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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-----------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 33-76368
BECKER GAMING, INC.
-------------------
(Exact name of registrant as specified in its charter)
Nevada 88-0303849
------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
740 S. Decatur
Las Vegas, Nevada 89107
- ----------------- -----
(Address of principal (Zip Code)
executive offices)
(702) 258-5200
(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former name, former address and former fiscal year if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of common stock October 31, 1997
- --------------------- --------------
$.01 par value 10,000,000 shares
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<PAGE>
BECKER GAMING, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
BECKER GAMING, INC. AND SUBSIDIARIES
Consolidated Balance Sheets as of September 30, 1997
and June 30, 1997 .................................................
Consolidated Statements of Operations and Retained
Earnings(Deficit) for the Three-Month Periods Ended
September 30, 1997 and 1996 and for the Three-Month
Periods Ended September 30, 1997 and 1996 ..........................
Consolidated Statements of Cash Flows for the Three-Month
Periods Ended September 30, 1997 and 1996 ......................
Notes to Consolidated Financial Statements .........................
ARIZONA CHARLIE'S, INC
Balance Sheets as of September 30, 1997 and June 30, 1997...........
Statements of Operations and Retained Earnings (Deficit) for the
Three-Month Periods Ended September 30, 1997
and 1996 and for the Three-Month Periods Ended
September 30, 1997 and 1996......................................
Statements of Cash Flows for the Three-Month Periods
Ended September 30, 1997 and 1996................................
Notes to Financial Statements........................................
SUNSET COIN, INC
Balance Sheets as of September 30, 1997 and June 30, 1997............
Statements of Income and Retained Earnings for the Three-Month
Periods Ended September 30, 1997 and 1996 and for the
Three-Month Periods Ended September 30, 1997 and 1996............
Statements of Cash Flows for the Three-Month Periods Ended
September 30, 1997 and 1996......................................
Notes to Financial Statements........................................
CAPITOL QUEEN & CASINO, INC
Balance Sheets as of September 30, 1997 and June 30, 1997............
Statements of Loss Incurred During the Development Stage
for the Three-Month Periods Ended September 30,
1997 and 1996 and for the Three-Month Periods Ended
March 31, 1997 and 1996 and for the period from January
20, 1993 (the date of inception) through September 30,
1997 ............................................................
Statements of Cash Flows for the for Three-Month Periods
Ended September 30, 1997 and 1996 and for the period
from January 20, 1993 (the date of inception) through
September 30, 1997 ..............................................
Notes to Financial Statements........................................
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Becker Gaming, Inc...................................................
Arizona Charlie's, Inc...............................................
Sunset Coin, Inc.....................................................
Capitol Queen & Casino, Inc..........................................
Part II. Other Information
Item 1 Legal Proceedings............................................
Item 5 Other Information ...........................................
Item 6 Exhibits and Reports on Form 8-K.............................
Signatures...............................................................
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<PAGE>
BECKER GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands, Except Share Data)
ASSETS
September 30, June 30,
1997 1997
------------ ------------
(Unaudited)
Current assets:
Cash and cash equivalents ....................... $ 8,600 $ 7,394
Restricted cash, in escrow account .............. 41 41
Trade and other accounts receivable ............. 373 374
Current portion receivables from related parties. 48 22
Inventories ..................................... 653 665
Prepaid expenses ................................ 939 1,119
Current portion of notes receivable ............. 90 256
Assets held for sale ............................ 370 382
-------- --------
Total current assets ....................... 11,114 10,253
-------- --------
Property and equipment:
Land improvements ............................... 1,628 1,628
Building and improvements ....................... 38,284 38,284
Leasehold improvements .......................... 655 663
Furniture and equipment ......................... 29,843 29,013
-------- --------
70,410 69,588
Less, accumulated depreciation .................. (21,920) (21,266)
-------- --------
48,490 48,322
Land ............................................ 208 208
Construction in process ......................... 480 443
-------- --------
Net property and equipment ................. 49,178 48,973
-------- --------
Other assets:
Assets held for sale ............................ 7,754 7,754
Notes receivable, less current portion, net ..... 245 268
Receivables from related parties, less
current portion ............................... 165 165
Deposits and other .............................. 1,202 1,187
Financing costs, net ............................ 2,236 2,409
-------- --------
Total other assets .......................... 11,602 11,783
-------- --------
Total assets ................................ $ 71,894 $ 71,009
======== ========
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
September 30, June 30,
1997 1997
------------ ------------
(Unaudited)
Current liabilities:
Trade accounts payable .......................... $ 1,719 $ 1,355
Construction accounts payable ................... 153 443
Accrued interest ................................ 13,064 9,998
Accrued expenses ................................ 3,296 3,125
Notes payable ................................... 43 106
Current portion of subordinated notes
payable to stockholders ....................... 800 800
Current portion of long term debt ............... 1,376 887
Long-term debt classified as current, net of
unamortized original issue discount of
$1,975 and $2,092, respectively ............. 73,025 72,908
Current portion of obligations
under capital leases ......................... 133 138
-------- --------
Total current liabilities ................... 93,609 89,760
Long-term debt, less current portion ............. 2,794 2,314
Subordinated notes payable to stockholders,
less current portion ........................... 8,000 8,000
Obligations under capital leases, less
current portion ................................ 124 98
-------- --------
Total liabilities ........................... 104,527 100,172
-------- --------
Commitments and contingencies Stockholders' equity (deficit):
Common stock, $.01 par value, 20,000,000 shares
authorized, 10,000,000 shares issued and
outstanding ................................... 100 100
Preferred stock, $1 par value, 5,000,000 shares
authorized, none issued and outstanding ...... -- --
Additional paid-in capital ...................... 9,006 9,006
Retained earnings (deficit) ..................... (41,739) (38,269)
-------- --------
Total stockholders' equity (deficit) ........ (32,633) (29,163)
-------- --------
Total liabilities and
stockholders' equity (deficit) ............... $ 71,894 $ 71,009
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
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<PAGE>
BECKER GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS (DEFICIT)
(Dollars In Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended September 30,
1997 1996
------------ ------------
Revenues:
Gaming .................................. $ 13,535 $ 14,430
Food and beverage ....................... 4,126 4,583
Hotel ................................... 647 761
Gift shop ............................... 160 131
Other ................................... 256 271
------------ ------------
Gross revenues ..................... 18,724 20,176
Less, promotional allowances ............... (1,918) (2,583)
------------ ------------
Net revenues ....................... 16,806 17,593
Operating expenses:
Gaming .................................. 4,349 5,059
Food and beverage ....................... 4,296 4,360
Hotel ................................... 337 406
Gift shop ............................... 138 124
Advertising and promotion ............... 1,037 1,330
General and administrative .............. 5,762 5,456
Rent expense paid to related party ...... 121 104
Depreciation and amortization .......... 1,080 1,022
------------ ------------
Total operating expenses ........... 17,120 17,861
------------ ------------
Operating income ................... (314) (268)
------------ ------------
Other income (expenses):
Development costs ....................... (143) (73)
Interest income ......................... 13 31
Interest expense ........................ (3,015) (2,740)
Other, net .............................. (11) 30
Provision for income taxes .............. -- --
------------ ------------
Total other income (expense) ....... (3,156) (2,752)
------------ ------------
Loss before income taxes ........... (3,470) (3,020)
Provision for income taxes ......... -- --
------------ ------------
Net loss ........................... (3,470) (3,020)
Retained earnings (deficit),
beginning of period ................ (38,269) (27,103)
------------ ------------
Retained earnings (deficit),
end of period ...................... $ (41,739) $ (30,123)
============ ============
Net loss per share of
common stock ....................... $ (0.35) $ (0.30)
============ ============
Weighted average common
shares outstanding ................. 10,000,000 10,000,000
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
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<PAGE>
BECKER GAMING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars In Thousands)
(Unaudited)
Three Months Ended September 30,
1997 1996
-------- --------
Cash flows from operating activities:
Net (loss) income ................................ $ (3,470) $ (3,020)
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization ................. 1,080 1,022
Amortization of original issue discount ....... 117 135
Increase (decrease) in operating assets:
Receivables .................................... 1 160
Receivables from related parties ............... (26) (11)
Inventories .................................... 12 (11)
Prepaid expenses ............................... 180 177
Deposits and other assets ...................... (23) (31)
Increase (decrease) in operating liabilities:
Accounts payable, net of amounts for capital
expenditures ................................. 364 125
Accrued expenses ............................... 3,237 2,698
-------- --------
Total adjustments ...................... 4,942 4,264
-------- --------
Net cash provided by operating activities .. 1,472 1,244
-------- --------
Cash flows from investing activities:
Capital expenditures, net of construction
accounts payable ............................... (668) (233)
Proceeds from sale of equipment .................. 168 3,315
Payments of notes receivable ..................... 189 30
-------- --------
Net cash provided by (used in)
investing activities .......................... (311) 3,112
-------- --------
Cash flows from financing activities:
Proceeds under notes payable ..................... 390 -
Payments under notes payable ..................... (287) (129)
Payments under capital lease obligations ......... (58) (1,884)
-------- --------
Net cash provided by (used in) financing
activities ..................................... 45 (2,013)
-------- --------
Net increase in cash and cash equivalents ...... 1,206 2,343
Cash and cash equivalents, beginning of period ..... 7,394 6,745
-------- --------
Cash and cash equivalents, end of period ........... $ 8,600 $ 9,088
======== ========
Supplemental cash flow disclosures:
Interest paid ................................... $ 207 $ 351
======== ========
Assets acquired through issuance of long-term
debt and capital leases........................ $ 882 $ -
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
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<PAGE>
BECKER GAMING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------
1) Basis of Presentation:
The accompanying consolidated financial statements of Becker Gaming, Inc. ("BGI"
or the "Company") are unaudited and have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments and normal recurring accruals
considered necessary for a fair presentation have been included. Operating
results for the three month period ended September 30, 1997 are not necessarily
indicative of the results that may be expected for the year ended June 30, 1998.
The accompanying unaudited consolidated financial statements and footnotes
should be read in conjunction with the financial statements included in the
Company's annual report on Form 10-K for the year ended June 30, 1997.
Certain amounts in the 1996 financial statements have been reclassified to
conform with the 1997 presentation.
2) Arizona Charlie's, Inc. Bankruptcy Filing
Arizona Charlie's, Inc., ("AC"), is a wholly owned subsidiary of BGI and the
source of the majority of BGI's operating revenues and cash flows. On November
14, 1997, AC filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy
Court in Las Vegas, Nevada in order to provide it protection from creditors
while it attempts to negotiate a settlement with the holders of certain debt,
which is more fully described in Note 3.
