================================================================================
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: March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 33-75806
CAPITOL QUEEN & CASINO, INC.
----------------------------
(Exact name of registrant as specified in its charter)
Nevada 43-1652885
------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporations 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 lastest practicable date.
Outstanding at
Class of common stock April 30, 1997
- --------------------- --------------
$1.00 par value 100 shares
================================================================================
CAPITOL QUEEN & CASINO, INC.
(A wholly owned subsidiary of Becker Gaming, Inc.)
FORM 10-Q
INDEX
PART I, FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
CAPITOL QUEEN & CASINO, INC.
- ----------------------------
Balance Sheets as of March 31, 1997 and June
30, 1996........................................................
Statements of Loss Incurred During the
Development Stage for the Three-Month Periods
Ended March 31, 1997 and 1996 and
for the Nine-Month Periods Ended March 31,
1997 and 1996 and for the period from
January 20, 1993 (the date of inception)
through March 31, 1997.......................................
Statements of Cash Flows for the Nine-Month
Periods Ended March 31, 1997 and 1996
and for the period from January 20,
1993 (the date of inception) through
March 31, 1997...............................................
Notes to Financial Statements...................................
ARIZONA CHARLIE'S, INC.
- -----------------------
Balance Sheets as of March 31, 1997 and
June 30, 1996...................................................
Statements of Income and Retained Earnings
(Deficit) for the Three-Month Periods Ended
March 31, 1997 and 1996
and for Nine-Month Periods Ended March 31,
1997 and 1996...................................................
Statements of Cash Flows for the Nine-Month
Periods Ended March 31, 1997 and 1996...........................
Notes to Financial Statements...................................
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Capitol Queen & Casino, Inc.....................................
Arizona Charlie's, Inc. ........................................
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................
Item 6. Exhibits and Reports on Form 8-K.........................
SIGNATURES.......................................................
================================================================================
CAPITOL QUEEN & CASINO, INC.
(A Development Stage Company And A Wholly Owned
Subsidiary of Becker Gaming, Inc.)
BALANCE SHEETS
(Dollars In Thousands, Except Share Data)
ASSETS
March 31, June 30,
1997 1996
------- -------
(Unaudited)
Current assets:
Restricted cash, in escrow account .................... $ 30 $ 30
------- -------
Total current assets ............................... 30 30
------- -------
Other assets:
Assets held for sale ................................... 7,754 7,754
Financing costs, net of accumulated
amortization of $411 at March 31,
1997 and $312 at June 30, 1996 ....................... 506 605
Deposits and other assets .............................. 60 60
------- -------
Total other assets ................................. 8,320 8,419
------- -------
Total assets ....................................... $ 8,350 $ 8,449
======= =======
LIABILITIES & STOCKHOLDERS' EQUITY(DEFICIT)
March 31, June 30,
1997 1996
-------- --------
(Unaudited)
Current liabilities:
Advances from related parties ....................... $ 1,180 $ 1,006
Accrued interest .................................... 4,889 2,775
Notes payable to related parties .................... 1,200 1,200
Long-term debt classified as current,
net of unamortized original issue discount
of $2,068 and $2,474, respectively ................ 17,932 17,526
-------- --------
Total liabilities ............................ 25,201 22,507
-------- --------
Commitments and contingencies
Stockholders' equity(deficit):
Common stock, $1.00 par value, 1,000 shares
authorized, 100 shares issued and outstanding ...... -- --
Additional paid-in capital .......................... 12,732 12,732
Deficit accumulated during development stage ........ (29,583) (26,790)
-------- --------
Total stockholders' equity (deficit) ............ (16,851) (14,058)
-------- --------
Total liabilities and stockholders'
equity(deficit) .............................. $ 8,350 $ 8,449
======== ========
The accompanying notes are an integral part of these financial statements.
================================================================================
CAPITOL QUEEN & CASINO, INC.
(A Development Stage Company And A Wholly Owned
Subsidiary of Becker Gaming, Inc.)
STATEMENTS OF LOSS INCURRED DURING THE DEVELOPMENT STAGE
(Dollars In Thousands)
(Unaudited)
Three Months Ended March 31,
1997 1996
------- -------
Revenues ......................... $- $-
Operating expenses:
Amortization of financing and
other costs .................. 33 33
Abandonment loss ............... -- 4,080
Development costs .............. 41 195
------- -------
Total operating expenses ... 74 4,308
------- -------
Operating loss ................... (74) (4,308)
Other income (expenses):
Interest income ................ -- --
Interest expense ............... (1,016) (750)
Interest capitalized ........... -- --
------- -------
Total other income (expense) ..... (1,016) (750)
------- -------
Net loss before extraordinary item
(1,090) (5,058)
------- -------
Extraordinary item:
Loss on early retirement of
debt (no income tax benefit
available) ................... -- --
------- -------
Net loss ...................... $(1,090) $(5,058)
======= =======
For The Period
January 20, 1993
(The Date Of
Inception)
Nine Months Through
Ended March 31, March 31,
1997 1996 1997
-------- -------- ------------------
Revenues ........................... $- $- $-
Operating expenses:
Amortization of financing and
other costs .................... 99 98 1,440
Abandonment loss ................. -- 4,392 10,426
Development costs ................ 175 751 1,886
-------- -------- ------------------
Total operating expenses ..... 274 5,241 13,752
-------- -------- ------------------
Operating loss (274) (5,241) (13,752)
Other income (expenses):
Interest income .................. -- -- 1,265
Interest expense ................. (2,519) (2,165) (13,690)
Interest capitalized ............. -- -- 683
-------- -------- ------------------
Total other income (expense) ....... (2,519) (2,165) (11,742)
-------- -------- ------------------
Net loss before extraordinary item . (2,793) (7,406) (25,494)
-------- -------- ------------------
Extraordinary item:
Loss on early retirement of
debt (no income tax benefit ...
available) .................... -- -- (4,089)
-------- -------- ------------------
Net loss ........................ $ (2,793) $ (7,406) $ (29,583)
======== ======== ==================
The accompanying notes are an integral part of these financial statements.
