SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended October 31, 1996
Commission File Number: 0-24846
COLORADO CASINO RESORTS, INC.
(Exact name of Registrant as specified in its Charter)
Texas 84-1303693
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification
No.)
304 South 8th Street
Suite 201
Colorado Springs, CO 80905
(719) 635-7047
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:
Common Stock, $0.001 Par Value
(Title of Class)
Check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB [X]
State the registrant's revenues for its most recent fiscal year:
$10,615,318.
The aggregate market value of the voting stock held by non-affiliates of
the registrant on January 24, 1997 was approximately $51,806,567 based upon the
average reported closing bid and asked price of such shares. As of January 24,
1997, there were 34,537,711 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Proxy Statement from Annual Meeting of Shareholders dated September
19, 1996
Table of Contents
Part I
Item 1.Business .............................................. 3
Item 2.Properties ............................................ 11
Item 3.Legal Proceedings ..................................... 12
Item 4.Submission of Matters to a Vote of Stockholders ....... 12
Part II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters..................... 13
Item 6. Management Discussion and Analysis of Financial Condition
and Results of Operations........................... 13
Item 7. Financial Statements ............................... 16
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.............. 16
Part III
Item 9. Directors and Executive Officers of the Registrant 16
Item 10. Executive Compensation ............................. 17
Item 11. Security Ownership of Certain Beneficial Owners
and Management ..................................... 18
Item 12.Certain Relationships and Related Transactions ....... 19
Item 13.Exhibits and Reports on Form 8-K ..................... 19
<PAGE>
Part I
Item 1. Business
General
Colorado Casino Resorts, Inc. (the "Company" or "CCRI"), a Texas
corporation, is a Colorado-based casino and hotel development company which
presently owns and operates casino and hotel/casino properties in Southern
Colorado.
Reorganization and Merger. The current structure of the Company is the
result of a reorganization and merger effected by Airline of the Virgin Islands,
Inc. (originally incorporated under the laws of the Virgin Islands on March 25,
1982 and reincorporated in the state of Texas on March 15, 1993) and Lyric
Development Company, Inc. ("Lyric"). On January 14, 1994, the Company completed
a reorganization with Lyric whereby the Company issued additional shares of
common stock to the shareholders of Lyric in exchange for 100% of the
outstanding common stock of Lyric. The Company's early operations had been
devoted primarily to acquiring land in Cripple Creek, Colorado, for future
development, identifying acquisition candidates, obtaining financing, raising
capital, and initial land development planning. On March 15, 1995, effective
with the merger of Creeker's, Inc., an on-going casino operation, the Company
ceased to be a development stage company. The merger was accounted for as a
pooling of interests. On March 29, 1995, the Company began trading in the NASDAQ
SmallCap Market under the symbol: CCRI.
Casino Properties. Presently, the Company owns and operates Creeker's
Casino ("Creeker's"), and the Double Eagle Hotel & Casino (the "Double Eagle")
through its two wholly-owned subsidiaries, Creeker's, Inc. and Double Eagle
Resorts, Inc., respectively. Both properties are located in Cripple Creek,
Colorado, with the Double Eagle being the largest hotel/casino in the state of
Colorado. Combined, Creeker's and the Double Eagle account for the Company a
total of 980 slot, keno, and video poker machines, seven blackjack tables, four
bars, two restaurants, a gift shop and a hotel with 158 rooms and suites.
Creeker's Casino. Creeker's Casino, resembling a Victorian-style historic
structure of the late 1800's, is located at the corner of 3rd Street and Bennett
Avenue in the center of town. Creeker's offers its customers a friendly,
"down-to-earth" atmosphere in which to enjoy gaming activities. Within its
19,000-square foot casino, it offers 246 slot machines, two blackjack tables,
two bars, a restaurant featuring buffet-style meals, and entertainment areas.
Creeker's currently employs approximately 90 people and is open seven days a
week from 8:00 a.m. to 2:00 a.m., as limited by Colorado gaming regulations.
The Double Eagle Hotel & Casino. Through the new Double Eagle Hotel &
Casino, the Company established the first major hotel and casino serving the
greater Colorado Springs area with a growing population base, approaching one
million. Unlike existing gaming facilities in the Cripple Creek area, which
offer limited or no overnight accommodations, inconvenient parking and few
non-gaming amenities, the Double Eagle features 158 hotel rooms and suites, a
400-space parking lot with free valet parking and shuttle transportation, and a
45,000- square foot casino offering 746 slot machines and five blackjack tables.
The facility also includes a 100-seat restaurant, Lombard's, two bars and a gift
shop.
The Double Eagle Hotel & Casino was designed to be a modern, state-of-
the-art hotel and casino with the grandeur of Las Vegas in mind. This facility
employs the latest in lodging and gaming network systems for reservations and
hotel guest check-in, player tracking, inter-linked voice and data
communications, and computerized ventilation and environment controls. The
exterior of the building is designed to be reminiscent of the historic
structures which adorned the city of Cripple Creek during the pre-World War I
era while the interior is themed to present the glamour and splendor of the
"Roaring 20's." With its simulated stained glass barrel ceiling, elegant winding
staircases, and colorful three-dimensional casino signs, the Double Eagle offers
its guests a unique and unforgettable gaming experience. Located on southwest
corner of Bennett Avenue and 5th Street, where Route 67 and Bennett Avenue
intersect, the Double Eagle provides superior access and visibility to motorists
entering and exiting the City of Cripple Creek. It currently employs
approximately 272 people and is open seven days a week. Its casino is limited to
open, by law, from 8:00 a.m. to 2:00 a.m. while its hotel is open 24 hours.
Business and Marketing Strategy
The Company's business strategy is to offer casino gaming and a full range
of amenities in a friendly atmosphere that caters to middle and upper-middle
income customers. Incorporating the distinction between Creeker's Casino and the
Double Eagle Hotel & Casino in its marketing efforts, management believes it is
able to increase gaming activity at its respective casinos by attracting
customers from two market segments.
Creeker's targets middle to upper-income customers from the greater
Colorado Springs area and surrounding communities who prefer to make day trips
to Cripple Creek. Because of its smaller size and "down-to- earth" atmosphere,
Creeker's appeals to many customers who enjoy a cozier environment and the
personal touch offered by its friendly employees. Free pizza and a hearty buffet
served in its restaurant further heightens Creeker's attractiveness to this
market segment.
The Double Eagle appeals to higher income patrons because of its "Las-
Vegas" style casino atmosphere, upscale hotel and restaurant facilities and a
variety of special events. With the largest number of rooms and elegant suites
in Cripple Creek, free valet parking under a covered car port, and an exciting
and lively atmosphere, the Double Eagle attracts customers who enjoy spending
multiple days of gaming within a facility which offers the hospitality and
convenience of first-class accommodations. In addition, the Company anticipates
that the planned convention facilities at the Double Eagle will attract new
players by capturing meeting and small convention business for the Double Eagle.
Effective Marketing and Promotion. The Company's marketing strategy has
been to aggressively promote its two properties to customers in the identified
market segments. Through the use of radio and print advertising, promotional
coupons and special events designed uniquely to address each market segment,
management attracts players to its respective properties. Promotional
allowances, such as complimentary rooms, food, beverage and entertainment are
used at both casinos to reward and retain its customers. Specifically, Creeker's
promotes coupons for free bus transportation, discounts on buffet meals, and
cash and prize give-aways while the Double Eagle offers discounted and
complimentary hotel rooms, complimentary dinners at Lombard's Restaurant, and
cash sweepstakes to attract respective customers.
The implementation of the "Winners Circle" slot club at both Creeker's and
the Double Eagle, and the use of a player tracking system which monitors the
wagering of its customers, provides the Company with an important tool for
understanding its customer base. Information from the computerized tracking
system assists management to plan and direct marketing efforts to its customers
in both market segments.
Emphasis on Slot Play. Responding to the increased popularity of slot
machines over the past several years and recognizing that most revenues are
generated by slot machines in a limited stakes market, the Company has focused
its gaming mix toward slot, keno, and video poker machines. At Creeker's,
management chose to increase the number of slot machines to 234, while limiting
the number of table games to two blackjack tables. The same philosophy was
implemented at the Double Eagle which has 746 slot machines and five blackjack
tables.
As members of the Winners Circle, patrons are encouraged to insert their
frequent player card into slot, keno, and video poker machines while playing in
the casino to earn points. Using the tracking system to track wagering,
management rewards members of the Winners Circle based on their point totals
with various cash and gift prizes. During fiscal year 1996, Creeker's signed up
11,000 members to the Winners Circle while the Double Eagle welcomed 14,000 new
members to the "club" during the two months its casino was in operation during
the fiscal year.
The Cripple Creek Market
A small mountain town located approximately 45 miles southwest of Colorado
Springs on the western boundary of Pikes Peak, Cripple Creek is a historic
mining town originally founded in the late 1800's following a large gold strike.
Primarily a tourist town, its traffic is heaviest in the summer months and
decreases to a low point in the winter months.
Cripple Creek is one of three Colorado historical cities where casino
gaming is legal, the others being Black Hawk and Central City. Cripple Creek
operated approximately 35% of the gaming devices and generated 25% of the gaming
revenues for these three cities during the calendar year ended December 31,
1996.
The tables below set forth information obtained from the Colorado Division
of Gaming regarding gaming revenue by market from calendar year 1993 through
1996.
<TABLE>
<CAPTION>
Gaming Revenue by Market
================================================================================
($ in Thousands) 1993 1994 %Change 1995 %Change 1996 % Change
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cripple Creek $ 68,736 $ 82,280 19.7% $ 94,029 14.3 $102,873 9.4%
Central City $ 78,964 $ 69,702 (11.7%) $ 94,468 35.5% $ 88,870 (5.9%)
Black Hawk .. $112,140 $173,703 54.9% $195,856 12.8% $219,911 12.3%
</TABLE>
Gaming in Colorado is "limited stakes," which restricts any single bet to a
maximum of $5.00. While this limits the revenue potential of table games,
management believes that slot machine play, which accounts for over 94% of total
gaming revenues, is currently impacted only marginally by the $5.00 limitation.
Management's belief is also based upon the fact that a majority of the slot
machines of Creeker's Casino and all of the slot machines of the Double Eagle
are equipped with embedded bill validators which accept bill denominations of up
to $100.
Although there are currently 26 casinos in Cripple Creek, 10 are small,
with an average of 115 gaming devices. In addition, until the opening of the
Double Eagle, there were only limited overnight accommodations available in
Cripple Creek. Based on these and other factors, the Double Eagle Hotel and
Casino represents management's belief that the casinos which will be more
successful and best able to take advantage of the market potential of Cripple
Creek will be the larger casinos that have reached a "critical mass", and,
ideally, can offer hotel accommodations.
The Company faces competition from other casinos in Cripple Creek. Although
there can be no assurance that other casinos in Cripple Creek will not undertake
expansion efforts similar to those initiated by the Company, or that large,
established gaming operators will not enter the market, management believes that
the timely opening of the Double Eagle has secured a lucrative position for the
Company in the Cripple Creek gaming market.