3) Missouri Gaming License, Default Under Indebtedness, Management's Plans,
and Going Concern:
Capitol Queen and Casino, Inc. ("CQC"), a wholly owned subsidiary of BGI, was
formed to develop, own and operate the "Capitol Queen" riverboat casino and
related land-based facilities in Jefferson City, Missouri. On September 28,
1994, CQC was notified that its application for a gaming license was rejected by
the Missouri Gaming Commission (the "Commission"). At the time CQC was notified
of the Commission's decision, construction of the riverboat under contract with
a shipbuilder was substantially completed. CQC had also obtained the necessary
permits for the land-based development portion of the project and performed
certain dredging and other site preparation work. Immediately following the
Commission's decision, management temporarily suspended further development of
the Capitol Queen project, pending an appeal of the decision and legal remedies
potentially available to the Company. Costs associated with the development of
the project which had been deferred during the development stage were written
off in the fourth quarter of the fiscal year ended June 30, 1994.
On November 7, 1995, voters in Jefferson City rejected an ordinance permitting
riverboat gambling, reversing the vote of an earlier election in which Jefferson
City voters approved riverboat gambling. Management ultimately determined to
abandon the project, and is currently looking for alternative uses for the
riverboat, including opportunities to sell or lease it to another operator.
CQC financed the Capitol Queen project through the issuance of $40,000,000 in
principal amount of 12% First Mortgage Notes due November 15, 2000 (the "CQC
Notes"). As of January 1, 1995, the indenture governing the CQC Notes was
amended to (i) eliminate CQC's obligation to construct and open the Capitol
Queen and (ii) permit a two-step purchase of the CQC Notes at 101% of principal
plus accrued and unpaid interest from a sale of assets. The first step
repurchase of $20,000,000 principal amount of the CQC Notes (plus accrued and
unpaid interest) was completed on January 17, 1995, with unexpended funds from
the project escrow account, and an aggregate of $20,000,000 principal amount of
the CQC Notes remained outstanding. However, the dates by which CQC previously
agreed with the holders of the CQC Notes to effect the sale of its assets and
repurchase the remaining CQC Notes have passed, and CQC is thus in default of
the amended covenants.
The remaining CQC Notes require annual interest payments of $2,400,000, payable
in equal installments semi-annually on May 15 and November 15. CQC was not able
to make its scheduled interest payments of $1,200,000 on November 15, 1995, May
15, 1996, November 15, 1996, May 15, 1997 and November 15, 1997 andAC (which has
guaranteed the CQC Notes as more fully described below) did not have available
funds to advance on behalf of CQC.
Concurrent with the issuance of the CQC Notes, AC completed a private placement
debt financing of $55,000,000 in principal amount of 12% First Mortgage Notes
due November 15, 2000 (the "AC Notes"). The AC Notes require annual interest
payments of $6,600,000, payable in equal installments semi-annually on May 15
and November 15. AC was not able to make its scheduled interest payments of
$3,300,000 on May 15, 1997 and November 15, 1997 and Sunset Coin, Inc. ("SC"),
another wholly owned subsidiary of BGI (which has guaranteed the AC Notes as
more fully described below) did not have available funds to advance on behalf of
AC. AC is restricted from selling assets under the covenants governing the AC
Notes and management believes that access to additional capital from other
sources is restricted as a result of the above described circumstances. AC does
not have sufficient financial resources (including a guaranty of the AC Notes by
SC, as more fully described below) to repay the AC Notes on a current basis and
satisfy its guaranty obligation (as more fully described below) with respect to
the CQC Notes.
As of September 30, 1997, AC was in default of certain debt covenants under the
Indenture governing the AC Notes. These covenant violations include (i) a
failure to meet a minimum Fixed Charge Coverage ratio, as defined in the
Indenture; (ii) advances by AC to Becker Gaming, Inc. which exceed amounts
allowed for under the Indenture (which advances remain outstanding at September
30, 1997); (iii) beginning in the fourth quarter of fiscal 1997, exceeding the
amount of new indebtedness allowed for under the Indenture; (iv) beginning with
the quarter ending December 31, 1995, AC has not met the Minimum Tangible Net
Worth Ratio of 1.5 to 1.0, as defined in the Indenture; and (v) AC did not make
its required semi-annual interest payments of $3,300,000 on May 15, 1997 and
November 15, 1997. In addition, beginning with the quarter ending December 31,
1995, AC has not met the Minimum Tangible Net Worth requirement defined in the
Indenture. Under the terms of the Indenture, AC was technically required to
offer to buy back $38,500,000 of the outstanding AC Notes at September 30, 1997
due to the failure to meet this covenant, increasing by $5,500,000 each fiscal
quarter. AC has not made such offer. As a result of these defaults under
covenants and demand for payment made by the Trustee, the AC Notes have been
classified as currently payable in the accompanying financial statements.
The CQC Notes are guaranteed by AC (which guaranty is subject to release only
upon licensing of the Capitol Queen, which is not expected). The AC Notes are
guaranteed by SC (which guaranty is subject to release upon completion of the
Expansion, which management believes has been satisfied, and the attainment of a
fixed-coverage ratio by AC of 2.25 to 1 following the completion of the
Expansion, which has not been satisfied). The amount and extent of AC's guaranty
of the CQC Notes is in dispute. Legal counsel has advised management that, under
the terms of the CQC indenture regarding fraudulent conveyance and limitation of
guarantor's liability, the guaranty liability of AC is not expected to be
material.
On July 3, 1997, CQC received a notice of acceleration (the "Notice") from the
trustee and collateral agent for the CQC Notes. Pursuant to section 6.02 of the
indenture governing the CQC Notes, due to certain violations of the indenture,
all of the outstanding CQC Notes are immediately due and payable together with
all accrued and unpaid interest thereon.
On September 5, 1997, AC received a notice of acceleration from the trustee and
collateral agent for the AC Notes. Pursuant to section 6.02 of the indenture
governing the AC Notes, due to certain violations of the indenture all of the
outstanding AC Notes are immediately due and payable together with all accrued
and unpaid interest thereon.
The CQC Indenture contains covenants that, among other things, limit the ability
of CQC and, in certain cases, AC, to pay dividends or management fees, or incur
additional indebtedness. At September 30, 1997, CQC had a net deficit of
approximately $18,900,000.
The AC Indenture contains covenants that, among other things, limit the ability
of AC and, in certain cases, SC, to pay dividends or management fees, or incur
additional indebtedness. At September 30, 1997 approximately $2,100,000 of SC's
net assets were restricted by such Indenture covenants; while AC had a net
deficit of approximately $19,200,000.
In connection with the decision to abandon the project, CQC had entered into an
Asset Purchase Agreement dated April 10, 1995, for the sale of its assets to
Aerie Riverboat Casinos of Missouri, Inc. at a purchase price of $18,000,000,
which price exceeded the carrying value of the CQC assets. However, the
consummation of the Aerie purchase agreement was subject to the satisfaction of
several conditions which could not be satisfied timely, including, among others,
that Jefferson City consent to the assignment of its Development Agreement with
CQC, that Aerie be found preliminarily suitable to hold a Missouri Gaming
license, and that riverboat gaming is legally permitted in Jefferson City. As a
result, the agreement with Aerie was terminated without penalty when the
December 31, 1995 expiration date passed. As more fully described in Note 3, a
further write-down in the carrying value of the riverboat was recognized in the
third quarter of 1996, after the election in Jefferson City, the expiration of
the Aerie contract, and due to deteriorating market conditions.
CQC continues to market its riverboat assets to prospective buyers. Based on
current market conditions, management does not expect that CQC will generate
sufficient funds through the sale of its assets to repurchase all of the
outstanding CQC Notes. These matters raise substantial doubt about the ability
of the Company's principal subsidiaries (and, thus the Company) to continue as a
going concern. The final outcome of these matters is not presently determinable
and the September 30, 1997 financial statements of the Company do not include
any adjustment that might result from the outcome of this uncertainty.
4). Assets Held For Sale:
At September 30, 1997, BGI had $7,754,000 of assets held for sale, consisting of
land and riverboat assets which were written down to a carrying value based on
management's best estimate of the riverboat's current net realizable value in a
cash sale, based on information obtained from shipbuilders, marine brokers, and
purchase offers made to the Company from third parties.
5) Becker Gaming Group Property Transactions:
Becker Gaming Group ("BGG") another wholly owned subsidiary of BGI, entered into
an agreement to sell one of its bars ("Cantina Charlie's") to a prospective,
unrelated buyer, subject to approval by Nevada Gaming Authorities, for which
licensing and operator approval is pending. The sale is subject to the
aforementioned requirements and satisfactory escrow procedures. Accordingly, the
fixed assets of Cantina Charlie's which total $370,000 have been classified as
assets held for sale in the accompanying financial statements.
A new BGG bar is currently under construction and is expected to be opened in
December, 1997. At September 30, 1997, $480,000 has been expended on the project
and is classified as Construction in process on the accompanying financial
statements.
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<PAGE>
ARIZONA CHARLIE'S, INC.
