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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-----------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1996
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, 1996
- --------------------- --------------
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
INDEX
PART I, FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Page
ARIZONA CHARLIE'S, INC.
Balance Sheets as of September 30, 1996 and June 30, 1996................. 1
Statements of Operation and Retained Earnings (Deficit)
for the Three-Month Periods Ended September 30, 1996 and 1995........ 2
Statements of Cash Flows for the Three-month Periods Ended
September 30, 1996 and 1995.......................................... 3
Notes to Financial Statements............................................. 4
SUNSET COIN, INC.
Balance Sheets as of September 30, 1996 and June 30, 1996..................7
Statements of Income and Retained Earnings for the Three-Month
Periods Ended September 30, 1996 and 1995.............................8
Statements of Cash Flows for the Three-month Periods Ended
September 30,1996 and 1995............................................9
Notes to Financial Statements.............................................10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Arizona Charlie's, Inc................................................... 12
Sunset Coin, Inc......................................................... 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 20
Item 6. Exhibits and Reports on Form 8-K.............................. 20
SIGNATURE................................................................ 21
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ARIZONA CHARLIE'S, INC.
(A Wholly Owned Subsidiary Of Becker Gaming, Inc.)
BALANCE SHEET
(Dollars In Thousands)
----------
ASSETS
September 30, June 30,
1996 1996
-------- --------
(Unaudited)
Current assets:
Cash and cash equivalents ....................... $ 5,426 $ 4,591
Restricted cash, in escrow account ............. 10 10
Trade and other accounts receivable ............. 304 473
Receivable from related parties ................ 2,649 1,539
Inventories ..................................... 581 575
Prepaid expenses ............................... 950 1,118
-------- --------
Total current assets ......................... 9,920 8,306
-------- --------
Property and equipment:
Building and improvements ....................... 37,488 37,488
Furniture and equipment ........................ 22,679 22,575
Land improvements ............................... 1,628 1,628
-------- --------
61,795 61,691
Less, accumulated depreciation .................. (16,937) (16,218)
-------- --------
44,858 45,473
Land ........................................... 208 208
-------- --------
Net property and equipment ................. 45,066 45,681
-------- --------
Other assets:
Receivable from related
party, noncurrent ............................. 210 987
Deposits and other .............................. 472 460
Notes receivable from related party ............. 4,416 4,416
Financing costs, less
accumulated amortization
of $1,505 September 30, 1996 and $1,336
June 30, 1996 ................................. 2,368 2,507
-------- --------
Total other assets ......................... 7,466 8,370
-------- --------
Total assets ............................... $ 62,452 $ 62,357
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
September 30, June 30,
1996 1996
-------- --------
(Unaudited)
Current liabilities:
Trade accounts payable ........................... $ 1,368 $ 1,452
Accounts payable to related parties .............. 1 4
Accrued expenses ................................. 5,649 3,323
Management fees due Becker Gaming, Inc. .......... 4,851 4,682
Notes payable .................................... 45 110
Notes payable to related party ................... 2,250 2,250
Current portion of obligations
under capital leases ........................... 11 15
Long-term debt classified as
current due to default
under covenants ................................ 55,000 55,000
-------- --------
Total current liabilities .................. 69,175 66,836
Subordinated notes payable to
prior stockholders ............................... 5,000 5,000
Obligations under capital
leases, less current portion ..................... 22 22
-------- --------
Total liabilities ......................... 74,197 71,858
-------- --------
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) ..................... (12,214) (9,970)
-------- --------
Total stockholder's equity (deficit) ....... (11,745) (9,501)
-------- --------
Total liabilities and
stockholder's equity (deficit) .......... $ 62,452 $ 62,357
======== ========
The accompanying notes are an integral part of these financial statements.