Competition
Intense competition characterizes the Cripple Creek and Black Hawk/Central
City markets. A number of Colorado casinos have ceased operations and other have
filed for protection under Chapter 11 of the Bankruptcy Code. Other casinos have
closed temporarily or reduced their number of employees, and many casinos may
not be operating profitably.
The Company competes with several established casino operators, some of
which have greater financial resources, experience and expertise than the
Company. Because of the intense nature of this competition, there can be no
assurance that the Company's present operations will not be adversely affected
or that its proposed expansion activities will be undertaken or will prove to be
economically successful.
Management of the Company believes the Double Eagle Hotel & Casino will
successfully compete in its market primarily due to the fact that it was
designed to be a hotel and casino from the ground up unlike most other
operations which were converted to casinos from saloons and general stores. In
addition, management of the casino has developed internal programs with its
employees to ensure customers are provided a congenial, friendly, safe, service
driven, relaxing environment in which gaming becomes an exciting, fun, energetic
activity. In the management's opinion, these factors, coupled with unique
marketing programs specifically directed at active customer participation,
provides the basis on which the Double Eagle competes in its market area.
From time to time, casino companies have publicly expressed an interest in
pursuing development or expansion in the Cripple Creek market. It appears that
national, regional, state and local competition for the casino gaming market in
general will be extremely high during the foreseeable future, as casino gaming
activities expand in traditional gaming states and in new jurisdictions, a
number of which have adopted or are considering gaming legislation.
In addition, passage of the Indian Gaming Regulatory Act in 1988 has led to
rapid increases in Native American gaming operations, and the Company's two
casinos may compete for customers with casinos located on Indian reservations in
far southwestern Colorado. The Company expects many competitors to enter such
new jurisdictions that authorize gaming, some of whom may have greater financial
and other resources than the Company. Such proliferation of gaming activities
could significantly and adversely affect the Company's business. Although there
are no current proposals to expand gaming into other areas in Colorado, if
gaming is allowed in or near any metropolitan area, such as Colorado Springs,
from which the Company draws customers, such expansion would have a material
adverse effect on the Company's business.
Colorado law requires local voter approval for any expansion of limited
gaming. State and local public initiatives regarding limited gaming in Colorado
are being actively pursued. Several cities within Colorado have active citizens'
lobbies, which in the past, were able to place limited gaming initiatives on the
November 1994 and 1996 statewide ballot. These initiatives failed by substantial
margins. The 1996 initiative to permit limited gaming in Trinidad, Colorado,
located approximately 200 miles south of Cripple Creek, on the New Mexico border
was placed on the November 1996 ballot and also failed. Future initiatives, if
passed, could significantly increase the competition for gaming customers,
thereby adversely affecting the Company's current business activities. In
addition, the Company's casinos in Colorado will compete with casinos in other
parts of the United States as legalized gambling continues to proliferate.
The Company is actively seeking to expand its casino operations into
jurisdictions that have legalized or are expected to legalize gaming in the
future. There can be no assurance that the Company will be able to identify
suitable casino projects in which to invest or will be able to complete any such
projects as scheduled or planned. The Company's ability to complete and operate
new casino projects will be dependent on a number of factors, many of which are
beyond its control, including identification of suitable partners (if needed),
negotiation of acceptable terms, securing the required local, state, (or
foreign) licenses, permits and approvals, voter and other political approvals,
and any other trends. As a result, there can be no assurance that the Company
will be able to develop its current casino operations beyond the Colorado
market. In addition, the Company may incur costs in connection with pursuing new
gaming opportunities that it cannot recover and may be required to expense a
portion of these costs, which may negatively affect the Company's reported
operating performance for the periods the costs are expensed.
Employees
As of January 24, 1997, the Company employed approximately 367 persons on
an equivalent full-time basis, including cashiers, dealers, housekeepers, food
and beverage service personnel, facilities maintenance staff, and accounting and
marketing personnel. Of this total, approximately 90 people work at Creeker's
Casino and 272 people work at the Double Eagle Hotel & Casino. The balance work
at the corporate offices. None of the Company's employees are covered by a
collective bargaining agreement and none are represented by labor unions.
Seasonality
The Company's business is not considered to be seasonal, however, the
anticipated highest levels of business activity (in Colorado) will occur during
the tourist season (i.e., from May through September). Its base level (i.e.,
November through May) is expected to remain fairly constant although weather
conditions during this period could have a significant impact on business levels
in Colorado.
Governmental Regulation
The Company's gaming operations are subject to strict governmental
regulations at federal, state and local levels. Statutes and regulations can
require the Company to meet various standards relating to, among other matters,
business licenses, registration of employees, floor plans, background
investigations of licensees and employees, historic preservation, building, fire
and accessibility requirements, payment of gaming taxes, and regulations
concerning equipment, machines, tokens, gaming participants, and ownership
interests. Civil and criminal penalties can be assessed against the Company
and/or its officers or stockholders to the extent of their individual
participation in, or association with, a violation of any of the state and local
gaming statutes or regulations. Such laws and regulations apply in all
jurisdictions within the United States in which the Company may do business.
Management believes that the Company is in compliance with applicable gaming
regulations.
Colorado Gaming Regulations
The State of Colorado created the Division of Gaming (the "Division")
within the Department of Revenue to license, implement, regulate and supervise
the conduct of limited gaming. The Director of the Division, under the
supervision of a five-member Colorado Commission, has been granted broad power
to ensure compliance with the gaming laws and regulations adopted thereunder
(the "Colorado Regulations"). The Director may inspect, without notice, impound
or remove any gaming device. He may examine and copy any licensee's records, may
investigate the background and conduct of licensees and their employees, and may
bring disciplinary actions against licensees and their employees. He also may
conduct detailed background investigations of persons who loan money to the
Company.
The Colorado Commission is empowered to issue five types of gaming and
gaming-related licenses. The failure or inability of the Company, CreekerOs
Casino, Double Eagle Hotel & Casino or others associated with the Company to
maintain necessary gaming licenses will have a material adverse effect on the
operations of the Company. All persons employed by the Company, CreekerOs and
the Double Eagle and involved, directly or indirectly, in gaming operations in
Colorado also are required to obtain a Colorado gaming license. All licenses
must be renewed annually.
As a general rule, under the Colorado Regulations, it is a criminal
violation for any person to have a legal, beneficial, voting or equitable
interest, or right to receive profits, in more than three retail gaming licenses
in Colorado. The Commission has ruled that a person does not have an interest in
a licensee for purposes of the multiple-license prohibition if: (i) such person
has less than a five percent (5%) interest in an institutional investor which
has an interest in a publicly traded licensee or publicly traded company
affiliated with a licensee (such as the Company); (ii) a person has a five
percent (5%) or more financial interest in an institutional investor, but the
institutional investor has less than a five percent (5%) interest in a publicly
traded licensee or publicly traded company affiliated with a licensee; (iii) an
institutional investor has less than a five percent (5%) financial interest in a
publicly traded licensee or publicly traded company affiliated with a licensee;
(iv) an institutional investor possesses securities in a fiduciary capacity for
another person, and does not exercise voting control over five percent (5%) or
more of the outstanding voting securities of a publicly traded licensee or of a
publicly traded company affiliated with a licensee; (v) a registered broker or
dealer retains possession of securities of a publicly traded licensee or of a
publicly traded company affiliated with a licensee for its customers in street
name or otherwise, and exercises voting rights for less than five percent (5%)
of the publicly traded licensee's voting securities or of a publicly traded
company affiliated with a licensee; (vi) a registered broker or dealer acts as a
market maker for the stock of a publicly traded licensee or of a publicly traded
company affiliated with a licensee and possesses a voting interest in less than
five percent (5%) of the stock of the publicly traded licensee or of a publicly
traded company affiliated with a licensee; (vii) an underwriter is holding
securities of a publicly traded licensee or of a publicly traded company
affiliated with a licensee as part of an underwriting for no more than 90 days
if it exercises voting rights of less than five percent (5%) of the outstanding
securities of a publicly traded licensee or of a publicly traded company
affiliated with a licensee; (viii) a stock clearinghouse holds voting securities
for third parties, if it exercises voting rights with respect to less than five
percent (5%) of the outstanding securities of a publicly traded licensee or of a
publicly traded company affiliated with a licensee; or (ix) a person owns less
than five percent (5%) of the voting securities of the publicly traded licensee
or publicly traded company affiliated with a licensee. Hence, the Company's and
its stockholders' business opportunities in Colorado are limited to such
interests that comply with the statute and Commission's rule.
In addition, pursuant to the Colorado Regulations, no manufacturer or
distributor of slot machines may have an interest in any casino operator, allow
any of its officers to have such an interest, employ any person if such person
is employed by a casino operator, or allow any casino operator or person with a
substantial interest therein to have an interest in a manufacturer's or
distributor's business. The Commission has ruled that a person does not have a
"substantial interest" if it directly or indirectly has less than five percent
(5%) of such voting securities of a licensee.
Under the Colorado Regulations, any person or entity having any direct or
indirect interest in a gaming licensee or an applicant for a gaming license,
including, but not limited to, the Company and stockholders of the Company, may
be required to supply the Colorado Commission with substantial information,
including, but not limited to, background information, source of funding
information, a sworn statement that such person or entity is not holding his
interest for any other party, and fingerprints. Such information, investigation
and licensing as an "associated person" automatically will be required of all
persons (other than certain institutional investors discussed below) which
directly or indirectly own ten percent (10%) or more of a direct or indirect
legal, beneficial or voting interest in CreekerOs or the Double Eagle, through
their ownership in the Company. Such persons must report their interest and file
appropriate applications within 45 days after acquiring such interest. Persons
directly or indirectly having a five percent (5%) or more interest (but less
than 10%) in CreekerOs or the Double Eagle, through their ownership in the
Company, must report their interest to the Colorado Commission within ten (10)
days after acquiring such interest and may be required to provide additional
information and to be found suitable. If certain institutional investors provide
certain information to the Colorado Commission, such investors, at the Colorado
Commission's discretion, may be permitted to own up to 14.99% of CreekerOs
and/or the Double Eagle, through their ownership in the Company, before being
required to be found suitable. All licensing and investigation fees will have to
be paid for by the person in question. The "associated person" investigation fee
currently is $37 per hour.
The Colorado Commission also has the right to request information from any
person directly or indirectly interested in, or employed by, a licensee, and to
investigate the moral character, honesty integrity, prior activities, criminal
record, reputation, habits and associations of (i) all persons licensed pursuant
to the Colorado Limited Gaming Act; (ii) all officers, directors and
stockholders of a licensed privately held corporation; (iii) all officers,
directors and stockholders holding either a five percent (5%) or greater
interest or a controlling interest in a licensed publicly traded corporation;
(iv) all general partners and all limited partners of a licensed partnership;
(v) all persons which have a relationship similar to that of an officer,
director or stockholder of a corporation (such as members and managers of a
limited liability company); (vi) all persons supplying financing or loaning
money to any licensee connected with the establishment or operation of limited
gaming; and (vii) all persons having a contract, lease or ongoing financial or
business arrangement with any licensee, where such contract, lease or
arrangement relates to limited gaming operations, equipment, devices or
premises.