(A Wholly Owned Subsidiary Of Becker Gaming, Inc. )
BALANCE SHEETS
(Dollars In Thousands)
ASSETS
September 30, June 30,
1997 1997
-------- --------
(unaudited)
Current assets:
Cash and cash equivalents ................. $ 6,089 $ 5,481
Restricted cash, in escrow account ........ 10 10
Trade and other accounts receivable ....... 243 240
Receivable from related parties .......... 2,862 2,665
Inventories ............................... 520 529
Prepaid expenses .......................... 799 985
-------- --------
Total current assets .................... 10,523 9,910
-------- --------
Property and equipment:
Building and improvements ................. 37,490 37,490
Furniture and equipment ................... 24,974 23,916
Land improvements ......................... 1,629 1,629
-------- --------
64,093 63,035
Less, accumulated depreciation ........... (19,041) (18,303)
-------- --------
45,052 44,732
Land ...................................... 208 208
-------- --------
Net property and equipment ............ 45,260 44,940
-------- --------
Other assets:
Receivable from related party, noncurrent.. 210 210
Deposits and other ........................ 542 544
Note receivable from related party......... 4,416 4,416
Financing costs, less accumulated
amortization of $2,063 at September 30,
1997 and $1,923 June 30, 1997 ............. 1,797 1,937
-------- --------
Total other assets ................... 6,965 7,107
-------- --------
Total assets .......................... $ 62,748 $ 61,957
======== ========
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
September, June 30,
1997 1997
-------- --------
(unaudited)
Current liabilities:
Trade accounts payable .................... $ 1,282 $ 1,047
Accrued expenses .......................... 2,952 2,642
Accrued interest .......................... 6,503 4,522
Management fees due Becker Gaming, Inc. ... 5,505 5,347
Notes payable, current portion............. 43 106
Notes payable to related party ............ 3,150 3,150
Current portion of obligations
under capital leases .................... 24 12
Current portion of long-term .............. 935 464
Long-term debt classified as current due
to default under covenants .............. 55,000 55,000
-------- --------
Total current liabilities ......... 75,394 72,290
Long-term debt, less current portion ......... 1,441 1,284
Subordinated notes payable to prior
stockholders ............................... 5,000 5,000
Obligations under capital leases,
less current portion ....................... 80 29
-------- --------
Total liabilities ................. 81,915 78,603
-------- --------
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, no par value,
2,500 shares authorized, 1,000
shares issued and outstanding ............. 469 469
Retained earnings (deficit) ................ (19,636) (17,115)
-------- --------
Total stockholders' equity
(deficit) ......................... (19,167) (16,646)
-------- --------
Total liabilities and
stockholders' equity (deficit) .... $ 62,748 $ 61,957
======== ========
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
ARIZONA CHARLIE'S, INC.
(A Wholly Owned Subsidiary Of Becker Gaming, Inc.)
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
(Dollars In Thousands)
(Unaudited)
Three Months Ended September 30,
1997 1996
-------- --------
Revenues:
Gaming ....................................... $ 11,574 $ 12,229
Food and beverage ............................ 3,129 3,501
Hotel ........................................ 647 761
Gift shop .................................... 160 131
Other ........................................ 247 258
-------- --------
Gross revenues ........................... 15,757 16,880
Less, promotional allowances ................... (1,584) (2,195)
-------- --------
Net revenues ............................. 14,173 14,685
-------- --------
Operating expenses:
Gaming ....................................... 3,914 4,488
Food and beverage ............................ 3,288 3,166
Hotel ........................................ 337 406
Gift shop .................................... 138 124
Advertising and promotion .................... 1,017 1,287
Provision for losses on related party
receivables ............................... 79 73
General and administrative ................... 4,837 4,590
Management fee - Becker Gaming, Inc. ......... 158 169
Rent expense paid to related party ........... 57 55
Depreciation and amortization ................ 911 858
-------- --------
Total operating expenses ................. 14,736 15,216
-------- --------
Operating income (loss)................... (563) (531)
-------- --------
Other income (expenses):
Interest income .............................. 68 68
Interest expense ............................. (2,031) (1,811)
Gain (loss) on sale of assets ................. (5) --
Other, net ................................... 10 30
-------- --------
Total other expenses ..................... (1,958) (1,713)
-------- --------
Income (loss) before taxes ............... (2,521) (2,244)
-------- --------
Provision for income taxes ............... -- --
-------- --------
Net (loss) income ......................... ($ 2,521) ($ 2,244)
Retained earnings (deficit),
beginning of period .......................... (17,115) (9,970)
-------- --------
Retained earnings (deficit),
end of period ............................... ($19,636) ($12,214)
======== ========
<PAGE>
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
ARIZONA CHARLIE'S, INC.
(A Wholly Owned Subsidiary Of Becker Gaming, Inc.)
STATEMENTS OF CASH FLOWS
(Dollars In Thousands)
(Unaudited)
Three Months Ended September 30,
1997 1996
-------- --------
Cash flows from operating activities:
Net income (loss) .................................. ($ 2,521) ($ 2,244)
Adjustments to reconcile net income
(loss) to net cash provided by operating
activities:
Provision for losses on related party receivables .. 79 73
Depreciation and amortization ...................... 911 858
(Increase) decrease in operating assets:
Trade and related party receivables ................ (200) 169
Inventories ........................................ 9 (6)
Prepaid expenses ................................... 186 168
Deposits and other ................................. 2 (12)
Increase (decrease) in operating liabilities:
Accounts payable ................................... 235 (87)
Management fees due to Becker Gaming, Inc. ......... 158 169
Accrued interest and other expenses ................ 2,291 2,326
-------- --------
Total adjustments ............................... 3,671 3,658
-------- --------
Net cash provided by operating activities ...... 1,150 1,414
-------- --------
Cash flows from investing activities:
Capital expenditures ............................... (386) (104)
Increase in related party notes receivables ........ -- (406)
Proceeds from assets sales ......................... 13 --
-------- --------
Net cash provided by
investing activities ......................... (373) (510)
-------- --------
Cash flows from financing activities:
Principal payments on notes payable ................ (154) (65)
Payments under capital lease obligations ........... (15) (4)
-------- --------
Net cash provided by
financing activities ......................... (169) (69)
-------- --------
Net increase in cash and cash equivalents ....... 608 835
Cash and cash equivalents, beginning of the period ..... 5,481 4,591
-------- --------
Cash and cash equivalents, end of the period ........... $ 6,089 $ 5,426
======== ========
Supplemental cash flow disclosures:
Interest paid ...................................... $ 67 $ 129
======== ========
Assets acquired through issuance of long-term debt
and captal leases ................................. $ 797 $ -
======== ========
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
ARIZONA CHARLIE'S, INC.
(A Wholly Owned Subsidiary Of Becker Gaming, Inc.)
NOTES TO FINANCIAL STATEMENTS
-------------
1) Basis of Presentation:
Arizona Charlie's, Inc. ("AC" or the "Company") is a wholly owned subsidiary of
Becker Gaming, Inc. ("BGI"). The accompanying financial statements of AC have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments and normal
recurring accruals considered necessary for a fair presentation have been
included. Operating results for the three month period ended September 30, 1997
are not necessarily indicative of the results that may be expected for the year
ended June 30, 1998. 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, 1997.
Certain amounts in the 1996 financial statements have been reclassified to
conform with the 1997 presentation.
2) Arizona Charlie's, Inc. Bankruptcy Filing
On November 14, 1997, AC filed a voluntary petition under Chapter 11 of the U.S.
Bankruptcy Court in Las Vegas, Nevada in order to provide it protection from
creditors while it attempts to negotiate a settlement with the holders of
certain debt, which is more fully described in Note 3.
3) Missouri Gaming License, Default Under Indebtedness, Management's Plans,
and Going Concern:
Capitol Queen and Casino, Inc. ("CQC") was formed to develop, own and operate
the "Capitol Queen" riverboat casino and related land-based facilities in
Jefferson City, Missouri. On September 28, 1994, CQC was notified that its
application for a gaming license was rejected by the Missouri Gaming Commission
(the "Commission"). At the time CQC was notified of the Commission's decision,
construction of the riverboat under contract with a shipbuilder was almost
completed. CQC had also obtained the necessary permits for the land-based
development portion of the project and performed certain dredging and other site
preparation work. Immediately following the Commission's decision, management
temporarily suspended further development of the Capitol Queen project, pending
an appeal of the decision and legal remedies potentially available to the
Company.
On November 7, 1995, voters in Jefferson City rejected an ordinance permitting
riverboat gambling, reversing the vote of an earlier election in which Jefferson
City voters approved riverboat gambling. Management subsequently abandoned the
project and is currently looking for alternative uses for the riverboat,
including opportunities to sell or lease it to another operator.
CQC financed the Capitol Queen project through the issuance of $40,000,000 in
principal amount of 12% First Mortgage Notes due November 15, 2000 (the "CQC
Notes"). As of January 1, 1995, the indenture governing the CQC Notes was
amended to (i) eliminate CQC's obligation to construct and open the Capitol
Queen and (ii) permit a two-step purchase of the CQC Notes at 101% of principal
plus accrued and unpaid interest from a sale of assets. The first step
repurchase of $20,000,000 principal amount of the CQC Notes (plus accrued and
unpaid interest) was completed on January 17, 1995, with unexpended funds from
the project escrow account, and an aggregate of $20,000,000 principal amount of
the CQC Notes remained outstanding. However, the dates by which CQC previously
agreed with the holders of the CQC Notes to effect the sale of its assets and
repurchase the remaining CQC Notes have passed, and CQC is thus in default of
the amended covenants.
The remaining CQC Notes require annual interest payments of $2,400,000, payable
in equal installments semi-annually on May 15 and November 15. CQC was not able
to make its scheduled interest payments of $1,200,000 on November 15, 1995, May
15, 1996, November 15, 1996, May 15, 1997 and November 15, 1997 and AC (which
has guaranteed the CQC Notes as more fully described below) did not have
available funds to advance on behalf of CQC.
Concurrent with the issuance of the CQC Notes, AC completed a private placement
debt financing of $55,000,000 in principal amount of 12% First Mortgage Notes
due November 15, 2000 (the "AC Notes"). The AC Notes require annual interest
payments of $6,600,000, payable in equal installments semi-annually on May 15
and November 15. AC was not able to make its scheduled interest payment of
$3,300,000 on May 15, 1997 and November 15, 1997 and Sunset Coin, Inc. ("SC"),
another wholly owned subsidiary of BGI (which has guaranteed the AC Notes as
more fully described below) did not have available funds to advance on behalf of
AC. AC is also in default of certain covenants under the AC 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 result of the above-described circumstances. AC does not have
sufficient financial resources (including a guarantee of the AC Notes by SC, as
more fully described below) to repay the AC Notes on a current basis and satisfy
its guarantee obligation (as more fully described below) with respect to the CQC
Notes.
The CQC Notes are guaranteed by AC (which guarantee is subject to release only
upon licensing of the Capitol Queen, which is not expected). The AC Notes are
guaranteed by SC (which guarantee is subject to release upon the attainment of a
fixed-coverage ratio by AC of 2.25 to 1, which has not been satisfied). The
amount and extent of AC's guaranty of the CQC Notes is in dispute. Legal counsel
has advised management that, under the terms of CQC indenture regarding
fraudulent conveyance, the guarantee liability of AC is not expected to be
material.
On July 3, 1997 CQC received a notice of acceleration (the "Notice") from the
trustee and collateral agent for the CQC Notes. Pursuant to section 6.02 of the
indenture governing the CQC Notes, due to certain violations of the indenture
(as more fully described above), all of the outstanding CQC Notes are
immediately due and payable together with all accrued and unpaid interest
thereon.
