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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT of 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 33-75808
ARIZONA CHARLIE'S, INC.
(Exact name of Registrant as specified in its charter)
NEVADA 88-0199671
(State or other jurisdiction of identification no.)
(IRS employer incorporation or organization)
740 South Decatur Boulevard
Las Vegas, Nevada 89107
(Address of Principal Executive Offices)
Registrant's telephone number: (702) 258-5200
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
12% First Mortgage Notes due November 15, 2000, Series B
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _______
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K: _______
The aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant at September 15, 1996 was $0. The
number of shares of the Registrant's Common Stock
outstanding as of September 15, 1996 was 1,000.
DOCUMENTS INCORPORATED BY REFERENCE
Specified exhibits listed in Part IV of this report are
incorporated by reference
to the Registrant's previously filed Registration Statement on
Form S-4 (33-75808) previously filed.
The Registrant meets the conditions set forth in General
Instructions (J)(1)(a) and (b) of Form 10-K and is therefore
filing this Form 10-K with the permitted reduced disclosure
format.
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PART I
Item 1. Business
Arizona Charlie's, Inc. ("AC" or the "Company") owns and operates a
locals-oriented casino-hotel by the same name ("Arizona Charlie's") in Las
Vegas, Nevada. Arizona Charlie's is situated on a 12.5 acre site located
prominently on a major north-south thoroughfare in an established retail and
residential neighborhood in the western metropolitan area of Las Vegas. A
60-foot high neon sign located in front of the facility provides Arizona
Charlie's high visibility.
The Company employs operating and marketing strategies formulated to build
a loyal, repeat resident customer base consisting principally of Las Vegas area
employees and retirees residing in surrounding well-established neighborhoods.
Arizona Charlie's market acceptance has resulted largely from its emphasis on
providing attractive pricing, friendly service, quality food, and exciting
entertainment, all in a comfortable atmosphere. In addition, the casino features
a selection of games that invite personal interaction and which management
believes, based on data published by state gaming regulators, are set for higher
payout rates than those at other Las Vegas casinos generally. See "Business
Strategy."
From January 1994 to February 1995, the Company expanded and enhanced
Arizona Charlie's (the "Expansion") through the addition of new casino space,
hotel rooms, specialty restaurants, and banquet/meeting room facilities, and the
expansion of existing restaurant, entertainment, and other facilities. The
Expansion also involved the general remodeling of existing hotel rooms, the
casino, and other interior areas, as well as the upgrading of the exterior
facade and addition of a porte cochere at the front entrance.
Casino. As of August 31, 1996, Arizona Charlie's had approximately 47,000
square feet of casino space open 24 hours a day, 365 days a year. At that date,
the casino included approximately 1,600 gaming machines and 26 table games
(blackjack, craps, roulette, Caribbean Stud, Let It Ride, mini- baccarat and
poker), a 92-seat race and sports book, and a 400-seat bingo parlor, which is
operated on the second floor.
Over 80% of Arizona Charlie's gaming machines consist of video poker
games. Although video poker machines are typically set for a lower net win rate
for the house and have longer playing time per bet as compared with traditional
slot machine games, Arizona Charlie's emphasizes video poker because it is
popular with local players and generates, as a result, high volumes of play and
casino revenues. Most of Arizona Charlie's table games are devoted to
double-deck, hand-dealt blackjack play, which locals prefer due to its potential
for more frequent payouts and greater customer interaction. For the year ended
June 30, 1996, approximately 84.4% of gaming revenues was attributable to gaming
machine play and 9.2% of gaming revenues was generated by table games.
Approximately 16.9 % of its gaming machines are devoted to five dollar, dollar
and half-dollar play and approximately 83.1% to quarter and nickel play. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Arizona Charlie's, Inc. - Results of Operations."
The Company maintains stringent controls on receipts and disbursements at
the casino. Security personnel, overhead cameras and other security devices are
deployed throughout the facilities. In addition, the Company has established a
series of other controls, including locked cash boxes, independent auditors and
observers, and daily tabulation and balancing of all cash transactions within
the gaming areas.
Hotel. Arizona Charlie's hotel is comprised of an eight- story tower
consisting of 160 rooms and 10 suites opened on September 2, 1994 and a
three-story tower consisting of an additional 100 rooms that underwent minor
upgrades in the Expansion. Arizona Charlie's hotel customers include local
residents and their out-of-town guests, as well as business and leisure
travelers who, because of location and cost considerations, choose not to stay
on the Las Vegas Strip or at other hotels in Las Vegas. Occupancy rates for the
years ended June 30, 1996 and 1995 averaged 86.9% and 84.3%, respectively, at
average daily rates of $39.81 and $37.27 per room, respectively. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Arizona Charlie's, Inc. -
Results of Operations." Arizona Charlie's has generated high occupancy rates,
particularly during weekends, with little if any marketing of the hotel.
Management believes that its favorable room rates, which are indicative of the
value it offers its customers generally, have contributed to Arizona Charlie's
ability to achieve such occupancy rates. The Company will continue to set aside
a small percentage of rooms and suites (approximately 5%) for complimentary use
by its preferred casino customers.
Food and Beverage. The Company operates four restaurants at the facility.
The Sourdough Cafe, open 24 hours a day, is located adjacent to the casino floor
and seats 247 patrons. The all-you-can-eat Wild West Buffet is located on the
second floor and seats 238 patrons. Two specialty restaurants, Chin's, which
offers gourmet Chinese cuisine and the Yukon Grille, an American-style
steakhouse, with 100 seats each, attract guests interested in a more upscale and
varied dining experience. The restaurants are designed to help attract more
casino patrons interested in higher stakes machines and games. Arizona Charlie's
also has three bars, which include a lounge bar, a sports book bar and a bar to
service the restaurants.
As with many casinos, Arizona Charlie's food and beverage
operations are not directly profitable, but are used as marketing
tools to stimulate casino activity. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -
Arizona Charlie's, Inc." Nonetheless, costs are minimized and operations are
streamlined by using one kitchen to serve all four restaurants. The Sourdough
Cafe and the Wild West Buffet offer quality food and service at affordable
prices, while the Yukon Grille and Chin's offer an upscale dining experience
that is preferred by select casino patrons. The Company believes that much of
its casino and other business is attributable to traffic created by the
restaurants, and thus prices are set at levels designed to draw patrons to the
facility.
Entertainment and Other Facilities. Arizona Charlie's emphasis on
reasonably priced entertainment has been an integral component of its overall
customer appeal. The Naughty Ladies Saloon, a 108-seat facility, features a
variety of entertainment including celebrity acts, live bands, musician showcase
nights and jam sessions. The Company also presents mini-concerts,
nationally-televised boxing events, and other events in its second, much larger
entertainment facility-the Palace Grand Theatre. This 700-seat showroom, located
on the second floor, also serves as a meeting and banquet facility. The Company
has focused added marketing emphasis on the appeal of its entertainment
programming. The larger showroom enables the Company to present
better-recognized musical acts, charge higher cover prices and attract more
gaming customers. The availability of two showrooms allows the Company to
present more and varied entertainment. The banquet and meeting space has enabled
the Company to expand its marketing efforts to visiting business travelers and
the small meetings market segment.
A small gift shop located adjacent to the casino provides a limited range
of inexpensive gift items, candy, newspapers, magazines and cigarettes. Added
focus has been placed on logo merchandise promoting the Arizona Charlie's name
and motif.
Parking Facility. Arizona Charlie's offers on-site valet and self-parking
lots with combined capacity for over 650 vehicles. Ease of access to the casino
is believed to be an important element in the appeal of Arizona Charlie's to
local customers.
Employees. As of August 31, 1995, the Company employed approximately 1,280
persons, none of which is employed pursuant to collective bargaining or other
union arrangements. Approximately 40 BGI employees were transferred to the
employ of the Company in March, 1995 in connection with the suspension if
activity of CQC. Management believes that its employee relations are good.
Government Regulation. The ownership and operation of casino gaming
facilities in Nevada are subject to (i) the Nevada Gaming Control Act and the
regulations promulgated thereunder, and (ii) various local regulation. The
gaming operations of the Company are subject to the licensing and regulatory
control of the Nevada Gaming Commission, the Nevada State Gaming Control Board,
the Clark County Liquor and Gaming Licensing Board, the city of Las Vegas and
other local jurisdictions.
Item 2. Properties
Arizona Charlie's is located at 740 South Decatur Boulevard, Las Vegas,
Nevada and comprises approximately 170,000 square feet on approximately 12.5
acres owned by AC. In addition, The Company leases office, storage and laundry
space located in an adjacent shopping center owned by Charleston Heights
Shopping Center, a partnership owned by the Becker family, pursuant to two
leases expiring in 1998. The current annual rent payable (including insurance,
tax and common area maintenance payments) under these leases aggregates
approximately $217,000.
AC, as the original lessee, is contingently obligated to pay the lease
costs of certain transportation assets, including a jet airplane held and
operated by AC's parent, Becker Gaming, Inc.
("BGI").
Item 3. Legal Proceedings
The Company is party to various lawsuits relating to routine matters
incidental to its business. Based on the amounts 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 Company.
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters
There is no established public trading market for the Company's Common
Stock, all of which is held by BGI. The Company has not declared or paid any
cash dividends on its Common Stock and does not anticipate the payment of cash
dividends in the foreseeable future.
Item 6. Selected Financial Data
Arizona Charlie's, Inc. Selected Financial Data
Years Ended June 30,
(amounts in thousands, except per share data)
1996 1995 1994
-------- -------- --------
Income Statement Data:
Operating revenues .................... $ 63,301 $ 57,082 $ 46,447
Operating income ...................... 2,199 1,058 5,105
Net income (loss) ..................... (4,559) (4,936) 1,134
Net income (loss) per share (1) ....... (4,559) (4,936) 1,134
Other Data:
Interest expense, net of amounts
capitalized .......................... 7,095 6,574 4,763
Capital expenditures .................. 190 24,253 11,379
Distributions to stockholders (2) ..... -- -- 5,317
Balance Sheet Data:
Unrestricted cash and cash
equivalents .......................... $ 4,591 $ 5,404 $ 4,014
Cash in escrow account restricted
for construction ..................... 10 10 3,613
Total assets .......................... 62,357 65,273 67,915
Long-term obligations (3)
Long-term debt (4) (5) ............ 5,000 60,000 60,000
Capitalized lease obligation ...... 22 4 1
Stockholder's equity (deficit) ........ (9,501) (4,942) (6)
1993 1992
------- -------
Income Statement Data:
Operating revenues ............................... $45,880 $42,278
Operating income ................................. 6,032 4,262
Net income (loss) ................................ 4,585 2,551
Net income (loss) per share (1) .................. 4,585 2,551
Other Data:
Interest expense, net of amounts
capitalized ..................................... 1,440 1,877
Capital expenditures ............................. 1,067 924
Distributions to stockholders (2) ................ 2,140 2,400
Balance Sheet Data:
Unrestricted cash and cash equivalents ........... $ 3,528 $ 3,225
Cash in escrow account restricted for
construction .................................... -- --
Total assets ..................................... 27,184 26,896
Long-term obligations (3)
Long-term debt (4) (5) .......................... -- 16,976
Capitalized lease obligation .................... 778 1,089
Stockholder's equity (deficit) ................... 5,953 3,508
- ----------
(1) The number of shares used in the computation of earnings (loss) per share
of common stock was 1,000 for each of the five years in the period ended
June 30, 1996. A total of 2,500 shares of common stock are authorized at
no par value, 1,000 shares of which are issued and outstanding.
(2) Because AC elected to be treated as an S corporation for the most of 1994,
and all of fiscal 1993 and 1992, a substantial portion of its income in
past years was distributed to its stockholders. In December 1993, AC
distributed $5,000 of previously taxed retained earnings to its
stockholders. This amount was loaned back to AC in exchange for
stockholder notes. Effective January 1, 1994, AC terminated its S
corporation tax status. The ability of AC to pay dividends is restricted
by the Indenture governing its 12% First Mortgage Notes due November 15,
2000 of (the "AC Notes"). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations_Arizona Charlie's,
Inc._General
(3) Includes subordinated notes to stockholders, non-current obligations under
capital leases, and excludes current maturities. At June 30, 1993,
approximately $16,900 of bank debt was classified as current, as it was
due and payable. See Management's Discussion and Analysis of Financial
Condition and Results of Operations_Arizona Charlie's, Inc._General and
"Notes to Financial Statements__Arizona Charlie's, Inc._ Long Term Debt."
(4) At June 30, 1996, $55,000 of AC Notes was classified as current due to
certain technical defaults of the AC Indenture. See Notes 2 and 6 of AC's
Notes to Financial Statements.
(5) At June 30, 1993, approximately $16,900 of bank debt of AC was classified
as current as it was due and payable. Such amount was paid off from a
portion of the proceeds from the sale of the AC Notes in November, 1993.
Sunset Coin, Inc. Selected Financial Data
Years Ended June 30,
(amounts in thousands, except per share data)
1996 1995 1994
---- ---- ----
Income Statement Data:
Operating revenues ....................... $2,649 $2,742 $2,859
Operating income ......................... 817 1,128 1,333
Net income ............................... 381 688 1,010
Net income per share (1) ................. 952 1,720 2,525
Other Data:
Interest expense, net of amounts
capitalized ............................. 398 352 190
Capital expenditures ..................... 208 1,142 232
Distribution to stockholders (2) ......... -- -- 3,280
Balance Sheet Data:
Unrestricted cash and cash
equivalents ............................. $1,122 $ 506 $1,940
Total assets (3) ......................... 5,891 5,349 3,845
Long-term obligations (4)
Long-term debt (5) ................... 3,502 3,664 3,220
Capitalized lease obligations ........ -- 28 85
Stockholders' equity ..................... 1,458 1,077 389
1993 1992
------ ------
Income Statement Data:
Operating revenues .................................. $2,959 $2,539
Operating income .................................... 1,382 1,234
Net income .......................................... 1,408 1,223
Net income per share (1) ............................ 3,520 3,057
Other Data:
Interest expense, net of amounts capitalized ........ 67 57
Capital expenditures ................................ 297 490
Distribution to stockholders (2) .................... 940 560
Balance Sheet Data:
Unrestricted cash and cash equivalents .............. $ 854 $ 441
Total assets (3) .................................... 3,270 3,134
Long-term obligations (4)
Long-term debt (5) .............................. 364 486
Capitalized lease obligations ................... 205 276
Stockholders' equity ................................ 2,659 2,191
- ----------
(1) The number of shares used in the computation of earnings (loss) per share
of common stock was 400 for each of the five years in the period ended
June 30, 1996. A total of 25,000 shares of common stocks are authorized at
no par value, 400 shares of which are issued and outstanding.
(2) Because SC elected to be treated as an S corporation during these periods,
a substantial portion of its net income in past years was distributed to
its stockholders. In December, 1993, SC distributed $3,000 of previously
taxed retained earnings to its stockholders. This amount was loaned back
to SC in exchange for stockholder notes. Effective January 1, 1994, SC
terminated its S corporation status. The ability of SC to pay dividends is
restricted under the Indenture governing the AC Notes. See "Dividend
Policy," "Management's Discussion and Analysis of Financial Condition and
Results of Operations_Sunset Coin, Inc._General" and "Certain
Relationships and Related Transactions."
(3) Includes $2,250 in notes receivable from AC, resulting from advances made
by SC to AC. Due to the financial condition of AC, management believes it
is reasonably possible that a portion of the notes receivable will be
uncollectible. However, an estimate of the loss cannot presently be
determined. See Note 3 of SC's Notes to Financial Statements.
(4) Excluded current maturities. See "Notes to Financial
Statements_Sunset Coin, Inc._Long-Term Debt."
(5) At June 30, 1996, $279,000 of SC debt was classified as Current Notes
Payable.
Item 7. Management's Discussion and Analysis of Financial
Conditions and Results of Operations
General
The Company'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. The Company generally views its
non-casino operations as complementary to its core casino operations.
Accordingly, it utilizes entertainment primarily as a casino marketing tool.