================================================================================
CAPITOL QUEEN & CASINO, INC.
( A Development Stage Company And A Wholly Owned Subsidiary of Becker Gaming,
Inc.)
STATEMENTS OF CASH FLOWS
(Dollars In Thousands)
(Unaudited)
Nine Months Ended
March 31,
1997 1996
------- -------
Cash flows from development stage activities:
Net loss .................................... $(2,793) $(7,406)
Adjustments to reconcile net loss
to net cash provided by (used in)
development stage activities:
Amortization of financing and other costs ... 99 98
Amortization of original issue discount ..... 406 401
Abandonment losses .......................... -- 4,392
Extraordinary loss on retirement of debt .... -- --
Increase in accounts payable
and accruals, net of amounts
for capital expenditures ................... 2,114 1,622
Increase in advances from related parties ... 174 848
------- -------
Total adjustments ..................... 2,793 7,361
------- -------
Net cash used in development
stage activities .................... -- (45)
------- -------
Cash flows from investing activities:
Capital expenditures, net of
construction accounts payable .............. -- --
Net (additions to) reductions
in restricted cash equivalents ........... -- --
Decrease (increase)in deposits and
other assets ............................. -- --
Capitalization of preopening costs .......... -- --
Development costs ........................... -- --
------- -------
Net cash provided by
(used in) investing activities ........ -- --
------- -------
Cash flows from financing activities:
Principal payments on First
Mortgage Notes ........................... -- --
Proceeds from issuance of First
Mortgage Notes, net of financing costs ... -- --
Proceeds from borrowings under
notes payable to related parties ........ -- --
Equity contribution from Becker Gaming, Inc. -- --
relating to sale of warrants ........... -- --
------- -------
Net cash provided by financing activities -- --
------- -------
Net (decrease) increase in
cash and cash equivalents .......... -- (45)
Cash and cash equivalents,
beginning of period ...................... -- 45
------- -------
Cash and cash equivalents,
end of period ............................ -- --
======== ========
Supplemental cash flow disclosures:
Interest paid, net of amounts capitalized ... $- $-
======== ========
Original issue discount that
did not affect cash ...................... $- $-
======== ========
Equity contribution by Becker Gaming
that did not affect cash ................. $- $-
======== ========
For The Period
January 20, 1993
(The Date Of
Inception)
Through
March 31,
1997
--------
Cash flows from development stage activities:
Net loss ................................... $(29,583)
Adjustments to reconcile net loss
to net cash provided by (used in)
development stage activities:
Amortization of financing and other costs .. 1,440
Amortization of original issue discount .... 2,313
Abandonment losses and write-downs of assets
held for salee.......................... 10,426
Extraordinary loss on retirement of debt ... 4,089
Increase in accounts payable
and accruals, net of amounts
for capital expenditures .................. 4,901
Increase in advances from related parties .. 1,168
--------
Total adjustments .................... 24,337
--------
Net cash used in development
stage activities ................... (5,246)
--------
Cash flows from investing activities:
Capital expenditures, net of
construction accounts payable ............. (12,936)
Decrease in deposits and other assets ...... (31)
Capitalization of preopening costs ......... (60)
Development costs .......................... (340)
Net (additions to) reductions
in restricted cash equivalents .......... (553)
--------
Net cash provided by
(used in) investing activities ....... (13,920)
--------
Cash flows from financing activities:
Principal payments on First
Mortgage Notes .......................... (20,200)
Proceeds from issuance of First
Mortgage Notes, net of financing costs .. 30,666
Proceeds from borrowings under
notes payable to related parties ....... 1,200
Equity contribution from Becker Gaming, Inc.
relating to sale of warrants .......... 7,500
--------
Net cash provided by financing activities 19,166
--------
Net (decrease) increase in
cash and cash equivalents ......... --
Cash and cash equivalents,
beginning of period ..................... --
--------
Cash and cash equivalents,
end of period ........................... $-
========
Supplemental cash flow disclosures:
Interest paid, net of amounts capitalized .. $ 5,807
========
Original issue discount that
did not affect cash ..................... $ 7,500
========
Equity contribution by Becker Gaming
that did not affect cash ................ $ 5,232
========
The accompanying notes are an integral part of these financial statements.
================================================================================
CAPITOL QUEEN & CASINO, INC.
(A Development Stage Company And A Wholly Owned Subsidiary
Of Becker Gaming, Inc.)
NOTES TO FINANCIAL STATEMENTS
--------------------
1) Basis of Presentation:
Capitol Queen & Casino, Inc. ("CQC" or the "Company") is a wholly owned
subsidiary of Becker Gaming, Inc. ("BGI"). The accompanying financial statements
of CQC have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instruction 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 and nine-month
periods ended March 31, 1997 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 CQC'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:
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 substantially completed. CQC had also obtained the necessary
permits for the land-based development portion of the project and performed
certain dredging and other site preparation work. Immediately following the
Commission's decision, management temporarily suspended further development of
the Capitol Queen project, pending an appeal of the decision and legal remedies
potentially available to the Company. Costs associated with the development of
the project which had been deferred during the development stage were written
off in the fourth quarter of the fiscal year ended June 30, 1994.
On November 7, 1995, voters in Jefferson City rejected an ordinance permitting
riverboat gambling, reversing the vote of an earlier election in which Jefferson
City voters approved riverboat gambling. Management ultimately determined to
abandon the project, and is currently looking for alternative uses for the
riverboat, including opportunities to sell or lease it to another operator.
2) Missouri Gaming License, Default Under Indebtedness,
Management's Plans, and Going Concern:
CQC financed the Capitol Queen project through the issuance of $40,000,000 in
principal amount of 12% First Mortgage Notes due November 15, 2000 (the "CQC
Notes"). As of January 1, 1995, the Indenture (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 each of November 15,
1995, May 15, 1996 and November 15, 1996 and will not have funds available to
make the May 15, 1997 interest payment. Arizona Charlie's, Inc. ("AC"), another
wholly owned subsidiary of BGI and a guarantor of the CQC Notes, does not have
funds available to advance on behalf of CQC at March 31, 1997. Further, AC does
not have sufficient financial resources to satisfy its guarantee obligation with
respect to the CQC Notes, particularly because AC is in default of covenants
under the Indenture governing its 12% First Mortgage Notes due November 15, 2000
(the "AC Notes").
