. As a result
of the above items, the CQC Notes have been classified as a current liability as
of December 31, 1998 and June 30, 1998.
On November 14, 1997, AC filed for bankruptcy protection with the United
States Bankruptcy Court for the District of Nevada in Las Vegas, Nevada (the
"Bankruptcy Court") under Chapter 11 of the United States Bankruptcy Code (Case
NO. 97- 28781 LBR).
On June 25, 1998, a "Consensual Plan of Reorganization Proposed by AC (the
"Debtor') and High River (the "Plan"), dated June 24, 1998, was approved by the
Bankruptcy Court. Pursuant to the Plan, AC was reorganized as of September 28,
1998 in accordance with the Debt Conversion Option of the Plan. As a part of the
Plan, the AC Limited Guaranty has been canceled in exchange for the payment of
$1,500,000 in cash to the CQC noteholders.
On January 26, 1999, CQC and IBJ Whitehall Bank & Trust Company ("IBJ
Whitehall"), by and through their selling agent, Continental Plants Corp. and
Plant & Machinery, Inc, acting as a consortium collectively, ("PMI"), conducted
a sealed bid sale of the Riverboat in accordance with the sealed bid sale
procedures previously approved by the Bankruptcy Court (the "Procedures"). PMI
received two bids for the riverboat. The highest bid was from High River, an
entity owned and controlled by Carl Icahn, a majority owner of certain
outstanding debt of CQC, at a bid price of $3,200,000, inclusive of the
mandatory 5% buyers premium (the "High River Bid"). High River submitted the
initial earnest money deposit of $200,000 with its bid and the funds were then
deposited in the Bernhard & Leslie, CHTD Trust Account (the "Trust Account").
The sealed bid sale, which was subject to Bankruptcy Court approval, resulted in
a write-down of the riverboat assets based on the highest bid received in the
amount of $2,800,000 in the December 31, 1998 financial statements.
On January 27, 1999, CQC and IBJ Whitehall executed a Notice of Acceptance
of the High River Bid. CQC and High River subsequently executed a Purchase and
Sale Agreement (the "Agreement") dated January 28, 1999, and High River
delivered an increased earnest money deposit of $600,000 in accordance with the
Procedures. The funds were deposited in the Trust Account.
On Friday, January 29, 1999, counsel for CQC was notified by counsel for
IBJ Whitehall that High River was requesting a continuance of hearing set for
Monday, February 1, 1999 (at which hearing counsel for CQC was to present to the
Bankruptcy Court the highest and best bid and obtain an order approving the sale
to the highest and best bidder), so High River could consider whether the High
River Bid was authorized by the proper persons. Counsel for CQC obtained a
continuance of the hearing to Wednesday, February 3, 1999 at 9:30 am.
On Tuesday, February 2, 1999, counsel for CQC received written notice from
High River's counsel confirming that High River did not intend to consummate the
purchase and sale transaction. Counsel for High River, IBJ Whitehall and CQC
subsequently negotiated and prepared an agreed-upon form of order to present to
the Bankruptcy Court at the February 3 hearing. The order provides, in pertinent
part, that CQC will retain the $800,000 earnest money deposit as its sole and
liquidated damages as a result of High River's failure and/or refusal to
purchase the Riverboat. The order was entered by the US Bankruptcy Court on
February 5, 1999.
<PAGE>
If approved by the Bankruptcy Court, the earnest money deposit will be
utilized as follows: (i) to reimburse PMI for out of pocket expenses incurred in
connection with the marketing and sale of the Riverboat, (ii) to reimburse PMI
for monthly expenses advanced to CQC through January 1, 1999 for maintenance of
and insurance on the Riverboat, (iii) for maintenance of and insurance on the
Riverboat from and after February 1, 1999 until a sale of the Riverboat is
consummated, (iv) for legal counsel fees incurred by CQC in connection with its
Chapter 11 reorganization, and (v) for any other administrative expenses which
the Bankruptcy Court may allow and authorize CQC to pay. Upon consummation of a
sale of the Riverboat, the balance of the earnest money deposit will be
distributed in accordance with a plan of reorganization or other court order
authorizing and directing distribution of the funds.
CQC currently is in the process of working with counsel for IBJ Whitehall
and representatives of PMI to sell the Riverboat. CQC currently plans to
continue soliciting potential buyers, and negotiate a new Purchase and Sale
Agreement which can be presented to the Bankruptcy Court for approval, subject
to overbids presented in open court. Counsel for IBJ Whitehall has been advised
by counsel for High River that High River is willing to enter into an agreement
to purchase the Riverboat for $1.2 million, subject to overbids. The offer has
not been accepted or rejected to date.