Further, the Company maintains food and beverage pricing structures designed to
benefit casino volumes, often resulting in departmental operating losses, even
in periods where individual restaurants or bars report operating profits. The
Company seeks to maximize profits from its hotel operations, however, while
maintaining attractive room rental rates. Gaming revenues represent the net win
from gaming wins and losses. The retail value of accommodations, food and
beverage provided to customers without charge is included in gross revenues and
deducted as promotional allowance. See "Notes to Financial Statements - Arizona
Charlie's, Inc. - Summary of Significant Accounting Policies." The estimated
costs of providing such promotional allowances have been classified as gaming
expenses through interdepartmental allocations as follows (in thousands):
Years Ended June 30,
1996 1995 1994
---- ---- ----
Hotel ......... $ 261 $ 164 $ 119
Food & Beverage 3,824 2,260 2,005
----- ----- -----
$4,085 $2,424 $2,124
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On November 18, 1993, the Company issued $55,000,000 in principal amount
of 12% First Mortgage Notes due November 15, 2000 (the "AC Notes"), which
resulted in net proceeds of approximately $51,100,000. A portion of the net
proceeds was used to retire approximately $16,900,000 in bank debt plus accrued
interest of $500,000. The balance of approximately $33,700,000 was initially
deposited into a restricted escrow account and subsequently was used to fund the
expansion and enhancement of Arizona Charlie's (the "Expansion") through the
addition of new casino space, hotel rooms, specialty restaurants and
banquet/meeting room facilities, and the expansion of existing restaurants,
entertainment and other facilities.. See "Notes to Financial Statements -
Arizona Charlie's, Inc. - Long- Term Debt." AC commenced construction of the
Expansion in January 1994. The Expansion was completed in February 1995 at an
under-budget cost of approximately $35,632,000.
Concurrent with the private placement of the AC Notes, Capitol Queen &
Casino, Inc. a sister company, issued $40,000,000 in principal amount of 12%
First Mortgage Notes due November 15, 2000, $20,000,000 in principal of which
currently remain outstanding (the "CQC Notes"). The Company has unconditionally
and fully guaranteed the payment of all principal of and interest on the CQC
Notes. CQC currently does not have any means to pay amounts owing on the CQC
Notes. See "Liquidity and Capital Resources. The Company, which now operates as
a "C" corporation, was operated as an "S" corporation through December 31, 1993.
See "Notes to Financial Statements - Arizona Charlie's Inc. - Summary of
Significant Accounting Policies - Income Taxes." In anticipation of the
termination of S corporation status, in December 1993, the Company distributed
to its stockholders an aggregate of $5,000,000 of retained earnings on which the
stockholders had previously paid federal income taxes. This amount was loaned
back to the Company in full in exchange for subordinated stockholder notes in
the principal amount of such distributions, which the Company stockholder notes
bear interest payable monthly at the annual rate of 10.0% and mature in January
2001. See "Notes to Financial Statements - Arizona Charlie's, Inc. - Related
Party Transactions."
Results of Operations
Years Ended June 30,
(dollars in thousands)
1996 1995 1994
---- ---- ----
Revenues:
Gaming ........................ $ 52,831 $ 47,466 $ 38,955
Food/beverage ................. 13,204 10,647 8,459
Hotel ......................... 3,208 2,614 1,219
Bowling ....................... -- -- 251
Gift Shop ..................... 590 577 535
Management fees from Affiliates -- -- 281
Other (1) ..................... 1,145 912 399
-- ----- --- ---
Gross revenues ................... 70,978 62,216 50,099
Less, promotional allowances (2) . (7,677) (5,134) (3,652)
-- ------ ------ ------
Net revenues .................. 63,301 57,082 46,447
Total operating expenses ...... 61,102 56,024 41,342
------ ------ ------
Total operating income ........ $ 2,199 $ 1,058 $ 5,105
======== ======== ========
- -----------
(1) Includes primarily revenues from entertainment cover charges, PBX
operations (hotel switchboard and room telephone system) and commissions on
automated teller machines located in the casino.
(2) Amounts represent the retail value of rooms, food, beverage and other
promotional allowances provided to customers without charge.
Comparison of fiscal years ended June 30, 1996, 1995 and 1994. Despite
increased revenues for fiscal 1996 and fiscal 1995, results from operations for
both periods were lower than the prior year as the result of increased operating
expenses, primarily due to additional slot promotion expenses, payments under
its guarantee of the CQC Notes, management fees, and the addition of staff
personnel, equipment and related operating expenses transferred to AC from BGI.
The increased revenues for fiscal 1996 reflect a full year of operations with
expanded casino-hotel facilities, while the increased revenues for fiscal 1995
reflect a partial year of operations with the expanded facilities. The Expansion
added new gaming machines and table games, an expanded race and sports book, a
new hotel tower, a remodeled coffee shop, two new specialty restaurants and a
new delicatessen, an expanded buffet room, a remodeled floor-level entertainment
lounge and new second-floor showroom/banquet facility.
The Company's net revenues increased to $63,301,000 for fiscal 1996, from
$57,082,000 for fiscal 1995 and $46,447,000 for fiscal 1994. Operating expenses,
including depreciation and amortization, increased to $61,102,000 for fiscal
1996, from $56,024,000 and $41,342,000 for the two preceding fiscal years. As a
result, operating income for fiscal 1996 was $2,199,000, with a corresponding
net operating margin of 3.5%. Operating income for fiscal 1995 and fiscal 1994
was $1,058,000 and $5,105,000, respectively, resulting in operating margins for
such years of 1.9% and 11.0%. The increase in operating expenses and resulting
decline in operating margin for fiscal 1996 resulted principally from increased
gaming department expense, amounting to $3,253,000, costs attributable to CQC in
the amount of $601,000, and the addition of staff personnel, equipment and
related operating expenses transferred to the Company. The increase in operating
expenses and resulting decline in operating margin for fiscal 1995 resulted
principally from costs attributable to the CQC Notes guarantee ($1,592,000,
including the write-off of advances which were used by CQC to pay interest on
the CQC Notes), and increased salaries and wages reflecting higher department
staffing requirements, increased advertising and promotional cost and the
additional expense of a management fee payable to BGI. Other increased expenses
for fiscal 1995 include additional depreciation and amortization expense
resulting from the addition of the new assets created in the Expansion.
For fiscal 1996, the Company had total gaming revenues of $52,831,000, as
compared to $47,466,000 and $38,955,000 for fiscal 1995 and 1994, respectively.
The increases (11.3% and 21.8% for fiscal 1996 and 1995, respectively) are
primarily attributable to increases in gaming machine revenues of 11.1% and
21.0% for such years to $44,612,000 and $40,140,000 from $33,173,000 for fiscal
1994. The increase for fiscal 1996 is primarily the result of increased levels
of play by patrons in response to additional slot promotional events. The
increase for fiscal 1995 reflects the additional revenue generated from 665
gaming machines added during that year. Revenues from table games were
$4,872,000, $4,829,000 and $4,070,000 for fiscal 1996, 1995 and 1994,
respectively. The table games revenue increase for fiscal 1995 reflects an
increase of five table games in that year. Other gaming revenues, consisting of
revenues from bingo, poker and the race and sports book, increased by 34.0% and
45.8% for fiscal 1996 and 1995 respectively, to $3,346,000 for fiscal 1996 and
$2,497,000 for fiscal 1995 from $1,713,000 for fiscal 1994. The increases were
largely a result of the added pari- mutual race facilities and increased sports
book revenues from the expanded race and sports book facility. For fiscal 1996,
1995 and 1994, 84.4%, 84.6% and 85.2%, respectively, of gaming revenues were
attributable to gaming machine play, compared to 9.2%, 10.2% and 10.4%,
respectively, attributable to table games and 6.3%, 5.2% and 4.4%, respectively,
attributable to other gaming revenues.
Food and beverage revenues increased 24.0% to $13,204,000 for fiscal 1996,
after increasing 25.9% to $10,647,000 for fiscal 1995 from $8,459,000 for fiscal
1994. The fiscal 1996 increase is due to increased complimentary sales in the
food and beverage department. Such sales are included in revenues at retail
value and are then deducted as a promotional allowance. Increased complimentary
sales in food and beverage departments are the result of casino promotion and
marketing efforts designed to attract, reward and retain qualified patrons. The
fiscal 1995 increase resulted from the addition of two specialty restaurants, a
delicatessen and a remodeled coffee shop during the second and third quarters of
fiscal 1995
Hotel revenues increased to $3,208,000 for fiscal 1996, from $2,614,000 and
$1,219,000 for fiscal 1995 and 1994, respectively. The 22.7% increase for fiscal
1996 is the result of an increase in average occupancy rate from 84.3% to 86.9%
and an increase in the average room rate from $37.27 to $39.81. The 114.4%
increase for fiscal 1995 is attributable to the opening of 150 new rooms
(including eight suites) in the new hotel tower in September 1994.
With the elimination of the bowling alley in December 1993, AC had no
bowling revenues for fiscal years 1996 and 1995, compared to $251,000 for fiscal
1994. Gift shop revenues increased 2.3% to $590,000 in fiscal 1996 and 7.9% to
$577,000 in fiscal 1995 due primarily to the remodeling and expansion of the
gift shop area, which was reopened in January 1995. Also, other revenues
increased $233,000 or 25.6% during fiscal 1996 and $513,000 or 128.6% during
fiscal 1995 as a result of increases in entertainment cover charge revenues
attributable to the addition of a new showroom facility that opened in December
1994.
Gaming expenses increased by 21.2% to $18,612,000 for fiscal 1996. The
increased expense includes higher slot promotional expense of $638,000; higher
gaming tax and license fees of $406,000; increased salary and wages of $468,000
and the additional expense of a newly created casino marketing department
totaling $479,000. Gaming expenses increased by 31.5% to $15,359,000 for fiscal
1995 from $11,681,000 for fiscal 1994. The higher levels of expense reflect
additional staffing associated with the expansion of gaming facilities. Gaming
expenses represented 35.2%, 32.4% and 30.0% of gaming revenues for fiscal 1996,
1995 and 1994, respectively. Management anticipates that these costs will
stabilize as a percentage of revenue in fiscal 1997 as the expanded facilities
are expected to generate higher customer volumes and efficiencies from the
Expansion are expected to be realized.
Food and beverage expenses increased 9.9% to $12,511,000 for fiscal 1996
from $11,388,000 for fiscal 1995 due to salary and wage increases associated
with increasing the hours of operation at one specialty restaurant and normal
salary and wage increases for food and beverage employees which comprise
approximately 33.0% of the Company's total work force. Food and beverage
expenses increased 35.7% to $11,388,000 for fiscal 1995 from $8,389,000 for
fiscal 1994 due primarily to the additional staffing requirements for the newly
remodeled coffee shop, new specialty restaurants, new delicatessen, and expanded
buffet room.
Hotel expenses increased 2.6% to $1,413,000 for fiscal 1996 from
$1,377,000 for fiscal 1995 as a result of normal salary and wage increases.
Hotel expenses increased to $1,377,000 for fiscal 1995 from $714,000 for fiscal
1994 due primarily to additional staffing required by the new hotel tower.
However, net contribution by the hotel department (hotel revenues less hotel
operating expenses) improved to $1,795,000 for fiscal 1996 from $1,237,000 for
fiscal 1995 and $505,000 for fiscal 1994.
Other departmental expenses increased by 5.6% to $475,000 for fiscal 1996
from $450,000 for fiscal 1995 due to increased costs of inventory items in the
gift shop, combined with normal salary and wage increases. Other departmental
expenses decreased by 46.7% to $450,000 for fiscal 1995 from $845,000 for fiscal
1994 due primarily to the scale-down and termination of bowling operations.
General and administrative expenses increased by 15.0% to $17,660,000 for
fiscal 1996 from $15,358,000 for fiscal 1995. The increases resulted from
additional staffing in the accounting, payroll, personnel and technical services
departments and the transfer of executive personnel (and related departmental
costs) in March 1995 to the Company from BGI. Other expenses transferred from
BGI to the Company include maintenance and other operating expenses associated
with an airplane and two boats. The airplane was sold in July 1996. Other
general and administrative expenses included payments made on behalf of CQC in
the amount of $601,000 for fiscal 1996 compared to $1,592,000 for fiscal 1995.
The Company accrued management fees payable to BGI of $1,396,000, $3,099,000 and
$188,000 for fiscal 1996, 1995 and 1994, respectively. Due to a decision to
suspend development of CQC's riverboat casino project and sell its assets, the
majority of BGI's management and administrative services are anticipated to
benefit the Company in the future. Accordingly, in late March 1995, BGI
transferred approximately 40 employees involved in accounting and administrative
functions from BGI to AC. In connection with this transfer, in October 1995, the
Company temporarily reduced the amount of the Company's management fee to 1.0%
of the Company's gross revenues (previously 5.0% of gross revenues) based on the
reduction in services it will receive from BGI in the future. See Note 9 of the
Company's Notes to Financial Statements.
General and administrative expenses increased by 10.7% to $15,358,000 for
fiscal 1995 from $13,867,000 for fiscal 1994 due to additional staffing in the
cage, security, data processing, entertainment, porter, engineering, accounting
and transportation departments. Personnel in these departments were added to
support the expanded facility. As a percentage of net revenues, general and
administrative expenses were 27.9%, 26.9% and 29.9% for fiscal 1996, 1995 and
1994 respectively.
Advertising and promotion expenses were $4,726,000 for fiscal 1996, as
compared to $3,837,000 for fiscal 1995. The increase of $889,000, or 23.1% is
due to additional television advertising of $466,000, new casino related
promotions of $166,000, and salary and wage increases of $116,000. The
additional advertising and promotions were conducted in an effort to increase
casino patronage and compete with other "locals" casinos opened in western Las
Vegas in fiscal 1995, including Texas Station and Santa Fe Casino. Advertising
and promotion expenses were $3,837,000 for fiscal 1995, as compared to
$3,093,000 for fiscal 1994. The increase of $744,000, or 24.1%, reflects
increased newspaper and television advertising undertaken to gain market
recognition for the newly expanded facility. Management anticipates that it will
maintain advertising expenditures at the 1996 level in order to continue
attracting customers and to promote the entertainment events in its expanded
facilities.
Depreciation and amortization expense increased by 3.5% to $3,491,000 for
fiscal 1996 from $3,373,000 for fiscal 1995. This increase is attributable to
additional depreciation expense associated with the newer expansion assets.
Depreciation and amortization expense increased by 51.8% to $3,373,000 for
fiscal 1995 from $2,222,000 for fiscal 1994. The increase is due primarily to
additional depreciation expenses associated with the new expansion assets placed
in service.
The Company had other expenses (net of other income) of $6,758,000 for
fiscal 1996 compared to $5,994,000 and $3,971,000 for fiscal years 1995 and
1994. The fiscal 1996 increase of $764,000 is due to a reduction of capitalized
interest in the amount of $676,000 and a decrease of interest income of $294,000
partially offset by a decrease of interest expense in the amount of $155,000 and
a decrease in other income of $51,000. For fiscal 1995, the increased expense of
$2,023,000 is attributable to an increase in interest expense from $5,223,000 to
$7,250,000, due primarily to the AC Notes, which were outstanding for all of the
fiscal 1995 but less than eight months for fiscal 1994.
Income Taxes
As a result of the termination of its election to be treated as an S
corporation, the Company is liable (as part of the BGI consolidated group) for
income taxes on income earned from and after January 1, 1994. Prior to such
termination, the Company 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 the Company. See "Notes to Financial Statements - Arizona
Charlie's, Inc. - Summary of Significant Accounting Policies - Income Taxes;
Related Party Transactions." Since terminating its S corporation status, the
Company generated a net operating loss for income tax purposes of approximately
$9,174,000. Due to low operating margins and high interest cost and depreciation
costs, management does not anticipate that the Company will generate taxable
income in the foreseeable future.
Liquidity and Capital Resources
As of or for the years ended June 30,
1996 1995 1994
---- ---- ----
Cash and cash equivalents ........... $ 4,591 $ 5,404 $ 4,014
Working capital (deficit) (1) ....... (58,530) 2,920 2,511
Cash provided by operating activities 1,639 2,772 5,876
Cash used for investing activities .. (2,240) (3,401) (37,180)
Cash provided by (used for)
financing activities .............. (212) 2,019 31,790
- ----------
(1) At June 30, 1996, the AC Notes are reflected as a current liability in the
amount of $55,000 due to default under Covenants.
For fiscal 1996, cash provided by operating activities decreased to
$1,639,000 from $2,772,000 for fiscal 1995. The decrease is attributable to a
reduction in operating income, prior to consideration of management fees and
other non-cash items, and changes in operating assets and operating liabilities.