As mentioned previously, CQC's obligations under the CQC Indenture was amended
with the requisite consent of the holders of the CQC Notes. CQC's previous
obligations to complete and open the Capitol Queen have been eliminated and CQC
has agreed to a two-step plan to repay the CQC Notes. The first step, which was
consummated on January 17, 1995, involved the repurchase of $20,000,000
principal amount of the CQC Notes at 101% of such principal amount plus accrued
and unpaid interest with funds held in the restricted project escrow account.
The Company incurred an extraordinary loss of approximately $4,089,000 in 1995,
reflecting the premium paid to retire the debt of $200,000 and the write-off of
related, unamortized debt issue costs and original issue discount in the
aggregate of $3,889,000.
2) Missouri Gaming License, Default Under Indebtedness,
Management's Plans, and Going Concern:
The CQC Notes are not subject to mandatory redemption, except upon a change of
control, or other circumstances as defined in the CQC Indenture. The Company has
the option to redeem the CQC Notes at a premium of 106% beginning on November
15, 1997, declining to par value on November 15, 1999. If prior to November 15,
1997, BGI consummates an initial public offering of its common stock, the
Company may also redeem the CQC Notes at a premium of 108%.
The CQC Indenture contains covenants that, among other things, limit the ability
of the Company and, in certain cases, AC, to pay dividends or management fees,
or incur additional indebtedness.
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 CQC to
continue as a going concern. The final outcome of these matters is not presently
determinable and the March 31, 1997 financial statements of the Company do not
include any adjustment that might result from the outcome of this uncertainty.
Management of AC has taken several steps to overcome the substantial doubt as to
its ability to continue as a going concern including reducing expenses as
previously described, eliminating costs associated with the maintenance and
operation of the BGI airplane that was sold in July, 1996, the on-going attempts
to sell the CQC riverboat and use the proceeds to retire indebtedness, pursuit
of new business development activities to strengthen BGI's position in the
gaming market, and continuing negotiations with an informal committee
representing the holders of the AC Notes and CQC Notes to reach a favorable
restructure of such Notes.
3) Assets Held For Sale:
At March 31, 1997, CQC had $7,754,000 of assets held for sale, consisting of
land and riverboat assets which were written down to a carrying value based on
management's best estimate of the riverboat's current net realizable value in a
cash sale, based on information obtained from shipbuilders, marine brokers, and
purchase offers made to the Company from third parties.
ARIZONA CHARLIE'S, INC.
(A Wholly Owned Subsidiary Of Becker Gaming, Inc. )
BALANCE SHEETS
(Dollars In Thousands)
ASSETS
March 31, June 30,
1997 1996
-------- --------
(unaudited)
Current assets:
Cash and cash equivalents ................. $ 5,355 $ 4,591
Restricted cash, in escrow account ........ 10 10
Trade and other accounts receivable ....... 444 473
Receivable from related parties .......... 2,483 1,539
Inventories ............................... 558 575
Prepaid expenses .......................... 949 1,118
-------- --------
Total current assets .................... 9,799 8,306
-------- --------
Property and equipment:
Building and improvements ................. 37,488 37,488
Furniture and equipment ................... 22,859 22,575
Land improvements ......................... 1,628 1,628
-------- --------
61,975 61,691
Less, accumulated depreciation ........... (18,371) (16,218)
-------- --------
43,604 45,473
Land ...................................... 208 208
-------- --------
Net property and equipment ............ 43,812 45,681
-------- --------
Other assets:
Receivable from related party, noncurrent.. 210 987
Deposits and other ........................ 562 460
Note receivable from related party......... 4,416 4,416
Financing costs, less accumulated
amortization of $1,782 at March 31,
1997 and $1,366 June 30, 1996 ............. 2,091 2,507
-------- --------
Total other assets ................... 7,279 8,370
-------- --------
Total assets .......................... $ 60,890 $ 62,357
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
March 31, June 30,
1997 1996
-------- --------
(unaudited)
Current liabilities:
Trade accounts payable .................... $ 990 $ 1,452
Accounts payable to related parties ....... 4 4
Accrued expenses .......................... 5,843 3,323
Management fees due Becker Gaming, Inc. ... 5,187 4,682
Notes payable ............................. 190 110
Notes payable to related party ............ 3,150 2,250
Current portion of obligations
under capital leases .................... 13 15
Long-term debt classified as current due
to default under covenants .............. 55,000 55,000
-------- --------
Total current liabilities ......... 70,377 66,836
Subordinated notes payable to prior
stockholders ............................... 5,000 5,000
Obligations under capital leases,
less current portion ....................... 14 22
-------- --------
Total liabilities ................. 75,391 71,858
-------- --------
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, no par value,
2,500 shares authorized, 1,000
shares issued and outstanding ............. 469 469
Retained earnings (deficit) ................ (14,970) (9,970)
-------- --------
Total stockholders' equity
(deficit) ......................... (14,501) (9,501)
-------- --------
Total liabilities and
stockholders' equity (deficit) .... $ 60,890 $ 62,357
======== ========
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 March 31,
1997 1996
-------- --------
Revenues:
Gaming ....................................... $ 11,837 $ 13,454
Food and beverage ............................ 3,297 3,436
Hotel ........................................ 854 844
Gift shop .................................... 135 150
Management fee from affiliates ............... 653 729
Other ........................................ 175 338
-------- --------
Gross revenues ........................... 16,951 18,951
Less, promotional allowances ................... (1,985) (2,033)
-------- --------
Net revenues ............................. 14,966 16,918
-------- --------
Operating expenses:
Gaming ....................................... 3,218 3,445
Food and beverage ............................ 3,922 4,164
Hotel ........................................ 421 428
Gift shop .................................... 137 119
Advertising and promotion .................... 1,100 1,097