Impact of the Year 2000 Issue
- -----------------------------
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Computer programs
that have date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
Since the Company has no existing operations, nor any anticipated future
operations, management believes that the Year 2000 Issue will not have a
material impact on the financial position, operations or cash flows of the
Company.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- ------- -----------------
The Company is not presently a party to any lawsuits relating to routine
or other matters incidental to its respective business, except as described
below.
By letters dated July 3, 1997 and July 17, 1997, IBJ Schroder Bank & Trust
Company now IBJ Whitehall Bank & Trust Company, ("IBJ Whitehall"), the trustee
of the CQC Indenture dated as of November 15, 1993, declared all of the
Securities (as defined in the Indenture) to be immediately due and payable,
together with all accrued and unpaid interest thereon. Subsequent letters from
IBJ Whitehall, dated September 5, 1997, provided notices of defaults by CQC and
AC under their respective Indentures and also served Notice of Acceleration on
AC with respect to its Securities and its Limited Guaranty of the CQC debt. CQC
and AC retained counsel to assist them in dealing with the Bondholders and on
July 16, 1997, a proposal for the financial restructuring of the CQC and AC
indebtedness was presented to the Bondholders through the Trustee and Counsel to
one of the major Bondholders. The Bondholders orally responded to such offer as
of September 10, 1997.
On November 14, 1997, AC filed for bankruptcy protection in the United
States Bankruptcy Court for the District of Nevada in Las Vegas, Nevada (the
"Bankruptcy Court") under Chapter 11 of the United States Bankruptcy Code (Case
No. 97-28781 LBR) to pursue the financial reorganization of AC.
On June 25, 1998, a "Consensual Plan of Reorganization Proposed by AC (the
"Debtor") and High River" (the "Plan"), dated June 24, 1998, was approved by the
Bankruptcy Court. Pursuant to the Plan, AC was reorganized as of September 28,
1998 (the "Effective Date") in accordance with the Debt Conversion Option of the
Plan. Under the Debt Conversion Option, the AC Notes were redeemed with funding
provided by Arnos, an affiliate of High River in the form of a loan to AC for
approximately $18,000,000.
As a part of the Plan, AC, the Reorganized Debtor, will continue in
business as a Nevada closely held corporation. However, the issued and
outstanding shares of common stock of AC were canceled on the Effective Date and
1,000,000 shares of new stock of AC, out of a total of 5,000,000 authorized
shares, were issued to High River, or its nominee. The AC Notes have been
canceled as provided under the Plan, and all security interests that formerly
secured the AC Notes have been removed of record; the AC Limited Guaranty of
indebtedness of CQC has been canceled in exchange for a payment of $1,500,000 in
cash to the CQC Note holders; unsecured creditors have been paid in full; other
secured gaming equipment contracts have been reinstated and will be honored in
full; and BGI has contributed $1,500,000 in cash to AC as a new value
contribution, which contribution was made effective July 24, 1998.
Except as may be otherwise expressly provided in the Plan and in the
Confirmation Order, on the Effective Date all property of the Debtor prior to
the Effective Date will revest in AC as the "Reorganized Debtor", free and clear
of all claims, liens, encumbrances and other interests of creditors and holders
of indebtedness.
On March 17, 1998, CQC filed for bankruptcy protection in the Bankruptcy
Court for the District of Nevada in Las Vegas, Nevada (the "Bankruptcy Court")
under Chapter 11 of the United States Bankruptcy Code (Case No. 98-22172LBR) to
pursue financial reorganization of CQC and to facilitate a sale of the gaming
vessel, the principal asset of CQC, to a third party. A third party bid for the
purchase of the Riverboat was filed with a Motion for Order Authorizing Sale of
Personal Property, and a hearing on the motion was set for April 16, 1998. On
April 16, 1998, the parties requested the hearing be deferred to April 29, 1998.
On April 29, 1998, the third party buyer withdrew its bid and, there being no
other willing buyers present to made a bid, the sale of the Riverboat was
continued to June 5, 1998, to allow CQC to solicit additional bids and offers.
Since CQC does not presently engage in any business operations, the Company did
not experience any material changes in its operations as a result of the
bankruptcy filing.