For fiscal, 1995, cash provided by operating activities decreased to $2,772,000
from $5,876,000 for fiscal 1994. The decrease is attributable to a decrease in
net income of $6,070,000 for fiscal 1995 which was partially offset by (i) an
increase in operating assets of $926,000 for fiscal 1995 compared to a decrease
in operating assets of $874,000 for fiscal 1994, reflecting primarily increases
in pre-paid gaming taxes and other receivables for fiscal 1995, (ii) a net
increase in operating liabilities of $3,671,000 for fiscal 1995 compared to an
increase of $1,669,000 for fiscal 1994, due to the accrual of management fees
payable to BGI and interest on the AC Notes, and (iii) an increase in
depreciation and amortization expense of $1,151,000 for fiscal 1995.
Cash flows used in investing activities for fiscal 1996 were $2,240,000
compared to $3,401,000 for fiscal 1995. The decrease is due to (i) a reduction
in cash advances to BGI resulting in decreased receivables from BGI of
$4,154,000, (ii) a reduction in notes issued to CQC of $1,200,000, and (iii) a
reduction in capital expenditures of $24,063,000 (reflecting the completion of
the majority of the construction of the expanded facility in fiscal 1995),
partially offset by a $26,102,000 net reduction in restricted cash which was
utilized for the expansion in fiscal 1995). Cash flows from investing and
financing activities for fiscal 1995 were significantly impacted by the November
1993 issuance of the AC Notes. In fiscal 1994, approximately $26,112,000 in
proceeds remained in a restricted escrow account to fund Expansion construction.
Pending such use, amounts held in the restricted escrow account were invested in
interest bearing securities. See "Notes to Financial Statements - Arizona
Charlie's, Inc. - Long-Term Debt." In fiscal 1995, cash flows used in investing
activities for fiscal 1995 includes $24,253,000 of capital expenditures,
virtually all of which relates to the Expansion.
Cash flows provided by financing activities for fiscal 1996 decreased to
($212,000) from $2,019,000 for fiscal 1995. The decrease is due to a reduction
of proceeds from borrowing, marginally offset by an decrease in principal
payments on notes and an increase in payments under capital lease obligations.
Financing activities for fiscal 1995 reflect proceeds from loans from related
parties in the amount of $2,250,000, and principal payments of notes.
The Company is currently in technical default under the Indenture
governing the AC Notes because it has neither maintained the required minimum
level of consolidated tangible net worth nor offered to repurchase a portion of
the AC Notes as required if such minimum level of consolidated tangible net
worth is not maintained. In addition, the Company has failed to maintain the
minimum consolidated fixed charge coverage ratio required under the Indenture
and has advanced funds to the Company in excess of the amounts permitted to be
so advanced under the Indenture. As a result of such defaults, the holders of
25% or more in principal amount of the Notes may cause the AC Notes to be
accelerated, in which event they would become immediately due and payable in
full. The Company does not have and is not expected to have the resources to pay
the AC Notes if they are accelerated.
The AC Notes are reflected as a current liability at June 30, 1995 as a
result of the above defaults. The Company's long-term obligations, approximately
$5,022,000 at June 30, 1996, consist of the stockholder notes and capitalized
equipment leases. The Company has annual interest expense aggregating $6,600,000
and $500,000 with respect to the AC Notes and the stockholder notes,
respectively. In addition, the Company is expected to have annual capital
expenditure requirements of approximately $600,000.
In addition, AC has a substantial contingent obligation resulting from its
guarantee of the CQC Notes, an aggregate of $20,000,000 in principal amount of
which remain outstanding. As a result of a September 1994 ruling of the Missouri
Gaming Commission denying CQC's gaming license application, CQC has adopted a
plan to sell its assets for the purpose of repaying, to the extent possible, the
outstanding CQC Notes and accrued interest thereon. See "Business - Capitol
Queen & Casino, Inc." There can be no assurance that CQC will be successful in
its efforts to sell its assets or, that if a sale is effected, the proceeds will
be sufficient to fully or substantially repay the CQC Notes and accrued interest
thereon. To the extent any funds CQC may realize from the sale of its assets are
not sufficient to repay the CQC Notes and accrued interest thereon, AC will be
obligated under its guarantee of the CQC Notes to fund the shortfall.
Moreover, because it has not yet effected the sale of its assets, CQC is
in default of the Indenture governing the CQC Notes. As a result, the holders of
25% or more in principal amount of the CQC Notes may cause the CQC Notes to be
accelerated, in which event they would become immediately due and payable in
full. If the CQC Notes were to be accelerated, CQC would not be able to pay the
outstanding CQC Notes without an infusion of capital, which is not expected to
be available. AC would then be obligated under its guarantee to pay the CQC
Notes but is not expected to have the resources to satisfy such obligation
should it materialize. A default by AC under its guarantee would also give the
holders of 25% or more in principal amount of the AC Notes the ability to
accelerate the AC Notes. If the AC Notes and the CQC Notes are accelerated,
substantial doubt exists about AC's ability to continue as a going concern. See
"Notes to Financial Statements - Arizona Charlie's, Inc. - CQC Gaming License,
Default Under Indebtedness Management's Plans, and Going Concern".
The Company's management believes that, assuming the AC Notes and CQC
Notes are not accelerated, it has sufficient funds to meet its projected needs
for financing of existing operations and to service its debt obligations.
However, the Company's ability to obtain capital, should it be required, is
significantly restricted under the Indentures governing the AC Notes and the CQC
Notes. The ability of the Company 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 the Company's control.
Competitive Environment
Various forms of casino-style gaming have been legalized in numerous new
jurisdictions within the past few years, including casino riverboats,
limited-stakes frontier town gambling, full-scale casinos on Indian
reservations, card rooms and video lottery terminals, which resemble the
Company's gaming machines. In addition, several major casino-hotels were
completed and opened in Las Vegas in the past year, continuing the
transformation of Las Vegas into an entertainment destination offering much more
than gaming. Management expects the legalization of gaming to continue to spread
and that Las Vegas will continue to experience at least limited expansion. See
"Item 1. Business - Market and Competition."
To date, casino revenues at Arizona Charlie's (and for Las Vegas
generally) have continued to grow despite the spread of legalized gaming.
Moreover, management believes that the Company has and will continue to benefit
from the expansion of the Las Vegas market, which has resulted in continued
growth in the residential population, from which the Company generates the
majority of its revenues. There can be no assurance, however, that the spread of
legalized gaming, or the construction of new casino-hotels in Las Vegas, will
not have an adverse impact on future revenues.
Inflation
The Company believes that its results of operations are not dependent
upon, or materially affected by, the rate of inflation.
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. See
"Notes to Financial Statements Sunset Coin, Inc. - Summary of Significant
Accounting Policies Revenue." 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's 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. See "Item 1. Business - Sunset Coin, Inc."
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 agreement are contracts
with each of the five BGG restaurants, which are expected to be
renewed in general course, and two additional locations owned by
unrelated parties. See "Item 1. Business - Sunset Coin, Inc." and
"Notes to Financial Statements - Sunset Coin, Inc. - Related
Party Transactions."
As in the case of AC, SC operated as an S corporation through December 31,
1993. In connection with the termination of S corporation status, SC distributed
$3,000,000 of previously taxed retained earnings to its stockholders. This
amount was loaned back to SC in full in exchange for stockholder notes bearing
interest at the annual rate of 10.0% and maturing in January 2001. The payment
of the SC stockholder notes is subordinated to any payments required to be made
by SC under its guarantee of the AC Notes.
Results of Operations
Years ended June 30,
(dollar in thousands)
1996 1995 1994
---- ---- ----
Revenues:
Gaming machine route:
Participation contracts ................. $2,294 $2,535 $2,496
Spaces leases ........................... 229 75 212
--- -- ---
Total gaming machine revenues .............. 2,523 2,610 2,708
Gaming machine services fees ............... 126 132 151
--- --- ---
Total revenues ............................. $2,649 $2,742 $2,859
====== ====== ======
Operating income:
Gaming machine route:
Participation contracts ................. $ 713 $1,043 $1,164
Spaces leases ........................... 71 30 99
-- -- --
Total gaming machine route expenses ........ 784 1,073 1,263
Gaming machine services fees ............... 33 55 70
-- -- --
Total operating income ..................... $ 817 $1,128 $1,333
====== ====== ======
During fiscal 1996, two participation locations were added, and one
participation contract was converted to a more favorable space lease contract. A
new BGG bar, Charlie's Down Under was opened in April 1995 and paid service fees
to SC for all of fiscal 1996. However, in April 1996, another BGG bar, Charlie's
Saloon, was closed resulting in the loss by SC of a participation service
agreement.
Comparison of Fiscal Years Ended June 30, 1996, 1995 and 1994. SC's
results of operations declined for fiscal 1996 compared to fiscal 1995. The
decrease in operating income was substantially a result of the increased payroll
and related costs needed to increase security measures for the protection of
slot technicians and cash on hand in response to a recent increase in related
crime activity in the Las Vegas area.
While revenues decreased by 3.4% to $2,649,000 for fiscal 1996 from
$2,742,000 for fiscal 1995, operating expenses, including depreciation and
amortization, increased by 13.5% to $1,832,000 for fiscal 1996 from $1,614,000
for fiscal 1995. This resulted in an overall decrease in operating income of
27.6% to $817,000 from $1,128,000, and a decline in net operating margin to
30.8% for fiscal 1996 from 41.1% for fiscal 1995. A smaller decrease in net
operating margin was experienced for fiscal 1995 to 41.1% from 46.6% for fiscal
1994, during which period revenues decreased by 4.1% and operating income
decreased by 15.4%.
The decrease in revenues for fiscal 1996 is due to a decrease in gaming
machine route revenues of 3.3% to $2,523,000 for fiscal 1996 from $2,610,000 for
fiscal 1995. Such revenues also decreased 3.6% for fiscal 1995 from $2,708,000
for fiscal 1994. Gaming machine service fee revenue decreased 4.6% for fiscal
1996 to $126,000 from $132,000 for fiscal 1995, following a 12.6% decrease for
fiscal 1995 from $151,000 for fiscal 1994. The decrease in gaming machine route
revenues reflects the net loss of 26 slot machines within the gaming machine
route between June 30, 1995 and June 30, 1996, most of which includes 15
machines operated at the former Charlie's Saloon. SC operated 27 route locations
for fiscal 1996 and 26 route locations in fiscal 1995 and 1994, with
approximately 265, 267 and 279 machines included in the route at June 30 of such
fiscal years, respectively. Revenues from the locations controlled by the Becker
family were $2,370,000, $2,331,000 and $2,333,000 for fiscal years 1996, 1995
and 1994, respectively. Fees from BGG accounted for approximately $93,000,
$77,000 and $71,000 of gaming machine service fees for fiscal 1996, 1995 and
1994, respectively. The increase in gaming machine service fees for fiscal 1996
reflects the net effect of the additional contract at Charlie's Down Under
during the full fiscal year of 1996, partially offset by the lost service fee
contract at Charlie's Saloon in April, 1996.
Gaming machine route and service expenses increased by 17.9% to $1,311,000
for fiscal 1996 from $1,112,000 for fiscal 1995. This increase, which consists
primarily of payroll and related taxes and benefits, follows an increase of
13.0% for fiscal 1995 from fiscal 1994 expense of $984,000. As a percentage of
revenues, route and service expenses increased to 49.5% for fiscal 1996 from
40.6% and 34.4% for fiscal 1995 and for fiscal 1994, respectively. General and
administrative expenses decreased 16.5% for fiscal 1996 to $86,000 from $103,000
for fiscal 1995, after a significant decrease of 22.0% from fiscal 1994. The
decrease for fiscal 1996 was the result of reduced expense associated with poker
giveaways, due to conversions of certain traditional video poker machines to
bonus poker machines. Management fees paid by SC to related parties decreased by
8.7% to $137,000 for fiscal 1996 from $150,000 for fiscal 1995 and $102,000 for
fiscal 1994. Effective June 1, 1994, a management fee of 5% of SC's gross
revenue was paid to BGI, as opposed to the lower flat monthly fee paid to AC
prior to that date. Management fees paid to BGI in fiscal 1996 totaled $137,000
compared to $150,000 for fiscal 1995. Depreciation and amortization expense
increased by 19.7% to $298,000 for fiscal 1996 from $249,000 for fiscal 1995,
following a decrease of 19.2% from $308,000 for fiscal 1994. The increase in
depreciation was due to the addition of bonus poker gaming machines placed in
service for fiscal 1996, net of slot machines sold.
SC had other expense (net of other income) of $240,000 for fiscal 1996,
$122,000 for fiscal 1995 and $136,000 for fiscal 1994. The increase in other
expense is the result of a loss due to a write-off of equipment and leasehold
improvements deemed worthless when Charlie's Saloon was abandoned on April 21,
1996.
Income Taxes
As a result of the termination of its election to be treated as an S
corporation, SC became liable for income taxes on income earned from and after
January 1, 1994. Prior to such termination, SC did not incur or pay income taxes
but distributed cash to its stockholders in amounts sufficient to pay their
income tax liability in respect of income of SC. See "Item 13. Certain
Relationships and Related Transactions" and "Notes to Financial Statements
Sunset Coin, Inc. - Summary of Significant Accounting Policies - Income Taxes;
Related Party Transactions." In fiscal 1996, no estimated income tax payments
were paid. In fiscal 1995 and fiscal 1994, SC made estimated income tax payments
of $102,000 and $187,000 for the respective time periods. These payments were
based upon an anticipated effective federal income tax rate approximating the
statutory rate of 34%.
Liquidity and Capital Resources
For fiscal 1996, cash provided by operating activities decreased to
$1,003,000 from $1,139,000 for fiscal 1995 and $1,458,000 for fiscal 1994. The
decrease in fiscal 1996 is attributable to a $307,000 decrease in net income, a
$49,000 increase in depreciation and amortization, offset by the net effect of
decreases in receivables and increases in payables. Cash provided by operating
activities for fiscal 1995 decreased from 1994 by $319,000, attributable to a
$322,000 decrease in net income, a $59,000 decrease in depreciation and
amortization, a $29,000 decrease in provision for losses on notes receivable
recorded during the period as partially offset by an increase in receivables and
payables.
Cash flows used in investing activities were $180,000 for fiscal 1996,
which includes $208,000 in capital expenditures and $72,000 in loans to related
parties including loans to AC that were utilized to pay interest on the AC
Notes. SC's proceeds from the sale of fixed assets were $12,000 and the
repayment of a note receivable were $88,000.
Cash flows from financing activities for fiscal 1996 were $207,000,
reflecting proceeds from notes payable of $109,000, offset by principal payments
on notes of $316,000.
SC's indebtedness includes the stockholder notes and notes collateralized
by its gaming equipment and other assets. 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 was converted to a note at July 1, 1994, with monthly
payments through June 1998. SC requested advances through October 28, 1995, at
which time the Company's right to receive advances under the agreement was
terminated. The $1.5 million non-revolving line of credit includes an
acceleration clause which would cause the full amount of the obligation to
become due on demand if a material adverse change occurs in the borrower's
financial condition, business operations or ownership or management.
In July 1994, SC entered into an agreement with a bank for a $1,200,000
non-revolving line of credit. Each advance under the line shall be evidenced by
a separate promissory note with a maturity date not exceeding 66 months from the
date of the respective advance giving rise to the note. During fiscal 1995, SC
drew down an aggregate of $738,000 and in fiscal 1996, an aggregate of $109,000
of the non-revolving line of credit with various monthly payments through April
2001. Advances under the agreement bear interest at the bank's prime rate plus
1.5% to 2.0%. SC's management believes that it has sufficient funds through 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, 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. Such
guarantee will be released upon AC's achievement of a fixed charge coverage
ratio of 2.25 to 1, which is not currently anticipated to occur.
Because AC is in technical default under the Indenture governing the AC
Notes, the AC Notes could be accelerated. See "Arizona Charlie's, Inc._Liquidity
and Capital Resources." In such event, AC is not expected to have the resources
to pay the AC Notes. In addition, AC is expected to have liability under its
guarantee 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,
would have liability under its guarantee, and such liability would likely exceed
the amount which it could immediately support. Accordingly, substantial doubt
exists about SC's ability to continue as a going concern if the AC Notes or CQC
Notes are accelerated if CQC is unable to sell its assets. See "Notes to
Financial Statements - Sunset Coin, Inc. - Guarantee Obligation, Management's
Plans and Going Concern."
