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FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-----------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 (I.R.S. Employer
incorporation or organization) Identification No.)
740 S. Decatur
Las Vegas, Nevada 89107
- ----------------- -----
(Address of principal (Zip Code)
executive offices)
(702) 258-5200
--------------
(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former name, former address and former fiscal year if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of common stock October 31, 1995
- --------------------- --------------
No par value 1,000 shares
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ARIZONA CHARLIE'S, INC.
(A wholly owned subsidiary of Becker Gaming, Inc.)
FORM 10-Q/A
INDEX
PART I, FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Page
ARIZONA CHARLIE'S, INC
Balance Sheets as of September 30, 1995 and June 30, 1995 ............ 1
Statements of Operation and Retained Earnings (Deficit)
for the Three-Month Periods Ended September 30, 1995 and 1994 ..... 2
Statements of Cash Flows for the Three-month Periods Ended
September 30, 1995 and 1994 ....................................... 3
Notes to Financial Statements ........................................ 4
SUNSET COIN, INC
Balance Sheets as of September 30, 1995 and June 30, 1994 ............ 10
Statements of Income and Retained Earnings for the Three-Month
Periods Ended September 30, 1995 and 1994 ......................... 11
Statements of Cash Flows for the Three-month Periods Ended
September 30,1995 and 1994 ........................................ 12
Notes to Financial Statements ........................................ 13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Arizona Charlie's, Inc. .............................................. 18
Sunset Coin, Inc. .................................................... 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................. 26
Item 6. Exhibits and Reports on Form 8-K .............................. 26
SIGNATURE .............................................................. 27
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ARIZONA CHARLIE'S, INC.
(A Wholly Owned Subsidiary Of Becker Gaming, Inc.)
BALANCE SHEETS
(Dollars In Thousands)
ASSETS
September 30, June 30,
1995 1995
-------- --------
(Unaudited)
Current assets:
Cash and cash equivalents .................... $ 6,571 $ 5,404
Restricted cash, in escrow account ........... 10 10
Trade and other accounts receivable .......... 405 658
Receivables from related parties party ....... 1,511 820
Notes receivable from related ................ 4,416 4,416
Inventories .................................. 602 661
Prepaid expenses ............................. 969 1,162
-------- --------
Total current assets ...................... 14,484 13,131
-------- --------
Property and equipment:
Building and improvements .................... 37,488 37,485
Furniture and equipment ...................... 22,498 22,609
Land improvements ............................ 1,628 1,628
-------- --------
61,614 61,722
Less, accumulated depreciation ............... (14,129) (13,572)
-------- --------
47,485 48,150
Land ........................................ 208 208
-------- --------
Net property and equipment ................ 47,693 48,358
-------- --------
Other assets:
Receivables from related party, noncurrent ... -- 240
Deposits and other ........................... 536 551
Financing costs, less
accumulated amortization
of $1,018 at September 30, 1995 and
$880 at June 30, 1995 ..................... 2,855 2,993
-------- --------
Total other assets ..................... 3,391 3,784
-------- --------
Total assets ............................ $ 65,568 $ 65,273
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
September 30, June 30,
1995 1995
-------- --------
(Unaudited)
Current liabilities:
Trade accounts payable ....................... $ 2,444 $ 1,449
Accounts payable to related parties ........... 3 3
Accrued expenses .............................. 3,417 3,097
Management fees due Becker Gaming, Inc. ....... 4,144 3,287
Notes payable ................................. 81 121
Notes payable to related party ................ 2,250 2,250
Current portion of obligations
under capital leases ...................... 3 4
-------- --------
Total current liabilities .............. 12,342 10,211
Long-term debt .................................. 55,000 55,000
Subordinated notes payable to
former stockholders ........................ 5,000 5,000
Obligations under
capital leases,
less current portion ....................... 3 4
-------- --------
Total liabilities ..................... 72,345 70,215
-------- --------
Commitments and contingencies Stockholder's
equity (deficit):
Common stock, no par value,
2,500 shares authorized, 1,000
shares issued and outstanding ............ 469 469
Retained earnings (deficit) ................ (7,246) (5,411)
-------- --------
Total stockholder's
equity (deficit) ....................... (6,777) (4,942)
-------- --------
Total liabilities and
stockholder's equity (deficit) ......... $ 65,568 $ 65,273
======== ========
The accompanying notes are an integral part of these financial statements.
================================================================================
ARIZONA CHARLIE'S, INC.
(A Wholly Owned Subsidiary Of Becker Gaming, Inc.)
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS(DEFICIT)
(Dollars In Thousands)
(Unaudited)
Three Months Ended September 30,
1995 1994
-------- --------
Revenues:
Gaming ................................... $ 12,891 $ 9,637
Food and beverage ........................ 3,033 2,165
Hotel .................................... 722 439
Gift shop ................................ 155 120
Other .................................... 299 90
-------- --------
Gross revenues ....................... 17,100 12,451
Less, promotional allowances ............... (1,668) (842)
-------- --------
Net revenues ......................... 15,432 11,609
-------- --------
Operating expenses:
Gaming ................................... 3,539 3,034
Food and beverage ........................ 3,835 2,353
Hotel .................................... 398 315
Gift shop ................................ 107 99
Advertising and promotion ................ 1,176 782
General and administrative ............... 4,798 3,071
Management fee - Becker Gaming, Inc. ..... 857 620
Rent expense paid to related party ....... 54 46
Depreciation and amortization ............ 886 699
-------- --------
Total operating expenses ............. 15,650 11,019
-------- --------
Operating income (loss) .............. (218) 590
-------- --------
Other income (expenses):
Interest income .......................... 69 244
Interest expense ......................... (1,714) (1,816)
Interest capitalized ..................... -- 507
Other, net ............................... 28 --
-------- --------
Total other income (expenses) ........ (1,617) (1,065)
-------- --------
Loss before income taxes ............. (1,835) (475)
Provision for income tax ................... -- --
-------- --------
Net loss ............................. (1,835) (475)
Retained earnings(deficit), beginning of
period ................................ (5,411) (475)
-------- --------
Retained earnings(deficit), end of period .. $ (7,246) $ (950)
======== ========
The accompanying notes are an integral part of these financial statements.
================================================================================
ARIZONA CHARLIE'S, INC.
(A Wholly Owned Subsidiary Of Becker Gaming, Inc.)