General and administrative ................... 3,996 4,423
Management fee - Becker Gaming, Inc. ......... 817 912
Rent expense paid to related party ........... 55 54
Depreciation and amortization ................ 864 889
-------- --------
Total operating expenses ................. 14,530 15,531
-------- --------
Operating income (loss)................... 436 1,387
-------- --------
Other income (expenses):
Gain (loss) on sale of assets ................. (1) --
Interest income .............................. 67 74
Interest expense ............................. (1,814) (1,808)
Other, net ................................... 22 16
-------- --------
Total other expenses ..................... (1,726) (1,718)
-------- --------
Income (loss) before taxes ............... (1,290) (331)
Provision for income tax ....................... -- --
-------- --------
Net (loss) income ......................... ($ 1,290) ($ 331)
Retained earnings (deficit),
beginning of period .......................... (13,681) (8,644)
-------- --------
Retained earnings (deficit),
end of period ............................... ($14,971) ($ 8,975)
======== ========
Nine Months Ended March 31,
1997 1996
-------- --------
Revenues:
Gaming ....................................... $ 36,362 $ 39,988
Food and beverage ............................ 10,445 9,807
Hotel ........................................ 2,540 2,337
Gift shop .................................... 404 457
Management fee from affiliates ............... 2,021 1,454
Other ........................................ 711 852
-------- --------
Gross revenues .......................... 52,483 54,895
Less, promotional allowances .................. (6,479) (5,647)
-------- --------
Net revenues ............................. 46,004 49,248
-------- --------
Operating expenses:
Gaming ....................................... 9,658 11,092
Food and beverage ............................ 12,505 12,054
Hotel ........................................ 1,325 1,243
Gift shop .................................... 387 353
Advertising and promotion .................... 3,708 3,392
General and administrative ................... 12,975 14,147
Management fee - Becker Gaming, Inc. ......... 2,526 2,674
Rent expense paid to related party ........... 167 164
Depreciation and amortization ................ 2,583 2,668
-------- --------
Total operating expenses ................. 45,834 47,787
-------- --------
Operating income (loss)................... 170 1,461
-------- --------
Other income (expenses):
Gain (loss) on sale of assets ................ (1) (10)
Interest income .............................. 204 218
Interest expense ............................. (5,435) (5,283)
Other, net ................................... 61 50
-------- --------
Total other expenses ..................... (5,171) (5,025)
-------- --------
Income (loss) before taxes ............... (5,001) (3,564)
Provision for income tax ....................... -- --
-------- --------
Net (loss) income ........................ ($ 5,001) ($ 3,564)
Retained earnings (deficit),
beginning of period .......................... (9,970) (5,411)
-------- --------
Retained earnings (deficit),
end of period ................................ ($14,971) ($ 8,975)
======== ========
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)
Nine Months Ended March 31,
1997 1996
-------- --------
Cash flows from operating activities:
Net income (loss) .................................. ($ 5,001) ($ 3,564)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization ...................... 2,583 2,668
Provision for losses on related
party receivables ................................. 175 1,239
(Gain) loss on sale of equipment ................... 1 11
(Increase) decrease in operating assets:
Receivables ........................................ 29 (2,203)
Inventories ........................................ 17 78
Prepaid expenses ................................... 169 137
Deposits and other ................................. (102) 85
Increase (decrease) in operating liabilities:
Accounts payable ................................... (462) 63
Accrued expenses ................................... 2,520 1,342
Management fees due to Becker Gaming, Inc. ......... 2,526 2,674
-------- --------
Total adjustments ............................... 7,456 6,094
-------- --------
Net cash provided by operating activities ...... 2,455 2,530
-------- --------
Cash flows from investing activities:
Capital expenditures ............................... (305) (271)
Increase in receivable from related party...........
Increase in receivable from Becker Gaming, Inc. .... (372) --
Increase in management fee receivable from Becker
Gaming, Inc. ....................................... (2,021) (1,454)
Payments from related party receivable.............. 30 --
Proceeds from assets sales ......................... 7 12
-------- --------
Net cash provided by
investing activities ......................... (2,661) (1,713)
-------- --------
Cash flows from financing activities:
Proceeds from borrowing under payables.............. 190 75
Proceeds from related party notes payable........... 900 --
Principal payments on notes payable ................ (110) --
Payments under capital lease obligations ........... (10) (4)
-------- --------
Net cash provided by
financing activities ......................... 970 (71)
-------- --------
Net increase in cash and cash equivalents ....... 764 888
Cash and cash equivalents, beginning of the period ..... 4,591 5,404
-------- --------
Cash and cash equivalents, end of the period ........... $ 5,355 $ 6,292
======== ========
Supplemental cash flow disclosures:
Interest paid, net of amount capitalized ........... $ 5,435 $ 5,282
======== ========
Income taxes paid .................................. $- $-
======== ========
Capital lease obligations incurred ................. $- $-
======== ========
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" 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 and nine-month periods ended March 31,
1997 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
$3,600,000 in past due interest are outstanding on the CQC Notes at March 31,
1997. 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 substantially completed. CQC had also
obtained the necessary permits for the land-based development portion of the
project and performed certain dredging and other site preparation work.
Immediately following the Commission's decision, Management temporarily
suspended further development of the Capitol Queen project, pending an appeal of
the decision and legal remedies potentially available to the Company.
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.