Competitive Environment
As SC's gaming machine route contracts reach maturity, SC is required to
compete for renewals with numerous route operators in the Las Vegas area, some
of which are significantly larger and better capitalized and manage
substantially more gaming machines than SC. Although SC's management believes
that the continuing expansion of the Las Vegas gaming market has resulted in
substantial growth of the local residential population, the market in which SC
generates the majority of its route business, there can be no assurance that
increased competition for gaming machine route locations will not have an
adverse impact on the future revenues. In addition, the spread of legalized
gaming into new jurisdictions may also impact the competitive position of SC.
See "Item 1. Business - Sunset Coin, Inc."
Inflation
Management believes that SC's results of operations are not dependent
upon, or materially affected by, the rate of inflation.
Item 8. Financial Statements and Supplementary Data
The Index to Financial Statements and Schedules appears at page F-1
hereof, the Report of Registrant's Independent Auditors appears at page F-2
hereof, and the Financial Statements and Notes to Financial Statements of the
Registrant and SC appear at page F-3 through F-24 hereof and page F-25 through
F- 43 hereof, respectively.
Item 9. Changes in and Disagreements with Accounts on
Accounting and Financial Disclosure
Not Applicable.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K
The following are filed as part of this Report:
(a)1. Financial Statements
An Index to Financial Statements and Schedule appears
at page F-1 hereof
(b)2. Financial Statement Schedules
The following Financial Statement Schedules are filed
herewith:
(a)3. Exhibits
2.1 Agreement of Reorganization dated November 16, 1993,
by and among Becker Gaming, Inc. ("BGI"), Arizona
Charlie's, Inc. ("Arizona Charlie's"), Sunset
Coin, Inc. ("Sunset Coin"), Becker Gaming Group, Inc.
("Becker Gaming Group"), Capitol Queen & Casino, Inc.
("Capitol Queen"), Charlie's Land Company ("CLC") ,
and each of Ernest A. Becker, III, Ernest A. Becker,
IV, Barry W. Becker and Bruce F. Becker
(collectively, the "Beckers").*
3.1 Articles of Incorporation of Arizona Charlie's.*
3.2 Amended and Restated By-Laws of Arizona Charlie's.*
3.3 Articles of Incorporation of Sunset Coin.*
3.4 Amended and Restated By-Laws of Sunset Coin.*
10.1 Purchase Agreement dated November 15, 1993 among BGI, Arizona
Charlie's, Capitol Queen, Sunset Coin and the purchasers named
therein (the "Purchasers").*
10.2 Indenture dated November 15, 1993 among Arizona Charlie's, as issuer,
Sunset Coin, as guarantor, and IBJ Schroder Bank & Trust Company
("IBJ"), as trustee.*
10.3 Indenture dated November 15, 1993 among Capitol Queen, as issuer,
Arizona Charlie's, as guarantor, and IBJ, as trustee.*
10.4 Fee and Leasehold Deed of Trust, Assignment of Leases and Subleases,
Security Agreement and Fixture Filing dated November 15, 1993 by
Arizona Charlie's and CLC, as grantors, to Land Title of Nevada,
Inc., as trustee, for the benefit of IBJ, as collateral agent.*
10.5 Security Agreement dated November 15, 1993 between
Arizona Charlie's and IBJ, as collateral agent.*
10.6 Stock Pledge Agreement dated November 15, 1993 between Arizona
Charlie's and IBJ, as collateral agent.*
10.7 Collateral Agency Agreement dated November 15, 1993 among Arizona
Charlie's, CLC and IBJ, as trustee and collateral agent.*
10.8 Disbursement and Escrow Agreement dated November 15, 1993 among
Arizona Charlie's and IBJ, as escrow agent, trustee and collateral
agent.*
10.9 Registration Rights Agreement dated November 15, 1993
among Arizona Charlie's, Sunset Coin and the
Purchasers.*
10.10 Registration Rights Agreement dated November 15, 1993
among Capitol Queen, Arizona Charlie's and the
Purchasers.*
10.11 Promissory Notes dated December 24, 1993 made by each
of the Beckers in favor of Arizona Charlie's. *
10.12 Tax Indemnity Agreement dated December 24, 1993 among
Arizona Charlie's, Sunset Coin, Becker Gaming Group
and each of the Beckers. Included at Exhibit G to
Exhibit 2-1 hereof.*
10.13 Form of Management Agreement to be entered into between BGI and each
of Arizona Charlie's, Capitol Queen, Sunset Coin and Becker Gaming
Group. Included at Exhibit I to Exhibit 2-1 hereof.*
10.14 Form of Tax Allocation Agreement to be entered into
between BGI and each of Arizona Charlie's, Sunset
Coin, Becker Gaming Group and Capitol Queen. Included
at Exhibit J to Exhibit 2-1 hereof.*
10.15 Letter Agreement dated September 10, 1993 among BGI, Arizona
Charlie's, Capitol Queen and Ladenburg, Thalmann & Co., Inc., as
placement agent.*
10.16 Airplane lease dated April 18, 1989 between Arizona Charlie's and Las
Vegas Auto Leasing.*
10.17 Lease dated March 1, 1989 between CLC and Arizona
Charlie's.*
10.18 Leases dated May 1, 1988 and August 21, 1990 between Charleston
Heights Shopping Center and Arizona Charlie's.*
10.19 Land Purchase Option Contract dated January 4, 1993
between Linda Ann and Harvey L. McCray and Vernon M.
and Joyce G. Burkhalter, as seller, and R.Q.
Enterprises, as buyer; and Wire Transfer Order and
Closing Document dated July 26, 1993 between Arizona
Charlie's and First Interstate Bank of Nevada.*
10.20 Building Contract dated December 10, 1993 between Arizona Charlie's
and Marnell Corrao & Associates.*
10.21 First Supplemental Indenture dated January 1, 1995 among Arizona
Charlie's, as issuer, Sunset Coin, as guarantor, and IBJ, as trustee.
10.22 First Supplemental Indenture dated January 1, 1995 among Capitol
Queen, as issuer, Arizona Charlie's, as guarantor, and IBJ, as
Trustee.
10.23 Lease agreement between Arizona Charlie's, Inc. and
Bruce F. Becker.
- ----------
* All Exhibits are incorporated by reference to the Company's Registration
Statement on Form S-1 (33-75808) declared effective by the Securities and
Exchange Commission on May 20, 1994.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ARIZONA CHARLIE'S, INC.
Dated: September 27, 1996 By: /s/ Bruce F. Becker
------------------------
Bruce F. Becker, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities indicated on the 27th day of September, 1996.
Signature Title
/s/ Bruce F. Becker President, Chief Executive
- ------------------------- Officer (Principal
Bruce F. Becker Executive Officer) and
Director
/s/ Jerry Griffis Controller (Principal
- ------------------------- Financial and
Jerry Griffis Accounting Officer
/s/ Barry W. Becker Director
- -------------------------
Barry W. Becker
/s/ Ernest A. Becker, III Director
- -------------------------
Ernest A. Becker, III
/s/ Ernest A. Becker, IV Director
- -------------------------
Ernest A. Becker, IV
Supplemental Information to be Furnished With Reports Filed
Pursuant to Section 15(d) of the Act by Registrants Which Have
Not Registered Securities Pursuant to Section 12 of the Act
The Company has not and does not intend to send to its security holders
any annual report with respect to the Registrant's most recent fiscal year or
any proxy statement, form of proxy or other proxy soliciting material with
respect to a meeting of security holders.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
ARIZONA CHARLIE'S, INC.
Report of Independent Accountants
Balance Sheets as of June 30, 1996 and 1995
Statements of Operations for the Years Ended June 30, 1996, 1995 and 1994
Statements of Stockholder's Equity (Deficit) for the Years Ended 1996, 1995
and 1994 Statements of Cash Flows for the Years Ended June 30, 1996,
1995 and 1994
Notes to Financial Statements
SUNSET COIN, INC.
Report of Independent Accountants Balance Sheets as of June 30, 1996 and
1995 Statements of Income for the Years Ended June 30, 1996,
1995 and 1994
Statements of Stockholder's Equity for the Years Ended
June 30, 1996, 1995 and 1994
Statements of Cash Flows for the Years Ended June 30, 1996,
1995 and 1994
Notes to Financial Statements
ARIZONA CHARLIE'S, INC.
Schedule II Valuation and Qualifying Accounts as of
and for the Years Ended June 30, 1996,
1995 and 1994
SUNSET COIN, INC.
Schedule II Valuation and Qualifying Accounts as of
and for the Years Ended June 30, 1996,
1995 and 1994
Schedules other than those listed above are omitted because they are not
required or are not applicable, or because the required information is shown in
the financial statements or notes to the financial statements. Columns omitted
from schedules filed have been omitted because the information is not
applicable.
REPORT OF INDEPENDENT ACCOUNTANTS
------------
To the Board of Directors
Arizona Charlie's, Inc.
We have audited the financial statements and the financial statement schedule of
Arizona Charlie's, Inc. (a wholly owned subsidiary of Becker Gaming, Inc.)
listed in Item 14(a) of this Form 10-K. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Arizona Charlie's, Inc. as of
June 30, 1996 and 1995, and the results of its operations and its cash flows for
each of the three years in the period ended June 30, 1996 in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
The accompanying financial statements have been prepared assuming that Arizona
Charlie's, Inc. ("AC") will continue as a going concern. As more fully described
in Note 2, AC is in default of debt covenants, resulting in the classification
of such debt as currently payable. AC is also obligated as a guarantor under
indebtedness of an affiliated company, and such indebtedness is also in default.
AC does not have sufficient resources to repay the indebtedness or honor its
guarantee on a current basis and management's plans are also described in Note
2. These matters raise substantial doubt about the ability of Arizona Charlie's,
Inc. to continue as a going concern. The final outcome of these matters is not
presently determinable and the June 30, 1996 financial statements of the Arizona
Charlie's, Inc. do not include any adjustment that might result from the outcome
of this uncertainty.
Las Vegas, Nevada
August 9, 1996
================================================================================
ARIZONA CHARLIE'S, INC.
(A Wholly Owned Subsidiary Of Becker Gaming, Inc.)
BALANCE SHEET
As Of June 30, 1996 and 1995
(Dollars In Thousands)
----------
================================================================================
ASSETS
1996 1995
-------- --------
Current assets:
Cash and cash equivalents.................... $ 4,591 $ 5,404
Restricted cash, in escrow account........... 10 10
Trade and other accounts receivable.......... 473 658
Receivable from related parties.............. 1,539 820
Notes receivable from related party.......... -- 4,416
Inventories ................................. 575 661
Prepaid expenses ............................ 1,118 1,162
-------- --------
Total current assets...................... 8,306 13,131
-------- --------
Property and equipment:
Building and improvements ................... 37,488 37,485
Furniture and equipment...................... 22,575 22,609
Land improvements ........................... 1,628 1,628
-------- --------
61,691 61,722
Less, accumulated depreciation .............. (16,218) (13,572)
-------- --------
45,473 48,150
Land ........................................ 208 208
-------- --------
Net property and equipment.............. 45,681 48,358
-------- --------
Other assets:
Receivable from related party, noncurrent.... 987 240
Deposits and other .......................... 460 551
Notes receivable from related party ......... -- 4,416
Financing costs, less accumulated
amortization of $1,366 (1996)
and $880 (1995) 2,507 2,993
-------- --------
Total other assets...................... 8,370 3,784
-------- --------
Total assets ........................... $ 62,357 $ 65,273
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
1996 1995
-------- --------
Current
liabilities:
Trade accounts payable...................... $ 1,452 $ 1,449
Construction accounts payable .............. --
Accounts payable to related parties......... 4 3
Accrued expenses ........................... 3,323 3,097
Management fees due Becker Gaming, Inc...... 4,682 3,287
Notes payable............................... 110 121
Notes payable to related party.............. 2,250 2,250
Current portion of
obligations under capital leases......... 15 4
Long-term debt classified as
current due to default
under covenants ......................... 55,000 --
-------- --------
Total current liabilities............ 66,836 10,211
Long-term debt, less current portion.......... -- 55,000
Subordinated notes payable to prior
stockholders ............................... 5,000 5,000
Obligations under capital leases,
less current portion ......... 22 4
-------- --------
Total liabilities.................... 71,858 70,215
-------- --------
Commitments and contingencies
Stockholder's equity (deficit):
Common stock, no par value, 2,500
shares authorized, 1,000 shares
issued and outstanding................... 469 469
Retained earnings (deficit)................. (9,970) (5,411)
-------- --------
Total stockholder's equity
(deficit)................. (9,501) (4,942)
-------- --------
Total liabilities and
stockholder's equity (deficit)....... $ 62,357 $ 65,273
======== ========
The accompanying notes are an integral part of these financial statements.
================================================================================
ARIZONA CHARLIE'S, INC.
(A Wholly Owned Subsidiary Of Becker Gaming, Inc.)
STATEMENTS OF OPERATIONS
(Dollars In Thousands)
================================================================================
Year Ended June 30,
------------------------------------------------
1996 1995 1994
Revenues:
Gaming ............................. $ 52,831 $ 47,466 $ 38,955
Food and beverage .................. 13,204 10,647 8,459
Hotel .............................. 3,208 2,614 1,219
Bowling ............................ - - 251
Gift shop .......................... 590 577 535
Management fee from affiliates ..... - - 281
Other .............................. 1,145 912 399
-------- -------- --------
Gross revenues ................. 70,978 62,216 50,099
Less, promotional allowances ......... (7,677) (5,134) (3,652)
-------- -------- --------
Net revenues ................... 63,301 57,082 46,447
-------- -------- --------
Operating expenses:
Gaming ............................. 18,612 15,359 11,681
Food and beverage .................. 12,511 11,388 8,389
Hotel .............................. 1,413 1,377 714
Bowling ............................ - - 387
Gift shop .......................... 475 450 458
Advertising and promotion .......... 4,726 3,837 3,093
General and administrative ......... 17,660 15,358 13,867
Payments under guarantee obligation 601 1,592 -
Management fee - Becker Gaming, Inc. 1,396 3,099 188
Rent expense paid to related party . 217 191 343
Depreciation and amortization ...... 3,491 3,373 2,222
-------- -------- --------
Total operating expenses ....... 61,102 56,024 41,342
-------- -------- --------
Operating income ............... 2,199 1,058 5,105
-------- -------- --------
Other income (expenses):
Interest income .................... 286 580 769
Interest expense ................... (7,095) (7,250) (5,223)
Interest capitalized ............... 676 460
Other, net ......................... 51 - 23
Total other expenses ........... (6,758) (5,994) (3,971)
-------- -------- --------
Net (loss)income before income tax (4,559) (4,936) 1,134
Provision for income taxes - - -
-------- -------- --------
Net (loss) income ................ $ (4,559) $ (4,936) $ 1,134
======== ======== ========
The accompanying notes are an integral part of these financial statements.
================================================================================
ARIZONA CHARLIE'S, INC.
(A Wholly Owned Subsidiary Of Becker Gaming, Inc. )
STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT) For The Years
Ended June 30, 1996, 1995 And 1994
(Dollars In Thousands)
================================================================================
Additional
Common Stock Paid-in
Shares Amount Capital
------ ------- ------
Balances, June 30, 1993 ............ 1,000 $ 1,513 $-
Distributions to stockholders .....
Reclassification of undistributed
earnings to additional paid-in
capital upon termination of S
corporation election .......... -- -- 732
Contribution of land from
Becker Gaming, Inc. ........... -- -- 208
Forgiveness of receivable from
Charlie's Land Company in
connection with the
Reorganization ................ -- -- (729)
Net transfer of certain assets
and liabilities to Becker
Gaming, Inc. as part of
the Reorganization ............ -- (1,044) (211)
Net income ........................ -- -- --
------ ------- ------
Balances, June 30, 1994 ............ 1,000 469 --
Net loss .......................... -- -- --
------ ------- ------
Balances, June 30, 1995 ............ 1,000 469 --
Net loss .......................... -- -- --
------ ------- ------
Balances, June 30, 1996 ............ 1,000 $ 469 $-
====== ======= ======
Retained
Earnings
(Deficit) Total
------- -------
Balances, June 30, 1993 ............ $ 4,440 $ 5,953
Distributions to stockholders ..... (5,317) (5,317)
Reclassification of undistributed
earnings to additional paid-in
capital upon termination of S
corporation election .......... (732) --
Contribution of land from
Becker Gaming, Inc. ........... -- 208
Forgiveness of receivable from
Charlie's Land Company in
connection with the
Reorganization ................ -- (729)
Net transfer of certain assets
and liabilities to Becker
Gaming, Inc. as part of
the Reorganization ............ -- (1,255)
Net income ........................ 1,134 1,134
------- -------
Balances, June 30, 1994 ............ (475) (6)
Net loss .......................... (4,936) (4,936)
------- -------
Balances, June 30, 1995 ............ (5,411) (4,942)
Net loss .......................... (4,559) (4,559)
------- -------
Balances, June 30, 1996 ............ $(9,970) $(9,501)
======= =======
The accompanying notes are an integral part of these financial statements.