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Three Months Ended September 30,
1995 1994
-------- --------
Cash flows from operating activities:
Net loss ....................................... ($ 1,835) ($ 475)
Adjustments to reconcile net income
(loss) to net cash provided by operating
activities:
Provision for losses on related party
receivables ................................. 1,149 --
Depreciation and amortization ................ 886 699
(Gain) loss on sale of equipment ............. -- 2
(Increase) decrease in operating assets:
Receivables .................................. (1,358) 234
Inventories .................................. 59 (74)
Prepaid expenses ............................. 193 35
Deposits and other ........................... 15 (74)
Increase (decrease) in operating liabilities:
Accounts payable, net of amounts for capital
expenditures ................................ 995 (655)
Management fees due to Becker Gaming, Inc. ... 857 620
Accrued expenses ............................. 320 1,655
-------- --------
Total adjustments .......................... 3,116 2,442
-------- --------
Net cash provided by operating activities .. 1,281 1,967
-------- --------
Cash flows from investing activities:
Capital expenditures, net of amounts in
accounts payable ............................ (74) (12,308)
Increase in related party receivables ........ -- (1,848)
Net (additions to) reductions in
restricted cash equivalents ................. -- 12,126
Proceeds from assets sales .................... 2 --
Net cash used in investing activities ...... (72) (2,030)
-------- --------
Cash flows from financing activities:
Principal payments on notes payable .......... (40) (60)
Proceeds from subordinated notes payable to
stockholders ................................ -- (9)
Payments under capital lease obligations ..... (2) --
Net cash used in financing activities ...... (42) (69)
-------- --------
Net increase (decrease) in cash and cash
equivalents .............................. 1,167 (132)
Cash and cash equivalents, beginning of the period 5,404 4,014
-------- --------
Cash and cash equivalents, end of the period ..... $ 6,571 $ 3,882
======== ========
Supplemental cash flow disclosures:
Interest paid, net of amounts capitalized ... $ 129 $ 132
======== ========
Income taxes paid ........................... $ 0 $ 136
======== ========
Capital lease obligations incurred .......... $ 0 $ 9
======== ========
The accompanying notes are an integral part of these financial statements.
================================================================================
ARIZONA CHARLIE'S, INC.
(A wholly owned subsidiary of Becker Gaming, Inc.)
NOTES TO FINANCIAL STATEMENTS
----------
1) Basis of Presentation:
Arizona Charlie's, Inc. ("AC") is a wholly owned subsidiary of Becker
Gaming, Inc. ("BGI"). The accompanying financial statements of AC have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments and normal
recurring accruals considered necessary for a fair presentation have been
included. Operating results for the three-month period September 30, 1995 are
not necessarily indicative of the results that may be expected for the year
ended June 30, 1996. The unaudited financial statements should be read in
conjunction with the financial statements and footnotes included in AC's annual
report on Form 10-K for the year ended June 30, 1995.
2) Denial of Missouri Gaming License Application of Capitol Queen &
Casino, Inc.:
Sunset Coin, Inc. ("SC"), a wholly owned subsidiary of BGI, has
guaranteed 12% First Mortgage Notes due November 15, 2000, of AC, until such
time as AC completes an expansion of its casino facilities (which it has done)
and obtains a specified fixed charge coverage ratio, as defined in the indenture
governing the AC First Mortgage Notes. AC, in turn, has guaranteed the 12% First
Mortgage Notes (the "CQC Notes") due November 15, 2000 of Capitol Queen &
Casino, Inc. ("CQC"), another wholly owned subsidiary of BGI, until such time as
CQC is licensed to conduct gaming in Missouri.
CQC was formed to develop, own and operate the "Capitol Queen"
riverboat casino in Jefferson City, Missouri. On September 28, 1994, CQC was
notified that its application for a gaming license was rejected by the Missouri
Gaming Commission (the "Commission"). Under the Commission's order, CQC, its
principal owners and affiliated companies cannot reapply for a gaming license in
Missouri prior to September 28, 1996.
The Commission's decision was based on an August 1994 recommendation of
its staff (the "Staff") that CQC's license application be denied without an
investigative review because CQC knowingly failed to disclose material,
substantive information in the application. The Commission did not find that CQC
knowingly failed to disclose information, but did find that the application
contained omissions of a substantive and material nature. Management of CQC
believes that its application was complete and accurate. Moreover, CQC has fully
disclosed the information cited by the Staff in post-application filings, other
public documents and communications with the Staff, all of which management
considers to be part of the licensing and related investigative process. Based
on the advice of legal counsel, CQC believes that the Commission acted outside
its authority in rejecting the application without a formal investigation.
On October 31, 1994, CQC petitioned the Cole County Circuit Court in
Jefferson City for a writ of mandamus. In response to the petition, the court
issued an order declaring that by denying CQC's application without first
conducting an investigation and by deliberating in a closed session, the
Commission had violated Missouri gaming and open meeting laws. The court issued
a preliminary writ of mandamus declaring the Commission's decision void and
ordering the Commission to immediately commence a full investigation and
thereafter to act on CQC's application. The court ordered the Commission to show
cause within thirty days why the preliminary writ should not be made permanent.
Initially, the Commission did not respond directly to the Circuit
Court's order to show cause, but instead filed two actions, both unsuccessful,
in the Missouri Court of Appeals for the Western District. On November 16, 1994,
the Commission petitioned the Court of Appeals for a writ of prohibition against
the Circuit Court, contending, among other things, that CQC was not entitled to
judicial relief because it had not exhausted its administrative remedy of an
evidentiary hearing before the Commission. The Court of Appeals initially issued
a preliminary writ in prohibition staying further proceedings in the Circuit
Court. However, in an opinion issued on April 18, 1995, the Court of Appeals
concluded that its preliminary writ of prohibition had been improvidently
granted, quashed the preliminary writ, and denied the Commission's request for a
permanent writ, relegating the Commission to its remedies in the Circuit Court.
On December 13, 1994, the Commission also filed an appeal of the Circuit Court's
order. On December 23, CQC moved to dismiss the appeal on the grounds that the
preliminary writ of mandamus was not a final order and therefore was not
appealable. On January 5, 1995, the Court of Appeals granted CQC's motion and
dismissed the appeal.
On June 26, 1995, the Circuit Court issued a peremptory (permanent)
writ of mandamus similar to the preliminary writ, declaring the Commission's
order void and ordering the Commission to proceed with an investigation of CQC's
application "with all deliberate speed." On July 21, 1995, the Commission
appealed the Circuit Court's decision to the Missouri Court of Appeals for the
Western District. That appeal is pending.
On November 1, 1994, concurrent with its efforts to obtain judicial
relief, CQC (with BGI as a co-party) requested an administrative hearing
pursuant to the Missouri gaming statutes, under which a denied applicant may
request an evidentiary hearing before a Commission appointed hearing officer.
