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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended October 31, 1997
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)
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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: $24,075,922.
The aggregate market value of the voting stock held by non-affiliates of the
registrant on January 27, 1998 was approximately $24,186,000 based upon the
average reported closing bid and asked price of such shares. As of January 27,
1998, there were 38,665,632 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Proxy Statement from Annual Meeting of Shareholders dated September 24, 1997
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TABLE OF CONTENTS
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PART I
Item 1. Business.................................................. 3
Item 2. Properties................................................ 9
Item 3. Legal Proceedings......................................... 10
Item 4. Submission of Matters to a Vote of Stockholders........... 10
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters...................... 10
Item 6. Management Discussion and Analysis of Financial Condition
and Results of Operations............................ 11
Item 7. Financial Statements...................................... 13
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............... 13
PART III
Item 9. Directors and Executive Officers of the Registrant........ 13
Item 10. Executive Compensation.................................... 14
Item 11. Security Ownership of Certain Beneficial Owners
and Management ........................................ 15
Item 12. Certain Relationships and Related Transactions............ 15
Item 13. Exhibits and Reports on Form 8-K.......................... 15
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Special Note on Forward-Looking Statements
This Annual Report on Form 10-KSB contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such statements
refer to events that could occur in the future or may be identified by the use
of words such as "intend," "plan," "believe," "anticipate," correlative words,
and other expressions indicating that future events are contemplated. Such
statements are subject to inherent risks and uncertainties, and actual results
could differ materially from those projected in the forward-looking statements
as a result of certain of the risk factors set forth following and elsewhere in
this Annual Report on Form 10-KSB.
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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. On January 14, 1994, the Company completed a
reorganization with Lyric Development Company, Inc. ("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 one of the largest hotel/casino in the state of Colorado.
As of January 27, 1998, Creeker's and the Double Eagle, combined, account for
the Company a total of 915 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 234 slot machines, two blackjack tables,
two bars, a restaurant featuring buffet-style meals, and entertainment areas.
Creeker's currently employs approximately 99 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 681 slot machines and five blackjack tables.
The facility also includes a 100-seat restaurant, Lombard's Bar & Grill, two
bars and a gift shop.
The Double Eagle Hotel & Casino is a modern, state-of-the-art hotel and casino
fashioned after the grandeur of Las Vegas casinos. 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 reminiscent of the historic structures which adorned the city of Cripple
Creek during the pre-World War I era while the interior presents 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 the 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 276 people and is open seven days a week. The
casino is open from 8:00 a.m. to 2:00 a.m. while the 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.
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The Double Eagle appeals to higher income patrons because of its "Las-Vegas"
style casino atmosphere, quality 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 Bar & Grill, and cash sweepstakes to
attract respective customers.
Management of the Double Eagle continues to reinforce its commitment to a high
growth strategy by improving its overall image and effectiveness through new and
innovative marketing programs, a redesigned casino floor layout with higher
payback percentages, the addition of poker tables, an amusement arcade, and the
introduction of a VIP lounge for rated players. In addition to free daily slot
tournaments and special events, the Double Eagle hosts live entertainment and
music acts at its new piano bar and lounge. Responding to the needs of its
customers, management recently changed the menu at Lombard's Bar & Grill. The
ambiance is less formal, while the new menu features a greater selection of
popular items, and a children's menu was added with service offered throughout
the day.
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. To maximize capacity utilization,
management chose to reduce the number of slot machines at the Double Eagle,
improving the casino floor layout while increasing payout percentages. As a
result, win per unit per day increased by approximately by 27% to date. The
Company continues to monitor payout percentages of its slot machines to ensure
that they remain competitive.
Increased slot play is also encouraged through the use of the slot club. The
"Winners Circle" slot club and the use of a computerized player tracking system,
which monitors the wagering of its members, provides the Company with
information which assists management in planning and directing its marketing
efforts to its customers. 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 1997,
Creeker's signed up nearly 7,000 members to the Winners Circle while the Double
Eagle welcomed 38,000 new members to the club. Currently, Creeker's and the
Double Eagle have a combined total of 67,000 members in their database.
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.
It is accessible via US Highway 24, a four-lane divided highway, which connects
with the two-lane State Highway 67. Once a thriving town, boasting a population
of over 50,000 persons during the height of the gold rush, Cripple Creek was
later reduced to a sleepy ghost town prior to the introduction of gaming in
1991.