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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,
1996 1995
-------- --------
Revenues:
Gaming ............................. $ 12,229 $ 12,891
Food and beverage .................. 3,501 3,033
Hotel .............................. 761 722
Gift shop .......................... 131 155
Management fee-affiliates .......... 676 --
Other .............................. 258 299
-------- --------
Gross revenues ................. 17,556 17,100
Less, promotional allowances ......... (2,195) (1,668)
-------- --------
Net revenues ................... 15,361 15,432
-------- --------
Operating expenses:
Gaming ............................. 3,284 3,539
Food and beverage .................. 4,297 3,835
Hotel .............................. 479 398
Gift shop .......................... 124 107
Advertising and promotion .......... 1,287 1,176
General and administrative ......... 4,663 4,798
Management fee - Becker Gaming, Inc. 845 857
Rent expense paid to related party . 55 54
Depreciation and amortization ...... 858 886
-------- --------
Total operating expenses ....... 15,892 15,650
-------- --------
Operating income (loss) ........ (531) (218)
-------- --------
Other income (expenses):
Interest income .................... 68 69
Interest expense ................... (1,811) (1,714)
Other, net ......................... 30 28
-------- --------
Total other income (expenses) .. (1,713) (1,617)
-------- --------
Loss before income taxes ....... (2,244) (1,835)
-------- --------
Net loss ....................... (2,244) (1,835)
Retained earnings(deficit),
beginning of period ............. (9,970) (5,411)
-------- --------
Retained earnings(deficit),
end of period ................... $(12,214) $ (7,246)
======== ========
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,
1996 1995
------- -------
Cash flows from operating activities:
Net loss .......................................... ($2,244) ($1,835)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Provision for losses on related party receivables 73 1,149
Depreciation and amortization ................... 858 886
(Increase) decrease in operating assets:
Receivables ..................................... 169 (1,358)
Inventories ..................................... 59 (6)
Prepaid expenses ................................ 168 193
Deposits and other .............................. (12) 15
Increase (decrease) in operating liabilities:
Accounts payable, net of amounts for capital
expenditures .................................... (87) 995
Management fees due to Becker Gaming, Inc. ...... 169 857
Accrued expenses ................................ 2,326 320
------- -------
Total adjustments ............................. 3,658 3,116
------- -------
Net cash provided by operating activities ..... 1,414 1,281
------- -------
Cash flows from investing activities:
Capital expenditures, net of amounts in accounts
payable ....................................... (104) (74)
Increase in related party receivables ........... (406) --
Proceeds from assets sales ...................... -- 2
------- -------
Net cash used in investing activities ......... (510) (72)
------- -------
Cash flows from financing activities:
Principal payments on notes payable ............. (65) (40)
Payments under capital lease obligations ........ (4) (2)
------- -------
Net cash used in financing activities ......... (69) (42)
------- -------
Net increase (decrease) in cash and cash
equivalents ............................... 835 1,167
Cash and cash equivalents, beginning of the period .. 4,591 5,404
------- -------
Cash and cash equivalents, end of the period ........ $ 5,426 $ 6,571
======= =======
Supplemental cash flow disclosures:
Interest paid, net of amounts capitalized ...... $ 129 $ 129
======= =======
The accompanying notes are an integral part of these financial statements.
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ARIZONA CHARLIE'S, INC.
(A wholly owned subsidiary of Becker Gaming, Inc.)
NOTES TO FINANCIAL STATEMENTS
----------
1) Basis of Presentation:
Arizona Charlie's, Inc. ("AC" or the "Company") is a wholly owned
subsidiary of Becker Gaming, Inc. ("BGI"). The accompanying financial statements
of AC have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments and normal recurring accruals considered necessary for a fair
presentation have been included. Operating results for the three-month period
ended September 30, 1996 are not necessarily indicative of the results that may
be expected for the year ended June 30, 1997. 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, 1996.
2) Missouri Gaming License, Default Under Indebtedness,
Management's Plans, and Going Concern:
AC has guaranteed the payment of principal of and interest on the 12% First
Mortgage Notes due November 15, 2000 (the "CQC" Notes") issued by Capitol Queen
& Casino, Inc. ("CQC"). An aggregate of $20,000,000 in principal amount and
$2,400,000 in accrued interest are outstanding on the CQC Notes 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 CQC Notes. As of January 1, 1995, the Indenture (the "CQC
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 repurchase of $20,000,000 principal amount of 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 remain 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
May 15, 1996 and will not be able to make such payment on November 15, 1996. AC
will not have funds available to advance on behalf of CQC on November 15, 1996.
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. AC does not have sufficient financial
resources to satisfy its guarantee obligation with respect to the CQC Notes.