The hearing officer's decision is subject to review by the Commission, and the
Commission's decision is in turn subject to judicial review. The Commission
filed an answer on November 29, alleging, among other things, that CQC is not
entitled to an administrative hearing because CQC had not been investigated. On
December 22, because the Commission had not appointed a hearing officer or
otherwise responded to CQC's request for a hearing, CQC moved the Commission to
appoint a hearing officer and establish a procedural schedule. The Commission
did not respond to this motion. However, in March 1995, CQC's counsel was
notified by a member of the Commission's staff that he had been appointed
hearing officer in the case. Because this person appears to have participated in
the staff's recommendation that CQC's license be denied, CQC moved on March 31
for the appointment of an impartial, independent hearing officer. The
Commission's attorney filed a response in opposition to this motion on April 12,
but the Commission has not responded to it. Instead, on August 10, 1995, the
hearing officer issued an order proclaiming his ability to proceed impartially
and purporting to deny the motion. Hearing dates have been vacated by
stipulation, and, after the Circuit Court's order voiding the Commission's
decision appeared to make the administrative proceeding premature, postponed
indefinitely.
On March 24, 1995, CQC filed an action against the Commission in the
Cole County, Missouri, Circuit Court, alleging that the Commission had violated
Missouri's open meeting law by deliberating in a closed session before issuing
its decision denying CQC's license. The petition requested an order voiding the
Commission's decision. On March 27, as a protective measure against possible
arguments that Cole County is not the proper venue, CQC filed a substantively
identical action in the St. Louis County Circuit Court. In April, the Commission
filed answers to both complaints denying that it had violated the open meeting
law. On June 1, CQC moved for summary judgment in the Cole County case. In its
response, the Commission stated that it "did not deliberately intend to
circumvent" the open meeting law but had deliberated in closed session based on
erroneous advice of counsel. The Commission argued that the closed session could
nevertheless be justified under statutory exceptions allowing agencies to meet
privately with their lawyers to discuss confidential information and litigation.
A hearing on the motion for summary judgment has been set for December 19. 1995.
In January 1995, CQC engaged in settlement discussions initiated by the
Missouri Attorney General's office, legal counsel for the Commission, with
respect to the civil matters involving the Commission. The discussions, which
terminated in March 1995, were resumed in August 1995 and were expanded to
include the misdemeanor charges filed by the Missouri Attorney General. While
CQC and its lawyers continue to seek a negotiated settlement to the disputes
with the Commission and the Attorney General, the discussions have again been
terminated by the Attorney General's office.
At the time CQC was notified of the Staff's position, construction of
the riverboat contemplated under the project being developed by CQC was almost
completed. CQC had also obtained the necessary permits for the land-based
development portion of the project and had performed certain dredging and other
site preparation work. In August 1994, CQC suspended all further land site
development activity pending resolution of the review of its license
application. Management of CQC believes that the Commission's subsequent ruling
in September 1994 makes further development of the project not feasible because
of significant delays in the ability to operate the riverboat casino, either
through appeal of the decision or expiration of the two-year probation period.
Accordingly, on September 29, 1994, management decided to suspend further
development of the Capitol Queen project. As a result of that decision, costs
associated with the development of the project which had been deferred during
the development stage were written-off in the fourth quarter of the fiscal year
ended June 30, 1994, and the land site and riverboat were written down to their
estimated net realizable value.
As of January 1, 1995, CQC's obligations under the Indenture governing
the CQC Notes were amended with the requisite consent of the holders of the CQC
Notes. CQC's previous obligations to complete and open the Capitol Queen have
been eliminated and CQC has agreed to a two-step plan to repay the CQC Notes.
The first step, which was consummated on January 17, 1995, involved the
repurchase of $20 million principal amount of the CQC Notes at 101% of such
principal amount plus accrued and unpaid interest with funds held in the
restricted project escrow account. The second step contemplates the sale of
CQC's assets and the use of the proceeds therefrom to repurchase the $20 million
principal amount of CQC Notes remaining outstanding at a purchase price of 101%
of principal plus accrued and unpaid interest. CQC's assets consist principally
of its riverboat, the Jefferson City land site, and development rights under a
Riverboat Development Agreement (the "Development Agreement") with Jefferson
City.
CQC has entered into an Asset Purchase Agreement for the sale of its
assets to Aerie Riverboat Casinos of Missouri, Inc. ("Aerie"). The agreement is
subject to several contingencies, one being the approval of the Jefferson City
city council, which as yet has not voted on the issue.
On November 7, 1995, voters in Jefferson City rejected an ordinance
permitting riverboat gambling, reversing the vote of an earlier election in
which Jefferson City voters approved riverboat gambling. Because CQC's
Development Agreement with Jefferson City was entered into pursuant to the
earlier ordinance permitting riverboat gambling, the Company believes that as a
matter of law the 1995 election does not affect the validity of the Development
Agreement. However, it has not yet been determined whether Jefferson City will
honor the Agreement in light of the election without litigation to uphold CQC's
position. Moreover, Aerie is not expected to proceed with the purchase of CQC
assets unless the vote can be nullified or is found to be not applicable to a
project the development of which is the subject of a pre-existing contract with
a given municipality, such as the Capitol Queen is under the Development
Agreement. CQC is exploring its legal options in the event Jefferson City
declines to honor the Development Agreement, but has not reached any decision.
In any event, CQC does not anticipate it will consummate its agreement with
Aerie before December 31, 1995, at which time CQC may terminate the Development
Agreement without penalty. A final judicial determination that the 1995 vote
abrogates the Development Agreement would have a material adverse effect on CQC
and its ability to sell its assets.
CQC is not expected to generate sufficient funds through the sale of
its assets to repurchase all of the outstanding CQC Notes. AC, pursuant to its
guarantee of the CQC Notes, will be liable for the principal of, and interest
on, any remaining outstanding CQC Notes. AC is restricted from selling assets
under the covenants governing its 12% First Mortgage Notes due November 15, 2000
(the "AC Notes"), and management believes that access to additional capital from
other sources is restricted as a result of the above-described circumstances. As
a result, management does not believe that AC (nor SC, as guarantor of the AC
Notes) would have sufficient resources to satisfy such obligation, should it be
necessary.
3) Relationship To Becker Gaming, Inc.:
Due to the decision to suspend development of CQC's riverboat casino
project and sell its assets, the majority of BGI's management and administrative
services are anticipated to benefit AC in the future. Accordingly, in late March
1995, BGI transferred approximately 40 employees involved in accounting and
administrative functions from BGI to AC. These employees were originally
employees of AC and were transferred to BGI in June 1994, when the
Reorganization became effective. The Company has reviewed the amount of the BGI
management fee (currently 5% of gross revenues) and determined that effective
October 1, 1995 an amount equal to 4% of gross revenues will be returned to AC
from BGI for the services that AC provides for BGI's subsidiaries as mentioned
above.
================================================================================
SUNSET COIN, INC.
(A Wholly Owned Subsidiary Of Becker Gaming, Inc.)