In addition, under the Colorado Regulations, every person who is a party to
a "gaming contract" with an applicant for a license, or with a licensee, upon
the request of the Colorado Commission or the Director, promptly must provide to
the Colorado Commission or Director all information which may be requested
concerning: financial history, financial holdings, real and personal property
ownership, interests in other companies, criminal history, personal history and
associations, character, reputation in the community, and all other information
which might be relevant to a determination whether a person would be suitable to
be licensed by the Colorado Commission. Failure to provide all information
requested constitutes sufficient grounds for the Director or the Colorado
Commission to require a licensee or applicant to terminate its "gaming contract"
with any person who failed to provide the information requested. In addition,
the Director or the Colorado Commission may require changes in "gaming
contracts" before an application is approved or participation in the contract is
allowed. A "gaming contract" is defined as an agreement in which a person does
business with or on the premises of a licensed entity.
An application for licensure or suitability may be denied for any cause
deemed reasonable by the Colorado Commission or the Director, as appropriate.
Specifically, the Colorado Commission and the Director must deny a license to
any applicant who (i) fails to prove by clear and convincing evidence that the
applicant is qualified; (ii) fails to provide information and documentation
requested; (iii) has been, or has any director, officer, general partner,
stockholder, limited partner or other person who has a financial or equity
interest in the applicant who has been convicted of certain crimes, including
gambling- related offenses, theft by deception or crimes involving fraud or
misrepresentation, is under current prosecution for such crimes, is a career
offender or a member or associate of a career offender cartel, or is a
professional gambler; or (iv) has refused to cooperate with any state or federal
body investigating organized crime, official corruption or gaming offenses.
If the Colorado Commission determines that a person or entity is unsuitable
to own interests in the Company, then the Company, CreekerOs and the Double
Eagle may be sanctioned, which may include the loss by the Company, CreekerOs
and the Double Eagle of their respective approvals and licenses.
The Colorado Commission does not need to approve in advance a public
offering of securities, but rather requires a filing of notice and additional
documents with regard to such public offering prior to such public offering.
Under the regulations, the Colorado Commission may, in its discretion, require
additional information and prior approval of such public offering. In addition,
the Colorado Regulations prohibit a licensee or affiliated company thereof such
as the Company, from paying dividends, interest or other remuneration to any
unsuitable person, or recognizing the exercise of any voting rights by any
unsuitable person. Further, the regulations require anyone with a material
involvement with a licensee, including a director or officer of a holding
company, such as the Company, to file for a finding of suitability if required
by the Colorado Commission.
In addition to its authority to deny an application for a license or
suitability, the Colorado Commission has jurisdiction to disapprove a change in
corporate position of a licensee and may have such authority with respect to any
entity which is required to be found suitable by the Colorado Commission. The
Colorado Commission has the power to require the Company, CreekerOs and the
Double Eagle to suspend or dismiss managers, officers, directors and other key
employees or sever relationships with other persons who refuse to file
appropriate applications or whom the authorities find unsuitable to act in such
capacities, and may have such power with respect to any entity which is required
to be found suitable.
A person or entity may not sell, lease, purchase, convey or acquire a
controlling interest in the Company without the prior approval of the Colorado
Commission. The Company may not sell any interest in CreekerOs and the Double
Eagle without the prior approval of the Colorado Commission.
Under the Colorado Regulations, the Company may repurchase the shares of
anyone found unsuitable at the lesser of the cash equivalent to the original
investment in the Company or the current market price. Under the Colorado
Regulations, the Company cannot make any distribution, pay any remuneration or
recognize the vote of any unsuitable person.
CreekerOs and the Double Eagle must meet certain architectural
requirements, fire safety standards and standards for access for disabled
persons. CreekerOs and the Double Eagle also must not exceed certain gaming
square footage limits as a total of each floor and the full building. CreekerOs
and the Double Eagle may operate their casinos only between 8:00 a.m. to 2:00
a.m., and may permit only individuals 21 years or older to gamble in the casino.
Furthermore, as a result of new regulations effective on October 1, 1996,
individuals under the 21 years may not be present in designated gaming areas
within the casino. CreekerOs and the Double Eagle may permit slot machines,
blackjack and poker, with a maximum single bet of $5.00. However, they may not
provide credit to its gaming patrons.
Gaming Taxes and Fees
The Colorado Constitution permits a gaming tax of up to 40% on adjusted
gross gaming proceeds. The Colorado Commission has set a gaming tax rate of 2%
on adjusted gross gaming proceeds of up to and including $2 million, 4% over $2
million up to and including $4 million, 14% over $4 million up to and including
$5 million, 18% over $5 million up to and including $10 million and 20% on
adjusted gross gaming proceeds in excess of $10 million. The Colorado Commission
also has imposed an annual device fee of $75 per gaming device. The Colorado
Commission may revise the gaming tax rate and device fee from time to time.
Cripple Creek has imposed an annual device fee of $675 per gaming device for the
first 50 devices and $1,200 per gaming device thereafter and may revise the same
from time to time.
Colorado Liquor Regulations
The sale of alcoholic beverages is subject to licensing, control and
regulation by the Colorado Liquor Agencies. All persons who directly or
indirectly own 10% or more of CreekerOs Casino and the Double Eagle Hotel &
Casino, through their ownership of the Company, must file applications and
possibly be investigated by the Colorado Liquor Agencies. The Liquor Agencies
also may investigate those persons who, directly or indirectly, loan money to or
have any financial interest in liquor licensees. All licenses are revocable and
not transferable. The Liquor Agencies have the full power to limit, condition,
suspend or revoke any such license and any such disciplinary action could (and
revocation would) have a material adverse effect upon the operations of the
Company. The Double Eagle and Creeker's hold a retail gaming tavern license for
their casino and restaurant operations. Accordingly, no person with an interest
in the Company can have an interest in a liquor licensee which holds anything
other than a gaming tavern license, and specifically cannot have an interest in
an entity which holds a hotel and restaurant liquor license.
Item 2. Properties
Corporate Offices. The Company leases approximately 2,700 square feet of
office space at 304 South Eight Street, Suite 201, Colorado Springs, Colorado
from an unaffiliated party. The term of the lease is until July 31, 1998 with
annual rental payments totaling $28,308 through July 31, 1997, and increasing to
$29,723 per year through the end of the term.
Creeker's Casino. Creeker's Casino is a three story building which houses a
19,000 square foot casino with 234 slot and video devices, two blackjack tables,
two bars, a 110-seat restaurant, and areas for live entertainment. Creeker's is
a corner property with 50 feet of frontage on Bennett Avenue, the major gaming
thoroughfare in Cripple Creek, Colorado, and 150 feet of frontage on 3rd Street.
Double Eagle Hotel & Casino. The Double Eagle Hotel & Casino six story
building situated on a 24,750 square foot lot. The hotel houses 158 rooms and
suites while the 45,000 square foot casino offers 746 slot and video devices,
five blackjack tables, two bars, a 100-seat restaurant, and gift shop. The
Double Eagle is the largest single property in Cripple Creek with 225 feet of
frontage on Bennett Avenue and 110 feet of frontage on 5th Street. In addition,
the Double Eagle owns a six-acre lot (the "Southern Boy" site), located 75 yards
southwest of the building, used for employee and guest parking. The lot
accommodates approximately 400 vehicles.
Myers Avenue Site. The Company presently owns a one acre parcel of
property, consisting of 40,705 square feet of land, situated 80 yards west of
Creeker's Casino in Cripple Creek. This property, located on the corner of 4th
Street and Myers Avenue, is currently zoned for gaming and is held by the
Company for future development.
Item 3. Legal Proceedings
Except non-material litigation incident to its ordinary course of business,
the Company is not a party to, and is not aware of any threatened litigation
which could have a material adverse effect on its business or results of
operations.
Item 4. Submission of Matters to a Vote of Stockholders
At the annual meeting of stockholders of the Company held on September 19,
1996, the stockholders considered and voted on the following items:
i) Three persons nominated by the Board of Directors for election as
directors to serve until the next annual meeting of stockholders of the
Company or until their successors have been duly elected and qualified,
along with the voting outcome which resulted in each nominee being elected
(as a group) as a director, were as follows: Votes Votes Votes Nominees
Cast For Cast Against Abstained Rudy S. Saenz, Gilbert M. Sisneros,
29,268,415 5,000 0 and Michael S. Smith
ii) Proposal to change the Company's state of incorporation from Te
xas to Colorado by means of a merger of the Company into Colorado Casino
Resorts, Inc. II, a newly organized Colorado corporation wholly owned by
the Company, was voted on and unanimously accepted.
iii) To ratify the selection of Williams, Richey & Co. to serve as the
Company's independent auditors until the next annual meeting of
stockholders was voted on and unanimously accepted.
Part II
Item 5.Market for Registrant's Common Equity and Related Stockholder
Matters
The common stock began trading in the NASDAQ SmallCap Market on March 29,
1995. The following table sets forth the low and high bid price per share
quotations as reported on the NASDAQ SmallCap Market of the common stock for the
periods indicated. These quotations reflect inter-dealer prices, without retail
mark up, mark down or commission and may not necessarily represent actual
transactions. Actual prices may vary.
<TABLE>
<CAPTION>
Fiscal Year Ending October 31, 1995:
High Low
<S> <C> <C>
First Quarter (from March 29, 1995).................. $3 3/4 $2 3/4
Second Quarter....................................... $4 3/4 $2 3/8
Third Quarter........................................ $5 1/4 $3 5/8
Fourth Quarter....................................... $5 1/8 $3 1/2
Fiscal Year Ending October 31, 1996:
High Low
First Quarter........................................ $4 3/4 $4 3/8
Second Quarter....................................... $4 5/8 $4 3/8
Third Quarter........................................ $2 5/8 $2 1/4
Fourth Quarter....................................... $2 3/8 $2 3/16
</TABLE>
At October 31, 1996, the Company had approximately 205 holders of record of
its voting common stock; management estimates that the Company has approximately
1,614 additional beneficial holders of its common stock held in names of brokers
and securities depositories.
At the present time, management of the Company intends to use any earnings
which may be generated to finance the growth of the Company's business.
Accordingly, the Company has not paid or declared cash distributions or
dividends on its common stock and does not intend to pay cash dividends in the
foreseeable future. Future payment of cash dividends rests within the discretion
of the Board of Directors and is based on the Company's earnings, financial
condition, capital requirements and other factors.
Item 6.Management Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
During the fiscal year ended October 31, 1996, the Company formed a wholly
owned subsidiary, Double Eagle Resorts, Inc., to conduct business as the Double
Eagle Hotel & Casino in Cripple Creek, Colorado. Effective August 1, 1996, the
Company transferred assets and liabilities, related to the Double Eagle, in the
net amount of $15,315,296 to the subsidiary in a tax-free exchange. On July 27,
1996 the Company opened the hotel and Lombard's Restaurant (at the Double Eagle)
for business and, upon receiving its gaming license from the Colorado State
Division of Gaming, opened the casino and bars on August 29, 1996. The Company's
results of operations for 1996 include the activities of the Double Eagle Hotel
& Casino and Creeker's Casino.