As of September 30, 1996, AC is in default of certain debt covenants under the
Indenture (the "AC Indenture") governing the AC Notes. These covenant violations
include (i) a failure to meet a minimum fixed charge coverage ratio, as defined
in the AC Indenture, and (ii) advances by AC to BGI in excess of amounts
permitted under the AC Indenture. Such advances remain outstanding at September
30, 1996. In addition, beginning with the quarter ending December 31, 1995, AC
has not met the minimum tangible net worth requirement, set forth in the AC
Indenture. Under the terms of the AC Indenture, AC is required to offer to buy
back $16,500,000 of the outstanding AC Notes at September 30, 1996 due to the
failure to meet this covenant, and such amount shall increase by $5,500,000 each
fiscal quarter so long as AC is in default of the covenant. AC has not made such
offer and does not intend to do so while the discussions with the Bondholder
Committee described below are in process. As a result of these covenants
defaults , the AC Notes have been classified as currently payable 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.
In connection with its guarantee of the CQC Notes, the CQC Indenture imposes
certain restrictive covenants on the Company, including minimum cash flow and
net worth requirements and restrictions on additional borrowings and
distributions of earnings.
CQC continues to market its riverboat assets to prospective buyers and
management is continuing its 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 September 30, 1996 financial statements of AC do not
include any adjustment that might result from the outcome of this uncertainty.
================================================================================
SUNSET COIN, INC.
(A Wholly Owned Subsidiary Of Becker Gaming, Inc.)
BALANCE SHEETS
(Dollars In Thousands)
ASSETS
September 30, une 30,
1996 1996
------- -------
(Unaudited)
Current assets:
Cash ................................................... $ 1,207 $ 1,122
Current portion of notes receivable .................... 106 117
Note receivable from related party ..................... 2,250 2,250
Other receivables ...................................... 250 274
Prepaid expenses ....................................... 39 46
------- -------
Total current assets ............................... 3,852 3,809
------- -------
Property and equipment:
Building and leasehold improvements .................... 174 174
Furniture, fixtures and equipment ...................... 2,951 2,885
------- -------
3,125 3,059
Less, accumulated depreciation ......................... (1,434) (1,370)
------- -------
Net property and equipment ......................... 1,691 1,689
------- -------
Notes receivable, less current
portion ................................................ 181 194
Advances to related parties .............................. 140 111
Other assets, less accumulated
amortization of $26 at September 30, 1996
and $24 at June 30 , 1996 .............................. 84 88
------- -------
Total assets ....................................... $ 5,948 $ 5,891
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
September 30, une 30,
1996 1996
------ ------
(Unaudited)
Current liabilities:
Trade accounts payable ................................. $ 12 $ 44
Accrued expenses ....................................... 637 608
Current portion of long term debt ...................... 306 279
------ ------
Total current liabilities .......................... 955 931
Long-term liabilities:
Long-term debt, less current portion .................. 437 502
Subordinated notes payable to
former stockholders ................................. 3,000 3,000
------ ------
Total liabilities .................................. 4,392 4,433
------ ------
Commitments and contingencies
Stockholder's equity:
Common stock, no par value, 2,500
shares authorized, 400 shares
issued and outstanding ................................. 27 27
Retained earnings ........................................ 1,529 1,431
------ ------
Total stockholder's equity ......................... 1,556 1,458
------ ------
Total liabilities and stockholder's
equity ............................................. $5,948 $5,891
====== ======
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,
1996 1995
------- -------
Revenues:
Slot route:
From locations controlled by related parties $ 567 $ 563
Other ...................................... 35 45
Slot service fees:
From related parties ....................... 21 24
Other ...................................... 8 8
------- -------
Total revenues ........................... 631 640
Operating expenses:
Slot route and service ........................ 347 302
General and administrative..................... 23 24
Management fee - Becker Gaming, Inc............ 33 34
Depreciation and amortization.................. 71 73
------- -------
Total operating expenses.................... 474 433
------- -------
Operating income .................................. 157 207
------- -------
Other income (expense):
Interest income ............................... 47 41
Interest expense .............................. (91) (99)
Other income .................................. 24 22
------- -------
Total other income (expense)................ (20) (36)
------- -------
Net income before income tax....................... 137 171
Provision for income tax .......................... (39) (58)
------- -------
Net income ........................................ 98 113
Retained earnings, beginning of period............. 1,431 1,050
------- -------
Retained earnings, end of period................... $ 1,529 $ 1,163
======= =======
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,
1996 1995
------- -------
Cash flows from operating activities:
Net income ...................... $ 98 $ 113
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization ... 71 73
(Increase) decrease in operating assets:
Other receivables ........... 24 16
Prepaid expenses ............ 7 5
Increase (decrease) in operating liabilities:
Accounts payable ............... (32) 46
Notes Payable .................. 44 --
Accrued expenses ............ 29 174
------- -------
Total adjustments
143 314
------- -------
Net cash provided by
operating activities . 241 427
------- -------
Cash flows from investing activities:
Capital expenditures ............. (70) (135)
Increase in advances to related
parties ........................ (29) (21)
Repayments of notes receivable ... 24 6
------- -------
Net cash used in investing
activities ..................... (75) (150)
------- -------
Cash flows from financing activities:
Principal payments on notes
payable ................... (81) (80)
------- -------
Net cash used in financing
activities ................ (81) (80)
------- -------
Net increase in cash
85 197
Cash, beginning of period ........... 1,122 506
------- -------
Cash, end of period ................. $ 1,207 $ 703
======= =======
Supplemental cash flow disclosures:
Interest paid ................... $ 91 $ 101
======= =======
The accompanying notes are an integral part of these financial statements.