================================================================================
ARIZONA CHARLIE'S, INC.
(A Wholly Owned Subsidiary Of Becker Gaming, Inc.)
STATEMENTS OF CASH FLOWS
(Dollars In Thousands)
================================================================================
Year Ended June 30,
--------
1996 1995 1994
-------- -------- --------
Cash flows from operating activities:
Net income (loss) ............................ $ (4,559) $ (4,936) $ 1,134
-------- -------- --------
Adjustments to reconcile net income
(loss) to net provided by (used by)
operating activities:
Provision for losses on related
party receivables .......................... 601 1,592 --
Depreciation and amortization ............... 3,491 3,373 2,222
(Gain) loss on sale of equipment ............ 11 (2) (23)
(Increase) decrease in operating assets:
Receivables ................................. 185 (387) 408
Inventories ................................. 86 (108) 33
Prepaid expenses ............................ 241 (339) 433
Deposits and other .......................... (41) (92) --
Increase (decrease) in operating liabilities:
Accounts payable, net of amounts
for capital ................................ 3 (144) 633
expenditures
Accrued expenses ............................ 226 716 848
Management fees due to Becker Gaming, Inc. .. 1,395 3,099 188
-------- -------- --------
Total adjustments ......................... 6,198 7,708 4,742
-------- -------- --------
Net cash provided by operating activities . 1,639 2,772 5,876
-------- -------- --------
Cash flows from investing activities:
Note receivable issued to CQC ............... -- (1,200) --
Capital expenditures, net of amounts in
accounts payable ........................... (190) (24,253) (11,379)
Increase in receivable from Becker Gaming,
Inc ........................................ (2,065) (4,154) (300)
Net (additions to) reductions in restricted
cash equivalents .......................... -- 26,102 (26,112)
Proceeds from assets sales .................. 15 104 269
Deposits and other .......................... -- -- 342
-------- -------- --------
Net cash used in investing activities ..... (2,240) (3,401) (37,180)
-------- -------- --------
Cash flows from financing activities:
Proceeds from notes payable, net of
financing costs ............................ -- -- 51,105
Proceeds from subordinated notes payable to . -- -- 5,000
stockholders
Proceeds from borrowing under notes payable . -- 2,250 --
Principal payments on notes payable ......... (208) (199) (17,421)
Payments under capital lease obligations ...... (4) (32) (848)
Distributions to former stockholders ........ -- -- (5,317)
Payment of liability for Charlie's Land
Company .................................... -- -- (729)
-------- -------- --------
Net cash provided by (used in) financing
activities ................................. (212) 2,019 31,790
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents ................................ (813) 1,390 486
Cash and cash equivalents, beginning of
the year .................................... 5,404 4,014 3,528
-------- -------- --------
Cash and cash equivalents, end of the year .... $ 4,591 $ 5,404 $ 4,014
======== ======== ========
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
ARIZONA CHARLIE'S, INC.
(A Wholly Owned Subsidiary Of Becker Gaming, Inc.)
NOTES TO FINANCIAL STATEMENTS
----------
1. Summary Of Significant Accounting Policies:
Nature Of Operations
- --------------------
Arizona Charlie's, Inc. ("AC" or the "Company") owns and operates
a casino and related hotel in Las Vegas, Nevada.
In connection with the financing transaction more fully discussed in Note 6, the
stockholders of AC exchanged all of their stock in the Company for stock of
Becker Gaming, Inc. ("BGI") (the "Reorganization") and, effective June 1, 1994,
AC became a wholly owned subsidiary of BGI. BGI has no independent activities
other than providing management and administrative services to, and exploring
and developing business opportunities for its subsidiaries, and serves as a
holding company for AC and the following entities:
o Capitol Queen & Casino, Inc. ("CQC"), a Missouri corporation
in the development stage of construction of a riverboat casino in
Jefferson City, Missouri (the "Capitol Queen").
o Sunset Coin, Inc. ("SC"), a Nevada corporation which
operates a Las Vegas gaming machine route and service business.
o Becker Gaming Group ("BGG"), a Nevada corporation which, together with
its wholly owned subsidiary Innerout, Inc., owns and operates restaurants
and bars in Las Vegas under the "Charlie's" name, each of which offers
gaming machines.
As a part of the Reorganization described above, the following transactions
occurred:
o The stockholders of BGI caused the ownership of the land underlying and
adjacent to Arizona Charlie's to be transferred to the Company from
Charlie's Land Company ("CLC"), an entity also then owned by the BGI
stockholders. The land was first conveyed to BGI by CLC in exchange for
BGI stock and then contributed by BGI to AC at its historical cost basis
of approximately $208,000. Concurrent with the transfer of land, AC
forgave $729,000 due the Company from CLC which arose in November 1993
when the Company paid-off CLC's mortgage on the land in contemplation of
the Reorganization.
o Certain property and equipment, consisting of aircraft and
boats with a net book value of approximately $5,254,000, accounts
payable relating to such property and equipment of approximately
$252,000, and related encumbrances in the form of capital lease
obligations totaling approximately $3,900,000, were transferred
from AC to BGI. In addition, certain prepaid expenses totaling
approximately $153,000 were transferred from AC to BGI. Such
prepaid expenses consisted primarily of insurance related to
certain personnel who were transferred from the Company to BGI in
connection with the Reorganization. The net effect of the above
transactions was to transfer net assets with a historical book
value of approximately $1,255,000.
The forgiveness of indebtedness from CLC and the transfer of net assets to BGI
are reflected as distributions to stockholders in the Company's June 30, 1994
Statement of Stockholder's Equity
(Deficit).
Subsequent to the Reorganization, certain overhead expenses of the Company
(primarily related to executive compensation), have been eliminated. However,
effective June 1, 1994, the Company is required to pay a management fee to BGI
in connection with executive services equal to a percentage of the Company's
gross operating revenues. Under the AC Indenture, no management fees will be
payable by AC until completion of AC's ongoing expansion project and such time
as AC has attained a specified fixed charge coverage ratio of 2.25 to 1.
However, such fees accrue until paid. See Note 9 of AC's Notes to Financial
Statements.
Gaming Revenue
- --------------
In accordance with industry practice, the Company recognizes as gaming revenue
the net win from gaming activities, which is the difference between gaming wins
and losses.
Promotional Allowances
- ----------------------
The retail value of hotel accommodations, food, beverage and gift shop items
provided to customers without charge is included in gross revenues and then
deducted as promotional allowances to arrive at net revenues. The estimated
costs of providing such promotional allowances have been classified as gaming
expenses through interdepartmental allocations, as follows:
Years Ended June 30,
--------------------
1996 1995 1994
---- ---- ----
Hotel ......... $ 261 $ 164 $ 119
Food & Beverage 3,824 2,260 2,005
----- ----- -----
$4,085 $2,424 $2,124
====== ====== ======
Cash Equivalents And Concentration Of Credit Risk
- -------------------------------------------------
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. The Company has cash on deposit
with financial institutions in excess of federally insured amounts.
Inventories
- -----------
Inventories are valued at the lower of cost (first-in, first-out) or market.
Property And Equipment
- ----------------------
Property and equipment are stated at cost. Maintenance and repairs are charged
to expense when incurred. Upon retirement or disposal of assets, the cost and
accumulated depreciation are eliminated from the accounts and the resulting gain
or loss is credited or charged to income, as appropriate.
Building, building improvements and land improvements are depreciated using the
straight-line method over estimated useful lives of 5 to 40 years. Furniture and
equipment are depreciated using straight-in declining balance methods over
estimated useful lives of 5 to 10 years.
Financing Costs
- ---------------
Costs associated with the issuance of debt are deferred and amortized over the
life of the related indebtedness using the effective interest method.
Preopening Expense
- ------------------
Certain preopening costs, consisting principally of personnel cost, training and
other costs directly associated with the opening of new hotel-casino or
significant expansions of the existing hotel-casino are capitalized and charged
to expense over a period not to exceed one year following the commencement of
related operations. During the year ended June 30, 1994, the Company capitalized
$27,000 of preopening costs which were amortized during the year ended June 30,
1995 after the expansion was completed. During the years ended June 30, 1996 and
1995, the Company did not capitalize any preopening costs.
Federal Income Taxes
- --------------------
Prior to January 1, 1994, the Company was taxed under Section 1362 (Subchapter
S) of the Internal Revenue Code, which provides that, in lieu of corporate
income taxes, the stockholders are taxed on their proportionate share of the
Company's taxable income or loss. Therefore, these financial statements do not
include any provision or liability for corporate income taxes for the periods
prior to December 31, 1993.
Effective January 1, 1994, the Company terminated its S corporation election and
adopted Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS 109"). Under SFAS 109 deferred tax assets and liabilities
are recognized for the expected future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
included the enactment position or results of operations.
In connection with the Reorganization, beginning June 1, 1994, the Company is
included in the consolidated federal income tax returns filed by BGI. AC's tax
allocation is based on the amount of tax it would incur if it filed a separate
return, except the Company does not receive any benefit from carrybacks to prior
years.
Reclassifications
- -----------------
Certain amounts in the 1994 and 1995 financial statements have been reclassified
to conform with the 1996 presentation.
Use of Estimates in the Preparation of Financial Statements
- -----------------------------------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates, particularly with respect to
the matters discussed in Note 2.
2.CQC Gaming License, Default Under Indebtedness, Management's Plans,
and Going Concern:
AC has guaranteed the payment of principal and interest of 12% First Mortgage
Notes due November 15, 2000 issued by CQC, of which $20,000,000 principal amount
and $2,400,000 in past-due accrued interest are outstanding at June 30, 1996.
CQC was formed to develop, own and operate the "Capitol Queen" riverboat casino
and related land-based facilities in Jefferson City, Missouri. On September 28,
1994, CQC was notified that its application for a gaming license was rejected by
the Missouri Gaming Commission (the "Commission"). At the time CQC was notified
of the Commission's decision, construction of the riverboat under contract with
a shipbuilder was almost completed. CQC had also obtained the necessary permits
for the land-based development portion of the project and performed certain
dredging and other site preparation work. Immediately following the Commission's
decision, Management temporarily suspended further development of the Capitol
Queen project, pending an appeal of the decision and legal remedies potentially
available to the Company.
On November 7, 1995, voters in Jefferson City rejected an ordinance permitting
riverboat gambling, reversing the vote of an earlier election in which Jefferson
City voters approved riverboat gambling. Management ultimately determined to
abandon the project and is currently looking for alternative uses for the
riverboat, including opportunities to sell or lease it to another operator.
CQC financed the Capitol Queen project through the issuance of $40,000,000 in
principal amount of 12% First Mortgage Notes due November 15, 2000 (the "CQC
Notes"). As of January 1, 1995, the indenture governing the CQC Notes was
amended to (i) eliminate CQC's obligation to construct and open the Capitol
Queen and (ii) permit a two-step purchase of the CQC Notes at 101% of principal
plus accrued and unpaid interest from a sale of assets. The first step
repurchase of $20,000,000 principal amount of the CQC Notes (plus accrued and
unpaid interest) was completed on January 17, 1995, with unexpended funds from
the project escrow account, and an aggregate of $20,000,000 principal amount of
the CQC Notes remained outstanding. However, the dates by which CQC previously
agreed with the holders of the CQC Notes to effect the sale of its assets and
repurchase the remaining CQC Notes have passed, and CQC is thus in default of
the amended covenants.
The remaining CQC Notes require annual interest payments of $2,400,000, payable
in equal installments semi-annually on May 15 and November 15. CQC was not able
to make its scheduled interest payments of $1,200,000 on November 15, 1995 and
$1,200,000 on May 15, 1996 and AC did not have available funds to advance on
behalf of CQC. AC is also in default of certain covenants under its indebtedness
(the "AC Notes", as more fully described in Note 6). AC is restricted from
selling assets under the covenants governing the AC Notes and management
believes that access to additional capital from other sources is restricted as a
result of the above-described circumstances. AC does not have sufficient
financial resources (including a guarantee of the AC Notes by SC, as more fully
described in Note 6) to repay the AC Notes on a current basis and satisfy its
guarantee obligation with respect to the CQC Notes. In connection with the
decision to abandon the project, CQC had entered into an Asset Purchase
Agreement dated April 10, 1995, for the sale of its assets to Aerie Riverboat
Casinos of Missouri, Inc. at a purchase price of $18,000,000, which price
exceeded the carrying value of the CQC assets. However, the consummation of the
Aerie purchase agreement was subject to the satisfaction of several conditions
which could not be satisfied timely, including, among others, that Jefferson
City consent to the assignment of its Development Agreement with CQC, that Aerie
be found preliminarily suitable to hold a Missouri Gaming license, and that
riverboat gaming is legally permitted in Jefferson City. As a result, the
agreement with Aerie was terminated without penalty when the December 31, 1995
expiration date passed.
CQC continues to market its riverboat assets to prospective buyers and
Management of the Company, AC and CQC are currently undergoing discussions with
an informal committee representing the holders of the AC Notes and CQC notes
(the "Bondholder Committee") regarding a proposed restructuring plan. Based on
current market conditions, management does not expect that CQC will generate
sufficient funds through the sale of its assets to repurchase all of the
outstanding CQC Notes. The proposed restructuring plan therefore contemplates
the issuance of additional AC Notes to fulfill AC's guarantee obligation for
remaining principal and accrued interest of the CQC Notes after applying sale
proceeds. However, no satisfactory offers for the riverboat are currently
available, and no agreement has been reached with the Bondholder Committee
regarding the proposed restructuring plan. Accordingly, these matters raise
substantial doubt about the ability of AC to continue as a going concern. The
final outcome of these matters is not presently determinable and the June 30,
1996 financial statements of AC do not include any adjustment that might result
from the outcome of this uncertainty.
3.Supplemental Cash Flow Information:
The following are supplemental disclosures of cash flow information for the
years ended June 30, 1996, 1995 and 1994:
1996 1995 1994
---- ---- ----
Interest paid, net of amounts
capitalized ........................ $7,116,000 $7,115,000 $3,883,000
========== ========== ==========
Capitalized lease obligations
incurred ........................... $ 34,000 $ 9,000 $3,650,000
========== ========== ==========
Net transfer of assets and
liabilities to Becker Gaming, Inc. . $ -- $ -- $1,255,000
========== ========== ==========
Contribution of land to AC from
Becker Gaming, Inc. ................ $ -- $ -- $ 208,000
========== ========== ==========
Net transfer of assets and related
liabilities from Becker Gaming, Inc. $ -- $ 25,000 $ --
========== ========== ==========
4.Accrued Expenses:
Major classes of accrued expenses consist of the following as of June 30, 1996
and 1995:
1996 1995
---- ----
Wages payable and accrued salaries $ 811,000 $ 703,000
Accrued vacation ................. 306,000 251,000
Group insurance .................. 352,000 300,000
Gaming taxes ..................... 239,000 260,000
Payroll and other taxes .......... 405,000 381,000
Progressive slot liability ....... 88,000 94,000
Other accrued expenses ........... 128,000 93,000
Accrued interest ................. 994,000 1,015,000
------- ---------
$3,323,000 $3,097,000
========== ==========
5.Notes Payable:
Notes payable consist of the following as of June 30, 1996 and 1995:
1996 1995
---- ----
Related parties:
Notes payable to SC with interest at 5.56%
uncollaterized and due May 1997 ............ $2,250,000 $2,250,000
Nonrelated parties:
5.96% note payable in monthly
installments of $22,352, including interest,
through January, 1997, uncollateralized .... $ 110,000 $ 121,000
----- ---------- ----------
Total notes payable ........... $2,360,000 $2,371,000
========== ==========
6.Long-Term Debt:
Long-term debt consists of the following as of June 30, 1996 and 1995:
1996 1995
---- ----
12% First Mortgage Notes Due November 15,
2000 (the "AC Notes") with interest
payable semiannually classified as
currently payable due to defaults under
covenants (see below) ................. $55,000,000 $55,000,000
=========== ===========
On November 18, 1993, the Company completed a private placement of the AC Notes.