The Company reported net operating revenues for fiscal 1996 of $10,615,318,
an increase of $6,408,383, or 152% from the $4,206,935 recorded in 1995. Of the
increase, $3,947,536, or 62% of the total increase, was attributable to one
quarter of operations of the Double Eagle Hotel & Casino. Although, income from
operations, net of pre- opening expenses, amounted to $1,205,917, representing a
1,194% increase over the $93,200 reported in 1995, the Company reported a net
loss of ($3,330,761) or ($0.1035) per share compared to a net loss of ($462,059)
or ($0.0150) per share in fiscal year 1995. Contributing to the loss was an
increase in interest expenses of $1,856,598 and a one-time charge for
pre-opening expenses of $2,298,763, both associated with building and opening
the Double Eagle.
Casino. Fiscal 1996 casino revenues increased $5,678,424, up 142% from
fiscal 1995 casino revenues of $4,006,694 to $9,685,118. The two months of
operations of the Double Eagle casino provided $3,228,098 of the increase.
Casino costs and expenses increased 42% with the opening of the Double Eagle
from $2,085,345 to $2,957,923 in fiscal 1996. While the Double Eagle accounted
for 57% of the casino revenue growth, it accounted for the entire $872,578
increase in casino expenses. Creeker's casino revenues grew by over 61%, while
casino expenses remained relatively flat with a 2% increase from fiscal 1995 to
fiscal 1996. Management attributes this improvement to aggressive marketing and
successful promotions, implementation of the "Winners Circle" slot club, as well
as, the selection and addition of new gaming devices with bill validators. As of
October 31, 1996, Creeker's had 234 gaming devices and two blackjack tables
while the Double Eagle had 746 gaming devices and five blackjack tables.
Hotel and Gift Shop. Revenues from the hotel and gift shop amounted to
$507,825, representing approximately 5% of total operating revenues in fiscal
1996. The 158-room hotel was open for three months while the gift shop was open
for one month during the fiscal year. Hotel and gift shop expenses of $398,263
constituted 78% of the revenues, due primarily to initial inventories and
start-up expenses.
Restaurant and Bar. Restaurant and bar revenues improved by 81%, up
$162,959 to $363,200 in fiscal 1996, net of promotional allowances of $385,432
and $214,518 in fiscal 1996 and 1995, respectively. Just over $130,000 of the
increase was provided by three months of operations of the new Lombard's
Restaurant, located in the Double Eagle. Lombard's is a 100-seat, up-scale
restaurant serving made-to- order meals from its American-Continental menu. Food
and beverage costs and expenses rose by 116%, up $650,773 to $1,210,615, with
restaurant and bar operations at the Double Eagle accounting for 63% of the
increase.
General and Administrative. General and administrative expenses increased
237%, up $2,648,073 to $3,765,232 for fiscal 1996. Approximately $672,104, or
25% of the increase, was directly attributable to the new operations at the
Double Eagle. Marketing and promotional expenses of $670,000 at Creeker's
constituted another 25% of the total increase, with the balance attributable to
increases in payroll and certain overhead costs at the corporate offices and
Creeker's.
Depreciation. Depreciation expense increased 207%, up $725,979 to
$1,077,368 for fiscal 1996, with 72% of the increase, approximately $525,000,
primarily due to capital spending associated with the Double Eagle. The
remaining increase of approximately $200,000 is attributable to the addition of
new gaming devices at Creeker's.
Interest Expense. Interest expense, net of interest capitalized of
$1,241,199, increased $1,856,598, or 334% from fiscal 1995 to fiscal 1996. This
increase was attributable to the Double Eagle financing, including equipment
financing, higher consolidated debt levels, and higher interest rates.
Pre-Opening Expenses. As a result of opening the Double Eagle Hotel &
Casino in fiscal 1996, the Company recognized $2,298,763 in pre-opening
expenses. These charges had been incurred in connection with the development and
opening of that property. Approximately $1,500,000, or 65% of the total
pre-opening expenses, is due to the initial progressive jackpot liability
reserves, while the balance is composed of the pre-opening payroll, gaming
taxes, marketing costs and supplies.
Liquidity and Capital Resources
The Company's primary sources of liquidity and capital resources to date
have been cash flow from operations, borrowings under various credit
arrangements, and equity capital from private placements.
At October 31, 1996 the Company had cash and cash equivalents totaling
$2,828,994 and $1,000,000 available under a revolving line of credit. Cash flow
from operations for fiscal 1996 was $2,495,032, while cash flow from financing
activities totaled $19,817,736. Net cash used in the purchase and construction
of land, building and capitalized expenditures for property and equipment of
$21,058,919 was funded by the infusion of $18,375,000 in debt and $4,275,000 in
equity capital during fiscal 1996.
Additionally, the Company entered into eight equipment financing agreements
to fund the acquisition of gaming and associated equipment. The outstanding
balance under these equipment financing agreements at October 31, 1996 was
$7,320,941. Under the terms of six agreements, repayments of principal and
interest are due in 36 monthly installments, while two agreements require
repayments of principal and interest in 60 monthly installments. All equipment
financing agreements are secured by the equipment financed under such
agreements. The obligations under the financing agreements are guaranteed by the
Company.
The $1,000,000 revolving line of credit requires interest payable monthly
at the prime rate plus 1% and contains certain financial and other covenants.
These covenants require the Company to use the line of credit only to fund the
progressive jackpot liabilities at the Double Eagle Hotel & Casino. The line of
credit is secured by a second deed of trust on the hotel/casino. There was no
outstanding balance under the line at October 31, 1996.
The Company has demonstrated its ability to raise debt and equity capital,
as needed, over the past four years and may seek to raise additional equity
capital in the future, although there are no present plans to do so. However,
the Company intends to seek permanent debt financing in order to take out more
expensive construction debt. Specifically, the Company anticipates refinancing
its near-term obligations of approximately $13,700,000 during the second fiscal
quarter. It is expected that substantially all of the assets of the two Cripple
Creek properties would be pledged as security for repayment of the debt. It is
likely that the terms of the debt would place certain restrictions on the
Company's ability to pay dividends and incur additional debt, and would require
the Company to maintain certain financial ratios. There can be no assurance that
the financing can be obtained on terms acceptable to the Company.
Management believes that the Company has sufficient financial resources at
October 31, 1996 to meet its foreseeable obligations and to pursue a number of
growth opportunities. Other than the proposed addition of a 60-room hotel to
Creeker's Casino and construction of a conference center within the Double
Eagle, both of which are dependent on additional financing, most of the
Company's near-term growth opportunities are to a large degree discretionary and
are not expected to require significant investment or commitment of the
Company's financial resources.
Item 7. Financial Statements
The consolidated financial statements and supplementary data are as set
forth in "Index to Consolidated Financial Statements" on page F-1 hereof.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Part III
Item 9. Directors and Executive Officers of the Registrant
The following table sets forth information regarding the officers and
directors of the Company:
<TABLE>
<CAPTION>
Name Age Positions Held Since
- ---- --- -------------- -----
<S> <C> <C> <C>
Rudy S. Saenz 41 President, Chief Executive January 1992
Officer and Director
Gilbert M. Sisneros 57 Vice President and Director March 1995
Michael S. Smith 37 Secretary, General Counsel January 1993
and Director
Farid E. Tannous 30 Treasurer and Chief Financial February 1996
Officer
</TABLE>
Rudy S. Saenz is President and a Director of the Company and its subsidiary
Double Eagle Resorts, Inc., and predecessors since 1992. From 1989 through 1992,
Mr. Saenz was employed in marketing and new business development at Hughes
Aircraft Company. Rudy received a Bachelors of Science in Engineering from the
University of California at San Diego in 1982.
Gilbert M. Sisneros is Vice President and a Director of the Company since
1995. Mr. Sisneros had been owner and President of Creeker's, Inc., a casino in
Cripple Creek, Colorado since 1991. From 1983 to 1991, he was owner and
President of Metro Wholesale, Inc., a food supply company in Colorado Springs,
Colorado. Gilbert attended Leadville Community College in Leadville, Colorado.
Michael S. Smith is Secretary, General Counsel and a Director of the
Company since 1992. Mr. Smith has also been a self-employed attorney in Denver,
Colorado since 1992. Prior to joining the Company, he was an attorney with
McKenna & Cueno from 1991 to February, 1992. He received a Bachelors of Arts
from Marquette University in 1981 and a Juris Doctoris degree in 1984.
Farid E. Tannous is Treasurer and Chief Financial Officer of the Company
since February, 1996. Prior to joining the Company, Mr. Tannous was Vice
President and Chief Financial Officer of Phoenix Micro-Lite, Inc., a privately
held start-up company in Los Angeles, California. Mr. Tannous was also owner and
President of F.E. Tannous & Company Investment Management Group in Beverly
Hills, California from July, 1994 to February, 1996. Previously, he was a
Business Analyst with Hughes Power Products, Inc. and engineer in various
divisions of Hughes Aircraft Company. In June of 1994, Farid received an MBA in
finance and accounting from the University of Chicago. He also holds a Masters
(1990) and a Bachelors (1988) of Science in Electrical Engineering from the
University of Southern California.
Item 10. Executive Compensation
<TABLE>
<CAPTION>
The table below sets forth executive compensation for the period 1993
through 1996 to the officers of the Company:
Summary Compensation Table
================================================================================
Name and Fiscal Annual Annual Other Annual LTIP All Other
Principal Position Year End Salary Bonus Compensation Payouts Compensation
- ------------------ -------- ------ ----- ------------ --------------------
<S> <C> <C> <C> <C> <C> <C>
Rudy S. Saenz 10/31/96 $148,000 $220,000 none none none
President & CEO 10/31/95 $120,453 none none none none
10/31/94 none none none none none
10/31/93 none none none none none
Gilbert M. Sisneros 10/31/96 $148,000 $220,000 none none none
Vice President 10/31/95 $232,962 none none none none
10/31/94 $26,000 none none none none
10/31/93 none none none none none
Michael S. Smith 10/31/96 none none none none none
Secretary & 10/31/95 none none none none none
General Counsel 10/31/94 none none none none none
10/31/93 none none none none none
Farid E. Tannous 10/31/96 $48,462 none none none none
Treasurer & CFO
</TABLE>
Directors of the Company who are full-time employees receive no
compensation for their services as directors. All of the directors of the
Company are full-time employees.
The table below sets forth information concerning the exercise of options
during 1996 along with the aggregate 1996 year-end option holdings of the
officers of the Company:
<TABLE>
<CAPTION>
Aggregated Option Exercises in 1996 and Year-End Option Values
Common Stock
================================================================================
Number of securities Value of unexercised
underlying options at in-the-money
Shares Acquired Value October 31, 1996 options at
Name on Exercise Realized Exercisable/Unexercisable October 31, 1996
- ---- ----------- -------- ------------------------- ----------------
<S> <C> <C> <C> <C>
Rudy S. Saenz none none 140,000/320,000 $382,500
Gilbert M. Sisneros none none 0/250,000 $93,750
Michael S. Smith none none 20,000/85,000 $69,375
Farid E. Tannous none none 0/100,000 $37,500
</TABLE>
The table below sets forth information concerning grants of options during
1996 to the officers and key employees of the Company under a Non-Qualified
Stock Option Plan:
<TABLE>
<CAPTION>
Option Grants of 1996 - Common Stock
Number of securities Percent of total
underlying options granted Exercise Expiration
Name options granted to employees Price Date
- ---- --------------- ------------ ----- ----
<S> <C> <C> <C> <C>
Rudy S. Saenz 250,000 30.58% $2.00 August, 2004
Gilbert M. Sisneros 250,000 30.58% $2.00 August, 2004
Michael S. Smith 75,000 9.17% $2.00 August, 2004
Farid E. Tannous 100,000 12.23% $2.00 February, 2004
All key employees
as a group 142,500 17.43% $2.00 August, 2004
</TABLE>
On March 26, 1996, the Company made a commitment to issue a warrant for
30,000 shares exercisable at $3.00 per share to a certain investment agent as
compensation for services rendered related to a $1.5 million private placement.