================================================================================
SUNSET COIN
(A wholly owned subsidiary of Becker Gaming, Inc.)
NOTES TO FINANCIAL STATEMENTS
----------
1) Basis of Presentation:
Sunset Coin, Inc. ("SC" or the "Company") 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 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 period ended
September 30, 1996 are not necessarily indicative of the results that may be
expected for the year ended June 30, 1997. The accompanying unaudited financial
statements and footnotes should be read in conjunction with the financial
statements included in the Company's annual report on Form 10-K for the year
ended June 30, 1996.
2) Guarantee Obligation, Management's Plans, and Going
Concern:
SC has guaranteed the payment of the $55,000,000 principal amount of and
interest on the 12% First Mortgage Notes due November 15, 2000 (the "AC Notes")
issued by Arizona Charlie's, Inc. ("AC"), another wholly owned subsidiary of
BGI. AC is in default of certain covenants under the Indenture (the "AC
Indenture") governing the AC Notes as of September 30, 1996. In addition, AC has
guaranteed the payment of principal and interest on certain mortgage notes
issued by CQC (the "CQC Notes"). An aggregate $20,000,000 in principal amount
and $2,400,000 in accrued interest are outstanding on the CQC Notes at September
30, 1996. Capitol Queen & Casino, Inc. ("CQC") is a development stage company
which has abandoned its project to develop, own and operate a riverboat casino,
and is currently attempting to sell its assets to prospective buyers. Based on
current market conditions, management does not expect that CQC will generate
sufficient funds through the sale of its assets to repurchase all of the
outstanding CQC Notes. A proposed restructuring plan therefore contemplates (i)
the modification of covenants under the AC Indenture to cure the current
defaults and (ii) the issuance of additional AC Notes to fulfill AC's guarantee
obligation for remaining principal of and accrued interest on 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, which the Company does not have sufficient
resources to satisfy. 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 September 30, 1996 financial
statements of the Company do not include any adjustment that might result from
the outcome of this uncertainty.
================================================================================
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 lesser extent, from food and beverage,
lodging, entertainment and retail sales. AC generally views its non- casino
operations as complementary to its core casino operations. Accordingly, it
utilizes entertainment primarily as a casino marketing tool. Further, AC
maintains food and beverage pricing structures designed to benefit casino
volumes, often resulting in 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, 1996 and 1995
Net revenues at AC decreased by $71,000, or 0.5%, from $15,432,000 to
$15,361,000 for the three-month period ended September 30, 1996 compared to the
three-month period ended September 30, 1995. In the same period to period
comparison, operating expenses, including depreciation and amortization,
increased by 1.6% to $15,892,000 from $15,650,000. This resulted in a increase
in operating losses of $313,000 from a loss of $218,000 to a loss of $531,000
for the more recent period.
Gaming revenues decreased 5.1% from $12,891,000 to $12,229,000. The
largest portion of the decrease in gaming revenues is attributable to gaming
machine revenues which decreased 4.2% from $10,931,000 to $10,472,000. The
decrease reflects lesser play from slot patrons during the more recent period.
Revenues from table games increased 3.9% from $1,169,000 to $1,215,000. The
increase in table games revenues for the three-month period ended September 30,
1996 is primarily the result of marketing efforts to attract table games patrons
utilizing select player events, including professional boxing and golfing
tournaments. Reflecting reduced sports play from patrons, race and sports book
revenues decreased by $120,000, or 16.9%, to $597,000 from $718,000 for the
three-month period ended September 30, 1996 compared to the same period in 1995.