On September 5, 1997, AC received a notice of acceleration from the trustee and
collateral agent for the AC Notes. Pursuant to section 6.02 of the indenture
governing the AC Notes, due to certain violations of the indenture, all of the
outstanding AC Notes are immediately due and payable together with all accrued
and unpaid interest thereon.
As of September 30, 1997, AC was in default of certain debt covenants under the
Indenture governing the AC Notes. These covenant violations include (i) a
failure to meet a minimum Fixed Charge Coverage ratio, as defined in the
Indenture; (ii) advances by AC to Becker Gaming, Inc. which exceed amounts
allowed for under the Indenture (which advances remain outstanding at September
30, 1997); (iii) beginning in the fourth quarter of fiscal 1997, exceeding the
amount of new indebtedness allowed for under the Indenture; (iv) beginning with
the quarter ending December 31, 1995, AC has not met the Minimum Tangible Net
Worth Ratio of 1.5 to 1.0, as defined in the Indenture; and (v) AC did not make
its required semi-annual interest payments of $3,300,000 on May 15, 1997 and
November 15, 1997. In addition, beginning with the quarter ending December 31,
1995, AC has not met the Minimum Tangible Net Worth requirement defined in the
Indenture. Under the terms of the Indenture, AC was technically required to
offer to buy back $38,500,000 of the outstanding AC Notes at September 30, 1997
due to the failure to meet this covenant, increasing by $5,500,000 each fiscal
quarter. As a result of these defaults under covenants and demand for payment
made by the Trustee, the AC Notes have been classified as currently payable in
the accompanying financial statements.
CQC continues to market its riverboat assets to prospective buyers. Based on
current market conditions, management does not expect that CQC will generate
sufficient funds through the sale of its assets to repurchase all of the
outstanding CQC Notes. These matters raise substantial doubt about the ability
of AC to continue as a going concern. The final outcome of these matters is not
presently determinable and the September 30, 1997 financial statements of AC do
not include any adjustment that might result from the outcome of this
uncertainty.
4) Related-Party Transactions:
AC has advanced to BGI an aggregate of approximately $6,478,000 to fund BGI's
operating expenses from June 1994 through September 1997 of which $4,416,000
represented notes receivable that are interest bearing and have been classified
as noncurrent based on management's expectation for the timing of repayments
from BGI. At September 30, 1997, accrued interest receivable on the interest
bearing portion of the advances to BGI totaled $698,000. The matters described
in Notes 2 and 3 raise substantial doubt about the ability of BGI's principal
subsidiaries (and, thus BGI) to continue as a going concern. Accordingly,
management of the Company believes it is reasonably possible that a portion, or
the entire balance, of the notes receivable from BGI will be uncollectible.
However, an estimate of the loss cannot presently be determined and no
adjustment has been made to the carrying value or classification of the notes
receivable at September 30, 1997.
================================================================================
<PAGE>
SUNSET COIN, INC.
(A Wholly Owned Subsidiary Of Becker Gaming, Inc.)
BALANCE SHEETS
(Dollars In Thousands)
ASSETS
September 30, June 30,
1997 1997
------- -------
(Unaudited)
Current assets:
Cash ................................................... $ 944 $ 707
Current portion of notes receivable .................... 47 222
Note receivable from related party ..................... 3,150 3,150
Advances to related party .............................. 369 312
Other receivables ...................................... 30 27
Interest receivable from related party ................. 354 313
Prepaid expenses ....................................... 40 45
------- -------
Total current assets ............................... 4,934 4,776
------- -------
Property and equipment:
Building and leasehold improvements .................... 174 174
Furniture, fixtures and equipment ...................... 3,042 3,068
------- -------
3,216 3,242
Less, accumulated depreciation ......................... (1,588) (1,604)
------- -------
Net property and equipment ......................... 1,628 1,638
------- -------
Other assets:
Notes receivable, less current
portion .............................................. 11 18
Advances to related parties ............................ 236 111
Other assets, less accumulated
amortization of $41 at September 30, 1997,
and $37 at June 30, 1997 ............................. 71 75
------- -------
Total other assets ................................. 82 93
------- -------
Total assets ....................................... $ 6,644 $ 6,507
======= =======
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, June 30,
1997 1997
------ ------
(Unaudited)
Current liabilities:
Trade accounts payable ................................. $ 11 $ 13
Accrued expenses ....................................... 65 39
Accrued taxes payable to related party ................. 818 779
Current portion of long-term debt ...................... 340 322
------ ------
Total current liabilities ......................... 1,234 1,153
Long-term liabilities:
Long-term debt, less current portion .................. 262 305
Subordinated notes payable to former stockholders ..... 3,000 3,000
------ ------
Total liabilities .................................. 4,496 4,458
------ ------
Commitments and contingencies
Stockholders' equity:
Common stock, no par value, 2,500 shares authorized,
400 shares issued and outstanding ...................... 27 27
Retained earnings ........................................ 2,121 2,022
------ ------
Total stockholders' equity ......................... 2,148 2,049
------ ------
Total liabilities and stockholders'
equity ............................................. $6,644 $6,507
====== ======
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
SUNSET COIN, INC.
(A Wholly Owned Subsidiary of Becker Gaming, Inc.)
STATEMENTS OF INCOME AND RETAINED EARNINGS
(Dollars in Thousands)
Three Months Ended September 30,
1997 1996
------- -------
Revenues:
Slot route:
From locations controlled
by related parties ........... $ 599 $ 567
Other ........................... 34 35
Slot service fees:
From related parties ............ 21 21
Other ........................... 8 8
------- -------
Total revenues ................ 662 631
Operating expenses:
Slot route and service ............. 364 347
General and administrative ......... 29 23
Management fee - Becker Gaming, Inc. 34 33
Depreciation and amortization ...... 78 71
------- -------
Total operating expenses ........ 505 474
------- -------
Operating income ....................... 157 157
------- -------
Other income (expense):
Interest income .................... 47 47
Interest expense ................... (90) (91)
Other income ....................... 24 24
------- -------
Total other income (expense) .... (19) (20)
------- -------
Net income before income tax ........... 138 137
Provision for income taxes.............. (39 (39)
------- -------
Net income ............................. 99 98
Retained earnings,
beginning of period .................... 2,022 1,431
------- -------
Retained earnings, end of
period ................................. $ 2,121 $ 1,529
======= =======
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
SUNSET COIN, INC.
(A Wholly Owned Subsidiary of Becker Gaming, Inc.)
STATEMENTS OF CASH FLOWS
(Dollars In Thousands)
(Unaudited)
Three Months Ended September 30,
1997 1996
------- -------
Cash flows from operating activities:
Net income ........................ $ 99 $ 98
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization .... 78 71
(Increase) decrease in operating assets:
Other receivables ................. (44) 24
Prepaid expenses .................. 5 7
Increase (decrease) in operating liabilities:
Accounts payable ................. (2) (32)
Accrued expenses ................. 65 29
------- -------
Total adjustments ............ 102 99
------- -------
Net cash provided by
operating activities ........ 201 197
------- -------
Cash flows from investing activities:
Capital expenditures ............... (9) (70)
Proceeds from sales of equipment ... 31 --
Decrease (increase) in related
party notes receivable ........... (60) --
Decrease (increase) in advances
to related parties ............... -- (29)
Repayments of notes receivable ..... 182 24
------- -------
Net cash used in
investing activities ........ 144 (75)
------- -------
Cash flows from financing activities:
Proceeds from notes payable ....... -- 44
Principal payments on notes payable (108) (81)
------- -------
Net cash (provided by) used in
financing activities ........ (108) (37)
------- -------
Net increase in cash .......... 237 85
Cash, beginning of period ............. 707 1,122
------- -------
Cash, end of period ................... $ 944 $ 1,207
======= =======
Supplemental cash flow disclosures:
Interest paid ..................... $ 90 $ 91
======= =======
Assets acquired through issuance of
long-term debt ................... $ 84 $ --
======= =======
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
SUNSET COIN, INC.
(A wholly owned subsidiary of Becker Gaming, Inc.)
NOTES TO FINANCIAL STATEMENTS
--------------------
1) Basis of Presentation:
Sunset Coin, Inc. ("SC" or the "Company") is a wholly owned subsidiary of Becker
Gaming, Inc. ("BGI"). The accompanying financial statements of SC are unaudited
and have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments and normal recurring accruals considered necessary for a fair
presentation have been included. Operating results for the three month period
ended September 30, 1997 are not necessarily indicative of the results that may
be expected for the year ended June 30, 1998. The accompanying unaudited
financial statements and footnotes should be read in conjunction with the
financial statements included in the Company's annual report on Form 10-K for
the year ended June 30, 1997.
Certain amounts in the 1996 financial statements have been reclassified to
conform with the 1997 presentation.
2) Guarantee Obligation, Management's Plans, and Going Concern:
SC has guaranteed the payment of interest and $55,000,000 principal amount of
12% First Mortgage Notes due November 15, 2000 issued by AC (the "AC Notes").
Arizona Charlie's, Inc. ("AC") was in default of certain covenants under the AC
Notes as of September 30, 1997. On September 5, 1997 AC received a notice of
acceleration from the trustee and collateral agent for the AC Notes, and all of
the outstanding AC Notes are immediately due and payable together with all
accrued and unpaid interest thereon. In addition, AC has guaranteed the payment
of interest and principal of notes payable issued by CQC (the "CQC Notes"), (the
amount and extent of which guaranty is in dispute) of which $20,000,000
principal amount are outstanding at September 30, 1997. Capitol Queen and
Casino, Inc. ("CQC") is a development stage company which has abandoned its
project to develop, own and operate a riverboat casino, and is currently
attempting to sell its assets to prospective buyers. Based on current market
conditions, management does not expect that CQC will generate sufficient funds
through the sale of its assets to repurchase all of the outstanding CQC Notes.
These matters raise substantial doubt about the ability of SC to continue as a
going concern. The final outcome of these matters is not presently determinable
and the September 30, 1997 financial statements of SC do not include any
adjustment that might result from the outcome of this uncertainty.
On November 14, 1997, AC filed a voluntary petition under Chapter 11 of the U.S.
Bankruptcy Court in Las Vegas, Nevada in order to provide it protection from
creditors while it attempts to negotiate a settlement with the holders of the AC
Notes and the CQC Notes.