As of October 31, 1996, the warrant had not been issued.
On May 10, 1996, the Company issued a warrant for an aggregate amount of
30,000 shares exercisable at $3.00 per share to outside legal counsel as
compensation for legal services rendered. The warrant entitles the holder to
exercise up to 20,000 shares during calendar 1996, and 10,000 shares in calendar
1997. The warrant expires two years from the date of issue.
Item 11. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth information concerning common stock
ownership by beneficial owners of five percent or more of the
Company's common stock and the officers and directors of the Company:
<TABLE>
<CAPTION>
Name and Address Amount of Percent of
Title of Class of Beneficial Owner Beneficial Ownership Class
- -------------- ------------------- -------------------- -----
<S> <C> <C> <C>
Common Rudy S. Saenz
$0.001 par value 304 S. 8th Street, Suite 201 11,883,610 34.41%
Colorado Springs, CO 80905
Common Gilbert M. Sisneros
$0.001 par value 304 S. 8th Street, Suite 201 11,853,610 34.32%
Colorado Springs, CO 80905
Common Michael S. Smith
$0.001 par value 304 S. 8th Street, Suite 201 2,500 Less than 1%
Colorado Springs, CO 80905
Common All Officers and Directors 23,739,720 68.74%
$0.001 par value as a group (three persons)
Common Total shares issued/outstanding 34,537,711 100.00%
</TABLE>
Compliance with Section 16(a) of the Securities Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who beneficially own more than 10%
of its outstanding common stock, to file with the SEC initial reports of
ownership and reports of changes in ownership of common stock and other equity
securities of the Company. Officers and stockholders who own more than 10% are
required by SEC regulation to furnish the Company with copies of all Section
16(a) reports they file.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended October 31, 1996, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10% stockholders were satisfied.
Item 12. Certain Relationships and Related Transactions
Michael S. Smith, Secretary and General Counsel of the Company, did not
receive a salary from the Company for the past fiscal year. However, in
consideration for legal services rendered to the Company, Mr. Smith received
$69,000 during fiscal year 1996. Mr. Smith received no compensation for his
services as director.
On July 12, 1996, Mr. Willard F. Clarey resigned as officer and director of
the Company. In conjunction with his resignation, Mr. Rudy S. Saenz and Mr.
Gilbert M. Sisneros jointly acquired all of Mr. Clarey's equity interest in the
Company.
Item 13. Exhibits and Reports on Form 8-K
None.
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, as amended, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized this 24th day of
January, 1997.
COLORADO CASINO RESORTS, INC.
By: /s/ Rudy S. Saenz
Rudy S. Saenz
President and Chief Executive
Officer, Director (Principal Executive
Officer)
/s/ Farid E. Tannous
Farid E. Tannous
Treasurer and Chief Financial
Officer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
January 24, 1997 /s/ Rudy S. Saenz
Rudy S. Saenz
President and Chief Executive
Officer, Director
January 24, 1997 /s/ Gilbert M. Sisneros
Gilbert M. Sisneros
Vice President, Director
January 24, 1997 /s/ Michael S. Smith
Michael S. Smith
Secretary and General Counsel,
Director
January 24, 1997 /s/ Farid E. Tannous
Farid E. Tannous
Treasurer and Chief Financial
Officer
<PAGE>
Colorado Casino Resorts, Inc.
Index to Consolidated Financial Statements
Independent Auditors's Report................................ F-2
Consolidated Balance Sheet as of October 31, 1996............ F-3
Consolidated Statements of Operations........................ F-5
Consolidated Statements of Shareholders' Equity.............. F-6
Consolidated Statements of Cash Flows ....................... F-8
Notes to Consolidated Financial Statements................... F-10
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Colorado Casino Resorts, Inc.
Colorado Springs, Colorado
We have audited the accompanying consolidated balance sheets of
Colorado Casino Resorts, Inc. and Subsidiaries as of October 31,
1996 and 1995, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the years
ended October 31, 1996 and 1995 and the ten-month short year
ended October 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Colorado Casino Resorts, Inc. and
Subsidiaries as of October 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for
the years ended October 31, 1996 and 1995 and the ten-month short
year ended October 31, 1994, in conformity with generally
accepted accounting principles.
As discussed in Note A, Colorado Casino Resorts, Inc., merged
with Creeker's, Inc., effective March 15, 1995, in a transaction
accounted for as a pooling of interests. The financial
statements for the ten months ended October 31, 1994 have been
restated to reflect the pooling of interests.
Williams, Richey & Co.
Denver, Colorado
December 19, 1996
<PAGE>
<TABLE>
<CAPTION>
COLORADO CASINO RESORTS, INC.
CONSOLIDATED BALANCE SHEETS
OCTOBER 31,
ASSETS 1996 1995
------ ---- ----
<S> <C> <C>
CURRENT ASSETS
Cash and temporary investments .................... $ 2,828,994 $ 1,375,145
Certificate of deposit, restricted ................ -- 450,000
Inventory ......................................... 251,662 49,885
Advances to officers .............................. 379,617 114,617
Other current assets .............................. 553,992 87,885
------- ------
TOTAL CURRENT ASSETS ....................... 4,014,265 2,077,532
--------- ---------
REAL ESTATE HELD FOR FUTURE DEVELOPMENT .............. 4,504,970 4,504,970
--------- ---------
LAND, BUILDING AND EQUIPMENT
Land .............................................. 7,071,644 7,071,644
Building .......................................... 23,085,250 1,625,154
Furniture and equipment ........................... 12,832,717 2,244,529
Construction in process ........................... -- 3,301,432
Accumulated depreciation .......................... (1,520,102) (533,606)
---------- --------
TOTAL LAND, BUILDING AND EQUIPMENT ........ 41,469,509 13,709,153
---------- ----------
OTHER ASSETS
Deposits, land and building option ................ 25,000 25,000
Other ............................................. 288,483 8,176
------- -----
TOTAL OTHER ASSETS ........................ 313,483 33,176
------- ------
TOTAL ASSETS ......................................... $ 50,302,227 $ 20,324,831
============ ============
<PAGE>
COLORADO CASINO RESORTS, INC .....
CONSOLIDATED BALANCE SHEETS (CONTINUED)
OCTOBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY .............. 1996 1995
--------------------------------------------------- ---- ----
CURRENT LIABILITIES
Accounts payable .................................. $ 649,895 $ 52,975
Progressive jackpot liabilities ................... 1,995,388 263,788
Accrued other expenses ............................ 1,253,026 261,698
Interest payable, related parties ................. 1,142,000 --
Note payable ...................................... -- 500,000
Current portion, long-term debt, related .......... 7,676,209 64,681
party
Current portion, long-term debt ................... 6,015,931 279,794
Current portion, capital lease ..................... 1,535,656 --
---------
obligations
TOTAL CURRENT LIABILITIES ................. 20,268,105 1,422,936
LONG-TERM DEBT, RELATED PARTY ........................ 412,125 665,603
LONG-TERM DEBT ....................................... 8,238,993 4,318,684
CONVERTIBLE DEBENTURES, RELATED PARTY ................ 5,199,739 4,876,297
CONVERTIBLE DEBENTURES ............................... 2,500,000 --
CAPITAL LEASE OBLIGATIONS ............................ 5,785,285 --
---------
TOTAL LIABILITIES ....................... 42,404,247 11,283,520
---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTE N)
STOCKHOLDERS' EQUITY
Preferred convertible stock, Series
One, $10 par value,
5,000,000 shares authorized,
250,000 and 650,000
issued and outstanding, ................. 2,500,000 6,500,000
respectively
Common stock, $.001 par value,
100,000,000 shares
authorized, 34,537,711 and
30,845,000 issued and
outstanding, respectively ................... 34,537 30,845
Paid-in capital ................................. 10,467,270 4,283,532
Accumulated deficit ............................. (5,103,827) (1,773,066)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY ................ 7,897,980 9,041,311
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........... $ 50,302,227 $ 20,324,831
============ ============
</TABLE>
<TABLE>
<CAPTION>
COLORADO CASINO RESORTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Ten-Months
Year Ended Year Ended Ended
October October October
31, 31, 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
REVENUE
Casino ............. $ 9,685,118 $ 4,006,694 $ 1,485,985
Hotel and gift shop 507,825 -- --
Restaurant and bar . 363,200 188,698 172,544
Miscellaneous ...... 59,175 11,543 --
------ ------
Total revenue . 10,615,318 4,206,935 1,658,529
---------- --------- ---------
EXPENSES
Casino ............. 2,957,923 2,085,345 1,129,819
Hotel and gift shop 398,263 -- --
Restaurant and bar . 1,210,615 559,842 182,599
General and ........ 3,765,232 1,117,159 266,824
administrative
Preopening costs ... 2,298,763 -- --
Depreciation ....... 1,077,368 351,389 108,506
--------- ------- -------
Total expenses 11,708,164 4,113,735 1,687,748
---------- --------- ---------
Income (Loss) From ...... (1,092,846) 93,200 (29,219)
Operations
NONOPERATING INCOME
(EXPENSES)
Interest income .... 173,942 -- --
Interest expense ... (2,411,857) (555,259) (349,230)
---------- -------- --------
Total
nonoperating income
(2,237,915) (555,259) (349,230)
---------- -------- --------
(expense)
NET LOSS ................ $ (3,330,761) $ (462,059) $ (378,449)
============ ============ ============
Net Loss Per Common Share $ (0.1035) $ (0.0150) $ (0.0135)
============ ============ ============
Weighted Average Common 32,170,990 30,747,582 27,960,986
Shares Outstanding ========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COLORADO CASINO RESORTS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 1996 AND 1995
TEN MONTHS ENDED OCTOBER 31, 1994
Preferred Stock Common Stock Paid-in Accumulated
-------------------------------------------------
Share Amount Shares Amount Capital Deficit Total
----- ------ ------ ------ ------- ------- -----
s
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 . -- $-- 25,000,000 $ 25,000 $ 1,976,953 $ (762,160) $ 1,239,793
Paid-In Capital, Debt ...... -- -- -- -- 582,424 -- 582,424
Converted to Equity
Issuance of Common Stock in
Exchange for
Common Stock in Lyric .... -- -- 1,000,000 1,000 (1,000) -- --
Development Co. ............