Bingo revenues decreased by $116,000 for the three-month period ended September
30, 1996 when compared to the same period of the prior year due to higher than
normal payouts combined with a decrease in play by patrons.
Food and beverage revenues increased 15.4% to $3,501,000 from $3,033,000
for the three-month period ended September 30, 1996 compared to the same period
of the prior year. The increase in revenues is primarily 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 the food and beverage departments are the
result of casino promotion and marketing efforts to attract, reward and retain
qualified patrons.
Hotel revenues increased from $722,000 to $761,000 for the three-months
ended September 30, 1996 compared to the same period in 1995. The increase of
5.4% in the 1996 period is primarily due to an increase in occupancy and average
room rates of 91% and $40.40, respectively, compared to 85% and $36.92 in the
1995 period.
Gift shop revenues decreased from $155,000 to $131,000 for the
three-months ended September 30, 1996 compared to the same period in 1995. The
decrease of 15.5% is primarily due to reducing the hours of operation in the
1996 period.
Management fees from BGI were $676,000 for the three-month period ended
September 30, 1996. Such fees were implemented on October 1, 1995 and are
designed to recover expenses associated with the addition of approximately 40
employees in the accounting, payroll, personnel (and related departmental costs)
and technical services departments and the transfer of certain executive
personnel in March 1995 to AC from BGI. The management fee is also designed to
recover other expenses transferred from BGI to AC, including the maintenance and
other operating expenses associated with an airplane and two boats. Management
fee revenue to AC from BGI is equal to 80% of the management fee expense to BGI.
The management fee is not collected from BGI, but serves as a vehicle to offset
the above described additional expenses and costs incurred by AC.
Other revenues, which include receipts from entertainment cover charges,
ATM commissions and revenues from PBX and banquets, decreased from $299,000 to
$258,000 for the three-months ended September 30, 1996 compared to the same
period in the prior year. The decrease of 13.7% is the primarily the result of
decreases in entertainment cover charge revenues.
Gaming expenses decreased by $255,000, or 7.2%, to $3,284,000 for the
three-month period ended September 30, 1996 from $3,539,000 for the same period
of the prior year reflecting a reduction in staffing levels for the table games
department and lower gaming tax and license fees associated with the decrease in
gaming revenues.
Food & beverage expenses increased by $462,000, or 12.0%, to $4,297,000
for the three-month period ended September 30, 1996 from $3,835,000 for the same
period of the prior year, due primarily to an increase in food cost of $164,000,
an increase in beverage cost of $41,000 and an increase in salaries and wages in
the Food Department of $112,000, all associated with the increase in food and
beverage revenues during the 1996 quarter.
Hotel expenses increased by $81,000, or 20.4%, to $479,000 for the
three-month period ended September 30, 1996 from $398,000 for the same period of
the prior year. The increase is primarily due to the expense of refurbishing the
older hotel rooms and normal wage and salary increases.
General and administrative expenses decreased by $135,000, or 2.8%, to
$4,663,000 for the three-month period ended September 30, 1996 from $4,798,000
for the same period of the prior year. The decrease is primarily the result of a
reduction in staffing in the security, purchasing, entertainment, porters and
aviation departments. The decrease is also due to a reduction in expenses
associated with the operation of a jet airplane which was sold in July 1996.
Advertising and promotion expenses increased by $111,000, or 9.4% to
$1,287,000 for the three-month period ended September 30, 1996 from $1,176,000
for the same period of the prior year. Management believes that these increased
levels of 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. Management believes that
frequent promotions are necessary to compete with the newer hotel/casinos that
are located close to AC.
Depreciation and amortization decreased by $28,000, or 3.2%, to $858,000
for the three-month period ended September 30, 1996 from $886,000 for the same
period in prior year, as a result of decreased depreciation expenses associated
with older assets.
Gift shop expenses increased by $17,000, or 15.9%, to $124,000 for the
three-month period ended September 30, 1996 compared to $107,000 for the same
period reflecting increases in wholesale item costs associated with the gift
shop operation.
Management fees to BGI decreased by $12,000, or 1.4%, to $845,000 for the
three-month period ended September 30, 1996 from $857,000 for the same period in
the prior year. Management fees are determined based on the gross revenues of
AC. As such, decreased gross revenues bring about lower management fees. Since
inception of the management fees agreement, management fees payable to BGI have
been and continue to be accrued by AC, and may not be paid under the Indenture
governing the AC Notes until such time that AC meets a specified fixed charged
coverage ratio.