2) Missouri Gaming License, Default Under Indebtedness,
Management's Plans, and Going Concern, Continued:
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 each of November 15,
1995, May 15, 1996 and November 15, 1996 and will not have funds available to
make the May 15, 1997 interest payment. AC does not have funds available to
advance on behalf of CQC at March 31, 1997. 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. However, in January 1997 Management has taken
steps to increase profitably and generate additional cash flow at AC, including
down-sizing employee staffing levels and associated payroll costs in certain
departments. Other operating departments have been combined to eliminate
supervisory and management positions. Such down-sizing and eliminations which
took place in February and March are partially reflected in the 1997 three-month
period. Also, the existing restaurants and food facilities are being analyzed to
determine if the current pricing structures are meeting the overall goals of
attracting a sufficient number of casino patrons as designed. As such, beginning
in April 1997, new value priced menus have been implemented in the Chinese
restaurant. The Sportsbook deli is being expanded to include a mini-food court
area which in addition to the present deli-style sandwiches will offer grilled
items as well as Mexican Style fast food items. Entertainment events including
headliner concerts, lounge acts, and professional boxing matches are being
re-evaluated to determine if these events attract the necessary casino patrons
desired. Also beginning in April 1997, a slot player club and automated slot
reporting system was purchased and is currently being installed to attract new
patrons and help retain existing patrons. However, no assurance can be made
regarding the future performance of AC. Such performance may be affected or
influenced by prevailing economic conditions and financial, business and
competitive factors, many which are beyond AC's control.
2) Missouri Gaming License, Default Under Indebtedness,
Management's Plans, and Going Concern, Continued:
As of March 31, 1997, 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 March 31,
1997. 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 $27,500,000 of the outstanding AC Notes at March 31, 1997 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 March 31, 1997 financial statements of AC do not include
any adjustment that might result from the outcome of this uncertainty.
Management of AC has taken several steps to overcome the substantial doubt as to
its ability to continue as a going concern including reducing expenses as
previously described, eliminating costs associated with the maintenance and
operation of the BGI airplane that was sold in July, 1996, the on-going attempts
to sell the CQC riverboat and use the proceeds to retire indebtedness, pursuit
of new business development activities to strengthen BGI's position in the
gaming market, and continuing negotiations with an informal committee
representing the holders of the AC Notes and CQC Notes to reach a favorable
restructure of such Notes.
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Capitol Queen & Casino, Inc.
- ----------------------------
Analysis of Development Stage Activities for the period January 20, 1993
(the date of inception) through March 31, 1997
CQC was organized on January 20, 1993 for the purpose of developing,
constructing, owning and operating the Capitol Queen. Since inception, CQC's
activities have been limited to, in addition to the financing transaction
described below, the acquisition of a land site in Jefferson City, Missouri and
the rights to develop the Capitol Queen thereon, the preparation and prosecution
of applications to become licensed to own and operate the Capitol Queen in
Missouri and for all other required permits and approvals, the preparation of
preliminary design plans, drawings and budgets for the project, construction of
a riverboat vessel and other pre-opening development activities. As of August
1994, CQC suspended the development of the Capitol Queen, other than completion
of the riverboat. As a result of a September 28, 1994 ruling by the Missouri
Gaming Commission denying CQC's license application, CQC subsequently terminated
the Capitol Queen project and is currently marketing its assets for sale. Such
assets include its riverboat and the Jefferson City land site.
As of January 1, 1995, the CQC Indenture was amended to (i) eliminate CQC's
obligation to construct and open the Capitol Queen and (ii) permit a two-step
purchase of the CQC Notes at 101% of principal plus accrued and unpaid interest
with funds remaining in the project escrow account and the net proceeds from a
sale of assets. The repurchase of $20,000,000 principal amount of the CQC Notes
(plus accrued and unpaid interest thereon) was completed on January 17, 1995
with funds from the project escrow account at a total cost of $20,200,000. CQC
incurred an extraordinary loss of approximately $4,089,000 in 1995, reflecting
the premium paid to retire the debt of $200,000 and the write-off of related,
unamortized debt issue costs and original issue discount in the aggregate of
$3,889,000. At March 31, 1997, approximately $30,000 remained in the escrow
account and an aggregate of $20,000,000 principal amount of the CQC Notes
remained outstanding. However, the dates by which CQC previously agreed with the
holders of the CQC Notes to effect the sale of its assets and repurchase the
remaining CQC Notes have passed.
The CQC Notes outstanding require annual interest payments of $2,400,000,
payable in equal installments semi-annually on May 15 and November 15. CQC was
not able to make its scheduled interest payments of $1,200,000 on each of
November 15, 1995, May 15, 1996, and November 15, 1996 and will not have funds
available to pay the May 15, 1997 interest payment. Further, AC does not have
available funds to advance on behalf of CQC. The management of AC and CQC are
currently in discussions with an informal committee representing the holders of
the AC Notes and CQC Notes regarding a proposed restructuring plan. However, an
agreement has not yet been reached.
During the period from inception through March 31, 1997, CQC had total
operating expenses of $13,752,000 consisting primarily of an abandonment loss of
$6,034,000 arising from the denial of the company's license application and
management's subsequent decision to terminate the Capitol Queen project and sell
its assets. Also, at June 30, 1996, CQC wrote-down the cost of the riverboat
assets to their net realizable value based on estimates provided by a
shipbuilder and marine brokers which resulted in an additional abandonment loss
of $4,392,000 in the 1996 fiscal year. Also included in operating expenses are
amortization expense of $1,440,000 associated with debt issue costs and
$1,886,000 of project development costs. For the same period, CQC incurred
$13,690,000 of interest cost, of which $683,000 was capitalized by CQC as
required by generally accepted accounting principles, as part of the riverboat
construction. CQC earned interest income of $1,265,000 for the period from
inception to March 31, 1997.
Liquidity and Capital Resources
- -------------------------------
For the period from inception through March 31, 1997, net cash used in
development stage activities was $5,246,000. Cash flows used in investing
activities for the period was $13,920,000 which included $12,936,000 of capital
expenditures related to the construction of the riverboat and acquisition of the
Jefferson City land site. At April 30, 1997, CQC had expended a total of
approximately $21,650,000 on the development and construction of the Capitol
Queen project including on-going maintenance and insurance costs.
CQC's obligations consist of the $20,000,000 in principal amount of the
outstanding CQC Notes and past due interest thereon of $3,600,000 at March 31,
1997. 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.
Moreover, CQC because it has not yet effected the sale of its assets, is in
default of the CQC Indenture. 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. CQC
is not expected to engage in any activities after the sale of its assets,
although it may continue to pursue legal relief with respect to the injury
caused by the ruling of Missouri Gaming Commission. The cost of pursuing such
relief is expected to be borne by Becker Gaming, Inc.