Common Stock Issued for Cash -- -- 500,000 500 249,500 -- 250,000
at $0.50 Per Share
Common Stock Issued for .... -- -- 100,000 100 74,900 -- 75,000
Services at $0.75 Per Share
Common Stock Issued for Cash -- -- 2,400,000 2,400 597,600 -- 600,000
at $0.25 Per Share
Common Stock Issued for Cash -- -- 40,000 40 99,960 -- 100,000
at $2.50 Per Share
Common Stock Issued for Cash -- -- 1,600,000 1,600 398,400 -- 400,000
at $.25 Per Share
Net Loss ................... -- -- -- -- -- (378,449) (378,449)
-------- --------
BALANCE, OCTOBER 31, 1994 .. -- -- 30,640,000 30,640 3,978,737 (1,140,609) 2,868,768
=== ==== ========== ====== ========= ========== =========
</TABLE>
<TABLE>
<CAPTION>
COLORADO CASINO RESORTS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED OCTOBER 31, 1996 AND 1995
TEN MONTHS ENDED OCTOBER 31, 1994
Preferred Stock Common Stock Paid-in Accumulated
-------------------------------------------------
Shares Amount Shares Amount Capital Deficit Total
------ ------ ------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
Common Stock Options Exercised
at $1 Per
Share ....................... -- -- 5,000 5 4,995 -- 5,000
Common Stock Issued at $1.50 . -- -- 200,000 200 299,800 -- 300,000
Per Share
Preferred Stock Issued at $10 650,000 6,500,000 -- -- -- -- 6,500,000
Per Share
Distribution to Former S- .... -- -- -- -- -- (170,398) (170,398)
Corporation Stockholders
Net Loss ..................... -- -- -- -- -- (462,059) (462,059)
------------------------------------------------------------------------------------------------
BALANCE, OCTOBER 31, 1995 .... 650,000 6,500,000 30,845,000 30,845 4,283,532 (1,773,066 9,041,311
Common Stock Issued at $2.03 . -- -- 614,770 614 1,124,386 -- 1,125,000
Per Share
Preferred Stock Issued at $10 350,000 3,150,000 -- -- -- -- 3,150,000
Per Share
Conversion of Series Two,
Preferred Stock
into Common Stock .......... (350,000) (3,150,000) 2,056,308 2,057 3,147,943 -- --
Conversion of Convertible
Debentures into
Common Stock ............... -- -- 1,021,633 1,021 1,911,409 -- 1,912,430
Conversion of Series One, .... (400,000) (4,000,000) -- -- -- -- (4,000,000)
Preferred Stock into Debt
Net Loss ..................... -- -- -- -- -- (3,330,761) (3,330,761)
-------------------------------------------------------------------------------------------------
BALANCE, OCTOBER 31, 1996 .... 250,000 $ 2,500,000 34,537,711 $ 34,537 $10,467,270 $(5,103,827) $ 7,897,980
=== ==== ======= =========== ========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
COLORADO CASINO RESORTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Ten Months
Year Ended Year Ended Ended
October October October
31, 31, 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net loss .......................... $ (3,330,761) $ (462,059) $ (378,449)
Noncash items
Depreciation and .............. 1,077,368 351,389 108,506
amortization
Amortization of debt .......... 600,939 -- --
issue costs
(Gain) loss on sale of ........ (14,467) 13,136 --
fixed assets
Common stock for services ..... -- -- 75,000
Interest converted to ......... 326,492 415,816 45,852
debt or equity
(Increase) decrease in:
Inventory ..................... (201,777) (20,204) (29,681)
Other current assets .......... (466,107) (38,904) (2,012)
Other assets .................... 41,497 -- --
(Decrease) increase in:
Accounts payable .............. 596,920 27,025 21,391
Interest payable, related ..... 1,142,000 -- --
parties
Accrued other expenses ........ 2,722,928 226,367 159,181
--------- ------- -------
Net cash provided (used)
by operating activities ..... 2,495,032 512,566 (212)
--------- ------- ----
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase/construction of
land,
building, and equipment ......... (21,058,919) (4,088,492) (311,469)
Proceeds from sale of fixed ....... 30,000 29,100 --
assets
Certificate of deposit, ........... 450,000 (450,000) --
restricted
Deposits, purchase options ........ -- (50,000) (50,000)
Advances to officers .............. (280,000) (94,617) (20,000)
-------- ------- -------
Net cash used by investing activities (20,858,919) (4,654,009) (381,469)
----------- ---------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COLORADO CASINO RESORTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Ten
Year Year Months
Ended Ended Ended
October October October
31, 31, 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES
Advances from officers ................. 15,000 -- 435,000
Repayments, advances from .............. -- (120,000) (480,633)
officers
Borrowings, note payable ............... -- 500,000 --
Repayments, note payable ............... (500,000) (93,000) --
Borrowings, long-term debt ............. 10,040,000 -- 405,000
Borrowings, long-term debt, ............ 8,355,000 -- --
related party
Repayments, long-term debt ............. (342,130) (2,046,957) (644,997)
Repayments, long-term debt, ............ (1,000,000) -- (66,574)
related party
Distributions, prior S-Corp ............ -- (170,398) --
stockholders
Debt and stock issue costs ............. (1,025,134) -- --
Issuance of common stock ............... 1,125,000 305,000 1,350,000
Issuance of preferred stock ............ 3,150,000 6,500,000 --
--------- ---------
Net cash provided by ............... 19,817,736 4,874,645 997,796
---------- --------- -------
financing activities
INCREASE IN CASH AND
CASH EQUIVALENTS ................... 1,453,849 733,202 616,115
CASH AND CASH EQUIVALENTS, ............... 1,375,145 641,943 25,828
--------- ------- ------
BEGINNING
CASH AND CASH EQUIVALENTS ................ $ 2,828,994 $ 1,375,145 $ 641,943
============ ============ ============
ENDING
NONCASH INVESTING AND FINANCING ACTIVITIES
Common stock issued for debt ........... $ 1,912,430 $-- $ 657,424
============ = ============
Common stock issued for ................ $-- $-- $ 75,000
= = ============
property and services
Preferred stock converted to ........... $ 3,150,000 $-- $--
============ = =
common stock
Preferred stock converted to ........... $ 4,000,000 $-- $--
============ = =
debt
Land, building and equipment
financed through debt ................. $ 7,794,338 $ 4,262,717 $ 4,856,651
============ ============ ============
Debt, refinanced ....................... $-- $ 1,180,919 $--
= ============ =
</TABLE>
<PAGE>
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Operations
Colorado Casino Resorts, Inc. (the Company or CCRI), (formerly Airline of
the Virgin Islands, Inc.) was originally incorporated under the laws of the
Virgin Islands on March 25, 1982, and was reincorporated in the state of Texas
on March 15, 1993. On January 14, 1994, the Company completed a merger with
Lyric Development Company, Inc., (Lyric) whereby the Company (which had no
assets or liabilities and 1,000,000 shares of common stock issued and
outstanding prior to the reorganization) issued an additional 5,000,000 shares
of common stock to the stockholders of Lyric in exchange for 100% of the
outstanding common stock of Lyric. The transaction has been accounted for as a
recapitalization of Lyric with Lyric's accumulated deficit and operations being
carried forward. During the year ended October 31, 1995, Lyric and its
subsidiaries were liquidated into CCRI. During the year ended October 31, 1996,
CCRI filed to reincorporate in the state of Colorado.
During the year ended October 31, 1996, the Company formed a wholly owned
subsidiary, Double Eagle Resorts, Inc. Effective August 1, 1996, the Company
transferred assets and liabilities, related to the Double Eagle Hotel & Casino,
in the net amount of $15,315,296 to the subsidiary in a tax-free exchange.
The Company through its wholly owned subsidiaries, Creeker's, Inc.
(Creeker's) and Double Eagle Resorts, Inc. (Double Eagle), own and operate a
casino and a hotel/casino in Cripple Creek, Colorado. Creeker's Casino has 234
slot machines and two blackjack tables. The Double Eagle's hotel/casino has 158
hotel rooms, 746 slot machines and five blackjack tables. The Double Eagle hotel
opened on July 27, 1996 and the casino opened on August 29, 1996.
Business Combination
Effective March 15, 1995, the Company issued 20,000,000 shares of its
common stock in exchange for all of the outstanding stock of Creeker's in a
merger accounted for as a pooling of interests. Financial statements for periods
prior to the combination have been restated to reflect the pooling of interests.
Concurrent with the merger, Creeker's became a subsidiary of the Company and
conformed its fiscal year to that of the Company. Creeker's briefly operated a
casino at another location from late 1991 through mid-1993. The current casino
began operations in April, 1994.
Included in consolidated results of operations for the year ended October
31, 1995, are the following results of the previously separate companies for the
period November 1, 1994 to April 30, 1995:
<TABLE>
<CAPTION>
CCRI Creeker's Intercompany Consolidated
<S> <C> <C> <C> <C>
Revenue ..................... $ 32,391 $ 1,596,108 $ (19,641) $ 1,608,858
Net Income (Loss) $ (558,831) $ 161,756 $ -- $ (397,075)
</TABLE>
The following is a reconciliation of revenue and earnings previously
reported by the Company for the ten months ended October 31, 1994 with the
combined amounts currently presented in the financial statements for that
period:
<TABLE>
<CAPTION>
CCRI Creeker's Intercompany Consolidated
<S> <C> <C> <C> <C>
Revenue .......... $ 9,500 $ 1,649,029 $ -- $ 1,658,529
Net income (loss) $ (555,947) $ 177,498 $ -- $ (378,449)
</TABLE>
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company's wholly-owned subsidiaries, Creeker's Inc. and Double Eagle
Resorts, Inc. All intercompany balances and transactions have been eliminated.
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Business Combination (Continued)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Certificate of Deposit, Restricted
The certificate of deposit was restricted under a letter of credit
agreement with the City of Cripple Creek to ensure completion of the
hotel/casino construction. The certificate of deposit was released from
restriction upon completion of construction.
Inventory
Inventory consists of food, beverages, gift shop items, and tokens/chips
and is recorded at the lower of cost (first-in, first- out method) or market.
Real Estate Held For Future Development
In August 1994, the Company acquired the Myers Avenue property from a real
estate partnership (a related party effective with the acquisition of
Creeker's). The property consists of 40,705 square feet of land located 80 yards
west of the Creeker's casino parking lot and has a carrying value of $4,504,970
at October 31, 1996 and 1995. The property was appraised May 26, 1995, for
$6,500,000 and is being held for future development.
Land, Building and Equipment
Real estate held for future development is recorded at the lower of cost or
fair value.
Impairment of real estate or other long-lived assets is evaluated whenever
there is an indication that there is (a) a significant decrease in market value,
(b) a significant change in the extent or manner in which an asset is used, (c)
a significant adverse change in legal factors or the business climate, (d) an
accumulation of costs significantly in excess of the amount originally expected
to acquire or construct, or (e) a forecast that demonstrates continuing expected
losses associated with the asset. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss is recognized. During the years ended October 31,
1996 and 1995, there were no changes in condition that indicated that the
carrying amounts of real estate or other long-lived assets may not be
recoverable.