The offering generated net proceeds of approximately $33,684,000 (after
deducting debt issue costs of approximately $16,294,000 and $497,000 used to
repay principal and accrued interest, respectively, to a bank which was due and
payable on November 18, 1993). The AC Notes are guaranteed by SC (which
guarantee is subject to release upon completion of the Expansion which
management believes has been satisfied, and the attainment of a fixed coverage
ratio by the Company of 2.25 to 1, following the completion of the Expansion,
which has not been satisfied) and are collateralized by a first mortgage on
substantially all of assets of the Company, including the Expansion.
As of June 30, 1996, AC is in default of certain debt covenants under the
Indenture governing the AC Notes. These covenant violations include (i) a
failure to meet a minimum Fixed Charge Coverage ratio, as defined in the
Indenture, and (ii) advances by AC to Becker Gaming, Inc. which exceed amounts
allowed for under the Indenture. Such advances remain outstanding at June 30,
1996. In addition, beginning with the quarter ending December 31, 1995, AC has
not met the Minimum Tangible Net Worth requirement, defined in the AC Indenture.
Under the terms of the Indenture, AC is technically required to offer to buy
back $11,000,000 of the outstanding AC Notes at June 30, 1996 due to the failure
to meet this covenant, increasing by $5,500,000 each fiscal quarter. AC has not
made such offer and does not intend to do so while the discussions with the
Bondholder Committee are in process. As a result of these defaults under
covenants, the AC Notes have been classified as currently payable in the
accompanying financial statements. Management's plans are more fully described
in Note 2.
The Indenture governing the AC Notes (the "Indenture") limits the use of the net
proceeds from the offering to fund the cost of the Expansion. The proceeds were
placed in escrow with a trustee pending draw-downs for qualifying project
expenditures and are classified as restricted cash, in escrow account, in the
accompanying financial statements. The AC Notes are not subject to mandatory
redemption, except upon a change of control, decline in tangible net worth, or
certain assets sales, all as defined in the Indenture. The Company has the
option to redeem the AC Notes at a premium of 106% beginning on November 15,
1997, declining to par value on November 15, 1999.
The Indenture contains covenants that, among other things, limit the ability of
the Company and, in certain cases, SC, to pay dividends or management fees, or
incur additional indebtedness. The Indenture also requires the Expansion to be
completed in a specified manner and time frame, which management believes has
been achieved.
In connection with AC's guarantee of the CQC Notes, the Indenture governing the
CQC Notes imposes certain restrictive covenants on the Company, including
minimum cash flow and net worth requirements and restrictions on additional
borrowings and distributions of earnings.
7.Income Taxes:
During the period from January 1, 1994 (the effective termination date of the
Company's S corporation election) to June 30, 1994 and for the fiscal years
ended June 30, 1996 and 1995, the Company incurred net operating losses for
federal income tax purposes, and accordingly, these financial statements do not
include a provision for federal income taxes.
The components included in determining the provision for income taxes are shown
below for the years ended June 30, 1996, 1995 and 1994:
1996 1995 1994
---- ---- ----
Tax provision at federal income tax
statutory rate ............... $(1,550,000) $(1,678,000) $ 386,000
Income tax liability borne by
stockholders during period of
S corporation status ......... -- -- (538,000)
Increase (decrease) in taxes
resulting from:
Unrecognized tax benefit from
net operating losses ......... 1,489,000 1,633,000 122,000
Other ........................ 61,000 45,000 30,000
------ ------ ------
Income tax provision $ -- $ -- $ --
======= ======= =======
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes, and the amounts used for income tax purposes. The major components of
deferred tax liabilities and assets as of June 30, 1996 and 1995 were as
follows:
1996 1995
---- ----
Liabilities
Depreciation ........................... $ 542,000 $ --
----------- -----------
Assets
Allowances for bad debts ............... 745,000 541,000
Federal net operating loss carryforwards 3,119,000 1,292,000
Other .................................. -- 7,000
----------- -----------
Total deferred tax assets ..... 3,864,000 1,840,000
Valuation allowance .................... (3,322,000) (1,840,000)
---------- ----------
Net deferred taxes ............ $ -- $ --
=========== ===========
As of June 30, 1996, the Company had a federal net operating loss carryforward
of approximately $9,174,000 which expires between 2009 and 2011.
8.Leases And Commitments:
The Company has entered into capital lease agreements whereby the Company leases
various equipment under three-and five-year leases which expire at various dates
through 2000.
Property and equipment includes the following property leased under capital
leases as of June 30, 1996 and 1995:
1996 1995
Equipment ................... $ 43,000 $ 67,000
Less accumulated depreciation (3,000) (23,000)
------ -------
$ 40,000 $ 44,000
======== ========
The Company leases office space under a 10-year operating lease, which expires
in 1998, from Charleston Heights Shopping Center ("CHSC"), a company related
through common ownership, as more fully described in Note 9.
Future minimum lease payments, by year and in the aggregate, under capital
leases and noncancellable operating leases with initial or remaining terms of
one year or more consist of the following at June 30, 1996:
Capital Lease Operating Leases
------------- ----------------
1997 15,000 242,000
1998 11,000 226,000
1999 11,000 --
2000 10,000 --
------ ------
Total minimum lease payments .......... $ 47,000 $468,000
========
Less amount representing interest ............ 10,000
------
Present value of net minimum
lease payments . 37,000
Less current portion ......................... 15,000
------
Obligations under capital leases,
noncurrent $ 22,000
========
The total rental expense under operating leases is as follows for the years
ended June 30, 1996, 1995 and 1994:
1996 1995 1994
---- ---- ----
Noncancellable airplane hangar
and equipment leases .... $ -- $ -- $110,000
Land and office leases ....... 217,000 191,000 344,000
------- ------- -------
$217,000 $191,000 $454,000
======== ======== ========
9.Related-Party Transactions:
The following balances due to or from related parties existed as of June 30,
1996 and 1995. The identified realted parties are stockholders of the Company or
affiliated companies related through common ownership.
June 30, 1996
-------------
Current Noncurrent Notes
Receivables Receivables Receivable
----------- ----------- -----------
Former Stockholders of the
Company ..................... $ 14,000 $ 165,000 --
BGI ......................... 1,400,000 747,000 $ 4,416,000
Sunset Coin ................. 47,000 -- --
Becker Vending .............. -- -- --
Becker Enterprises .......... 1,000 -- --
CQC ......................... 993,000 -- 1,200,000
BGG:
Charlie's Lakeside ...... (7,000) -- --
Charlie's Bar ........... 10,000 -- --
Cantina Charlie's ....... 11,000 -- --
Cariba Charlie's ........ 13,000 75,000 --
Charlie's Saloon ........ 6,000 -- --
Charlie's Down Under .... 44,000 -- --
----------- ----------- -----------
Total ....................... 2,532,000 987,000 5,616,000
Less: Allowance for doubful
collection of amounts
due from CQC ........ (993,000) -- (1,200,000)
----------- ----------- -----------
$ 1,539,000 $ 987,000 $ 4,416,000
=========== =========== ===========
Management
Fee and Subordinated
Accounts Notes Notes
Payable Payable Payable
---------- ---------- ----------
Former Stockholders of the
Company ......................... $ 4,000 -- $5,000,000
BGI ............................. 4,682,000 -- --
Sunset Coin ..................... -- $2,250,000 --
Becker Vending .................. -- -- --
Becker Enterprises .............. -- -- --
CQC ............................. -- -- --
BGG:
Charlie's Lakeside .......... -- -- --
Charlie's Bar ............... -- -- --
Cantina Charlie's ........... -- -- --
Cariba Charlie's ............ -- -- --
Charlie's Saloon ............ -- -- --
Charlie's Down Under ........ -- -- --
---------- ---------- ----------
Total ........................... 4,686,000 2,250,000 5,000,000
Less: Allowance for doubful
collection of amounts
due from CQC ............ -- -- --
---------- ---------- ----------
$4,686,000 $2,250,000 $5,000,000
========== ========== ==========
June 30, 1995
-------------------------------------------------------------------------------
Current Noncurrent Notes
Receivables Receivables Receivable
----------- ----------- -----------
Former Stockholders of the
Company .......................... $ 25,000 $ 165,000 --
BGI .............................. 608,000 -- $ 4,416,000
Sunset Coin ...................... 103,000 -- --
Becker Vending ................... 10,000 -- --
Becker Enterprises ............... 1,000 -- --
CQC .............................. 392,000 -- 1,200,000
BGG:
Charlie's Lakeside ........... (7,000) -- --
Charlie's Bar ................ 6,000 -- --
Cantina Charlie's ............ 9,000 -- --
Cariba Charlie's ............. 11,000 75,000 --
Charlie's Saloon ............. 12,000 -- --
Charlie's Down Under ......... 42,000 -- --
----------- ----------- -----------
Total ............................ 1,212,000 240,000 5,616,000
Less: Allowance for doubful
collection of amounts
due from CQC ............. (392,000) -- (1,200,000)
----------- ----------- -----------
$ 820,000 $ 240,000 $ 4,416,000
=========== =========== ===========
Management Fee Subordinated
and Accounts Notes Notes
Payable Payable Payable
---------- ---------- ----------
Former Stockholders of the
Company ........................... $ 3,000 -- $5,000,000
BGI ............................... 3,287,000 -- --
Sunset Coin ....................... -- $2,250,000 --
Becker Vending .................... -- -- --
Becker Enterprises ................ -- -- --
CQC ............................... -- -- --
BGG:
Charlie's Lakeside ............ -- -- --
Charlie's Bar ................. -- -- --
Cantina Charlie's ............. -- -- --
Cariba Charlie's .............. -- -- --
Charlie's Saloon .............. -- -- --
Charlie's Down Under .......... -- -- --
---------- ---------- ----------
Total ............................. 3,290,000 2,250,000 5,000,000
Less: Allowance for doubful
collection of amounts
due from CQC .............. -- -- --
---------- ---------- ----------
$3,290,000 $2,250,000 $5,000,000
========== ========== ==========
CHSC owns the land on which the Company's administrative offices are located
and, prior to the Reorganization, CLC owned the land on which the Company's
operations are located. Rent expense paid to CHSC and CLC and included in
results of operations of the Company was $217,000, $191,000 and $343,000, for
the years ended June 30, 1996, 1995 and 1994, respectively. The rental fees
include the cost of insurance, taxes and common area maintenance on the land.
Receivables from BGG, stockholders of the Company and BGI bear interest at 8.0%,
4.5% and 6.0%, respectively. Interest income from related parties was $245,000,
$168,000 and $64,000 for the years ended June 30, 1996, 1995 and 1994,
respectively.
In anticipation of the January 1, 1994 termination of the Company's S
corporation election, on December 24, 1993, the Company distributed $5,000,000
to its stockholders, representing previously taxed, undistributed income. This
distribution was immediately loaned back to the Company by the stockholders in
the form of subordinated notes payable, which bear interest at an annual rate of
10%, payable monthly, with the entire principal amount due on January 1, 2001.
Interest expense incurred under related-party notes was $508,000, $507,000 and
$266,000 for the years ended June 30, 1996, 1995 and 1994, respectively.
In May, 1995, CQC borrowed $1,200,000 from AC in order to have funds to make the
semi-annual interest payment due on the CQC Notes. The borrowing was executed as
an uncollateralized note payable to AC due May, 1996 with interest at the rate
of 5.56%. Due to the current financial condition of CQC, management has
determined that collectibility of the note, and of other advances of $301,000
(1995) and $692,000 (1996) made to CQC, is doubtful. Accordingly, provisions
were made to fully reserve the advances and note payable and losses have been
recorded in the accompanying financial statements as payments under guarantee
obligations.
The Company has loaned to BGI an aggregate of approximately $4,416,000 to fund
BGI's operating expenses from June 1994 through March 1995. The advances are
interest bearing and have been classified as non-current based on Management's
expectation for the timing of repayments from BGI. At June 30, 1996, the Company
owed BGI approximately $4,682,000 in accrued management fees. Under the terms of
the Indenture governing the AC Notes, these fees cannot be paid to BGI until a
specified fixed charge coverage ratio is achieved.
Due to the decision to suspend development of CQC's riverboat casino project and
sell its assets, the majority of BGI's management and administrative services
are anticipated to benefit AC in the future. Accordingly, in late March 1995,
BGI transferred approximately 40 employees involved in accounting and
administrative functions from BGI to AC. These employees were originally
employees of AC and were transferred to BGI in June 1994, when the
Reorganization became effective. In connection with this transfer, in October
1995, the Company temporarily reduced the amount of the BGI management fee to a
net 1.0% of AC's gross revenues (previously 5.0% of gross revenues) based on the
reduction in services it will receive from BGI in the future.
Included in other revenues is income from management and accounting services
performed by the Company for SC and BGG of $281,000 for the year ended June 30,
1994.
The Company's president operates a sole proprietorship under the name "Becker
Vending" which places arcade, cigarette, music and other vending machines at
Arizona Charlie's. The Company provides nominal collection and accounting
services to Becker Vending in connection with these machines. The Company does
not receive any rental fee or other payment from Becker Vending in connection
with these agreements. Becker Vending retains all amounts deposited in its
vending machines. Becker Vending also sells to the Company cigarettes, candy and
similar items for resale in the Arizona Charlie's gift shop.
10.Contingencies:
The Company is subject to various litigation and claims which arise in the
ordinary course of its business. In the opinion of management, after
consultation with legal counsel, the disposition of all such pending litigation
and claims will not have a material effect on the Company's results of
operations, cash flows, or financial position.
11. Defined Contributions Plan:
The Company has adopted a 401(k) Defined Contribution Plan (the "Plan") covering
substantially all of its employees. Eligible employees may contribute up to 10%
of their annual compensation to the Plan, up to certain limits prescribed by the
Internal Revenue Service. The Company matches 25% of each eligible employee's
contributions up to a maximum of 6% of their individual earnings. In addition,
the Company contributes an amount equal to 2% of each participant's earnings.
The Plan went into effect July 1, 1990.
The Company recorded charges for contributions of $495,000, $395,000 and
$350,000 for the years ended June 30, 1996, 1995 and 1994, respectively.
12. Fair Value of Financial Instruments:
The estimated fair value of the Company's financial instruments have been
determined by the Company using available market information and appropriate
valuation methodologies. The carrying amounts of cash and cash equivalents,
accounts receivable, accounts payable, capital lease obligations and notes
payable approximate their respective fair values due to the short-term
maturities and approximate market interest rates of these instruments.
Management is unable to determine a fair value for the outstanding $55,000,000
principal amount of 12% First Mortgage Notes due November 15, 2000 of Arizona
Charlie's, Inc. (the "AC Notes") or the outstanding $20,000,000 principal amount
($17,526,000 carrying amount at June 30, 1996) of 12% First Mortgage Notes due
November 15, 2000 of Capitol Queen and Casino, Inc. (the "CQC Notes"), which are
guaranteed by AC. It is not practicable to determine the fair value of these
financial instruments due to the debt covenant violations and related
uncertainties involved in negotiations with the holders of AC Notes and CQC
Notes, as more fully discussed in Note 2.
REPORT OF INDEPENDENT ACCOUNTANTS
------------
To the Board of Directors
Sunset Coin, Inc.
We have audited the financial statements and the financial statement schedule of
Sunset Coin, Inc. (a wholly owned subsidiary of Becker Gaming, Inc.) listed in
Item 14(a) of this Form 10-K. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sunset Coin, Inc. as of June
30, 1996 and 1995, and the results of its operations and its cash flows for each
of the three years in the period ended June 30, 1996 in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
The accompanying financial statements have been prepared assuming that Sunset
Coin, Inc. will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company is obligated as a guarantor under indebtedness
of Arizona Charlie's, Inc. ("AC"), a company affiliated through common
ownership, and such indebtedness is in default of covenants. AC is currently
negotiating a restructuring of its indebtedness and management's plans are
described in Note 2. Should AC be unsuccessful in modifying the indebtedness,
the Company may be required to then satisfy its guarantee obligation. The
Company does not have sufficient resources available to satisfy such obligation.
These matters raise substantial doubt about the ability of Sunset Coin, Inc. to
continue as a going concern. The final outcome of these matters is not presently
determinable and the June 30, 1996 financial statements of the Sunset Coin, Inc.
do not include any adjustment that might result from the outcome of this
uncertainty.
As discussed in Note 3 to the financial statements, AC owes the Company
approximately $2,250,000 resulting from advances made by the Company to AC. Due
to the financial condition of AC, as described above, management of the Company
believes it is reasonably possible that a portion of the notes receivable from
AC will be uncollectible. However, an estimate of the loss cannot presently be
determined.