BALANCE SHEETS
(Dollars In Thousands)
ASSETS
September 30, June 30,
1995 1995
------- -------
(Unaudited)
Current assets:
Cash .................................................. $ 703 $ 506
Current portion of notes receivable ................... 181 175
Note receivable from related party .................... 2,250 2,250
Other receivables ..................................... 130 146
Prepaid expenses ...................................... 41 46
------- -------
Total current assets .............................. 3,305 3,123
------- -------
Property and equipment:
Building and leasehold improvements ................... 461 461
Furniture, fixtures and equipment ..................... 3,167 2,984
------- -------
3,628 3,445
Less, accumulated depreciation ........................ (1,781) (1,710)
------- -------
Net property and equipment ........................ 1,847 1,735
------- -------
Notes receivable, less current
portion ............................................... 255 267
Advances to related parties ............................. 107 86
Other assets, less accumulated
amortization of $20 at September 30, 1995
and $19 at June 30 , 1995 ............................. 88 138
------- -------
Total assets ...................................... $ 5,602 $ 5,349
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
September 30, June 30,
1995 1995
------ ------
(Unaudited)
Current liabilities:
Trade accounts payable .................................. $ 115 $ 69
Accrued expenses ........................................ 458 284
Current portion of long term debt ....................... 240 255
------ ------
Total current liabilities ............................ 813 608
Long-term liabilities:
Long-term debt, less current portion ................... 599 664
Subordinated notes payable to .......................... 3,000 3,000
former stockholders
------ ------
Total liabilities ................................... 4,412 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 ......................................... 1,163 1,050
------ ------
Total stockholder's equity ......................... 1,190 1,077
------ ------
Total liabilities and stockholder's
equity .............................................. $5,602 $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 AND RETAINED EARNINGS
(Dollars In Thousands)
(Unaudited)
Three Months Ended September 30,
1995 1994
------- -------
Revenues:
Slot route:
From locations controlled
by related parties ........... $ 563 $ 544
Other ........................... 45 69
Slot service fees:
From related parties ............ 24 18
Other ........................... 8 17
------- -------
Total revenues ................ 640 648
Operating expenses:
Slot route and service ............. 302 212
General and administrative ......... 24 44
Management fee - Becker Gaming, Inc. 34 36
Depreciation and amortization ...... 73 56
------- -------
Total operating expenses ........ 433 348
------- -------
Operating income ....................... 207 300
------- -------
Other income (expense):
Interest income .................... 41 25
Interest expense ................... (99) (84)
Other income ....................... 22 25
------- -------
Total other income (expense) .... (36) (34)
------- -------
Net income before income tax ........... 171 266
Provision for income tax ............... (58) (102)
------- -------
Net income ............................. 113 164
Retained earnings, beginning of period . 1,050 363
------- -------
Retained earnings, end of period ....... $ 1,163 $ 527
======= =======
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)
(Unaudited)
Three Months Ended September 30,
1995 1994
------- -------
Cash flows from operating activities:
Net income .................................... $ 113 $ 164
Adjustments to reconcile net
income to net cash provided
by operating activities:
Provision for losses on notes
receivable ................................. -- 5
Depreciation and amortization ............... 73 56
(Increase) decrease in
operating assets
Other receivables ......................... 16 (15)
Prepaid expenses .......................... 5 (3)
Increase (decrease) in operating liabilities:
Accounts payable .......................... 46 (57)
Accrued expenses ......................... 174 6
------- -------
Total adjustments ....................... 314 (8)
------- -------
Net cash provided by
operating activities ................... 427 156
------- -------
Cash flows from investing activities:
Capital expenditures
(135) (29)
Increase in related party notes
receivable ................................... -- (58)
Increase in advances to related
parties ...................................... (21) --
Repayments of notes receivable ................ 6 19
------- -------
Net cash used in investing
activities .............................. (150) (68)
------- -------
Cash flows from financing activities:
Principal payments on notes
payable ...................................... (80) (35)
------- -------
Net cash used in financing
activities .............................. (80) (35)
------- -------
Net increase in cash ...................... 197 53
Cash, beginning of period ......................... 506 1,940
------- -------
Cash, end of period ............................... $ 703 $ 1,993
======= =======
Supplemental cash flow disclosures:
Interest paid ................................. $ 101 $ 189
======= =======
Income taxes paid ............................. $- $ 102
======= =======
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
----------
1) Basis of Presentation:
Sunset Coin, Inc. ("SC") is wholly owned subsidiary of Becker Gaming,
Inc. ("BGI"). The accompanying financial statements of SC are unaudited and have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all adjustments and
normal recurring accruals considered necessary for a fair presentation have been
included. Operating results for the three-month period ended September 30, 1995
are not necessarily indicative of the results that may be expected for the year
ended June 30, 1996. The unaudited financial statements should be read in
conjunction with the financial statements and footnotes including in SC's annual
report on Form 10-K for the year ended June 30, 1995.
2) Denial of Missouri Gaming License Application of Capitol Queen &
Casino, Inc.:
SC has guaranteed the 12% First Mortgage Notes due November 15, 2000,
of Arizona Charlie's, Inc. ("AC"), another wholly owned subsidiary of BGI, until
such time as AC completes an expansion of its casino facilities (which it has
done) and obtains a specified fixed charge coverage ratio, as defined in the
governing Indenture. AC, in turn, has guaranteed the 12% First Mortgage Notes
due November 15, 2000 the "CQC Notes" of Capitol Queen & Casino, Inc. ("CQC"),
another wholly owned subsidiary of BGI, until such time as CQC is licensed to
conduct gaming in Missouri.
CQC was formed to develop, own and operate the "Capitol Queen"
riverboat casino in Jefferson City, Missouri. On September 28, 1994, CQC was
notified that its application for a gaming license was rejected by the Missouri
Gaming Commission (the "Commission"). Under the Commission order, CQC, its
principal owners and affiliated companies cannot reapply for a gaming license in
Missouri prior to September 28, 1996.
The Commission's decision was based on an August 1994 recommendation of
its staff (the "Staff") that CQC's license application be denied without an
investigative review because CQC knowingly failed to disclose material,
substantive information in the application. The Commission did not find that CQC
knowingly failed to disclose information, but did find that the application
contained omissions of a substantive and material nature. Management of CQC
believes that its application was complete and accurate. Moreover, CQC has fully
disclosed the information cited by the Staff in post-application filings, other
public documents and communications with the Staff, all of which management
considers to be part of the licensing and related investigative process. Based
on the advice of legal counsel, CQC believes that the Commission acted outside
its authority in rejecting the application without a formal investigation.
On October 31, 1994, CQC petitioned the Cole County Circuit Court in
Jefferson City for a writ of mandamus. In response to the petition, the court
issued an order declaring that by denying CQC's application without first
conducting an investigation and by deliberating in a closed session, the
Commission had violated Missouri gaming and open meeting laws. The court issued
a preliminary writ of mandamus declaring the Commission's decision void and
ordering the Commission to immediately commence a full investigation and
thereafter to act on CQC's application. The court ordered the Commission to show
cause within thirty days why the preliminary writ should not be made permanent.