Other expense (net of other income) amounted to $1,713,000 for the
three-month period ended September 30, 1996 compared to $1,617,000 for the same
period in the prior year. The increase in expense of $96,000, or 5.9%, reflects
an adjustment to correct the calculation of interest associated with the AC
notes
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 $11,250,000. 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, 1996, AC had a working capital deficit of $59,255,000
compared to a working capital deficit of $58,530,000 at June 30, 1996. The
decrease in working capital in the amount of $725,000 was caused primarily by
increased accruals on the AC Notes and accrued management fees payable to BGI.
For the three-month period ended September 30, 1996, cash provided by
operating activities increased approximately $133,000, or 10.4%, to $1,414,000
from $1,281,000 for the same period in 1995. The increase in the 1996 period is
primarily attributable to a net increase in operating assets of $1,410,000, and
an increase in operating liabilities of $236,000 partially offset by a decrease
in net income of $409,000, a decrease in the provision for losses on related
party receivables of $1,076,000 and a decrease in depreciation and amortization
of $28,000.
For the three-month period ended September 30, 1996, net cash used in
investing activities decreased to $510,000 for the three-month period ended
September 30, 1996 compared with $72,000 for the same period in 1995. The
decrease of $438,000 was caused primarily by a $406,000 decrease in related
party receivable and a decrease in capital expenditures of $30,000.
Cash flows used in financing activities for the three-month period ended
September 30, 1996 was $69,000, reflecting payments on notes payable and capital
leases. For the three-month period ended September 30, 1995, cash flows used in
financing activities was $42,000.
AC's long-term obligations, approximately $5,022,000 at September 30, 1996,
consist of the stockholder notes and capitalized equipment leases. AC has annual
interest expense aggregating $6,600,000 and $500,000 with respect to the AC
Notes (classified as current due to default under covenants) and the stockholder
notes. Further, AC is expected to have annual capital expenditure requirements
of approximately $600,000.
AC 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, AC has failed to maintain the minimum consolidated
fixed charge coverage ratio required under the Indenture and has advanced funds
to BGI in excess of the amounts permitted to be so advanced under the Indenture.
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. AC does not have and is not expected
to have the resources to pay the AC Notes if they are accelerated.
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. 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.
AC'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, AC'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 AC
to service its debt obligations (and to comply with the consolidated tangible
net worth covenant) will be dependent upon its future performance, which
performance will be influenced by prevailing economic conditions and financial,
business and competitive factors, many of which are beyond AC's control.
Sunset Coin, Inc.
General
SC derives its revenues and profits largely from its gaming machine route
pursuant to participation contracts and, to a lesser extent, space leases. Under
its participation contracts, SC pays a percentage of the net win (amounts
wagered less winnings paid) from its gaming machines to the site owner. The
balance is retained by SC. Under its space leases, SC pays the site owner a
fixed space rental fee and retains all of the net win. SC gaming revenues under
participation contracts represent SC's share of the net win after payments to
the location, and under space leases represent all revenues before lease
payments, which are treated as expenses. A majority of SC's gaming machines are
installed at locations controlled by the Becker family and the contracts with
such locations are expected to be renewed as a matter of general course.
In addition to the operation of its gaming machine route, SC services
gaming machines owned by other operators for fixed service fees. Included among
its service agreements are contracts with five Becker Gaming Group ("BGG")
locations and one additional location owned by an unrelated party, which are
expected to be renewed in general course.
Results of operations for the three months ended September
30, 1996 and 1995
SC's results of operations declined for the three-month period ended
September 30, 1996 compared to the same period in the prior year. Revenues
decreased by 13.3% from $113,000 for the 1995 three-month period to $98,000 for
the 1996 three-month period. The decrease in revenues is attributable to the
expiration of contracts that were not renewed with one participation and one
service fee location in the more recent period, the effect of which was slightly
offset by the addition of two participation locations and the conversion of
another location from a participation contract to a more favorable space lease
contract. A decrease in service revenues in the more recent three-month period
was due to the discontinued operation of Charlie's Saloon (a BGG bar).
The average number of gaming machines operated during the three-month
period ended September 30, 1996 was 369 compared to 259 in the prior year
period. The average number of gaming machines at BGG locations serviced by SC
was 115 for the three-month period ended September 30, 1996 compared to 130 for
the same period in 1995. Slot service fees from BGG for the three-month period
ended September 30, 1996 were $29,000, down from $32,000 for the same period in
the prior year, due to the discontinued operation of Charlie's Saloon on April
21, 1996.