<PAGE>
Subsequently, CQC received a conditional offer from a third party and a
new hearing date of May 15, 1998 was scheduled to consider this bid and any
others that might be forthcoming. The third party, however, then requested a
continuance to allow for additional time to complete its diligence investigation
regarding the Riverboat and, there being no other bidders prepared to offer a
competitive bid to that of the third party, a further continuance was requested
and granted to June 15, 1998, at which time the third party bid and that of any
competing buyers were to be considered. Prior to that hearing date, the pending
bid was withdrawn and the hearing was vacated. Several additional bids were
subsequently received but were rejected for inadequacy of the offered purchase
price and sale of the Riverboat has not occurred.
On January 26, 1999, CQC and IBJ Whitehall Bank & Trust Company ("IBJ
Whitehall"), by and through their selling agent, Continental Plants Corp. and
Plant & Machinery, Inc, acting as a consortium collectively, ("PMI"), conducted
a sealed bid sale of the Riverboat in accordance with the sealed bid sale
procedures previously approved by the Bankruptcy Court (the "Procedures"). PMI
received two bids for the riverboat. The highest bid was from High River, an
entity owned and controlled by Carl Icahn, a majority owner of certain
outstanding debt of CQC, at a bid price of $3,200,000, inclusive of the
mandatory 5% buyers premium (the "High River Bid"). High River submitted the
initial earnest money deposit of $200,000 with its bid and the funds were then
deposited in the Bernhard & Leslie, CHTD Trust Account (the "Trust Account").
The sealed bid sale, which was subject to Bankruptcy Court approval, resulted in
a write-down of the riverboat assets based on the highest bid received in the
amount of $2,800,000 in the December 31, 1998 financial statements.
On January 27, 1999, CQC and IBJ Whitehall executed a Notice of Acceptance
of the High River Bid. CQC and High River subsequently executed a Purchase and
Sale Agreement (the "Agreement") dated January 28, 1999, and High River
delivered an increased earnest money deposit of $600,000 in accordance with the
Procedures. The funds were deposited in the Trust Account.
On Friday, January 29, 1999, counsel for CQC was notified by counsel for
IBJ Whitehall that High River was requesting a continuance of hearing set for
Monday, February 1, 1999 (at which hearing counsel for CQC was to present to the
Bankruptcy Court the highest and best bid and obtain an order approving the sale
to the highest and best bidder), so High River could consider whether the High
River Bid was authorized by the proper persons. Counsel for CQC obtained a
continuance of the hearing to Wednesday, February 3, 1999 at 9:30 am.
On Tuesday, February 2, 1999, counsel for CQC received written notice from
High River's counsel confirming that High River did not intend to consummate the
purchase and sale transaction. Counsel for High River, IBJ Whitehall and CQC
subsequently negotiated and prepared an agreed-upon form of order to present to
the Bankruptcy Court at the February 3 hearing. The order provides, in pertinent
part, that CQC will retain the $800,000 earnest money deposit as its sole and
liquidated damages as a result of High River's failure and/or refusal to
purchase the Riverboat. The order was entered by the US Bankruptcy Court on
February 5, 1999.
If approved by the Bankruptcy Court, the earnest money deposit will be
utilized as follows: (i) to reimburse PMI for out of pocket expenses incurred in
connection with the marketing and sale of the Riverboat, (ii) to reimburse PMI
for monthly expenses advanced to CQC through January 1, 1999 for maintenance of
and insurance on the Riverboat, (iii) for maintenance of and insurance on the
Riverboat from and after February 1, 1999 until a sale of the Riverboat is
consummated, (iv) for legal counsel fees incurred by CQC in connection with its
Chapter 11 reorganization, and (v) for any other administrative expenses which
the Bankruptcy Court may allow and authorize CQC to pay. Upon consummation of a
sale of the Riverboat, the balance of the earnest money deposit will be
distributed in accordance with a plan of reorganization or other court order
authorizing and directing distribution of the funds.
CQC currently is in the process of working with counsel for IBJ Whitehall
and representatives of PMI to sell the Riverboat. CQC currently plans to
continue soliciting potential buyers, and negotiate a new Purchase and Sale
Agreement which can be presented to the Bankruptcy Court for approval, subject
to overbids presented in open court. Counsel for IBJ Whitehall has been advised
by counsel for High River that High River is willing to enter into an agreement
to purchase the Riverboat for $1.2 million, subject to overbids. The offer has
not been accepted or rejected to date.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
The Company did not file any reports on form 8-K during the six-months
ended December 31, 1998.
================================================================================
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: February 12, 1999 /S/ Bruce F. Becker
---------------- -------------------
Bruce F. Becker
President, Chief Executive
Officer (Principal Executive Officer)
Sole Director, Controller (Principal
Financial and Accounting Officer)
================================================================================
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1998
<CASH> 7,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,000
<PP&E> 0
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