Primarily a tourist town, with its Victorian-style architecture, scenic vistas,
few active gold mines, and many abandoned mines shafts and caves left by
prospectors, Cripple Creek is now one of three venues for gaming in the State of
Colorado. The other two are Black Hawk and Central City. Cripple Creek operated
approximately 34% of the gaming devices and generated 25% of the gaming revenues
reported by these three cities during the calendar year ended December 31, 1997.
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The table below set forth information obtained from the Colorado Division of
Gaming regarding gaming revenue by market from calendar year 1994 through 1997.
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GAMING REVENUE BY MARKET
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($ in Thousands) 1994 1995 %Change 1996 %Change 1997 % Change
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Cripple Creek $82,280 $94,029 14.3% $102,873 9.4% $107,959 5.0%
Central City $69,702 $94,468 35.5% $88,870 (5.9%) $87,714 (1.3%)
Black Hawk $173,703 $195,856 12.8% $219,911 12.3% $235,768 7.2%
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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.
The slot machines at Creeker's and the Double Eagle are all equipped with
embedded bill validators which accept bill denominations of up to $100.
Although there are currently 21 casinos in Cripple Creek, 10 are small, with an
average of 86 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 which can offer
quality 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 dominant 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 in Colorado, 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 to ensure
customers are provided a congenial, friendly, safe, and service-driven
environment in which gaming becomes an exciting, fun, energetic activity. In
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
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 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.
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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 currently 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 27, 1998, the Company employed approximately 380 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 99 people work at Creeker's
Casino and 276 people work at the Double Eagle Hotel & Casino. The balance work
at the Company's corporate offices. A standard package of employee benefits is
provided to all full-time employees in addition to on-the-job training and
advancement opportunities. 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). Cripple Creek averages
over 300 days of sunshine, with moderate temperatures during the summer months,
averaging around 70(degree) F. Annual rainfall is approximately 16 1/2 inches
while annual snowfall averages 68 1/4 inches, mostly in early Spring. Its
business base level (i.e., November through May) is expected to remain fairly
constant, although inclement weather conditions during this period could have an
adverse effect on business activity.
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.
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The Colorado Commission is empowered to issue five types of gaming and
gaming-related licenses. The failure or inability of the Company, Creeker's
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, Creeker's 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 Creeker's 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 Creeker's 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 Creeker's
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.
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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, Creeker's and the Double Eagle
may be sanctioned, which may include the loss by the Company, Creeker's 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.
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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, Creeker's 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 Creeker's 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.
Creeker's and the Double Eagle must meet certain architectural requirements,
fire safety standards and standards for access for disabled persons. Creeker's
and the Double Eagle also must not exceed certain gaming square footage limits
as a total of each floor and the full building. Creeker's 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,
individuals under the age of 21 years may not be present in designated gaming
areas within the casino. Creeker's 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.
-8-
<PAGE>
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 Creeker's 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 both 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 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.
The Company plans to relocate its corporate offices at the end of its current
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, and 125 feet of frontage on 3rd Street.
Double Eagle Hotel & Casino. The Double Eagle Hotel & Casino is a six story
building situated on a 28,000 square foot lot. The hotel houses 158 rooms and
suites while the 45,000 square foot casino offers 681 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 125 feet of frontage on 5th Street. In addition,
the Double Eagle owns a six-acre lot, located 75 yards southwest of the
building, used for employee and guest parking. The lot accommodates
approximately 400 automobiles.
Double Eagle Parking Site. Management believes that an integral component of
attracting patrons in Cripple Creek is adequate, nearby parking. On September
26, 1997, the Company acquired control of fifteen contiguous city lots,
comprising approximately 47,000 square feet (one city block), located adjacent
to the Double Eagle in Cripple Creek. This property is currently used for guest
parking, accommodating approximately 250 automobiles. The Company expects to use
the land in its expansion plans to build a six story parking garage, which will
accommodate over 400 automobiles, a convention center, a health club facility,
and additional hotel rooms.
Creeker's Parking Site. On March 28, 1997, Creeker's, Inc. exercised its option
to purchase three contiguous city lots, comprising nearly 10,000 square feet,
located adjacent to Creeker's Casino in Cripple Creek. This property is used for
guest parking, accommodating approximately 40 automobiles.
Myers Avenue Site. The Company presently owns a one-acre parcel of property,
consisting of over 40,000 square feet of undeveloped land, situated 80 yards
west of the Double Eagle 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.