3) Related-Party Transactions:
Note receivable from related party consists of uncollateralized advances made by
the Company to AC for general working capital purposes. Due to the present
financial condition of AC, as described in Note 2, management of the Company
believes it is reasonably possible that a portion, or the entire balance, of the
notes receivable from AC will be uncollectible. However, an estimate of the loss
cannot presently be determined and no adjustment has been made to the carrying
value or classification of the note receivable at September 30, 1997. Interest
earned by SC on the note receivable from AC was $42,000 and $32,000 for the
three-month periods ended September 30, 1997 and 1996, respectively. The
interest receivable from AC and payables to AC are included in other receivables
and advances to related parties, respectively.
================================================================================
<PAGE>
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,
1997 1997
------- -------
(Unaudited)
Current assets:
Restricted cash, in escrow account .................... $ 31 $ 31
------- -------
Total current assets ............................... 31 31
------- -------
Other assets:
Assets held for sale ................................... 7,754 7,754
Financing costs, net of accumulated
amortization of $478 at September 30,
1997 and $445 at June 30, 1997 ....................... 439 472
------- -------
Total other assets ................................. 8,193 8,226
------- -------
Total assets ....................................... $ 8,224 $ 8,257
======= =======
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
September 30, June 30,
1997 1997
-------- --------
(Unaudited)
Current liabilities:
Advances from related parties ....................... $ 1,305 $ 1,226
Accrued interest .................................... 6,561 5,788
Notes payable to related parties .................... 1,200 1,200
Long-term debt classified as current,
net of unamortized original issue discount
of $1,975 and $2,092, respectively ................ 18,025 17,908
-------- --------
Total current liabilities .................... 27,091 26,122
-------- --------
Total liabilities ............................ 27,091 26,122
-------- --------
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 .......................... 12,732 12,732
Deficit accumulated during development stage ........ (31,599) (30,597)
-------- --------
Total stockholders' equity (deficit) ............ (18,867) (17,865)
-------- --------
Total liabilities and stockholders'
equity (deficit) .............................. $ 8,224 $ 8,257
======== ========
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
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,
1997 1996
------- -------
Revenues ............................. $- $-
Operating expenses:
Amortization of financing and
other costs ...................... 33 33
Abandonment loss ................... -- --
Development costs .................. 79 73
------- -------
Total operating expenses ....... 112 106
------- -------
Operating loss ....................... (112) (106)
Other income (expenses):
Interest income .................... -- --
Interest expense ................... (890) (752)
Interest capitalized ............... -- --
------- -------
Total other (expense) ................ (890) (752)
------- -------
Net loss before extraordinary item
(1,002) (858)
Extraordinary item:
Loss on early retirement of debt (no
income tax benefit available) .... -- --
------- -------
Net loss .......................... $(1,002) $ (858)
======= =======
<PAGE>
For The Period
January 20, 1993
(The Date Of
Inception)
Through
September 30,
1997
------------------
Revenues ........................... $-
Operating expenses:
Amortization of financing and
other costs .................... 1,507
Abandonment loss ................. 10,426
Development costs ................ 2,070
------------------
Total operating expenses ..... 14,003
------------------
Operating loss (14,003)
Other income (expenses):
Interest income .................. 1,266
Interest expense ................. (15,456)
Interest capitalized ............. 683
------------------
Total other income (expense) ....... (13,507)
------------------
Net loss before extraordinary item . (27,510)
------------------
Extraordinary item:
Loss on early retirement of
debt (no income tax benefit ...
available) .................... (4,089)
------------------
Net loss ........................ $ (31,599)
==================
The accompanying notes are an integral part of these financial statements.
================================================================================
<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)
Three Months Ended
September 30,
1997 1996
------- -------
Cash flows from development stage activities:
Net loss .................................... $(1,002) $ (858)
Adjustments to reconcile net loss
to net cash provided by (used in)
development stage activities:
Amortization of financing and other costs ... 33 33
Amortization of original issue discount ..... 117 135
Abandonment losses and write-downs of assets
held for sale ........................... -- --
Extraordinary loss on retirement of debt .... -- --
Increase (cash) provided decrease) in accounts
payable and accruals, net of amounts for
capital expenditures .................... 773 617
Increase in advances from related parties ... 79 73
------- -------
Total adjustments ..................... 1,002 858
------- -------
Net cash used in development
stage activities .................... -- --
------- -------
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 ......................... -- --
------- -------
Net cash provided by
(used in) investing activities ........ -- --
------- -------
Cash flows from financing activities:
Principal payments on First Mortgage Notes .. -- --
Proceeds from issuance of First Mortgage
Notes, net of financing costs ........... -- --
Proceeds from borrowings under
notes payable to related parties ........ -- --
Equity contribution from Becker Gaming, Inc. -- --
relating to sale of warrants ........... -- --
------- -------
Net cash (used in 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
September 30,
1997
--------
Cash flows from development stage activities:
Net loss .................................... $(31,599)
Adjustments to reconcile net loss
to net cash provided by (used in)
development stage activities:
Amortization of financing and other costs ... 1,507
Amortization of original issue discount ..... 2,406
Abandonment losses and write-downs of assets
held for sale ........................... 10,486
Extraordinary loss on retirement of debt .... 4,089
Increase (decrease) in accounts payable and
accruals, net of amounts for capital
expenditures ............................ 6,573
Increase in advances from related parties ... 1,293
-------
Total adjustments ..................... 26,354
-------
Net cash used in development
stage activities .................... (5,245)
-------
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 ......................... (32)
-------
Net cash provided by
(used in) investing activities ........ (13,921)
-------
Cash flows from financing activities:
Principal payments on First Mortgage Notes .. (20,200)
Proceeds from issuance of First Mortgage
Notes, net of financing costs ........... 30,666
Proceeds from borrowings under
notes payable to related parties ........ 1,200
Equity contribution from Becker Gaming, Inc.
relating to sale of warrants ........... 7,500
-------
Net cash (used in 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.
================================================================================
<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 period
ended September 30, 1997 are not necessarily indicative of the results that may
be expected for the year ended June 30, 1998. 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, 1997.
2) Arizona Charlie's, Inc. Bankruptcy Filing
Arizona Charlie's, Inc., ("AC"), is a wholly owned subsidiary of BGI, is the
guarantor of certain debt of CQC. On November 14, 1997, AC filed a voluntary
petition under Chapter 11 of the U.S. Bankruptcy Court in Las Vegas, Nevada in
order to provide it protection from creditors while it attempts to negotiate a
settlement with the holders of such CQC debt and certain debt of AC, which is
more fully described in Note 3.
3) Missouri Gaming License, Default Under Indebtedness,
Management's Plans, and Going Concern:
CQC was formed to develop, own and operate the "Capitol Queen" riverboat casino
and related land-based facilities in Jefferson City, Missouri. On September 28,
1994, CQC was notified that its application for a gaming license was rejected by
the Missouri Gaming Commission (the "Commission"). At the time CQC was notified
of the Commission's decision, construction of the riverboat under contract with
a shipbuilder was almost completed. CQC had also obtained the necessary permits
for the land-based development portion of the project and performed certain
dredging and other site preparation work. Immediately following the Commission's
decision, management temporarily suspended further development of the Capitol
Queen project, pending an appeal of the decision and legal remedies potentially
available to the Company. Costs associated with the development of the project
which had been deferred during the development stage were written-off in the
fourth quarter of the fiscal year ended June 30, 1994.
On November 7, 1995, voters in Jefferson City rejected an ordinance permitting
riverboat gambling, reversing the vote of an earlier election in which Jefferson
City voters approved riverboat gambling. Management has abandoned the project,
and is currently looking for alternative uses for the riverboat, including
opportunities to sell or lease it to another operator.
CQC financed the Capitol Queen project through the issuance of $40,000,000 in
principal amount of 12% First Mortgage Notes due November 15, 2000 (the "CQC
Notes"). As of January 1, 1995, the indenture governing the CQC Notes was
amended to (i) eliminate CQC's obligation to construct and open the Capitol
Queen and (ii) permit a two-step purchase of the CQC Notes at 101% of principal
plus accrued and unpaid interest from a sale of assets. The first step
repurchase of $20,000,000 principal amount of the CQC Notes (plus accrued and
unpaid interest) was completed on January 17, 1995, with unexpended funds from
the project escrow account, and an aggregate of $20,000,000 principal amount of
the CQC Notes remained outstanding. However, the dates by which CQC previously
agreed with the holders of the CQC Notes to effect the sale of its assets and
repurchase the remaining CQC Notes have passed, and CQC is thus in default of
the amended covenants.
The remaining CQC Notes require annual interest payments of $2,400,000, payable
in equal installments semi-annually on May 15 and November 15. CQC was not able
to make its scheduled interest payments of $1,200,000 on November 15, 1995, May
15, 1996, November 15, 1996, May 15, 1997 and November 15, 1997 and AC (which
has guaranteed the CQC Notes as more fully described in below) did not have
available funds to advance on behalf of CQC.
Concurrent with the issuance of the CQC Notes, AC completed a private placement
debt financing of $55,000,000 in principal amount of 12% First Mortgage Notes
due November 15, 2000 (the "AC Notes"). The AC Notes require annual interest
payments of $6,600,000, payable in equal installments semi-annually on May 15
and November 15. AC was not able to make its scheduled interest payments of
$3,300,000 on May 15, 1997 and November 15, 1997 and Sunset Coin, Inc. ("SC"),
another wholly owned subsidiary of BGI (which has guaranteed the AC Notes as
more fully described below) did not have available funds to advance on behalf of
AC. AC is also in default of certain covenants under the AC 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. AC does not have
sufficient financial resources including a guarantee of the AC Notes by SC, (as
more fully described below) to repay the AC Notes on a current basis and satisfy
its guarantee obligation (as more fully described below) with respect to the CQC
Notes.
The CQC Notes are guaranteed by AC (which guarantee is subject to release only
upon licensing of the Capitol Queen, which is not expected). The AC Notes are
guaranteed by SC (which guarantee is subject to release upon completion of the
Expansion, which management believes has been satisfied, and the attainment of a
fixed-coverage ratio by AC of 2.25 to 1 following the completion of the
Expansion, which has not been satisfied). The amount and extent of AC's guaranty
of the CQC Notes is in dispute. Legal counsel has advised management that, under
the terms of CQC indenture regarding fraudulent conveyance, the guarantee
liability of AC is not expected to be material.
On July 3, 1997 the Company received a notice of acceleration (the "Notice")
from the trustee and collateral agent for the CQC Notes. Pursuant to section
6.02 of the Indenture, due to certain violations of the Indenture by the Company
(as more fully described above) all of the outstanding CQC Notes are immediately
due and payable, together with all accrued and unpaid interest thereon.
Accordingly, the CQC Notes have been classified as currently payable at
September 30, 1997.