Initially, the Commission did not respond directly to the Circuit
Court's order to show cause, but instead filed two actions, both unsuccessful,
in the Missouri Court of Appeals for the Western District. On November 16, 1994,
the Commission petitioned the Court of Appeals for a writ of prohibition against
the Circuit Court, contending, among other things, that CQC was not entitled to
judicial relief because it had not exhausted its administrative remedy of an
evidentiary hearing before the Commission. The Court of Appeals initially issued
a preliminary writ in prohibition staying further proceedings in the Circuit
Court. However, in an opinion issued on April 18, 1995, the Court of Appeals
concluded that its preliminary writ of prohibition had been improvidently
granted, quashed the preliminary writ, and denied the Commission's request for a
permanent writ, relegating the Commission to its remedies in the Circuit Court.
On December 13, 1994, the Commission also filed an appeal of the Circuit Court's
order. On December 23, CQC moved to dismiss the appeal on the grounds that the
preliminary writ of mandamus was not a final order and therefore was not
appealable. On January 5, 1995, the Court of Appeals granted CQC's motion and
dismissed the appeal.
On June 26, 1995, the Circuit Court issued a peremptory (permanent)
writ of mandamus similar to the preliminary writ, declaring the Commission's
order void and ordering the Commission to proceed with an investigation of CQC's
application "with all deliberate speed." On July 21, 1995, the Commission
appealed the Circuit Court's decision to the Missouri Court of Appeals for the
Western District. That appeal is pending.
On November 1, 1994, concurrent with its efforts to obtain judicial
relief, CQC (with BGI as a co-party) requested an administrative hearing
pursuant to the Missouri gaming statutes, under which a denied applicant may
request an evidentiary hearing before a Commission appointed hearing officer.
The hearing officer's decision is subject to review by the Commission, and the
Commission's decision is in turn subject to judicial review. The Commission
filed an answer on November 29, alleging, among other things, that CQC is not
entitled to an administrative hearing because CQC had not been investigated. On
December 22, because the Commission had not appointed a hearing officer or
otherwise responded to CQC's request for a hearing, CQC moved the Commission to
appoint a hearing officer and establish a procedural schedule. The Commission
did not respond to this motion. However, in March 1995, CQC's counsel was
notified by a member of the Commission's staff that he had been appointed
hearing officer in the case. Because this person appears to have participated in
the staff's recommendation that CQC's license be denied, CQC moved on March 31
for the appointment of an impartial, independent hearing officer. The
Commission's attorney filed a response in opposition to this motion on April 12,
but the Commission has not responded to it. Instead, on August 10, 1995, the
hearing officer issued an order proclaiming his ability to proceed impartially
and purporting to deny the motion. Hearing dates have been vacated by
stipulation, and, after the Circuit Court's order voiding the Commission's
decision appeared to make the administrative proceeding premature, postponed
indefinitely.
On March 24, 1995, CQC filed an action against the Commission in the
Cole County, Missouri, Circuit Court, alleging that the Commission had violated
Missouri's open meeting law by deliberating in a closed session before issuing
its decision denying CQC's license. The petition requested an order voiding the
Commission's decision. On March 27, as a protective measure against possible
arguments that Cole County is not the proper venue, CQC filed a substantively
identical action in the St. Louis County Circuit Court. In April, the Commission
filed answers to both complaints denying that it had violated the open meeting
law. On June 1, CQC moved for summary judgment in the Cole County case. In its
response, the Commission stated that it "did not deliberately intend to
circumvent" the open meeting law but had deliberated in closed session based on
erroneous advice of counsel. The Commission argued that the closed session could
nevertheless be justified under statutory exceptions allowing agencies to meet
privately with their lawyers to discuss confidential information and litigation.
A hearing on the motion for summary judgment has been set for December 19. 1995.
In January 1995, CQC engaged in settlement discussions initiated by the
Missouri Attorney General's office, legal counsel for the Commission, with
respect to the civil matters involving the Commission. The discussions, which
terminated in March 1995, were resumed in August 1995 and were expanded to
include the misdemeanor charges filed by the Missouri Attorney General. While
CQC and its lawyers continue to seek a negotiated settlement to the disputes
with the Commission and the Attorney General, the discussions have again been
terminated by the Attorney General's office.
At the time CQC was notified of the Staff's position, construction of
the riverboat contemplated under the project being developed by CQC was almost
completed. CQC had also obtained the necessary permits for the land-based
development portion of the project and had performed certain dredging and other
site preparation work. In August 1994, CQC suspended all further land site
development activity pending resolution of the review of its license
application. Management of CQC believes that the Commission's subsequent ruling
in September 1994 makes further development of the project not feasible because
of significant delays in the ability to operate the riverboat casino, either
through appeal of the decision or expiration of the two-year probation period.
Accordingly, on September 29, 1994, management decided to suspend further
development of the Capitol Queen project. As a result of that decision, costs
associated with the development of the project which had been deferred during
the development stage were written-off in the fourth quarter of the fiscal year
ended June 30, 1994, and the land site and riverboat were written down to their
estimated net realizable value.
As of January 1, 1995, CQC's obligations under the Indenture governing
the CQC Notes were amended with the requisite consent of the holders of the CQC
Notes. CQC's previous obligations to complete and open the Capitol Queen have
been eliminated and CQC has agreed to a two-step plan to repay the CQC Notes.
The first step, which was consummated on January 17, 1995, involved the
repurchase of $20 million principal amount of the CQC Notes at 101% of such
principal amount plus accrued and unpaid interest with funds held in the
restricted project escrow account. The second step contemplates the sale of
CQC's assets and the use of the proceeds therefrom to repurchase the $20 million
principal amount of CQC Notes remaining outstanding at a purchase price of 101%
of principal plus accrued and unpaid interest. CQC's assets consist principally
of its riverboat, the Jefferson City land site, and development rights under a
Riverboat Development Agreement (the "Development Agreement") with Jefferson
City.
CQC has entered into an Asset Purchase Agreement for the sale of its
assets to Aerie Riverboat Casinos of Missouri, Inc. ("Aerie"). The agreement is
subject to several contingencies, one being the approval of the Jefferson City
city council, which as yet has not voted on the issue.