Furniture and equipment are being depreciated over their estimated useful
lives using accelerated methods. Building and improvements are being depreciated
over their estimated useful lives on a straight-line basis. Building includes
$1,301,049 of capitalized interest of which $1,241,199 and $59,850 was incurred
for the years ended October 31, 1996 and 1995, respectively. Land, building and
equipment used in operations consist of the following: A. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
Land, Building and Equipment (Continued)
<TABLE>
<CAPTION>
October October Estimated
31, 31, Useful
1996 1995 Life
---- ---- ----
<S> <C> <C> <C>
Land ..................... $ 7,071,644 $ 7,071,644 --
Buildings and improvements 23,085,250 1,752,059 39 Years
Gaming equipment ......... 6,895,111 1,571,765 7 Years
Surveillance equipment ... 587,550 99,199 5 Years
Coin handling equipment .. 388,033 91,858 7 Years
Transportation equipment . 96,292 -- 5 Years
Signs .................... 748,523 -- 7 Years
Kitchen, bar and
restaurant equipment ... 300,627 45,189 7 Years
Hotel furnishings ........ 2,663,614 -- 7 Years
Office, computer, audio .. 1,152,967 309,613 5-7 Years
equipment
Construction in process .. -- 3,301,432 --
---------
42,989,611 14,242,759 --
Less accumulated ......... 1,520,102 533,606 --
--------- -------
depreciation
$41,469,509 $13,709,153 --
=========== ===========
</TABLE>
Debt Issue Costs
Debt issue costs are being amortized over the life of the related loans
using the effective interest method. Debt issue costs of $825,134 less
accumulated amortization of $600,939 are included in other assets at October 31,
1996.
Stockholders' Equity
Effective September 30, 1994, the stockholders of Creeker's contributed as
additional paid-in capital, debt and related interest payable owed to them by
Creeker's in the amount of $582,424.
During the year ended October 31, 1995, Creeker's made distributions of
$170,398 to the former S-Corporation stockholders to meet their estimated tax
obligations for taxable S-Corporation earnings passed through to them.
The Company has authorized 5,000,000 shares of Series One preferred
convertible non-voting stock. The preferred stock will be automatically
converted into units upon the closing of the Company's next public offering of
common stock units, provided such closing occurs within two years from the date
of issue of the preferred stock. Said units will be identical to the units
offered to the public and should consist of at least one share of common stock
and one redeemable common stock purchase warrant.
The preferred stock will be convertible at a conversion rate of three units
for each amount of par value of preferred stock equal to the initial public
offering price per unit. If the preferred stock is not automatically converted
within two years, it may be converted, at the option of the holder, into four
units, with each unit consisting of one share of common stock and one redeemable
common stock purchase warrant.
Each warrant obtained on optional conversion will entitle the holder
thereof to purchase one share of Common Stock for a period of three years
commencing with the date of optional conversion at a price of four dollars.
During the exercise period of the warrants, each warrant shall be redeemable by
the Company at a redemption price of $.10 per warrant upon 30 days prior written
notice to each warrant holder provided, however, that the closing average bid
price of the Company's common stock, for a period of 20 consecutive trading days
prior to any such call for redemption, shall have been 150% or more of the
effective exercise price of the warrants.
The Series One convertible preferred stockholders are entitled to a
cumulative annual dividend equal to six percent of the par value of the
preferred stock. Upon either an automatic or optional conversion of the
preferred stock (as described
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
below) all cumulative dividends are forfeited. Cumulative preferred
dividends in arrears at October 31, 1996 and 1995, would be $179,270 and
$99,270, respectively.
During the year ended October 31, 1996, the Company issued 350,000 shares
of Series Two, $10 Par Value, Convertible Preferred Stock, for $3,150,000 (net
of issuance costs). The Series Two, Preferred Stock was converted into 2,056,308
shares of common stock at 80% of the market price (average closing bid for the
five days prior to conversion) during the year ended October 31, 1996.
Revenues
Casino revenues are the net winnings from gaming activities, which is the
difference between gaming wins and losses.
Promotional Allowances
Bar and restaurant revenue does not include the retail amount of food and
beverage provided gratuitously to customers, which amounted to $385,432 and
$214,518 for the years ended October 31, 1996 and 1995, respectively.
Preopening Costs
Preopening costs consist of those direct incremental costs incurred prior
to commencement of hotel/casino operations and are expensed as incurred.
Income Taxes
The Company and its subsidiaries file consolidated income tax returns.
Creeker's revoked its S-Corporation status effective January 1, 1995, filed a
short period return for the period January 1, 1995 to March 31, 1995 and filed a
consolidated return with the Company effective for the period ended October 31,
1995.
An income tax provision is provided for the tax effect of transactions
reported in the financial statements. The provision consists of taxes currently
due plus deferred taxes related to differences between the basis of assets and
liabilities for financial and income tax reporting. The deferred taxes represent
the future tax return consequences of the differences, which will be either
taxable or deductible when the related assets or liabilities are recovered or
settled. A valuation allowance is provided for deferred tax assets not expected
to be realized.
Net Loss Per Share
Net loss per share is computed by dividing the net loss by the weighted
average number of common shares outstanding during each period. common stock
equivalents have been excluded since they are antidilutive. Cumulative preferred
dividends in arrears have been excluded from the net loss calculation since they
are forfeitable upon automatic or optional conversion to common stock.
Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less to be cash and
cash equivalents. Total interest paid amounted to $972,058, $232,583, and
$162,912, for the years ended October 31, 1996 and 1995, and the ten months
ended October 31, 1994, respectively.
The Company and its subsidiaries maintain cash balances at several
financial institutions located in Colorado. Accounts at each institution are
insured by the Federal Deposit Insurance Corporation up to $100,000. At October
31, 1996, the Company's uninsured cash balances total $1,531,834.
Recently Issued Accounting Standards
The Company anticipates adopting the disclosure requirements, but not the
optional recognition requirements of recently issued FAS 123 Accounting for
Stock-Based Compensation (effective for fiscal years beginning after December
15, 1995) in fiscal 1997. Stock- based compensation expense will be continued to
be recognized in accordance with APB 25 Accounting for Stock Issued to
Employees. Proforma disclosures of net income and earnings per share as though
the recognition requirements of the Standard had been adopted will be required
beginning in fiscal 1997. A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Reclassifications
Certain reclassifications have been made to prior years' balances to
conform to the current financial statement presentation.
B. ADVANCES TO OFFICERS
Advances to officers are unsecured, due on demand and bear interest at 2%
over the prime rate. Officers advanced funds to the Company in the amount of
$15,000, $None, and $435,000 for the years ended October 31, 1996 and 1995, and
the ten months ended October 31, 1994. The Company advanced funds to officers in
the amount of $280,000, $214,617, and $500,633 for the years ended October 31,
1996 and 1995, and the ten months ended October 31, 1994. Outstanding advances
to officers amounted to $379,617 and $114,617 at October 31, 1996 and 1995,
respectively.
C. NOTES PAYABLE
Note payable consisted of a unsecured note payable, corporation, dated
October, 1995 with interest payable at 20% per annum, due on demand, repaid
November, 1995.
The Company has a $1,000,000 revolving line of credit with a financial
institution under a loan agreement dated August 22, 1996 expiring March 24,
1997, with interest payable monthly at the prime rate plus 1%. The line of
credit is secured by a second deed of trust on the hotel/casino and may only be
used to fund the Company's progressive jackpot liabilities. There was no
outstanding balance under the line at October 31, 1996.
D. LONG-TERM DEBT, RELATED PARTIES
<TABLE>
<CAPTION>
Long-term debt, related parties consists of the following at October 31:
1996 1995
---- ----
<S> <C> <C>
Notes payable, stockholder, dated
November, 1995-March, 1996, extended
April 12, 1996, interest at 14.10%
per annum, due January 15, 1997 or . $2,087,500 $--
upon permanent financing,
collateralized by Creeker's, Inc. ..
common stock
Notes payable, stockholder, dated
November, 1995-March, 1996 extended
April 12, 1996, interest at 20.10%
per annum, due January 15, 1997 or . 5,267,500 --
upon permanent financing,
collateralized by Creeker's, Inc. ..
common stock
Note payable, related real estate
partnership, unsecured, dated
September, 1992, payable in monthly
installments of $17,777 including .. 733,334 730,284
------- -------
interest at 16% per annum, with a
final payment due November 1, 1997
8,088,334 730,284
Less current portion ............... 7,676,209 64,681
--------- ------
$ 412,125 $ 665,603
========== ==========
</TABLE>
Total related party interest expense under all debt arrangements (including
the convertible debenture) amounted to $1,660,506, $407,542, and $133,207 for
the years ended October 31, 1996 and 1995 and the ten months ended October 31,
1994, respectively. E. LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt consists of the following at October 31:
1996 1995
---- ----
<S> <C> <C>
Mortgage payable, individual, dated
October, 1992 modified August, 1995,
payable in monthly installments of
$3,400, including interest at 8% per $ 285,070 $ 298,022
annum, with a final principal payment
due November, 1999, collateralized
by deed of trust
Mortgage payable, individual, dated
September, 1995, payable in monthly
installments of $7,875, including ... 1,050,000 1,050,000
interest at 9% per annum, due August,
2000, collateralized by deed of trust
Mortgage payable individual, dated
October, 1995, currently payable in
monthly installments of $14,764
including interest at 8% per annum,
interest rate adjustable to prime
plus 2% on March, 1999, and every 3.5 2,055,484 2,066,704
years thereafter, not to exceed 12%
or be less than 4%, remaining
principal due November, 2025,
collateralized by deed of trust
Note payable, corporation, dated
April, 1996, extended December, 1996
payable in minimum monthly
installments of $46,166, interest ... 5,540,000 --
payable at 12% per annum, remaining
balance due April, 1997,
collateralized by deed of trusts and
personal property
Note payable, corporation, redemption
of preferred stock, unsecured, dated
July, 1996, interest payable at 18% . 4,000,000 --
per annum, principal and interest due
July, 1998
Note payable, corporation, dated
October, 1995, payable in monthly
installments of $31,092 including
interest at 11% per annum, with a ... 949,576 1,180,919
final payment due October, 1998,
collateralized by gaming equipment
Notes payable, various corporations,
dated March , 1995 to July, 1996,
payable in aggregate monthly
installments of $18,550 including 374,794 2,833
------- -----
interest at 10.50% to 12% per annum,
due January 1997 to July, 1999,
collateralized by various equipment
14,254,924 4,598,478
Less current portion ................ 6,015,931 279,794
--------- -------
$ 8,238,993 $ 4,318,684
=========== ===========
</TABLE>
E. LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
Future maturities of long-term debt are as follows at October 31,
1996:
Years Ended Unrelated Related Party Total
--------- ------------- -----
October 31,
-----------
<S> <C> <C> <C>
1997 $ 6,015,931 $ 7,676,209 $13,692,140
1998 4,832,276 412,125 5,244,401
1999 119,968 -- 119,968
2000 1,291,068 -- 1,291,068
2001 18,176 -- 18,176
Thereafter 1,977,505 -- 1,977,505
--------- ---------
$14,254,924 $ 8,088,334 $22,343,258
=========== =========== ===========
</TABLE>
F. CAPITAL LEASE OBLIGATIONS
Capital lease obligations consist of the following at October
31, 1996:
1996
Gaming equipment lease payable in monthly
installments of $136,894 including interest
imputed at 11.75% per annum. The lease expires
in November, 1999 and is collateralized by $4,892,735
gaming equipment with an approximate cost of
$4,892,735 and a book value of $4,718,064.
Equipment lease payable in monthly
installments of $23,404 including interest
imputed at 14.39% per annum. The lease expires
in August, 2001 and is collateralized by 1,076,443
various equipment, furniture and fixtures with
an approximate cost of $1,121,659 and a book
value of $1,038,014.