On September 5, 1997, AC received a notice of acceleration from the trustee and
collateral agent for the AC Notes. Pursuant to section 6.02 of the indenture
governing the AC Notes, due to certain violations of the indenture, all of the
outstanding AC Notes are immediately due and payable together with all accrued
and unpaid interest thereon.
In connection with the decision to abandon the project, CQC had entered into an
Asset Purchase Agreement dated April 10, 1995, for the sale of its assets to
Aerie Riverboat Casinos of Missouri, Inc. at a purchase price of $18,000,000,
which price exceeded the carrying value of the CQC assets. However, the
consummation of the Aerie purchase agreement was subject to the satisfaction of
several conditions which could not be satisfied timely, including, among others,
that Jefferson City consent to the assignment of its Development Agreement with
CQC, that Aerie be found preliminarily suitable to hold a Missouri gaming
license, and that riverboat gaming is legally permitted in Jefferson City. As a
result, the agreement with Aerie was terminated without penalty when the
December 31, 1995 expiration date passed. As more fully described in Note 3, a
further write-down in the carrying value of the riverboat was recognized in the
fourth quarter of 1996, after the election in Jefferson City, the expiration of
the Aerie contract, and due to deteriorating market conditions.
CQC continues to market its riverboat assets to prospective buyers. Based on
current market conditions, management does not expect that CQC will generate
sufficient funds through the sale of its assets to repurchase all of the
outstanding CQC Notes. These matters raise substantial doubt about the ability
of CQC to continue as a going concern. The final outcome of these matters is not
presently determinable and the September 30, 1997 financial statements of CQC do
not include any adjustment that might result from the outcome of this
uncertainty.
4) Assets Held For Sale:
At September 30, 1997, CQC had $7,754,000 of assets held for sale, consisting of
land and riverboat assets which were written down to a carrying value based on
management's best estimate of the riverboat's current net realizable value in a
cash sale, based on information obtained from shipbuilders, marine brokers, and
purchase offers made to the Company from third parties.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Becker Gaming, Inc.
The Company serves as a holding company for, and provides management and
administrative services to, the Becker family gaming interests, including
Arizona Charlie's, Inc. ("AC"), Sunset Coin, Inc. ("SC"), Becker Gaming Group
("BGG"), and Capitol Queen & Casino, Inc. ("CQC").
BGI is currently receiving payment for management fees from SC and BGG,
and is accruing management fees from AC until such time as such fees may be paid
under the Indenture governing the AC Notes. BGI does not expect to receive
management fee income from CQC as a result of the events in Missouri adversely
affecting CQC's efforts to become licensed to conduct riverboat gaming in that
State. As a result of these developments, CQC has adopted a plan to sell its
assets and business. See "Capitol Queen & Casino, Inc. - General" and "Notes to
Financial Statements - Capitol Queen & Casino, Inc."
As a result of the events adversely impacting CQC's ability to complete
and open the Capitol Queen, significant doubt exists about the ability of CQC to
continue as a going concern. Similar doubt exists with respect to AC and SC as a
result of their limited guarantees of the CQC Notes and the AC Notes,
respectively, to the extent the guarantees are valid and enforceable. AC, SC and
CQC represent the Company's principal subsidiaries, from which it anticipated
receiving management fee income and, accordingly, substantial doubt also exists
about BGI's ability to continue as a going concern. See "Notes to Financial
Statements - Becker Gaming, Inc. - Missouri Gaming License, Default Under
Indebtedness, Management's Plans, and Going Concern.
On November 14, 1997, AC filed a voluntary petition under Chapter 11 of
the U.S. Bankruptcy Court in Las Vegas, Nevada in order to provide it protection
from creditors while it attempts to negotiate a settlement with the holders of
the AC Notes and the CQC Notes.
Arizona Charlie's, Inc.
General
AC's revenues are derived largely from gaming activities at its Arizona
Charlie's casino-hotel, and, to a lesser extent, from food and beverage,
lodging, entertainment and retail sales. AC generally views its non- casino
operations as complementary to its core casino operations. Accordingly, it
utilizes entertainment primarily as a casino marketing tool. Further, AC
maintains food and beverage pricing structures designed to benefit casino
volumes, often resulting in departmental operating losses. 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, 1997 and 1996
Net revenues at AC decreased by $512,000, or 3.5%, from $14,685,000 to
$14,173,000 for the three-month period ended September 30, 1997 compared to the
three-month period ended September 30, 1996. In the same period to period
comparison, operating expenses, including depreciation and amortization,
decreased by 3.2% to $14,736,000 from $15,216,000. This resulted in a increase
in operating losses of $32,000 from a loss of $531,000 to a loss of $563,000 for
the more recent period.
Gaming revenues decreased 5.4% from $12,229,000 to $11,574,000. The
largest portion of the decrease in gaming revenues is attributable to gaming
machine revenues which decreased $287,000, or 2.7% from $10,472,000 to
$10,185,000. The decrease reflects lesser play from slot patrons during the more
recent period. Revenues from table games decreased $208,000, or 17.1% from
$1,215,000 to $1,007,000. The decrease in table games revenues for the
three-month period ended September 30, 1997 is also the result of lesser play
from patrons. Race and sports book revenues decreased by $12,000, or 2.0%, to
$585,000 from $597,000 for the three-month period ended September 30, 1997
compared to the same period in 1996. Bingo revenues decreased by $128,000 for
the three-month period ended September 30, 1997 when compared to the same period
of the prior year due to higher than normal payouts combined with a decrease in
play by patrons.
Food and beverage revenues decreased 10.6% to $3,129,000 from $3,501,000
for the three-month period ended September 30, 1997 compared to the same period
of the prior year. The decrease in revenues of $372,000 is primarily due to
decreased complimentary sales in the amount $463,000 in the food department
partially offset by an increase in cash sales of $91,000. Complimentary sales
are included in revenues at retail value and are then deducted as a promotional
allowance. Decreased complimentary sales in the food and beverage departments
are the result of a new patron complimentary policy put into effect in June,
1997 utilizing the newly acquired computerized slot reporting and player
tracking system to better evaluate and document patron play and reward qualified
patrons with complimentary items.
Hotel revenues decreased from $761,000 to $647,000 for the three-months
ended September 30, 1997 compared to the same period in 1996. The decrease of
15.0% in the 1997 period is primarily due to a decrease in occupancy and average
room rates of 72.0% and $38.89, respectively, compared to 91% and $40.40 in the
1996 period.
Gift shop revenues increased from $131,000 to $160,000 for the
three-months ended September 30, 1997 compared to the same period in 1996. The
increase of 22.1% is primarily due to increasing the hours of operation in the
1997 period.
Other revenues, which include receipts from entertainment cover charges,
ATM commissions and revenues from PBX operations and banquets, decreased
slightly from $258,000 to $247,000 for the three-months ended September 30, 1997
compared to the same period in the prior year. The decrease of 4.3% is primarily
the result of decreases in entertainment cover charge revenues reflecting fewer
entertainment events and musical concerts in the 1997 period.
Gaming expenses decreased by $574,000, or 12.8%, to $3,914,000 for the
three-month period ended September 30, 1997 from $4,488,000 for the same period
of the prior year reflecting a reduction in staffing levels for the table games
department and lower gaming tax and license fees associated with the decrease in
gaming revenues.
Food & beverage expenses increased by $122,000, or 3.9%, to $3,288,000 for
the three-month period ended September 30, 1997 from $3,166,000 for the same
period of the prior year, due primarily to increased food and beverage costs
reflecting an adjustment of complimentary expense items in the 1997 period.
Hotel expenses decreased by $69,000, or 17.0%, to $337,000 for the
three-month period ended September 30, 1997 from $406,000 for the same period of
the prior year. The decrease is primarily due to decreases of $54,000 in
salaries and wages and $26,000 in repairs and maintenance, offset by increased
advertising and promotion expense of $11,000 in the 1997 period.
General and administrative expenses increased by $247,000, or 5.4%, to
$4,837,000 for the three-month period ended September 30, 1997 from $4,590,000
for the same period of the prior year. The increase is primarily the result of
the creation of the "Charlie Card Club" department in June, 1997 to better
evaluate and reward patrons with complimentary items for slot, table games, race
& sports play. During the 1997 period the Charlie Card Club accrued $322,000 for
future patron complimentaries earned by patron play in the casino.
Advertising and promotion expenses decreased by $270,000, or 21.0% to
$1,017,000 for the three-month period ended September 30, 1997 from $1,287,000
for the same period of the prior year. The decreased expense is the result of
fewer monthly promotions in the 1997 period and redirecting some of the
promotional and patron expense to the Charlie Card Club.
Depreciation and amortization increased by $53,000, or 6.2%, to $911,000
for the three-month period ended September 30, 1997 from $858,000 for the same
period of the prior year, as a result of increased depreciation expenses
associated with the purchases of new slot machines and the computerized slot
reporting and player tracking system.
Gift shop expenses increased by $14,000, or 11.3%, to $138,000 for the
three-month period ended September 30, 1997 compared to $124,000 for the same
period of the prior year reflecting increases in wholesale item costs associated
with the gift shop operation.
Management fees to BGI decreased by $11,000, or 6.5%, to $158,000 for the
three-month period ended September 30, 1997 from $169,000 for the same period in
the prior year. Currently, management fees are equal to 1.0% of gross revenues
of AC. As such, decreased gross revenues bring about lower 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. Rent expense paid to related parties increased slightly
from $55,000 to $57,000 reflecting small yearly adjustments in the annual base
rents.
Other expense (net of other income) amounted to $1,958,000 for the
three-month period ended September 30, 1997 compared to $1,713,000 for the same
period in the prior year. The increase in expense of $245,000, or 14.4%,
reflects additional interest costs associated with the AC notes due to
additional default interest expense associated with the May 15, 1997 interest
payment which was not made, and additional interest costs associated with the
financing of the computerized slot reporting and player tracking system
purchased in May, 1997.
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 $19,500,000. Due to low operating margins, high interest and
depreciation costs, management does not anticipate that AC will generate taxable
income in the foreseeable future.
Liquidity and Capital Resources
At September 30, 1997, AC had a working capital deficit of $64,871,000
compared to a working capital deficit of $62,380,000 at June 30, 1997. The
decrease in working capital in the amount of $2,491,000 was caused primarily by
increased accruals on the AC Notes and accrued management fees payable to BGI,
plus additional short term notes payable for slot machines.