On November 7, 1995, voters in Jefferson City rejected an ordinance
permitting riverboat gambling, reversing the vote of an earlier election in
which Jefferson City voters approved riverboat gambling. Because CQC's
Development Agreement with Jefferson City was entered into pursuant to the
earlier ordinance permitting riverboat gambling, the Company believes that as a
matter of law the 1995 election does not affect the validity of the Development
Agreement. However, it has not yet been determined whether Jefferson City will
honor the Agreement in light of the election without litigation to uphold CQC's
position. Moreover, Aerie is not expected to proceed with the purchase of CQC
assets unless the vote can be nullified or is found to be not applicable to a
project the development of which is the subject of a pre-existing contract with
a given municipality, such as the Capitol Queen is under the Development
Agreement. CQC is exploring its legal options in the event Jefferson City
declines to honor the Development Agreement, but has not reached any decision.
In any event, CQC does not anticipate it will consummate its agreement with
Aerie before December 31, 1995, at which time CQC may terminate the Development
Agreement without penalty. A final judicial determination that the 1995 vote
abrogates the Development Agreement would have a material adverse effect on CQC
and its ability to sell its assets.
CQC is not expected to generate sufficient funds through the sale of
its assets to repurchase all of the outstanding CQC Notes. AC, pursuant to its
guarantee of the CQC Notes, will be liable for the principal of, and interest
on, any remaining outstanding CQC Notes. AC is restricted from selling assets
under the covenants governing the AC Notes, and management believes that access
to additional capital from other sources is restricted as a result of the
above-described circumstances. As a result, management does not believe that AC
a default by AC under its guarantee of the CQC Notes could cause a default under
the AC Notes. SC, persuaded to its guarantee of the AC Notes, will be liable for
the principal of and interest on, any AC Notes which AC is not able to repay.
Management does not believe SC would have sufficient resources to satisfy such
obligation, should it be necessary.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Arizona Charlie's, Inc.
- -----------------------
General
AC's revenues are derived largely from gaming activities at its Arizona
Charlie's casino-hotel, and, to a lessor extent, from food and beverage,
lodging, entertainment and retail sales. AC generally views its non-casino
operations as complementary to its core casino operations. Accordingly, it
utilizes entertainment primarily as a casino marketing tool. Further, AC
maintains food and beverage pricing structures designed to benefit casino
volumes, often resulting in department operating losses. AC seeks to maximize
profits from its hotel operations, however, while maintaining attractive room
rental rates. Gaming revenues represent the net win from gaming wins and losses.
The retail value of accommodations, food and beverage provided to customers
without charge is included in gross revenues and deducted as promotional
allowance.
Results of Operations for the three-months ended September 30, 1995 and 1994
Despite increased revenues for the three-months ended September 30,
1995, results from operations declined for the period, an compared to the same
period in the prior year, as the result of increased operating expenses,
primarily due to higher operating costs associated with operating expanded
facilities. The increase in revenues also resulted from the operation of
expanded casino-hotel facilities, which include additional gaming machines and
table games, an expanded race and sports book, remodeled coffee shop, two
specialty restaurants and a delicatessen, an expanded buffet room, a newly
constructed hotel tower, a remodeled floor-level entertainment lounge and new
second-floor showroom/banquet facility.
Net revenues at AC increased by $3,823,000, or 32.9%, from $11,609,000
to $15,432,000 for the three-month period ended September 30, 1995 compared to
the three-month period ended September 30, 1994. In the same period to period
comparison, operating expenses, including depreciation and amortization,
increased by 50.2% to $16,550,000 from $11,019,000. This resulted in a decrease
in operating income of $1,708,000 from $590,000 to a loss of $1,118,000 for the
more recent period.
Gaming Revenues increased 33.8% from $9,637,000 to $12,891,000. The
largest portion of the increase in gaming revenues is attributable to gaming
machine revenues which increased 30.4% from $8,378,000 to $10,931,000 million.
The large increase reflects an additional 655 slot machines that were added
during the expansion. Revenues from table games increased 24.8% from $936,000 to
$1,169,000. The increase in table games revenues for the three-month period
ended September 30, 1995 is primarily due to the additional 5 table games that
were added during the expansion. Reflecting greater sports play from patrons and
an expanded facility featuring pari-mutual wagering, race and sports book
revenues increased by $300,000, or 71.7%, to $718,000 from $418,000 for the
three-month period ended September 30, 1995 compared to the same period in 1994.
Bingo revenues decreased slightly by $7,000 for the three-month period ended
September 30, 1995 when compared to the same period of the prior year.
Food and Beverage revenues increased 40.1% to $3,033,000 from
$2,165,000 for the three-month period ended September 30, 1995 compared to the
same period of the prior year. The increase in revenues is primarily due to the
addition of two specialty restaurants, a delicatessen, a remodeled coffee shop,
an expanded buffet and a redesigned bar and lounge.
Hotel revenues increased from $439,000 to $722,000 for the three-months
ended September 30, 1995 compared to the same period in 1994. The increase of
64.5% is primarily due to the addition of 158 new rooms.
Gift shop revenues increased from $120,000 to $155,000 for the
three-months ended September 30, 1995 compared to the same period in 1994. The
increase of 29.2% is primarily due to the remodeling and expansion of the gift
shop.
Other revenues, which include receipts from entertainment cover
charges, ATM commissions and revenues from PBX and banquets, increased from
$90,000 to $299,000 for the three-months ended September 30, 1995 compared to
the same period in the prior year. The increase of 232.2% is the result of
increases in (i) entertainment cover charge revenues attributable to the
addition of a new showroom and (ii) banquet revenues attributable to the
addition of new banquet facilities.
Gaming expenses increased by $505,000, or 16.6%, to $3,539,000 for the
three-month period ended September 30, 1995 from $3,034,000 for the same period
of the prior year reflecting primarily the additional staffing associated with
the expanded gaming facilities.
Food & Beverage expenses increased by $1,482,000, or 63.0%, to
$3,835,000 for the three-month period ended September 30, 1995 from $2,353,000
for the same period of the prior year, due primarily to the additional staffing
requirements for the new food service facilities.
Hotel expenses increased by $83,000, or 26.4%, to $398,000 for the
three-month period ended September 30, 1995 from $315,000 for the same period of
the prior year. The increase is primarily due to additional staffing and
associated costs required by the hotel expansion.
General and Administrative expenses increased by $1,727,000, or 56.2%,
to $4,798,000 for the three-month period ended September 30, 1995 from
$3,071,000 for the same prior of the prior year. The increase is primarily the
result of additional staffing in the cage, security, data processing,
entertainment, porters, engineering, accounting and transportation departments,
added to support the expanded facility. The increase is also due to the
provision for losses and advances made by the AC to CQC for payment of legal and
accounting services and for the insurance and maintenance costs of CQC's
riverboat. Because of CQC's current financial condition, including that it is in
default of the covenants governing the CQC Notes, AC has provided a 100%
allowance for the cumulative, accrued and unpaid advances made to CQC through
September 30, 1995.