Las Vegas, Nevada
August 9, 1996
================================================================================
SUNSET COIN, INC.
(A Wholly Owned Subsidiary Of Becker Gaming, Inc.)
BALANCE SHEETS
As Of June 30, 1996 And 1995
(Dollars In Thousands)
================================================================================
ASSETS
1996 1995
------- -------
Current assets:
Cash ............................................. $ 1,122 $ 506
Current portion of notes receivable, net ......... 117 175
Notes receivable from related party .............. 2,250 2,250
Other receivables ................................ 274 146
Prepaid expenses ................................. 46 46
------- -------
Total current assets ......................... 3,809 3,123
------- -------
Property and equipment:
Building and leasehold improvements .............. 174 461
Furniture, fixtures and equipment ................ 2,885 2,984
------- -------
3,059 3,445
Less, accumulated depreciation ................... (1,370) (1,710)
------- -------
Net property and equipment ................ 1,689 1,735
------- -------
Notes receivable, less current portion, net ........ 194 267
Advances to related parties ........................ 111 86
Other assets, less accumulated amortization
of $24 (1996) and $19 (1995) ..................... 88 138
------- -------
Total other assets ........................... 393 491
------- -------
Total assets ................................. $ 5,891 $ 5,349
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
1996 1995
------ ------
Current liabilities:
Trade accounts payable ................................. $ 44 $ 69
Accrued expenses ....................................... 608 284
Current portion of long- term debt ..................... 279 255
------ ------
Total current liabilities ........................ 931 608
------ ------
Long-term liabilities:
Long-term debt, less current portion .................. 502 664
Subordinated notes payable to
prior stockholders .................................. 3,000 3,000
------ ------
Total liabilities .................................. 4,433 4,272
------ ------
Commitments and contingencies
Stockholder's equity:
Common stock, no par value, 2,500 shares
authorized, 400 shares issued and outstanding ......... 27 27
Retained earnings ...................................... 1,431 1,050
------ ------
Total stockholder's equity ......................... 1,458 1,077
------ ------
Total liabilities and stockholder's
equity ............................................. $5,891 $5,349
====== ======
The accompanying notes are an integral part of these financial statements.
================================================================================
SUNSET COIN, INC.
(A Wholly Owned Subsidiary Of Becker Gaming, Inc.)
STATEMENTS OF INCOME
(Dollars In Thousands)
================================================================================
Year Ended
June 30,
----------------------------------------
1996 1995 1994
----------- ----------- -----------
Revenues:
Slot route:
From locations controlled by $2,370 $2,331 $2,333
related parties
Other 153 279 375
Slot service fees:
From related 93 77 71
parties
Other 33 55 80
----------- ----------- -----------
Total revenues 2,649 2,742 2,859
Operating expenses:
Slot route and service 1,311 1,112 984
General and 86 103 132
administrative
Management fee - Arizona 88
Charlie's, Inc. - -
Management fee - 137 150 14
Becker Gaming, Inc.
Depreciation and 298 249 308
amortization
----------- ----------- -----------
Total operating 1,832 1,614 1,526
expenses
----------- ----------- -----------
Operating income 817 1,128 1,333
----------- ----------- -----------
Other income (expense):
Interest income 171 146 62
Interest expense (398) (356) (189)
Rental and other 102 101
income -
Net loss on sales of (115) (13) (9)
equipment
----------- ----------- -----------
Total other income (240) (122) (136)
(expense)
----------- ----------- -----------
Income before 577 1,006 1,197
income taxes
Provision for income taxes (196) (318) (187)
----------- ----------- -----------
Net income $381 $688 $1,010
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
================================================================================
SUNSET COIN, INC.
(A Wholly Owned Subsidiary Of Becker Gaming, Inc.)
STATEMENT OF STOCKHOLDER'S EQUITY
For The Years Ended June 30, 1996, 1995 And 1994
(Dollars In Thousands)
================================================================================
Common
Stock
-----------------------------------
Shares Amount
------ ------
Balances, June 30, 1993 ................ 400 $ 34
Distributions to stockholders ........ -- --
Adjustment to retained earnings to
reflect the termination of S
corporation election ................ -- (7)
Net income .......................... -- --
------ ------
Balances, June 30, 1994 ................ 400 27
Net income ........................... -- --
------ ------
Balances, June 30, 1995 ................ 400 27
------ ------
Net income .......................... -- --
------ ------
Balance, June 30, 1996 ................. 400 $ 27
====== ======
Retained
Earnings Total
------- -------
Balances, June 30, 1993 .................................. $ 2,625 $ 2,659
Distributions to stockholders .......................... (3,280) (3,280)
Adjustment to retained earnings to
reflect the termination of S
corporation election .................................. 7 --
Net income ............................................ 1,010 1,010
------- -------
Balances, June 30, 1994 .................................. 362 389
Net income ............................................. 688 688
------- -------
Balances, June 30, 1995 .................................. 1,050 1,077
------- -------
Net income ............................................ 381 381
------- -------
Balance, June 30, 1996 ................................... $ 1,431 $ 1,458
======= =======
The accompanying notes are an integral part of these financial statements.
================================================================================
SUNSET COIN, INC.
(A Wholly Owned Subsidiary of Becker Gaming, Inc.)
STATEMENTS OF CASH FLOWS
(Dollars In Thousands)
================================================================================
Year Ended June 30,
-----------------------------
1996 1995 1994
------- ------- -------
Cash flows from operating activities:
Net income ................................... $ 381 $ 688 $ 1,010
------- ------- -------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for losses on notes receivable ... 44 44 15
Depreciation and amortization .............. 298 249 308
Net loss on sales of equipment ............. 115 13 9
(Increase) decrease in operating assets
Other receivables ......................... (128) (49) 50
Prepaid expenses .......................... -- (2) 11
Other assets .............................. (6) (59) --
Increase (decrease) in operating liabilities:
Accounts payable .......................... (25) (6) 70
Accrued expenses .......................... 324 260 (15)
------- ------- -------
Total adjustments ...................... 622 450 448
------- ------- -------
Net cash provided by operating
activities ............................ 1,003 1,138 1,458
------- ------- -------
Cash flows from investing activities:
Capital expenditures ......................... (208) (1,142) (232)
Proceeds from sales of equipment ............. 12 26 209
Decrease (increase) in advances to
related parties ............................. (72) (2,154) 48
Issuance of notes receivable ................. -- (25) (321)
Repayments of notes receivable ............... 88 161 415
------- ------- -------
Net cash provided by (used in)
investing activities .................. (180) (3,134) 119
------- ------- -------
Cash flows from financing activities:
Proceeds from notes payable .................. 109 738 --
Principal payments on notes payable .......... (316) (176) (211)
Proceeds from subordinated notes payable
to stockholders ............................. -- -- 3,000
Distributions to prior stockholders .......... -- -- (3,280)
------- ------- -------
Net cash used in financing activities .. (207) 562 (491)
------- ------- -------
Net increase (decrease) in cash ........ 616 (1,434) 1,086
Cash, beginning of year ........................ 506 1,940 854
------- ------- -------
Cash, end of year .............................. $ 1,122 $ 506 $ 1,940
======= ======= =======
Supplemental cash flow disclosures:
Interest paid ................................. $ 395 $ 352 $ 190
======= ======= =======
Assets acquired by incurring notes payable .. $ 69 $ -- $ --
======= ======= =======
Income taxes paid ............................. $ -- $ 102 $ 187
======= ======= =======
Assets acquired by forgiveness of
accounts receivable .......................... $ 49 $ -- $ --
======= ======= =======
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
SUNSET COIN, INC.
(A Wholly Owned Subsidiary Of Becker Gaming, Inc.)
NOTES TO FINANCIAL STATEMENTS
----------
Summary Of Significant Accounting Policies:
Nature Of Operations
- --------------------
Sunset Coin, Inc. ("SC" or the "Company") operates a slot route in Las Vegas,
Nevada. The Company owns slot machines which it places in licensed locations. In
addition, the Company provides slot machine maintenance services to other owners
of slot machines pursuant to service agreements. At June 30, 1996, the Company
had route and service agreements with 26 slot locations which have between 4 and
35 slot machines each.
In connection with the financing transaction more fully discussed in Note 8, the
stockholders of SC exchanged all of their stock in the Company for stock of
Becker Gaming, Inc. ("BGI") (the "Reorganization"), and effective June 1, 1994,
SC became a wholly owned subsidiary of BGI. BGI has no independent business
activities other than providing management and administrative services to, and
exploring and developing business opportunities for, its subsidiaries, and
serves as a holding company for SC and the following entities:
o Arizona Charlie's, Inc. ("AC"), a Nevada corporation which
operates a Las Vegas hotel and casino.
o Capitol Queen & Casino, Inc. ("CQC"), a Missouri corporation
in the development stage of construction of a riverboat casino in
Jefferson City, Missouri (the "Capitol Queen").
o Becker Gaming Group ("BGG"), a Nevada corporation which (together with
its wholly owned subsidiary, Innerout, Inc.) owns and operates
restaurants and bars in Las Vegas under the "Charlie's" name, each of
which offers gaming machines.
Prior to the Reorganization, certain services to the Company (primarily related
to executive compensation, accounting personnel, administration and data
processing expenses) were provided by AC and charged to the Company at an amount
which approximated cost. However, effective June 1, 1994, this arrangement with
AC was terminated (although AC will continue to provide certain administrative
services to SC) and the Company became subject to the payment of a management
fee BGI in connection with executive and administrative services equal to 5% of
the Company's gross operating revenues.
Revenue
- -------
The primary source of revenue is from slot route participation agreements with
unaffiliated locations in which the Company recognizes as slot revenue a
predetermined percentage (operator's share) of the net win from Company-owned
machines at the slot locations. In accordance with industry practice, net win
from slot activities consists of the slot drop less jackpots and fills. The
percentage of the net win that the Company and the slot locations receive is
determined by individual participation agreements between the parties.
In addition, the Company also generates revenue under slot service agreements.
Under the agreements, the Company receives a fixed fee and certain cost
reimbursements in exchange for maintaining proprietor-owned slot machines.
The Company's participation agreements and slot service agreements range between
1 and 9 years in length and expire, subject to renewal, at various dates through
2003. At June 30, 1996, 254 (approximately 90%) of the machines operated or
serviced by the Company were installed at unaffiliated locations controlled by
the stockholders of BGI (as lessor), through restrictive lease provisions.
Property And Equipment, And Depreciation
- ----------------------------------------
Property and equipment are stated at cost. Expenditures for additions, renewals
and betterments are capitalized; expenditures for repairs and maintenance are
charged to expense as incurred. Upon retirement or disposal of assets, the cost
and accumulated depreciation are eliminated from the accounts and the resulting
gain or loss is credited or charged to income. Depreciation is computed by
either the straight-line or declining balance method over estimated useful lives
of 5 to 10 years for furniture, fixtures and equipment or, for buildings and
leasehold improvements, the lesser of the useful life or the lease term.
Cash Equivalents And Concentration Of Credit Risk
- -------------------------------------------------
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. The Company has cash on deposit
with financial institutions in excess of federally insured amounts.
Income Tax Status
- -----------------
Prior to 1994, the Company was taxed under Section 1362 (Subchapter S) of the
Internal Revenue Code, which provides that, in lieu of corporate income taxes,
the stockholders are taxed on their proportionate share of the Company's taxable
income or loss. Therefore, these financial statements do not include any
provision or liability for corporate income taxes for the periods prior to
December 31, 1993.
Effective January 1, 1994, the Company terminated its S corporation election and
adopted Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS 109"). Under SFAS 109 deferred tax assets and liabilities
are recognized for the expected future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. The adoption of SFAS 109 did not have a material
impact on the Company's financial position or results of operations.
In connection with the Reorganization, beginning June 1, 1994, the Company is
included in the consolidated federal income tax returns filed by BGI. SC's tax
allocation is based on the amount of tax it would incur if it filed a separate
return, except the Company does not receive any benefit from carry-backs to
prior years.
Use of Estimates in the Preparation of Financial Statements
- -----------------------------------------------------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates.
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"). AC
is in default of certain covenants under the AC Notes as of June 30, 1996. In
addition, AC has guaranteed the payment of interest and principal of notes
payable issued by CQC, of which $20,000,000 principal amount are outstanding at
June 30, 1996. 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. A
proposed restructuring plan therefore contemplates (i) the modification of
covenants under the AC Notes to cure the current defaults and (ii) the issuance
of additional AC Notes to fulfill AC's guarantee obligation for remaining
principal and accrued interest of the CQC Notes after applying sale proceeds.
However, no satisfactory offers for the riverboat are currently available, and
no agreement has been reached with the holders of the AC Notes and CQC Notes
regarding the proposed restructuring plan.
Should AC be unable to complete its restructuring plan, it will not have the
financial resources to repay the AC Notes and honor its guarantee obligation
under the CQC Notes. The Company would thus likely be required to honor its
guarantee obligation of the AC Notes, and the Company does not have sufficient
resources to satisfy such obligation. Accordingly, these matters raise
substantial doubt about the ability of the Company to continue as a going
concern. The final outcome of these matters is not presently determinable and
the June 30, 1996 financial statements of the Company do not include any
adjustment that might result from the outcome of this uncertainty.
3. Related-Party Transactions:
In anticipation of the January 1, 1994 termination of the Company's S
corporation election, on December 24, 1993, the Company distributed $3,000,000
to its stockholders, representing previously taxed, undistributed income. This
distribution was immediately loaned back to the Company by the stockholders in
the form of subordinated notes payable, which bear interest at an annual rate of
10%, payable monthly, with the entire principal amount due on January 1, 2001.
Interest expense incurred by SC under the notes payable to prior shareholders
was $300,000, $300,000 and $150,000 for the years ended June 30, 1996, 1995 and
1994, respectively.
The payment of the SC stockholder notes is subordinated to any payments required
to be made by SC under its guarantee of the AC Notes.
The Company is involved in numerous other transactions with companies related
through common ownership. Such related-party transactions are summarized as
follows:
Arizona Charlie's, Inc.
- ----------------------- June 30,
1996 1995
---- ----
Uncollateralized notes receivable from AC
(interest at 5.56%) due May 1997 ......... $ 2,250,000 $ 2,250,000
=========== ===========
Interest receivable from AC .................. 169,000 44,000
======= ======
Payables to AC .............................. (46,000) (98,000)
======= =======
The uncollateralized notes receivable from AC result from 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 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
notes receivable at June 30, 1996. Interest earned by SC on the notes receivable
from AC was $125,000, $44,000 and $-0- for the years ended June 30, 1996, 1995
and 1994, respectively. The interest receivable from AC and payables to AC are
included in other receivables and advances to related parties, respectively.
Prior to the Reorganization, AC provided accounting, general and administrative
services for the Company. Additionally, AC has and will continue to provide
security personnel, and safeguard the coin and currency used in SC's route
operations.
In connection with these services, the Company paid AC management fees $88,000
for the year ended June 30, 1994.
Becker Gaming Group
- -------------------
June 30,
1996 1995
---- ----
Advances to BGG ............................... $ 149,000 $ 194,000
========= =========
The Company has executed slot service agreements with each of the BGG
restaurant/bar locations under which SC provides slot machine maintenance and
other services for a fixed fee. Fees paid by BGG to SC under the agreements are
included in slot service fee revenue in the accompanying financial statements
and totaled approximately $93,000, $77,000 and $71,000 in 1996, 1995 and 1994,
respectively.
During 1991, SC purchased the assets of a restaurant/bar facility for
approximately $525,000 for use by BGG. The Company entered into an agreement to
lease (as lessor) the facility (d.b.a. Charlie's Saloon) to BGG under an
agreement which was terminated when the facility was closed due to loss of a
third-party lease on April 21, 1996. In connection with the closing of the
facility, certain leasehold improvements and equipment were abandoned, and the
Company recognized a loss of $101,000 in 1996 representing the net book value of
the related assets. The liquor license from the closed facility will be
transferred to a new BGG location which is anticipated to open in early 1997.
The net investment in the assets leased to BGG for Charlie's Saloon as of June
30, 1996 and 1995 is listed below:
1996 1995
---- ----
Building and improvements ..................... $ -- $ 335,000
Furniture, fixtures and equipment ............. -- 130,000
Liquor license ................................ 60,000 60,000
------ ------
60,000 525,000
Less, accumulated depreciation ................ -- (342,000)
-------- --------
$ 60,000 $ 183,000
========= =========
The terms of the Charlie's Saloon lease required BGG to pay all taxes, normal
maintenance and insurance on the facility, and provided for annual rental
payments to Sunset Coin of $89,000, until the closing date of April 21, 1996.