For the three-month period ended September 30, 1997, cash provided by
operating activities decreased approximately $264,000, or 18.7%, to $1,150,000
from $1,414,000 for the same period in 1996. The decrease in the 1997 period is
primarily attributable to a increase in net loss of $277,000 and slower payments
on accounts receivable of $369,000. This is partially offset by increased
accounts payable liability of $322,000.
For the three-month period ended September 30, 1997, net cash used in
investing activities decreased to $373,000 compared with $510,000 for the same
period in 1996. The decrease of $137,000 was caused primarily by a $406,000
increase in a prior period related party receivable offset by increased cash
capital expenditures of $282,000 in the current year period.
Cash flows used in financing activities for the three-month period ended
September 30, 1997 was $169,000, up from $69,000 for the same period in 1996.
The increase is primarily the result of higher principal payments on additional
notes payable
AC's long-term obligations, approximately $6,521,000 at September 30, 1997,
consist of the stockholder notes, capitalized equipment leases and long-term
debt on slot equipment. AC has annual interest expense aggregating $6,600,000
and $500,000 with respect to the AC Notes (classified as current due to default
under covenants) and the stockholder notes, however, AC did not make its May 15,
1997 and November 15, 1997 semi-annual interest payments on the AC Notes, and
has suspended monthly payments on the stockholder notes since May, 1997.
Further, AC is expected to have annual capital expenditure requirements of
approximately $1,200,000.
Claims by Trustee
AC currently has outstanding $55,000,000 of 12% First Mortgage Notes due
2000. SC has issued a limited guaranty with respect to the AC Notes (the "SC
Limited Guaranty"). CQC currently has outstanding $20,000,000 of 12% First
Mortgage Notes due 2000. AC has issued a limited guaranty with respect to the
CQC Notes (the "AC Limited Guaranty"). The amount and extent of AC's guaranty of
the CQC Notes is in dispute due to certain provisions of the Indenture under
which the CQC Notes were issued, as well as certain provisions of State and/or
Federal Law that may be applicable in or with respect to financial
restructuring. It is AC's position that, based on advice from legal counsel, its
limited guaranty does not create a material liability on its part for the
payment of the obligations under the CQC Notes.
IBJ Schroder Bank & Trust Company, as Trustee under the Indentures under
which such Notes are outstanding, has declared the AC Notes and the CQC Notes to
be in default and has declared all such Notes to be immediately due and payable.
The Trustee has also notified AC that the purported obligations of AC under its
guaranty have been accelerated and has declared the obligations of AC thereunder
to be due. Management of AC and CQC and the holders of the Notes are discussing
possible financial restructuring of the AC and CQC obligations, but no such
restructuring has yet been agreed to. The Trustee has taken no further action to
enforce the Notes or the purported guaranties thereof or to foreclose on any
assets of AC or CQC. No assurance can be given, however, that the Trustee will
not do so.
AC is currently in default under the Indenture governing the AC Notes
because it has not made its required semi-annual interest payments in the amount
of $3,300,000 due on May 15, 1997 and November 15, 1997 and has neither
maintained the required minimum level of consolidated tangible net worth nor
offered to repurchase a portion of the AC Notes as required if such minimum
level of consolidated tangible net worth is not maintained. In addition, AC has
failed to maintain the minimum consolidated fixed charge coverage ratio required
under the Indenture and has advanced funds to BGI in excess of the amounts
permitted to be so advanced under the Indenture. Also, AC incurred new notes
payable (in the amount of approximately $2,545,000) for the purchase of a
computerized reporting and player club system and new slot machines in excess of
the $1,000,000 allowed. See Arizona Charlie's, Inc. - Liquidity and Capitol
Resources - Claims by Trustee".
AC has a contingent obligation resulting from a limited guaranty issued by
it on the CQC Notes, an aggregate of $20,000,000 in principal amount of which
remain outstanding. The amount and extent of such guaranty are in dispute. As a
result of a September 1994 ruling of the Missouri Gaming Commission denying
CQC's gaming license application, CQC has adopted a plan to sell its assets for
the purpose of repaying, to the extent possible, the outstanding CQC Notes and
accrued interest thereon. See "Business - Capitol Queen & Casino, Inc." There
can be no assurance that CQC will be successful in its efforts to sell its
assets or, that if a sale is effected, the proceeds will be sufficient to fully
or substantially repay the CQC Notes and accrued interest thereon. To the extent
any funds CQC may realize from the sale of its assets are not sufficient to
repay the CQC Notes and accrued interest thereon, AC may be obligated under the
AC Limited Guaranty of the CQC Notes to fund the a portion of shortfall.
Moreover, because it has failed to pay interest due on the Notes and it
has not yet effected the sale of its assets, CQC is in default of the CQC Notes.
CQC is not able to pay the outstanding CQC Notes without an infusion of capital,
which is not expected to be available. If AC is obligated under the AC Limited
Guaranty to pay a portion of the CQC Notes it is not expected to have the
resources to satisfy such obligation should it materialize. If the AC Notes and
the CQC Notes are accelerated, substantial doubt exists about AC's ability to
continue as a going concern. See "Notes to Financial Statements - Arizona
Charlie's, Inc. - Missouri Gaming License, Default Under Indebtedness
Management's Plans, and Going Concern".
AC's ability to obtain capital, is significantly restricted under the
Indentures governing the AC Notes and the CQC Notes. The ability of AC to
service its debt obligations (and to comply with the consolidated tangible net
worth covenant) will be dependent upon its future performance, which performance
will be influenced by prevailing economic conditions and financial, business and
competitive factors, many of which are beyond AC's control.
On November 14, 1997, AC filed a voluntary petition under Chapter 11 of
the U.S. Bankruptcy Court in Las Vegas, Nevada in order to provide it protection
from creditors while it attempts to negotiate a settlement with the holders of
the AC Notes and the CQC Notes.
Sunset Coin, Inc.
General
SC derives its revenues and profits largely from its gaming machine route
pursuant to participation contracts and, to a lesser extent, space leases. Under
its participation contracts, SC pays a percentage of the net win (amounts
wagered less winnings paid) from its gaming machines to the site owner. The
balance is retained by SC. Under its space leases, SC pays the site owner a
fixed space rental fee and retains all of the net win. SC gaming revenues under
participation contracts represent SC's share of the net win after payments to
the location, and under space leases represent all revenues before lease
payments, which are treated as expenses. A majority of SC's gaming machines are
installed at locations controlled by the Becker family and the contracts with
such locations are expected to be renewed as a matter of general course.
In addition to the operation of its gaming machine route, SC services
gaming machines owned by other operators for fixed service fees. Included among
its service agreements are contracts with five Becker Gaming Group ("BGG")
locations and one additional location owned by an unrelated party, which are
expected to be renewed in general course.
Results of operations for the three months ended September
30, 1997 and 1996
SC's results of operations increased slightly for the three-month period
ended September 30, 1997 compared to the same period in the prior year. Slot
route revenues increased by 5.6% from $567,000 for the 1996 three-month period
to $599,000 for the 1997 three-month period. The increase in revenues is
attributable to the addition of three participation locations partially offset
by the loss of one participating location in July of 1997. Another small factor
offsetting the increase was the conversion of one space lease location to a
participation contract.
The average number of gaming machines operated during the three-month
period ended September 30, 1997 was 267 compared to 254 in the prior year
period. The average number of gaming machines at BGG locations serviced by SC
was 115 for the three-month period ended September 30, 1997 unchanged from the
same period in 1996. Accordingly, slot service fees from BGG for the three-month
period ended September 30, 1997 were $29,000, identical to the same period in
the prior year.
Gaming machine route expenses for the three-month period ended September
30, 1997 increased by 4.9% to $364,000 when compared to the same period in the
prior year reflecting annual merit increases in salaries and wages. Other
increased expenses for loss and damage, advertising and rent expenses were
partially offset by a decrease in repair and maintenance and complimentary
expenses.
General and administrative expenses for the three-month period increased by
26.1% to $29,000 from $23,000, the direct result of increased supply expenses.
Management fees (based upon gross revenues) increased by 3.0% to $34,000
for the three-month period ended September 30, 1997 when compared to the same
period in the prior year. This increase is attributable to higher gross revenues
in the more recent period.
Depreciation and amortization increased by 9.9% from $71,000 for the
three-month period ended September 30, 1996 to $78,000 for the three-month
period ended September 30, 1997, reflecting increased depreciation and
amortization costs associated with the purchase of additional slot machines and
vehicles.
During the three-month period ended September 30, 1997, SC had other
expenses (net of interest and other income) of approximately $19,000 compared to
$20,000 for the same period in 1996. The small decrease is attributable to
reduced interest expense relating to notes payable paid in the previous year for
existing locations plus the result of most new notes payable from venders being
interest free..
Income Taxes
As a result of the termination of its election to be treated as S
corporation, SC became liable for income taxes on income earned from and after
January 1, 1995. Prior to such termination, SC did not incur or pay their income
tax liability in respect to income of SC. Estimated income tax payable for both
three-month periods ended September 30, 1996 and September 30, 1997 was $39,000.
These were based on an anticipated effective federal income tax rate
approximating the statutory rate of 34%.
Liquidity and Capital Resources
Cash provided by operating activities for the three-month period ended
September 30, 1997 increased to $201,000 from $197,000 for the three-month
period ended September 30, 1996, mostly due to a net increase in operating
liabilities of $66,000 and depreciation and amortization of $7,000 offset by a
decrease in operating assets of $70,000.
Cash flows used in investing activities for the three months ended
September 30, 1997 amounted to $144,000, including repayment of notes receivable
of $182,000 and proceeds on sale of equipment of $31,000. These sources were
offset by capital expenditures of $9,000 and increased advances to related party
of $60,000.
Cash flows used in financing activities for the three months ended
September 30, 1997 increased to $108,000, resulting from additional principal
payments of $108,000.
SC's indebtedness includes stockholder notes and notes collateralized by
its gaming equipment and other assets. The stockholder notes aggregate
$3,000,000 in principal amount, bear interest at an annual rate of 10% and
mature January 2001. The collateralized notes bear interest at annual rates of
approximately 10.89%, in the case of fixed rate loans, or at prime plus 1.5% ,
in the case of a collateralized line of credit, the outstanding aggregate
balance of which, $272,000, was converted to a note at July 1, 1994 with monthly
payments through June 1998.