Advertising and promotion expenses increased by $394,000, or 50.4% to
$1,176,000 for the three-month period ended September 30, 1995 from $782,000 for
the same period of the prior year reflecting increased newspaper and television
advertising undertaken to gain market recognition for the newly expanded
facility. Management believes that these increased levels of advertising and
promotional expenditures are necessary to attract and maintain the desired
customer levels, to promote the entertainment events, and support the other
existing facilities throughout the property.
Depreciation and Amortization increased by $187,000, or 26.8%, to
$886,000 for the three-month period ended September 30, 1995 from $699,000 for
the same period in prior year, as a result of additional depreciation expenses
associated with assets added in the expansion.
Gift shop expenses increased slightly by $8,000 or 8.1% to $107,000 for
the three-month period ended September 30, 1995 compared to $99,000 for the same
period reflecting small increases in staffing and operating costs associated
with the gift shop operation.
Management fees to BGI increased by $237,000, or 38.2%, to $857,000 for
the three-month period ended September 30, 1995 from $620,000 for the same
period in the prior year. Management fees are determined based on the gross
revenues of AC. As such, increased gross revenues bring about the higher
management fees. Since inception of the management fees agreement, management
fees payable to BGI have been and continue to be accrued by AC, and may not be
paid under the Indenture governing the AC Notes until such time that AC meets a
specified fixed charged coverage ratio.
Other expense (net of other income) amounted to $1,617,000 for the
three-month period ended September 30, 1995 compared to $1,065,000 for the same
period in the prior year. The increase in expense of $552,000, or 51.8%, is the
result of a reduction of capitalized interest (other income) in the amount of
$507,000 and a decrease in interest income (other income) of $175,000, partially
offset by a decrease of interest expense (other expense) in the amount of
$102,000.
Income Taxes
- ------------
As a result of the termination of its election to be treated as an S
corporation, AC is liable for income taxes on income earned from and after
January 1, 1994, prior to such termination, AC did not incur or pay income taxes
but distributed cash to its stockholders in amounts sufficient to pay their
income tax liability in respect to income of AC. Since terminating its S
corporation status, AC generated a net operating loss for income tax purposes of
approximately $5,200,000. Management anticipates that AC will generate taxable
income and that its effective federal income tax rate will approximate the
statutory rate of 34%, prior to consideration of the benefit from the net
operating losses, which may be utilized to offset taxable income.
Liquidity and Capital Resources
- -------------------------------
At September 30, 1995, AC had working capital of $2,142,000 compared to
working capital of $2,920,000 at June 30, 1995. The decrease in working capital
was caused primarily by increased accruals on the AC Notes, management fees
payable BGI, and interest on a $2,250,000 short-term note payable to Sunset
Coin, Inc., as well as a reduction in a related party receivable.
For the three-month period ended September 30, 1995, cash provided by
operating activities decreased approximately 35% to $1,281,000 from $1,967,000
for the same period in 1994. The decrease is primarily attributable to a net
loss of $1,835,000 for the three-month period in 1995 compared to net loss of
$475,000 for the three-month period in 1994 and an increase in accounts payable
of $995,000 for three-months ended September 30, 1995 compared to decrease of
$655,000 for the same period in 1994.
For the three-month period ended September 30, 1995, net cash used in
investing activities decreased to $72,000 for the three-month period ended
September 30, 1995 compared with $2,030,000 for the same period in 1994. The
decrease was caused primarily by a $74,000 outlay for additional capital
expenditures offset by $2,000 from proceeds from equipment sale. This compares
with an increase of restricted cash of $12,126,000 offset by capital
expenditures of $12,108,000 and an increase of $1,848,000 in related party
receivable for the same period in 1994.
Cash flows provided by financing activities for the three-month periods
ended September 30, 1995 was $42,000, reflecting payments on notes payable and
capital leases. For the three-month period ended September 30, 1994, cash flows
from financing activities was $69,000.
AC's long-term obligations, approximately $60,000,000 at September 30,
1995, consist of the AC Notes, stockholder notes and capitalized equipment
leases. AC has annual interest expense aggregating $6,600,000 and $500,000 with
respect to the AC Notes and the stockholder notes, in addition to current annual
payments of $1,200,000 associated with capitalized equipment financings.
Further, AC is expected to have annual capital expenditure requirements of
approximately $600,000.
In addition, AC has a substantial contingent obligation resulting from
its guarantee of the CQC Notes $20,000,000 in principal amount of which are
outstanding. As a result of a September 28, 1994 ruling of the Missouri Gaming
Commission denying CQC's gaming license application, CQC has adopted a plan to
sell its assets for the purpose of repaying the Outstanding CQC Notes and
accrued interest thereon. Although CQC has entered into an agreement for the
sale of its assets at a purchase price of $18,000,000 consummation of such
agreement is subject to the satisfaction of several conditions including
preliminary suitability of a buyer and gaming being legal in Jefferson City, an
is not expected to be satisfied prior to December 31, 1995, at which date CQC
may terminate the agreement, and, as a result, the agreement is not expected to
be consummated. See "Management `s Discussion and Analysis of Financial
Condition and Results of Operations - Capitol Queen & Casino, Inc." Moreover,
because CQC does not have any significant funds, AC will be obligated to pay
interest on the CQC Notes, which accrues at the rate of $2,400,000 annually.
Such interest is payable semi-annually on May 15 and November 15 of each year.
In addition, unless the holders of the CQC Notes otherwise agree, AC
will be liable for any shortfall between the proceeds from any sale of assets by
CQC and the amount required to retire the CQC Notes. Because there can be no
assurances that CQC will be able to sell its assets for an amount which will
allow it to fully or substantially repay the CQC Notes, AC's liability under its
guarantee of the CQC Notes may exceed that amount which it could support. In
addition, a default by AC under its guarantee of the CQC Notes, unless cured,
may cause a default under the AC Notes and entitle the holders of 25% or more in
principal amount thereof to cause such AC Notes to become accelerated, in which
event they would become immediately due and payable in full.
AC's management believes that, if not required to make any large cash
payments under its guarantee of the CQC Notes, AC has sufficient funds to meet
its projected needs for financing of existing operations and service its debt
obligations. However, AC's performance will be influenced by prevailing economic
conditions and financial, business and competitive factors, many of which are
beyond its control.
Sunset Coin, Inc.
- -----------------
General
SC derives its revenues and profits largely from its gaming machine
route pursuant to participation contracts and, to a lesser extent, space leases.
Under its participation contracts, SC pays a percentage of the net win (amounts
wagered less winnings paid) from its gaming machines to the site owner. The
balance is retained by SC. Under its space leases, SC pays the site owner a
fixed space rental fee and retains all of the net win. SC gaming revenues under
participation contracts represent SC's share of the net win after payments to
the location, and under space leases represent all revenues before lease
payments, which are treated as expenses. A majority of SC's gaming machines are
installed at locations controlled by the Becker family and the contracts with
such locations are expected to be renewed as a matter of general course.