Equipment leases payable in aggregate monthly
installments totaling $25,917 including
interest imputed at 8% and 12% per annum. The
leases expire in August to October, 1999 and 744,140
are collateralized by various equipment with
an approximate cost of $748,523 and a book
value of $717,574.
Equipment lease payable in monthly
installments of $7,369 including interest
imputed at 8.87% per annum. The lease expires
August, 1999 and is collateralized by computer 220,837
equipment with an approximate cost of $231,127
and a book value of $209,795.
Equipment leases payable in aggregate monthly
installments totaling $4,909 including
interest imputed at 12% per annum. The leases
expire July to September, 2001 and are 213,906
collateralized by telephone and audio
equipment with an approximate cost of $215,660
and a book value of $204,877.
Equipment lease payable in monthly
installments of $1,273 including interest
imputed at 13.85% per annum. The lease expires 33,709
June, 1999 and is collateralized by radio
equipment with an approximate cost of $37,200
and a book value of $32,506.
F. CAPITAL LEASE OBLIGATIONS (CONTINUED)
1996
----
Vehicle lease payable in monthly installments
of $2,755 including interest imputed at 8.16%
per annum. The lease expires October, 1999 and 96,292
is collateralized by vehicles with an
approximate cost of $96,292 and a book value
of $91,477.
Equipment leases payable in aggregate monthly
installments totaling $1,568 including
interest imputed at 12% per annum. The leases
expire May to October, 1999 and are 42,879
collateralized by computer equipment with an
approximate cost of $48,003 and a book value
of $45,603.
Total lease obligations 7,320,941
Less current portion 1,535,656
---------
$5,785,285
==========
<TABLE>
<CAPTION>
Future minimum lease payments under the leases are as follows at
October 31, 1996:
Years Ended October 31, Amount
----------------------- ------
<S> <C>
1997 $2,471,500
1998 2,471,500
1999 2,140,666
2000 1,585,384
2001 301,830
---- -------
Total future lease payments 8,970,880
Less amount representing interest 1,649,939
---------
$7,320,941
==========
</TABLE>
G. CONVERTIBLE DEBENTURE, RELATED PARTY
On August 18, 1994, the Company purchased real property, currently being
held for future development, from a related party in exchange for a convertible
debenture in the amount of $4,500,000. The convertible debenture bears interest
at 7.05% per annum, with the principle balance and any accrued interest due
August 20, 1999 and is collateralized by deeds of trust on the related property.
The debenture is convertible into 9,000,000 shares of Company common stock. The
conversion cannot be exercised prior to November 1, 1997. The balance (including
interest added to principal) amounted to $5,199,739 and $4,876,297 at October
31, 1996 and 1995, respectively. H. CONVERTIBLE DEBENTURES
Convertible debentures consist of the following at October 31, 1996:
10% Convertible Debenture, dated January,
1996, interest payable quarterly in arrears,
convertible in $10,000 increments at 80% of
the market price of the Company's common stock
for the three business days prior to the date $1,000,000
of the holder's election to convert, any
remaining principal balance on the first
anniversary date will automatically convert
into common stock in the same manner
10% Convertible Debenture, dated March, 1996,
interest payable quarterly in arrears,
convertible in $50,000 increments at the
lesser of $4.50 per share or 80% of the market
price of the Company's common stock for the
three business days prior to the date of the 1,500,000
---------
holder's election to convert, any remaining
principal balance on the second anniversary
date will automatically convert into common
stock in the same manner
$2,500,000
==========
I. STOCK OPTIONS
<TABLE>
<CAPTION>
The following schedule details activity related to options and
warrants to officers and employees of the Company for the years
ended October 31, 1996 and 1995, and the ten months ended October
31, 1994:
Shares Option Price
<S> <C> <C>
Options Outstanding, December 31,
1993 and
October 31, 1994 400,000 $1.00
Exercised (5,000) $1.00
Surrendered (155,000) $1.00
--------
Options Outstanding, October 31, 240,000 $1.00
1995
Granted 817,500 $2.00
Surrendered (240,000) $1.00
--------
Options Outstanding, October 31, 817,500 $2.00
1996 =======
</TABLE>
<TABLE>
<CAPTION>
The following options and warrants are outstanding at October 31, 1996:
Number
of
Shares Under Exercise Expiration
Options Price Total Date
<S> <C> <C> <C>
170,500 $2.00 341,000 August, 2000
165,500 $2.00 331,000 August, 2001
165,500 $2.00 331,000 August, 2002
165,500 $2.00 331,000 August, 2003
150,500 $2.00 301,000 August, 2004
------- ----- -------
817,500 $2.00 $1,635,000
======= ===== ==========
*
Warrants
30,000 $3.00 $90,000 May, 1998
30,000 (1) $3.00 $90,000 March, 2001
60,000 $3.00 $180,000
====== ===== ========
<FN>
(1) As of October 31, 1996, no warrants had been issued although a
commitment was made by the Company. Total options and warrants exercisable at
October 31, 1996 amounted to 20,000 shares for $3.00 per share.
</FN>
</TABLE>
J. INCOME TAXES
<TABLE>
<CAPTION>
The tax effect of significant temporary differences and carrybacks
which gave rise to the Company's deferred tax assets and
liabilities are as follows:
October October
31, 31,
1996 1995
---- ----
<S> <C> <C>
Deferred Tax Assets-
Net operating loss carryforwards $875,000 $380,000
Cash basis tax assets 809,000 183,000
Capitalized construction carrying 127,000 50,000
------- ------
costs
1,811,000 613,000
Valuation Allowance (1,811,000) (613,000)
---------- --------
Net Deferred Tax Asset $ NONE $ NONE
== ==
</TABLE>
<TABLE>
<CAPTION>
The components of income tax expense are as follows:
Year Year Ten Months
Ended Ended Ended
October October October
31, 31, 31,
1996 1995 1994
<S> <C> <C> <C>
Deferred Federal Tax $(1,100,000) $(233,100) $(185,400)
(Benefit)
Deferred State Tax (98,000) (25,900) (20,600)
(Benefit)
Valuation Allowance 1,198,000 259,000 206,000
--------- ------- -------
Income Tax Expense $ NONE $ NONE $ NONE
== == ==
</TABLE>
<TABLE>
<CAPTION>
The provision for income taxes differs from the amount of income tax
determined by applying the applicable statutory federal and state income tax
rates as a result of the following differences:
Year Year Ended
Ended Ende
d
October October October
31, 31, 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal tax at statutory $(1,100,000) $(157,100) $(128,700)
rates
State tax, net of federal (98,000) (15,900) (13,300)
benefit
(Tax) passed through to
former S-Corporation -- (86,000) (64,000)
stockholders
Adjustment of the valuation
allowance 1,198,000 259,000 206,000
--------- ------- -------
Income tax provision $ NONE $ NONE $ NONE
== == ==
</TABLE>
At October 31, 1996, the Company has estimated net operating loss
carryforwards of approximately $2,334,000 available to offset taxable income
through 2011.
K. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, temporary investments, short term receivables
and payables and long-term debt approximates their fair value as of October 31,
1996 and 1995.
L. CURRENT VULNERABILITY DUE TO CONCENTRATIONS
The majority of the Company's revenues are from slot machines and the
majority of the Company's customers are located in the Colorado Springs,
Colorado area. The Company is dependent on continued Limited Stakes Gaming
regulations, which allow gaming only in the mountain towns of Cripple Creek,
Black Hawk and Central City, Colorado, to maintain its customer base. M. SEGMENT
INFORMATION
The Company's two business segments are the operation of the Creeker's
casino and the development and subsequent operation of the Double Eagle Hotel &
Casino. All operations are in Cripple Creek, Colorado. Presented below is
information concerning the Company's business segments.
<TABLE>
<CAPTION>
Ten Months
Year Ended Year Ended Ended
October 31, October 31, October 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenue
Creeker's Casino $ 6,667,782 $ 4,162,300 $ 1,649,029
Double Eagle ... 3,947,536 44,635 9,500
--------- ------ -----
$ 10,615,318 $ 4,206,935 $ 1,658,529
============ ============ ============
Operating income
(loss)
Creeker's Casino $ 2,126,460 $ 1,095,013 $ 235,112
Double Eagle ... (1,275,770) (1,001,813) (264,331)
Corporate ...... (1,943,536) -- --
----------
$ (1,092,846) $ 93,200 $ (29,219)
============ ============ ============
Identifiable
Assets
Creeker's Casino $ 5,089,813 $ 5,022,914 $ 1,195,460
Double Eagle ... 39,992,274 15,301,917 9,784,860
Corporate ...... 5,220,140 -- --
---------
$ 50,302,227 $ 20,324,831 $ 10,980,320
============ ============ ============
Depreciation
Creeker's Casino $ 532,070 $ 329,566 $ 101,499
Double Eagle ... 526,660 21,823 7,007
Corporate .. 18,638 -- --
------
$ 1,077,368 $ 351,389 $ 108,506
============ ============ ============
Capital
Expenditures
Creeker's Casino $ 391,939 $ 3,885,548 $ 589,446
Double Eagle ... 28,444,479 4,541,660 4,580,167
Corporate ...... 16,839 -- --
------
$ 28,853,257 $ 8,427,208 $ 5,169,613
============ ============ ============
</TABLE>
N. COMMITMENTS AND CONTINGENCIES
Leases
Creeker's exercised its option under a lease to purchase its casino land
and building on October 31, 1995, for $2,500,000. Total building rent expense
prior to exercising the option amounted to $225,000, and $133,335 for the year
ended October 31, 1995, and the ten months ended October 31, 1994.
The Company leases office space under a non-cancelable lease agreement
which expires July, 1998. Total rent expense amounted to $17,285, $13,500, and
$5,940 for the years ended October 31, 1996 and 1995, and the ten months ended
October 31, 1994.
N. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Leases (Continued)
<TABLE>
<CAPTION>
Future minimum lease payments are as follows:
Year Ended October 31, Amount
- ---------------------- ------
<S> <C>
1997 $28,308
1998 21,231
---- ------
$49,539
=======
</TABLE>
Land Option
Creeker's continues to have the option, under the building lease, to
purchase the parking lot behind the building for $750,000. The Company may
exercise the option at any time prior to the expiration of the agreement on
April 1, 1997.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<EXCHANGE-RATE> 1
<CASH> 2,828,994
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 251,662
<CURRENT-ASSETS> 4,014,265
<PP&E> 41,469,509
<DEPRECIATION> 1,520,102
<TOTAL-ASSETS> 50,302,227
<CURRENT-LIABILITIES> 20,268,105
<BONDS> 7,699,739
0
2,500,000
<COMMON> 34,537
<OTHER-SE> 5,363,443
<TOTAL-LIABILITY-AND-EQUITY> 50,332,227
<SALES> 10,615,318
<TOTAL-REVENUES> 10,615,318
<CGS> 11,708,164
<TOTAL-COSTS> 11,708,164
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,411,657
<INCOME-PRETAX> (3,330,761)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,330,761)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,330,761)
<EPS-PRIMARY> (.104)
<EPS-DILUTED> (.104)
</TABLE>