BGG did not make any rental payments under the lease from the time Charlie's
Saloon opened, through June 30, 1994, and the rentals were forgiven, without
recourse, by the Company. Due to the related-party nature of the above
transaction, SC recognized no income (as lessor) or loss in 1994 in the
accompanying financial statements for this agreement. Total lease payments for
the years ended June 30, 1996 and 1995 included as rental income in the
accompanying financial statements amounted to $64,000 and $89,000, respectively.
The total cost of depreciation expense related to the Charlie's Saloon facility
included in the accompanying financial statements of Sunset Coin totaled
$17,000, $22,000 and $58,000 in 1996, 1995 and 1994, respectively.
In 1995, SC purchased and leased personal property to be used by BGG in one of
its bar operations (d.b.a. Charlie's Bar Down Under). The purchase was financed
with long-term debt, as more fully described in Note 6. The net investment in
the assets leased to Charlie's Down Under as of June 30, 1996 and 1995 is listed
below:
1996 1995
---- ----
Building and improvements ................... $ 174,000 $ 126,000
Furniture, fixtures and equipment ............ 550,000 550,000
------- -------
724,000 676,000
Less, accumulated depreciation ............... (76,000) (15,000)
------- -------
$ 648,000 $ 661,000
========= =========
On April 1, 1995, Charlie's Bar Down Under (the Lessee) entered into a lease
agreement with SC for the above property at an annual lease cost of $95,000. BGG
did not make any rental payments under the lease from the time Charlie's Down
Under opened through March 31, 1996, and the rentals were forgiven, without
recourse, by the Company. Due to the related-party nature of the above
transaction, SC recognized no income (as lessor) or loss through March 31, 1996
in the accompanying financial statements for this agreement. Total lease
payments for the period from April 1, 1996 through June 30, 1996 included in the
accompanying financial statements of Sunset Coin totaled $24,000.
The terms of the Charlie's Down Under lease require BGG to pay all taxes, normal
maintenance and insurance on the facility. The total cost of depreciation
expense related to the Charlie's Bar Down Under facility included in the
accompanying financial statements of SC totaled $61,000 and $15,000 for the
years ended June 30, 1996 and 1995, respectively.
Becker Gaming, Inc.
- -------------------
June 30,
1996 1995
---- ----
Advances to BGI ........................... $8,000 --
======
Management fees payable ................... -- $(10,000)
========
SC pays management fees to BGI at 5% of the gross gaming revenues, effective
with the Reorganization on June 1, 1994. Total management fees included in the
accompanying financial statements were $137,000, $150,000 and $14,000 in 1996,
1995 and 1994, respectively.
4. Other Receivables:
Other receivable at June 30, 1996 and 1995 consist of uncollateralized,
non-interest bearing short-term advances to various proprietors who have entered
into slot route agreements with the Company.
5. Notes Receivable:
Notes receivable consist of loans to various proprietors who have entered into
slot route agreements with the Company. Such advances are primarily used to
finance long-term facility improvements to the slot locations and are as follows
at June 30, 1996 and 1995:
1996 1995
---- ----
Prime plus 2.5% note receivable,
due in weekly payments of $675 including
interest through August 1998, collateralized
by assets of the related slot location .......... $ 75,000 $ 101,000
10% note receivable, due in weekly payments of $650 including interest through
January 2003, personally guaranteed by a stockholder of the related slot
location ........................... 175,000 190,000
Other collateralized and uncollateralized notes with varying interest rates up
to prime plus 2.5%, due at various
dates through December 2003 ........ 149,000 195,000
------- -------
399,000 486,000
Allowance for doubtful accounts (88,000) (44,000)
------- -------
311,000 442,000
Less, current maturities (117,000) (175,000)
-------- --------
$ 194,000 $ 267,000
========= =========
6. Long-Term Debt:
Long-term debt consists of the following at June 30, 1996 and 1995,
respectively:
Prime plus 1.5%, $1.5 million revolving line of credit available through June
1994, (line expired and not renewed); amounts outstanding under the line of
credit at June 30, 1994 were converted to a term note payable with interest and
principal due monthly through June 1998, collateralized by substantially all of
the assets of SC and personal guarantees of the stockholders of Becker
Gaming, Inc. ...................................... $ 113,000 $ 199,000
Prime plus 1.5%, term note payable with interest and principal due monthly
through January 1, 2001, collateralized by security agreement dated July 15,
1994 and a right to lien without notice on all property and deposit accounts of
SC; Borrowings made under a non-revolving line
of credit agreement (see below) ................... 162,000 214,000
Prime plus 2.0%, term note payable with interest and principal due monthly
through April 23, 2000, collateralized by a security agreement dated July 15,
1994 and a right to lien without notice on all property and eposits accounts of
SC. Borrowings made under a non-revolving
line of credit agreement (see below) .............. 262,000 331,000
Prime plus 2.0%, term note payable with interest and principal due monthly
through April 23, 2000, collateralized by a security agreement dated July 15,
1994 and a right to lien without notice on all property and deposit accounts of
SC. Borrowings made under a non-revolving line of credit
agreement (see below) ............................. 119,000 147,000
Prime plus 1.5%, term note payable with interest and principal due monthly
through April 10, 2001, collateralized by security agreement dated October 2,
1995 and a right to lien without notice on all property and deposit accounts of
SC. Borrowings made under a non-revolving line of credit
agreement (see below) ............................. 102,000 --
Other notes payable due in monthly installments
including interest through June 1996 collateralized
by slot machine equipment of the Company and BGG .. 23,000 28,000
------ ------
781,000 919,000
Less, current portion ...................... (279,000) (255,000)
-------- --------
$ 502,000 $ 664,000
========= =========
In July 1994, the Company entered into an agreement with a bank for a $1.2
million non-revolving line of credit. Each advance was evidenced by a separate
promissory note with a maturity date not exceeding 66 months from the date of
the respective advance. The Company was able to request advances through October
28, 1995 at which time the Company's right to receive advances under the
agreement was terminated until the defaults under the AC Notes and CQC Notes are
cured. Advances under the agreement bear interest at rates ranging from 1.5% to
2.0% plus the bank's prime rate.
The $1.2 million non-revolving line of credit includes an acceleration clause
which would cause the full amount of the obligation to become due on demand if a
material adverse change occurs in the SC's financial condition, business
operations or ownership or management.
Maturities of long-term debt at June 30, 1996 are as follows:
1997 $279,000
1998 210,000
1999 177,000
2000 115,000
---- -------
$781,000
========
7. Income Taxes:
The components of the income tax provision are summarized for June 30, 1996,
1995 and 1994 as follows:
1996 1995 1994
---- ---- ----
Current:
Federal ......................... $196,000 $318,000 $187,000
Deferred:
Federal ......................... -- -- --
-------- -------- --------
Total income tax provision $196,000 $318,000 $187,000
======== ======== ========
The components included in determining the provision for income taxes are shown
below:
1996 1995 1994
--------- --------- ---------
Tax provision at federal
income tax statutory rate ..... $ 202,000 $ 342,000 $ 407,000
Income tax liability borne
by stockholders during period
of S corporation status ....... -- -- (220,000)
Other ........................... (6,000) (24,000) --
--------- --------- ---------
Income tax provision
per statements of income $ 196,000 $ 318,000 $ 187,000
========= ========= =========
Differences between the carrying amounts of assets and liabilities for financial
reporting purposes, and the amounts used for income tax purposes were nominal.
Accordingly, deferred taxes have not been recognized.
8. Commitments:
Future minimum operating lease commitments at June 30, 1996, are as follows:
1997 $40,600
1998 40,600
1999 38,600
2000 16,600
2001 15,100
------
$151,500
========
Aggregate rent expense was $40,000, $38,000 and $103,000 in 1996, 1995 and 1994,
respectively.
9. Contingencies:
The Company is subject to various litigation and claims which arise in the
ordinary course of its business. In the opinion of management, after
consultation with legal counsel, the disposition of all such pending litigation
and claims will not have a material effect on the Company's results of
operations, cash flows, or financial position.
10. Employee Benefit Plans:
The Company participates in a 401(k) Defined Contribution Plan (the "Plan")
sponsored by AC which covers substantially all employees of SC. Participants may
contribute up to 10% of their annual compensation to the Plan, up to certain
limits prescribed by the Internal Revenue Service. The Company matches 25% of
each eligible employee's contribution up to a maximum of 6% of their individual
earnings. In addition, the Company contributes an amount equal to 2% of each
participant's earnings. The Plan went into effect July 1, 1990.
The Company recorded charges for contributions of $19,000, $15,000 and $15,000
for the years ended June 30, 1996, 1995 and 1994, respectively.
11.Fair Value of Financial Instruments:
The estimated fair value of the Company's financial instruments have been
determined by the Company using available market information and appropriate
valuation methodologies. The carrying amounts of cash and cash equivalents,
accounts receivable, accounts payable, capital lease obligations and notes
approximate fair values due to the short-term maturities and the approximately
market interest rates of these instruments.
================================================================================
SCHEDULE II
ARIZONA CHARLIE'S, INC.
VALUATION AND QUALIFYING ACCOUNTS
For The Years Ended June 30, 1996, 1995 And 1994
Additions
----------------------
Balance at Charged to Charged to
Beginning Costs and Other
Description of Year Expenses Accounts
----------- ------- -------- --------
Allowance for doubtful accounts:
Year ended June 30, 1996 .............. $1,592,000 $ 601,000 $ --
========== ========== ==========
Year ended June 30, 1995 .............. $ -- $1,592,000 $ --
========== ========== ==========
Year ended June 30, 1994 .............. $ -- $ -- $ --
========== ========== ==========
Deferred Tax Asset Valuation Allowance:
Year ended June 30, 1996 .............. $1,840,000 $ -- $1,482,000
========== ========== ==========
Year ended June 30, 1995 .............. $ 213,000 $ -- $1,627,000
========== ========== ==========
Year ended June 30, 1994 .............. $ -- $ -- $ 213,000
========== ========== ==========
Balance at
End of
Description Deductions Year
----------- ---------- ----
Allowance for doubtful accounts:
Year ended June 30, 1996 ............. $ -- $2,193,000
========== ==========
Year ended June 30, 1995 ............. $ -- $1,592,000
========== ==========
Year ended June 30, 1994 ............. $ -- $ --
========== ==========
Deferred Tax Asset Valuation Allowance:
Year ended June 30, 1996 ............. $ -- $3,322,000
========== ==========
Year ended June 30, 1995 ............. $ -- $1,840,000
========== ==========
Year ended June 30, 1994 ............. $ -- $ 218,000
========== ==========
SCHEDULE II
SUNSET COIN, INC.
VALUATION AND QUALIFYING ACCOUNTS
For The Years Ended June 30, 1996, 1995 And 1994
Additions
------------------------
Balance at Charged to Charged to
Beginning Costs and Other
Description of Year Expenses Accounts
- -------------------------------------- ----------- ----------- -----------
Allowance for doubtful accounts
Year ended June 30, 1996 ............ $ 44,000 $ 44,000 $ --
=========== =========== ===========
Year ended June 30, 1995 ............ $ -- $ 44,000 $ --
=========== =========== ===========
Year ended June 30, 1994 ............ $ 150,000 $ 14,689 $ --
=========== =========== ===========
Balance at
End of
Description Deductions Year
- -------------------------------------- ----------- --------
Allowance for doubtful accounts
Year ended June 30, 1996 ............ $ -- $ 88,000
=========== ========
Year ended June 30, 1995 ............ $ -- $ 44,000
=========== ========
Year ended June 30, 1994 ............ $ 164,689 $ --
=========== ========
EXHIBIT
2.1 Agreement of Reorganization dated November 16, 1993,
by and among Becker Gaming, Inc. ("BGI"), Arizona
Charlie's, Inc. ("Arizona Charlie's"), Sunset
Coin, Inc. ("Sunset Coin"), Becker Gaming Group, Inc.
("Becker Gaming Group"), Capitol Queen & Casino, Inc.
("Capitol Queen"), Charlie's Land Company ("CLC") ,
and each of Ernest A. Becker, III, Ernest A. Becker,
IV, Barry W. Becker and Bruce F. Becker
(collectively, the "Beckers").*
3.1 Articles of Incorporation of Arizona Charlie's.*
3.2 Amended and Restated By-Laws of Arizona Charlie's.*
3.3 Articles of Incorporation of Sunset Coin.*
3.4 Amended and Restated By-Laws of Sunset Coin.*
10.1 Purchase Agreement dated November 15, 1993 among BGI, Arizona
Charlie's, Capitol Queen, Sunset Coin and the purchasers named
therein (the "Purchasers").*
10.2 Indenture dated November 15, 1993 among Arizona Charlie's, as issuer,
Sunset Coin, as guarantor, and IBJ Schroder Bank & Trust Company
("IBJ"), as trustee.*
10.3 Indenture dated November 15, 1993 among Capitol Queen, as issuer,
Arizona Charlie's, as guarantor, and IBJ, as trustee.*
10.4 Fee and Leasehold Deed of Trust, Assignment of Leases and Subleases,
Security Agreement and Fixture Filing dated November 15, 1993 by
Arizona Charlie's and CLC, as grantors, to Land Title of Nevada,
Inc., as trustee, for the benefit of IBJ, as collateral agent.*
10.5 Security Agreement dated November 15, 1993 between
Arizona Charlie's and IBJ, as collateral agent.*
10.6 Stock Pledge Agreement dated November 15, 1993 between Arizona
Charlie's and IBJ, as collateral agent.*
10.7 Collateral Agency Agreement dated November 15, 1993 among Arizona
Charlie's, CLC and IBJ, as trustee and collateral agent.*
10.8 Disbursement and Escrow Agreement dated November 15, 1993 among
Arizona Charlie's and IBJ, as escrow agent, trustee and collateral
agent.*
10.9 Registration Rights Agreement dated November 15, 1993
among Arizona Charlie's, Sunset Coin and the
Purchasers.*
10.10 Registration Rights Agreement dated November 15, 1993
among Capitol Queen, Arizona Charlie's and the
Purchasers.*
10.11 Promissory Notes dated December 24, 1993 made by each
of the Beckers in favor of Arizona Charlie's. *
10.12 Tax Indemnity Agreement dated December 24, 1993 among
Arizona Charlie's, Sunset Coin, Becker Gaming Group
and each of the Beckers. Included at Exhibit G to
Exhibit 2-1 hereof.*
10.13 Form of Management Agreement to be entered into between BGI and each
of Arizona Charlie's, Capitol Queen, Sunset Coin and Becker Gaming
Group. Included at Exhibit I to Exhibit 2-1 hereof.*
10.14 Form of Tax Allocation Agreement to be entered into
between BGI and each of Arizona Charlie's, Sunset
Coin, Becker Gaming Group and Capitol Queen. Included
at Exhibit J to Exhibit 2-1 hereof.*
10.15 Letter Agreement dated September 10, 1993 among BGI, Arizona
Charlie's, Capitol Queen and Ladenburg, Thalmann & Co., Inc., as
placement agent.*
10.16 Airplane lease dated April 18, 1989 between Arizona Charlie's and Las
Vegas Auto Leasing.*
10.17 Lease dated March 1, 1989 between CLC and Arizona
Charlie's.*
10.18 Leases dated May 1, 1988 and August 21, 1990 between Charleston
Heights Shopping Center and Arizona Charlie's.*
10.19 Land Purchase Option Contract dated January 4, 1993
between Linda Ann and Harvey L. McCray and Vernon M.
and Joyce G. Burkhalter, as seller, and R.Q.
Enterprises, as buyer; and Wire Transfer Order and
Closing Document dated July 26, 1993 between Arizona
Charlie's and First Interstate Bank of Nevada.*
10.20 Building Contract dated December 10, 1993 between Arizona Charlie's
and Marnell Corrao & Associates.*
10.21 First Supplemental Indenture dated January 1, 1995 among Arizona
Charlie's, as issuer, Sunset Coin, as guarantor, and IBJ, as trustee.
10.22 First Supplemental Indenture dated January 1, 1995 among Capitol
Queen, as issuer, Arizona Charlie's, as guarantor, and IBJ, as
Trustee.
10.23 Lease agreement between Arizona Charlie's, Inc. and
Bruce F. Becker.