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 a promotional
allowance.
Results of Operations for the three and nine-months ended
March 31, 1997 and 1996
Results from operations at AC decreased for both the three and nine-month
periods ended March 31, 1997 compared to the same periods in 1996 primarily as a
result of decreased gaming revenues in the more recent periods. Operating
expenses also decreased for both the three-month and nine-month periods ended
March 31, 1997, primarily as a result of reduced payroll expenses in the
operating departments and reduced General and Administrative expenses associated
with the maintenance and operation of the corporate airplane sold in July, 1996.
Net revenues at AC decreased by $1,952,000, or 11.5%, from $16,918,000 to
$14,966,000 for the three-month period ended March 31, 1997 compared to the
three-month period ended March 31, 1996. In the same period-to-period
comparison, operating expenses, including depreciation and amortization,
decreased by 6.4% to $14,530,000 from $15,531,000. This resulted in a $951,000
decrease in operating income from $1,387,000 to $436,000 for the more recent
period.
Net revenues at AC decreased by $3,244,000, or 6.6%, from $49,248,000 to
$46,004,000 for the nine-month period ended March 31, 1997 compared to the
nine-month period ended March 31, 1996. In the same period-to-period comparison,
operating expenses, including depreciation and amortization, decreased by 4.1%
to $45,834,000 from $47,787,000. This resulted in a $1,291,000 decrease in
operating income from $1,461,000 to $170,000 for the more recent period.
The largest portion of the revenue decrease for the three-month period
ended March 31, 1997 is attributable to gaming revenues, specifically, gaming
machine revenues, which decreased 10.4% from $11,464,000 to $10,269,000,
reflecting lower levels of play from patrons. Revenues from table games
increased 4.4% from $1,071,000 to $1,120,000 during the 1997 three-month period
and race and sports book revenues decreased $244,917 or 34.0% reflecting lesser
pari-mutuel horse race play from patrons because of the on-going dispute over
increased fees that began in November 1996, between the Nevada Pari-Mutuel
Association and both the Thoroughbred Owners of California and the California
Horse Racing Board who provide and authorize televised disseminator services to
Race & Sports books in Nevada. Until the increased fee issues are resolved,
these televised disseminator services which are popular with existing patrons
will not be available. Bingo revenues also decreased by $201,000 for the
three-month period ended March 31, 1997 when compared to the same period of the
prior year. The largest portion of the decrease in revenues for the nine-month
period ended March 31, 1997 is also attributable to gaming revenues which
decreased 9.1% from $39,988,000 to $36,362,000. Specifically, gaming machine
revenues decreased $2,711,000 or 8.0% from $33,760,000 to $31,049,000 reflecting
lesser play from patrons. Revenues from table games increased $19,000 or 0.5%,
from $3,506,000 to $3,525,000, and revenues from the race & sports book
decreased $398,000, or 17.1%, from $2,332,000 to $1,934,000 also reflecting the
aforementioned on-going dispute between the Nevada Pari-Mutuel Association and
both the Thoroughbred Owners of California and the California Horse Racing
Board. Bingo revenues also decreased by $479,000 during the nine-month period
ended March 31, 1997 compared to the same period of the prior year. Lesser play
from patrons for both the 1997 three-month and nine-month periods are the result
of increased competition from surrounding hotel/casinos that appeal to Arizona
Charlie's "local" patron base.
Food and Beverage revenues decreased $139,000 or 4.0% from $3,436,000 to
$3,297,000 during the three-month period ended March 31, 1997 compared to the
same period in the prior year. The decrease in revenues is primarily due to
decreased complimentary sales in the food and beverage department reflecting
management's recent efforts to better control the costs associated with
complimentary sales through stronger player evaluation methods. Such sales are
included in revenues at retail value and are then deducted as a promotional
allowance. For the nine-month period ended March 31, 1997, food & beverage
revenues increased $638,000 or 6.1% from $9,807,000 to $10,445,000 when compared
to the nine-month period of the prior year, reflecting increased complimentary
sales in the food and beverage departments. Increased complimentary sales in the
food and beverage department are the result of casino promotion and marketing
efforts to attract, reward and retain qualified patrons.
Hotel revenues increased $10,000 or 1.2% from $844,000 to $854,000 during
the three months ended March 31, 1997 compared to the same three-month period in
1996. The increase is primarily due to a slight decrease in occupancy and an
increase in average room rates of 86.7% and $43.7, respectively, compared to
92.3% and $39.3 in the 1996 period. During the nine-month period ended March 31,
1997, hotel revenues increased by $203,000 or 8.0% from $2,337,000 to $2,540,000
compared to the same nine-month period of 1996. The increased revenue is largely
due to an increase in occupancy and average room rates of 87.3% and $43.22,
respectively, compared to 86.9% and $38.77 in the 1996 nine-month period.
Gift shop revenues decreased $15,000 or 10.0% from $150,000 to $135,000
during the three-month period ended March 31, 1997 compared to the same period
in 1996. During the nine-month period ended March 31, 1997, gift shop revenues
decreased $53,000, or 11.6%, from $457,000 to $404,000 compared to the same
period in 1996. The decreases are primarily due to reducing the hours of
operation in the 1997 periods.
Other revenues, which principally include entertainment cover charges, ATM
commissions, and revenues from PBX and banquets, decreased 48.2% from $338,000
to $175,000 for the three-month period ended March 31, 1997 compared to the same
period in 1996. During the nine month period ended March 31, 1997, other
revenues decreased by $141,000 or 16.6% from $852,000 to $711,000 compared to
the same nine-month period of 1996. The decreases reflect lower entertainment
cover charge, banquet revenues and boxing revenues resulting from fewer
concerts, banquets and boxing events that occurred in the 1997 periods.