In addition to the operation of its gaming machine route, SC services
gaming machines owned by other operators for fixed service fees. Included among
its service agreements are contracts with six BGG restaurants, which are
expected to be renewed in general course, and one additional location owned by
an unrelated party.
Results of operations for the three months ended September 30, 1995 and 1994
SC's results of operations declined for the three-months ended
September 30, 1995 compared to the same period in the prior year. Although,
total revenues decreased by only 1.2% to $640,000 for the three-month period
ended September 30, 1995 from $648,000 for the three-month period ended
September 30, 1994, operating expenses increased 24.4% to $433,000 from $348,000
over the same period-to-period comparison, resulting in an overall decrease in
operating income of 31.0% to $207,000 from $300,000. The net operating margin
for the three-month period ended September 30, 1995 and 1994 were 32.4% and
46.3%, respectively.
During the three-month period ended September 30, 1995, SC gained one
gaming machine route contract. However, when compared to the same period in the
prior year, SC had 20 fewer gaming machines during the period due to the
expiration of a contract covering one participation location and the expiration
of one slot service fee location prior to the more recent period. Space lease
revenues increased to $40,000 for the three-month period ended September 30,
1995 from $12,000 for the same period in the prior year due to a conversion of a
participation location to a space lease pending gaming license approval of the
location's owner. Gross revenues of $32,000 associated with the converted
location are included in participation contract revenues for the three-month
period ended September 30, 1995. The total number of machines included in the
route for the three-month period ended September 30, 1995 and 1994 were 259 and
279, respectively. Despite the decrease in the total number of slot machines,
gross revenues were only slightly impacted due to the installation of currency
acceptor machines at 12 locations, which resulted in increased play per machine,
and the positive effect of the conversion of one participation location to a
space lease. Fees from BGG increased to $24,000 for the three-month period ended
September 30, 1995 from $18,000 for the same period in the prior year due to the
addition of a sixth BGG location in April 1995.
Gaming machine route expenses for the three-month period ended
September 1995 increased by 42.5% to $302,000 from $212,000 for the three-month
period ended September 30, 1994, reflecting increased salaries, wages, and
payroll taxes due to the transfer of management personnel from BGI back to SC in
the more recent period. General and administrative expenses decreased to $24,000
from $44,000, which decrease is attributable to bad debt and loss and damage
which were not incurred in the more recent period. Management fees decreased
slightly to $34,000 from $36,000 due to the decrease in gross revenues.
Depreciation and amortization for the three-month period ended September 30,
1995 increased to $73,000 from $56,000, due to the acquisition by SC of fixtures
and equipment for the new BGG location and 26 new replacement slot machines.
During the three-month periods ended September 30, 1995 and 1994, SC
had other expenses (net of other income) of approximately $36,000 and $34,000,
respectively. The increase in other expenses is attributable to increased
interest expense resulting from additional draws from the existing revolving
line of credit.
Income Taxes
- ------------
As a result of the termination of its election to be treated as S
corporation, SC became liable for income taxes on income earned from and after
January 1, 1994. Prior to such termination, SC did not incur or pay their income
tax liability in respect to income of SC. Estimated income tax payable for the
three-month period ended September 30, 1995 amounted to $58,000 from $102,000,
in the same period in the prior year. These were based on an anticipated
effective federal income tax rate approximating the statutory rate of 34%.
Liquidity and Capital Resources
- -------------------------------
Cash provided by operating activities for the three-month period ended
September 30, 1995 increased to $427,000 from $156,000 for the three-month
period ended September 30, 1994, due to an increase in operating liabilities of
$271,000.
Cash flows used in investing activities for the quarter ended September
30, 1995 amounted to $150,000, including repayment of notes receivable of
$6,000, decrease in advances to related parties of $21,000 and purchase of slot
machines of $135,000.
Cash flows used in financing activities for the quarter ended
September 30, 1995 amounted to $80,000, reflecting principal payments on
notes payable.
SC's indebtedness includes stockholder notes and notes collateralized
by its gaming equipment and other assets. The stockholder notes aggregate
$3,000,000 in principal amount, bear interest at an annual rate of 10% and
mature January 2001. The collateralized notes bear interest at annual rates of
approximately 10.89%, in the case of fixed rate loans, or at prime plus 1.5%, in
the case of a collateralized line of credit, the outstanding aggregate balance
of which, $272,000 was converted to a note at July 1, 1994 with monthly payments
through June 1998. The fixed rate notes mature at various date through December
1995.
In July 1994, SC entered into an agreement with a bank for a new $1.2
million non-revolving line of credit. Each advance under the line shall be
evidenced by a separate promissory note with maturity date not exceeding 66
months from the date of the respective advance giving rise to the note. Under
the agreement for the non-revolving line of credit, SC could request advances
through October 28, 1995 at which time their rights to advances under the
agreement were terminated. However, the remaining available balance of the line
of credit is expected to be renewed for a period of one year. Advances under the
agreement bear interest at the bank's prime rate plus 1.5% up to 2.0%. As of
September 30, 1995, SC has an outstanding non-revolving line of credit amounting
to $826,000. SC has guaranteed the payment of the AC Notes, which guarantee is
subject to release upon attainment by AC of a fixed charge coverage ratio of
2.25 to 1. In connection with its guarantee, the Indenture imposes restrictions
on the distribution of earning. SC's management believes that it has sufficient
funds through the non-revolving line of credit and cash generated by operations
to meet its projected needs for existing operations and limited expansion of its
gaming machine route business. Should SC determine to expand on more than a
limited basis, it is likely that further capital would be necessary. SC access
to additional capital will be significantly restricted under the AC Indenture so
long as SC is a guarantor of the AC Notes. AC may have liability under its
guarantee of the CQC Notes which may exceed the amount which it could
immediately support. In such event, AC would be in default of the AC Notes. SC,
as guarantor of the AC Notes, would have liability under its guarantee if AC is
in default of AC Notes, and such liability would likely exceed the amount which
it could immediately support, including amounts available under its
non-revolving line of credit.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Arizona Charlie's., and Sunset Coin, Inc., are parties to various
lawsuits relating to routine matters incidental to their respective businesses.
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 results of operations or financial condition of
either company.
Item 6. Exhibits and Reports on Form 8-K
No exhibits are included herein:
The Company did not file any reports on form 8-K during the
Three-Months ended September 30, 1995.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Arizona Charlie's, Inc.
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(Registrant)
Date: November 1, 1996 /S/ Bruce F. Becker
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Bruce F. Becker
President, Chief Executive
Officer(Principal Executive Officer)
Date: November 1, 1996 /S/ Jerry Griffis
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Jerry Griffis
Controller(Principal Financial and
Accounting Officer)