Gaming machine route expenses for the three-month period ended September
30, 1996 increased by 14.9% to $347,000 when compared to the same period in the
prior year reflecting increased salaries and wages, due to additional staffing
requirements in slot route service and the transfer of management personnel from
BGI to SC, as well as additional security guard wage expense for increased
protection in response to greater slot route theft. Other increased expenses for
repairs and maintenance, automotive and complimentary expenses were partially
offset by a decrease in loss and damage, advertising, and supplies expenses.
General and administrative expenses for the three-month period decreased by
4.2% to $23,000 from $24,000 , reflecting decreases in professional fees,
donations, office and supplies expenses, and bad debts.
Management fees (based upon gross revenues) decreased by 2.9% to $33,000
for the three-month period ended September 30, 1996 when compared to the same
period in the prior year. This decrease is attributable to lower gross revenues
in the more recent period.
Depreciation and amortization decreased by 2.7% to $71,000 for the
three-month period ended September 30, 1996, reflecting decreased depreciation
and amortization costs associated with the April 1996 closing of Charlie's
Saloon (a BGG bar). SC abandoned furniture, fixtures and equipment contained in
this bar.
During the three-month period ended September 30, 1996, SC had other
expenses (net of other income) of approximately $20,000 compared to $36,000 for
the same period in 1995. The decrease is attributable to reduced interest
expense relating to notes payable paid in the previous year for existing
locations.
Income Taxes
As a result of the termination of its election to be treated as S
corporation, SC became liable for income taxes on income earned from and after
January 1, 1995. Prior to such termination, SC did not incur or pay their income
tax liability in respect to income of SC. Estimated income tax payable for the
three-month period ended September 30, 1996 was $39,000 compared to $58,000 for
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, 1996 decreased to $241,000 from $427,000 for the three-month
period ended September 30, 1995, mostly due to a net decrease in operating
liabilities of $179,000 and depreciation and amortization of $2,000 offset by an
increase in operating assets of $10,000, and decrease in revenues of $15,000.
Cash flows used in investing activities for the three months ended
September 30, 1996 amounted to $75,000, including repayment of notes receivable
of $24,000, an increase in advances to related parties of $29,000, and purchases
of slot machines of $70,000.
Cash flows used in financing activities for the three months ended
September 30, 1996 amounted to $81,000, 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.
In July 1994, SC entered into an agreement with a bank for a new
$1,200,000 non-revolving line of credit. Each advance under the line shall be
evidenced by a separate promissory note with maturity date not exceeding 66
months from the date of the respective advance giving rise to the note. Under
the agreement, SC originally could request advances through October 28, 1995
only, at which time its rights to advances under the agreement were terminated.
In December 1995, the agreement was amended, making available the unused portion
of $1,200,000 until October 20, 1996. Advances under the agreement bear interest
at the bank's prime rate plus 1.5% up to a maximum rate of 2.0%. As of September
30, 1996, the amount outstanding under the non- revolving line of credit totaled
$693,000.
SC's management believes that it has sufficient funds through the
non-revolving line of credit and cash generated by operations to meet its
projected needs for existing operations and limited expansion of its gaming
machine route business. Should SC determine to expand on more than a limited
basis, however, it is likely that further capital would be necessary. SC's
access to additional capital will be significantly restricted under the AC
Indenture so long as SC is a guarantor of the AC Notes. SC has guaranteed the
payment of the AC Notes, which guarantee is subject to release upon attainment
by AC of a fixed charge coverage ratio of 2.25 to 1. In connection with its
guarantee, the Indenture imposes restrictions on the distribution of earnings.
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's 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 beyond that
which it could immediately support. AC is in technical default under the
Indenture governing the AC Notes and SC, as guarantor of the AC Notes, would
have liability under its guarantee. Such liability would likely exceed the
amount which SC 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, 1996.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Arizona Charlie's, Inc.
-----------------------
(Registrant)
Date: November 14, 1996 /S/ Bruce F. Becker
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Bruce F. Becker
President, Chief Executive
Officer(Principal Executive Officer)
Date: November 14, 1996 /S/ Jerry Griffis
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Jerry Griffis
Controller(Principal Financial and
Accounting Officer)