Gaming expenses decreased by $227,000 and $1,434,000, or 6.6% and 12.9%,
from $3,445,000 and $11,092,000 to $3,218,000 and $9,658,000, respectively, for
the three-month and nine-month periods ended March 31, 1997 as compared to the
same periods in 1996. The lower levels of expense for both periods reflect
reductions in staffing levels in the slot and table games departments and
decreased slot promotion expenses.
Food and Beverage expenses decreased by $242,000 and increased by
$451,000, or 5.8% and 3.6%, from $4,164,000 and $12,054,000 to $3,922,000 and
$12,505,000, respectively, for the three-month and nine-month periods ended
March 31, 1997 when compared to the same periods in 1996, as a result of lower
food costs associated with decreased Food & Beverage revenues for the 1997
three-month period, and increased food and beverage costs and an increase in
salary and wages, all associated with the increase in food & beverage revenues
during the 1997 nine-month period. As a result, food and beverage expenses
represented 118.9% and 119.7% of food and beverage revenues for the three-month
and nine-month periods ended March 31, 1997 compared to 121.2% and 122.9% of the
food and beverage revenues for the same periods in 1996.
Hotel expenses decreased by $7,000 and increased by $82,000, or 1.6% and
6.2%, from $428,000 and $1,243,000 to $421,000 and $1,325,000, respectively, for
the three-month and nine-month periods ended March 31, 1997 as compared to the
same periods in 1996, reflecting staffing reductions in the 1997 three-month
period, and additional repair and maintenance costs associated with the original
100 rooms built in 1988, the additional costs of room linens, and normal wage
and salary increases in the 1997 nine-month period. Net contribution by the
hotel department (hotel revenues less hotel operating expenses) was $433,000 and
$1,215,000 for the three-month and nine-month periods ended March 31, 1997 as
compared to $416,000 and $1,094,000 for the same periods in 1996.
General and Administrative expenses decreased by $427,000 and $1,172,000,
or 9.7% and 8.3%, from $4,423,000 and $14,147,000 to $3,996,000 and $12,975,000
respectively, for the three-month and nine-month periods ended March 31, 1997 as
compared to the same periods in 1996. The decreases resulted from a reduction in
entertainment department costs that are associated with fewer entertainment
events and lower entertainer fees and equipment rental expense. Other decreases
include reductions of staffing levels in the security, entertainment, porters
and aviation departments and a reduction in expenses associated with the
operation of a jet airplane which was sold in July 1996. The Company accrued
management fees payable to BGI of $817,000 and $2,526,000 during the three-month
and nine-month periods ended March 31, 1997.
Advertising and Promotional expenses increased by $3,000 and $316,000, or
0.3% and 8.5%, from $1,097,000 and $3,392,000 to $1,100,000 and $3,708,000
during the three-month and nine-month periods ended March 31, 1997 as compared
to the same period in 1996. Management believes that these levels of slot
promotional expenditures in both of the 1996 periods are necessary to attract
and maintain the desired customer levels, 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 in
proximity to AC. These newer hotel/casinos appeal and market to the Arizona
Charlie's "local" patron base.
Depreciation and Amortization decreased by $25,000 and $85,000, or 2.8%
and 3.2%, from $889,000 and $2,668,000 to $864,000 and $2,583,000 during the
three-month and nine-month periods ended March 31, 1997 when compared to the
same periods in 1996, as a result of decreased depreciation expenses associated
with older assets.
AC had other expenses of $1,726,000 and $5,171,000 for the three-month and
nine-month periods ended March 31, 1997 compared with $1,718,000 and $5,025,000
for the same periods in 1996. The increase in the 1997 nine-month period
reflects an adjustment to correct the calculation of interest associated with
the AC Notes.
In January, 1997 Management has taken steps to increase profitably and
generate additional cash flow at AC, including down-sizing employee staffing
levels and associated payroll costs in certain departments. Other operating
departments have been combined to eliminate supervisory and management
positions. Such down-sizing and eliminations which took place in February and
March are partially reflected in the 1997 three-month period. Also, the existing
restaurants and food facilities have being analyzed to determine if the current
pricing structures are meeting the overall goals of attracting a sufficient
number of casino patrons as designed. As such, beginning in April 1997, new
value priced menus have been implemented in the Chinese restaurant. The
Sportsbook deli is being expanded to include a mini-food court area which in
addition to the present deli-style sandwiches will offer grilled items as well
as Mexican Style fast food items. Entertainment events including headliner
concerts, lounge acts, and professional boxing matches are being re-evaluated to
determine if these events attract the necessary casino patrons desired. Also
beginning in April 1997, a slot player club and automated slot reporting system
was purchased and is currently being installed to attract new patrons and help
retain existing patrons. However, no assurance can be made regarding the future
performance of AC. Such performance may be affected or influenced by prevailing
economic conditions and financial, business and competitive factors, many which
are beyond AC's control.
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 $13,750,000. 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 March 31, 1997, AC had a working capital deficit of $60,578,000
compared to a working capital deficit of $58,530,000 at June 30, 1996. The
decrease in working capital in the amount of $2,046,000 was caused primarily by
increased accrued interest on the AC Notes and accrued management fees payable
to BGI.
For the nine-month period ended March 31, 1997, cash provided by operating
activities decreased approximately $75,000 to $2,455,000, from $2,530,000 for
the same period in 1996. The decrease in the 1997 period is primarily
attributable to the increased net loss for the current period, partially offset
by the increased accrued interest on the AC Notes.
For the nine-month period ended March 31, 1997, net cash used in investing
activities increased to $2,661,000 for the nine-month period ended March 31,
1997 compared with $1,713,000 for the same period in 1996. The increase of
$948,000 was caused primarily by a $372,000 increase in related party
receivable, an increase in management fee receivable of $567,000 and an increase
in capital expenditures of $34,000. .
Cash flows provided by financing activities for the nine-month period
ended March 31, 1997 was $970,000 compared with $71,000 for the nine-month
period ended March 31, 1996 reflecting proceeds from a related party payable.
AC's long-term obligations, approximately $5,014,000 at March 31, 1997,
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.