In July 1994, SC entered into an agreement with a bank for a new
$1,200,000 non-revolving line of credit. Each advance under the line shall be
evidenced by a separate promissory note with maturity date not exceeding 66
months from the date of the respective advance giving rise to the note. Under
the agreement, SC originally could request advances through October 28, 1995
only, at which time its rights to advances under the agreement were terminated
until the defaults under the AC and CQC Notes are resolved. Advances under the
agreement bear interest at the bank's prime rate plus 1.5% up to a maximum rate
of 2.0%. As of September 30, 1997, the amount outstanding under the non-
revolving line of credit totaled $435,000.
SC's management believes that it has sufficient funds through the
non-revolving line of credit and cash generated by operations to meet its
projected needs for existing operations and limited expansion of its gaming
machine route business. Should SC determine to expand on more than a limited
basis, however, it is likely that further capital would be necessary. SC's
access to additional capital will be significantly restricted under the AC
Indenture so long as SC is a guarantor of the AC Notes. SC has guaranteed the
payment of the AC Notes, which guarantee is subject to release upon attainment
by AC of a fixed charge coverage ratio of 2.25 to 1. In connection with its
guarantee, the Indenture imposes restrictions on the distribution of earnings.
Because AC is in default under the Indenture governing the AC Notes, the
AC Notes have been accelerated. See "Arizona Charlie's, Inc.--Liquidity and
Capital Resources Claims by Trustee." AC does not have the resources to pay the
AC Notes. In addition, AC may have limited liability under the AC Limited
Guaranty of the CQC Notes which may exceed the amount which it could immediately
support or repay. In either case, SC, as guarantor of the AC Notes, may have
liability under the SC Limited Guaranty, and such liability could exceed the
amount which it could immediately support. Accordingly, substantial doubt exists
about SC's ability to continue as a going concern if the Trustee for the AC
Notes and CQC Notes is able to enforce its acceleration thereof. See "Notes to
Financial Statements Sunset Coin, Inc. - Guarantee Obligation, Management's
Plans and Going Concern."
On November 14, 1997, AC filed a voluntary petition under Chapter 11 of
the U.S. Bankruptcy Court in Las Vegas, Nevada in order to provide it protection
from creditors while it attempts to negotiate a settlement with the holders of
the AC Notes and the CQC Notes.
Capitol Queen and Casino, Inc.
Analysis of Development Stage Activities for the period January 20, 1993 (the
date of inception) through September 30, 1997
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 September 30, 1997, approximately $31,000 remained in the escrow
account and an aggregate of $20,000,000 principal amount of the CQC Notes
remained outstanding. However, the dates by which CQC previously agreed with the
holders of the CQC Notes to effect the sale of its assets and repurchase the
remaining CQC Notes have passed.
The CQC Notes outstanding require annual interest payments of $2,400,000,
payable in equal installments semi-annually on May 15 and November 15. CQC was
not able to make its scheduled interest payments of $1,200,000 on each of
November 15, 1995, May 15, 1996, November 15, 1996, May 15, 1997 and November
15, 1997. Further, AC does not have available funds to advance on behalf of CQC.
See "Liquidity and Capital Resources - Capitol Queen & Casino, Inc. - Claims by
Trustee".
During the period from inception through September 30, 1997, CQC had total
operating expenses of $14,003,000 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 additional abandonment loss
of $4,392,000 in the 1996 fiscal year. Also included in operating expenses are
amortization expense of $1,507,000 associated with debt issue costs and
$2,070,000 of project development costs. For the same period, CQC incurred
$15,456,000 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 $1,266,000 for the period from
inception to September 30, 1997.
Liquidity and Capital Resources
For the period from inception through September 30, 1997, net cash used in
development stage activities was $5,245,000. Cash flows used in investing
activities for the period was $13,921,000 which included $12,936,000 of capital
expenditures related to the construction of the riverboat and acquisition of the
Jefferson City land site. At September 30, 1997, CQC had expended a total of
approximately $21,760,000 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 $6,402,000 at September
30, 1997, which includes amounts accrued on unpaid interest. 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 September 30, 1997 and June 30, 1997.
Claims by Trustee
AC currently has outstanding $55,000,000 of 12% First Mortgages Notes due
2000. SC has issued a limited guaranty with respect to the AC Notes (the "SC
Limited Guaranty"). CQC currently has outstanding $20,000,000 of 12% First
Mortgage Notes due 2000. AC has issued a limited guaranty with respect to the
CQC Notes (the "AC Limited Guaranty"). The amount and extent of AC's guaranty of
the CQC Notes is in dispute due to certain provisions of the Indenture under
which the CQC Notes were issued, as well as certain provisions of State and/or
Federal Law that may be applicable in or with respect to financial
restructuring. It is AC's position that, based on advice from legal counsel, its
limited guaranty does not create a material liability on its part for the
payment of the obligations under the CQC Notes.
IBJ Schroder Bank & Trust Company, as Trustee under the Indentures under
which such Notes are outstanding, has declared the AC Notes and the CQC Notes to
be in default and has declared all such Notes to be immediately due and payable.
The Trustee has also notified AC that the purported obligations of AC under its
guaranty have been accelerated and has declared the obligations of AC thereunder
to be due. The Trustee has taken no further action to enforce the Notes or the
purported guaranties thereof or to foreclose on any assets of AC or CQC. No
assurance can be given, however, that the Trustee will not do so.
On November 14, 1997, AC filed a voluntary petition under Chapter 11 of
the U.S. Bankruptcy Court in Las Vegas, Nevada in order to provide it protection
from creditors while it attempts to negotiate a settlement with the holders of
the AC Notes and the CQC Notes.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
BGI, CQC, and the Nevada Operating Companies are parties to various
lawsuits relating to routine matters incidental to their respective businesses,
in addition to the litigation discussed below. Based on the amounts and issues
believed to be in controversy and management's evaluation of the merits of the
claims after consultation with counsel, management does not believe that the
outcome of such litigation, in the aggregate, will have a material adverse
effect on the results of operations, cash flows, or financial condition of BGI,
CQC, or the Nevada Operating Companies.
By letters dated July 3, 1997 and July 17, 1997, IBJ Schroder Bank & Trust
Company, the trustee on 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 Schroder Bank & Trust Company, 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 have 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 have orally responded to such offer as of September
10, 1997 and the company is currently evaluating such responses and the possible
actions to be taken by AC and CQC as a result of that response. No further
action by the Trustee has been taken to foreclose on the assets of CQC or to
collect on any claims against any purported guarantees of the CQC debt issued by
AC.
On November 14, 1997, Arizona Charlie's, Inc. (the "Company") 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 the Company. The Company currently is operating under the
Bankruptcy Code as debtor-in-possession. The Bankruptcy Court has entered orders
allowing the Company to honor certain of the pre- petition debts of its
customers (such as hotel room deposits and outstanding gaming chips) and to pay
the pre-petition wages of its employees. As a result, the Company does not
expect any immediate changes in the operations of Arizona Charlie's Hotel &
Casino, located in Las Vegas, Nevada, which is owned and operated by the
Company.
Item 5. Other Information
Bankruptcy or Receivership
On November 14, 1997, Arizona Charlie's, Inc. (the "Company") 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 the Company. The Company currently is operating under the
Bankruptcy Code as debtor-in-possession. The Bankruptcy Court has entered orders
allowing the Company to honor certain of the pre- petition debts of its
customers (such as hotel room deposits and outstanding gaming chips) and to pay
the pre-petition wages of its employees. As a result, the Company does not
expect any immediate changes in the operations of Arizona Charlie's Hotel &
Casino, located in Las Vegas, Nevada, which is owned and operated by the
Company.
Item 6. Exhibits and Reports on Form 8-K
Exhibit Number Description
- -------------- -----------
99.1 Press Release of the Company dated November 14, 1997
The Company did not file any reports on form 8-K during the Three-Months
ended September 30, 1997.
================================================================================
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.
Becker Gaming, Inc.
-------------------
(Registrant)
Date: November 19, 1997 /S/ Bruce F. Becker
--------------------- -------------------
Bruce F. Becker
President, Chief Executive
Officer (Principal Executive Officer)
Date: November 19, 1997 /S/ Jerry Griffis
---------------- -----------------
Jerry Griffis
Chief Financial Officer
(Principal Financial and
Accounting Officer)
================================================================================
EXHIBIT
PRESS RELEASE - FOR IMMEDIATE RELEASE
ARIZONA CHARLIE'S, INC.
November 14, 1997
Contact: Bruce F. Becker
Telephone: 258-5115
Arizona Charlie's, Inc., announced today that it has filed for Chapter 11
Bankruptcy protection in the U.S. Bankruptcy Court in Las Vegas, Nevada, while
pursuing a financial reorganization of the Company. Bruce F. Becker, President
and Chief Executive Officer of the Company, which owns and operates Arizona
Charlie's Casino & Hotel at 740 S. Decatur Boulevard in Las Vegas, Nevada, said,
"the action was taken to give the Company time to negotiate a settlement with
the holders of First Mortgage Notes issued by Arizona Charlie's, Inc., and an
affiliated company, Capitol Queen & Casino, Inc., in 1993, to fund the expansion
of Arizona Charlie's and to fund Capitol Queen & Casinos' efforts to constuct
and operate a riverboat casino in Jefferson City, Missouri. While the expansion
of Arizona Charlie's has been successfully completed, Capitol Queen & Casino was
unable to secure the required Missouri gaming licenses for operation of the
Jefferson City casino and has been unable to sell the gambling boat that was
constructed for use in Missouri." The inability of Capitol Queen & Casino to
complete its Missouri expansion plans resulted in substantial debt and no liquid
resources for repayment. Mr. Becker further stated, "Capitol Queen & Casino has
been in default for some time under the terms of the bonds it issued in 1993 and
claims now have been made against Arizona Charlie's by the holders of the
Capitol Queen bonds under the terms of a limited guarantee executed by Arizona
Charlie's in 1993. In order to preserve all of our legal rights to contest the
validity and extent of those guarantees, the Company had no choice but to file
the bankruptcy action."
Mr. Becker states: "The filing will not result in any changes in the operations
of Arizona Charlie's and business will continue as usual. There will be no
layoffs or other impact on employees and customers of Arizona Charlie's will see
no difference in the operations of the Company as a result of this action. Our
customers should be assured that the action taken by Arizona Charlie's will have
absolutely no impact on them, and they can continue to enjoy our facilities to
the fullest extent without concern."
The Company is negotiating with various sources for the funding of all or part
of its financial reorganization plan and expects to announce shortly its
refinancing terms. This release contains forward looking statements that involve
risks and uncertainties. These statements may differ from actual future events
or results.
================================================================================
<PAGE>
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