On November 15, 1996, AC made an interest payment due on the AC Notes in
the amount of $1,100,000, an amount equal to one-third of the required due. On
December 16, 1996 another one-third of the interest due in the amount of
$1,100,000 was paid. The remainder of the interest was paid on January 15, 1997.
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. CQC was not able to make its scheduled interest
payments of $1,200,000 due on each of November 15, 1995, May 15, 1996 and
November 15, 1996, and will not have funds available to make the May 15, 1997
interest payment and AC does not have funds available to advance on behalf of
CQC at March 31, 1997. Management of AC and CQC are currently undergoing
discussions with an informal committee representing the holders of the AC Notes
and CQC Notes regarding a proposed restructuring plan, however, an agreement has
not yet been reached. 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 past due 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 past due 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 past
due 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 or 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.
Management of AC has taken several steps to overcome the substantial doubt
as to its ability continue as a going concern including reducing expenses as
previously described, eliminating costs associated with the maintenance and
operation of the BGI airplane that was sold in July, 1996, the on-going attempts
to sell the CQC riverboat, and use the proceeds to retire indebtedness, pursuit
of new business development activities to strengthen BGI's position in the
gaming market, and continuing negotiations with an informal committee
representing the holders of the AC Notes and CQC Notes to reach a favorable
restructure of such Notes.
PART II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings
BGI, CQC, and the Nevada Operating Companies are parties to various
lawsuits relating to routine matters incidental to their respective businesses,
in addition to the litigation discussed below. Based on the amounts and issues
believed to be in controversy and management's evaluation of the merits of the
claims after consultation with counsel, management does not believe that the
outcome of such litigation, in the aggregate, will have a material adverse
effect on the results of operations or financial condition of BGI, CQC, or the
Nevada Operating Companies.
On October 31, 1994, CQC and BGI petitioned the Cole County Circuit Court
in Jefferson City, Missouri, for a writ of mandamus with respect to the ruling
of the Missouri Gaming Commission. In response to the petition, the Circuit
Court issued an order declaring that by denying CQC's application for a
riverboat gaming license without first conducting an investigation and by
deliberating in a closed session, the Missouri Gaming Commission had violated
Missouri gaming and open meeting laws. The Circuit 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 Circuit Court ordered the Commission to show cause within
thirty days why the preliminary writ should not be made permanent.
In response to the Circuit Court's order to show cause, the Commission
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 of
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 to show
cause. On December 23, CQC moved to dismiss the appeal on the ground 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, and on April 30, 1996, a three-judge panel of that Court ruled
that mandamus was not the proper vehicle for challenging the Commission's
decision. The Court of Appeals ruled that CQC may obtain judicial review only
after an administrative proceeding. The Court of Appeals also ruled that the
Missouri statutes did not prohibit the Commission from denying a license without
conducting an investigation, and that the claim that the Commission broke its
promise not to deny a license without first investigating should be raised in a
breach of contract action, not a mandamus petition. The Court of Appeals did not
address the merits; that is, it did not decide whether the Commission acted
arbitrarily or whether its decision was justified or a breach of its promises.
The Missouri Supreme Court declined to review the decision. However, the Court
of Appeals' ruling had no immediate consequences for two reasons. First, a
Missouri Circuit Court in a separate action (discussed below) voided the
Commission's decision for the independent reason that it was made in violation
of Missouri's open meeting law. Second, after the decision in the open meeting
law case, CQC notified the Commission that it was withdrawing its application.
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, 1995, 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, 1995, 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. The Circuit Court heard the motion for summary
judgment on December 19, 1995. In an order issued on April 23, 1996, the Circuit
Court rejected the Commission's arguments and granted CQC's motion, ruling that
the Commission had violated the open meeting law and declaring the Commission's
order to be void. The Commission did not appeal the decision, and the time for
doing so has expired. Therefore, the decision declaring the Commission's order
to be void is final. As a result, notwithstanding the other related actions
discussed above, there no longer exists any denial of licenses by the
Commission.
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. On April 30, 1996, the hearing officer
reversed himself, recused himself, and asked the Commission to appoint another
hearing officer. To date, the Commission has not acted on this request. Hearing
dates have been vacated by stipulation, and, after the Circuit Court's orders
voiding the Commission's decision appeared to make the administrative proceeding
premature, the hearing was postponed indefinitely. Because of the withdrawal of
CQC's application, the administrative proceeding is moot.
On March 23, 1995, the Missouri Attorney General filed misdemeanor charges
against CQC and Bruce Becker alleging they knowingly made false statements on
CQC's gaming license application. CQC and Mr. Becker vehemently denied the
charges and launched a vigorous defense. On July 25, 1995, the Circuit Court for
St. Louis County, Missouri, dismissed the charges, ruling that they did not
state an offense, that the Attorney General lacked authority to bring them, and
that they were filed after the statute of limitations had expired. On July 28,
1995, the Attorney General filed an appeal in the Missouri Court of Appeals for
the Eastern District. CQC's and Bruce Becker's motions to dismiss the appeals as
untimely filed were summarily denied on August 14, 1995. On April 16, 1996, in a
2-1 decision, a panel of the Missouri Court of Appeals reversed the Circuit
Court's dismissal. The Missouri Supreme Court then exercised its discretion to
review the case, and on January 27, 1997 the Missouri Supreme Court issued its
ruling in favor of CQC and Bruce Becker, holding that the prosecutions sought by
the Attorney General were barred by the applicable statute of limitations.
Accordingly, the Attorney General, or any other Missouri prosecutor, is
precluded from any further pursuit of the misdemeanor charges levied against CQC
and Bruce Becker in this matter.
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 nine-months
ended March 31, 1997.
================================================================================
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Capitol Queen & Casino, Inc.
----------------------------
(Registrant)
Date: May 15, 1997 /S/ Bruce F. Becker
---------------- -------------------
Bruce F. Becker
President, Chief Executive
Officer(Principal Executive Officer)
and Sole Director
Date: May 15, 1997 /S/ Jerry Griffis
---------------- -----------------
Jerry Griffis
Controller(Principal Financial and
Accounting Officer)
================================================================================