-9-
<PAGE>
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 24, 1997,
the stockholders considered and voted on the following items:
(i) Four 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:
<TABLE>
<CAPTION>
Votes Votes Votes
Nominees Cast For Withheld Abstained
------------------------------------ ------------- -------- ---------
<S> <C> <C> <C>
Rudy S. Saenz 27,350,956 89,475 - 0 -
Gilbert M. Sisneros 27,350,956 89,475 - 0 -
Michael S. Smith 27,353,956 86,475 - 0 -
Sam Halpern 27,353,956 86,475 - 0 -
</TABLE>
(ii) To ratify the selection of Williams, Richey & Co. (now known as Richey, May
& Co., P.C.) to serve as the Company's independent auditors until the next
annual meeting of stockholders:
<TABLE>
<CAPTION>
Votes Votes Votes
Independent Auditors Cast For Withheld Abstained
------------------------------------ ---------- -------- --------
<S> <C> <C> <C>
Williams, Richey & Co. 27,397,828 34,103 8,500
</TABLE>
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, 1996:
High Low
<S> <C> <C>
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>
-10-
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ending October 31, 1997:
High Low
<S> <C> <C>
First Quarter................................. $2 3/8 $1 1/4
Second Quarter ............................... $2 3/8 $1 1/4
Third Quarter ................................ $2 1/8 $1 5/32
Fourth Quarter ............................... $1 17/32 $1 1/16
</TABLE>
At October 31, 1997, the Company had approximately 202 holders of record of its
voting common stock; management estimates that the Company has approximately
1,300 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
Prior to August 29, 1996 the Company's operations were substantially limited to
those of Creeker's Casino in Cripple Creek, Colorado. During the fourth quarter
of fiscal 1996, the Company opened the Double Eagle Hotel & Casino, also in
Cripple Creek. The changes in the operating results for fiscal 1997 as compared
to fiscal 1996 are primarily the result of the opening of the Double Eagle.
The Company reported net operating revenues for fiscal 1997 of $24.1 million, an
increase of $13.5 million, or 126.8% from the $10.6 million recorded in 1996.
Generating more than 80% of the total revenues, the Double Eagle's first year
operations significantly contributed to the increase. Total operating expenses
were $21.8 million for the fiscal year ended October 31, 1997, an increase of
$10.1 million or 86.3% from $11.7 million for fiscal 1996. Total operating
expenses as a percentage of total revenues decreased to 90.6% during fiscal year
1997 from 110.3% during fiscal 1996.
Casino. Fiscal 1997 casino revenues increased $10.7 million, up 110.8% from
fiscal 1996 casino revenues of $9.7 million to $20.4 million. Costs and expenses
of casino operations were $7.7 million for fiscal year ended October 31, 1997,
an increase of $4.8 million or 160.6% from $2.9 million for fiscal 1996. Casino
costs and expenses as a percentage of casino revenues increased to 37.8% during
fiscal year 1997 from 30.5% during fiscal 1996. The increase in casino costs and
expenses was primarily due to increased gaming taxes and additional labor costs
associated with the opening of the Company's Double Eagle Hotel & Casino.
Hotel and Gift Shop. Revenues from the hotel and gift shop amounted to $2.4
million for fiscal year 1997, up $1.9 million, or 370.3% from fiscal 1996.
Revenues from the Double Eagle's 158-room hotel operation provided nearly $1.7
million of the increase with an occupancy rate of 75.5% during fiscal 1997.
Management's decision to reduce room rates during winter months was successful
in attracting customers to the property. Hotel and gift shop revenues accounted
for 9.9% of total consolidated revenues. Costs and expenses of hotel and gift
shop operations were $1.1 million for fiscal year 1997, an increase of $713,000
or 179.1% from $398,000 for fiscal 1996. Hotel and gift shop costs and expenses
as a percentage of hotel and gift shop revenues decreased to 46.5% during fiscal
year 1997 from 78.4% during fiscal 1996. The decrease in hotel and gift shop
costs and expenses was a result of management's decision to reduce room rates
and introduce "no-frills" accommodations while maintaining the level of
hospitality and value the guests have come to expect.
Restaurant and Bar. Restaurant and bar revenues improved by 231.2%, up $840,000
to $1.2 million in fiscal year 1997, net of promotional allowances of $1.3
million and $385,000 in fiscal 1997 and 1996, respectively. Just over $1.0
million of the increase was provided by Lombard's Bar & Grill. Restaurant and
bar costs and expenses as a percentage of restaurant and bar revenues decreased
to 231.7% during fiscal year 1997 from 333.3% during fiscal 1996. The restaurant
and bar operations at Lombard's contributed 100.0% to the increase in revenues
and 88.4% of the increase in costs and expenses in fiscal year 1997 when
compared to fiscal 1996, while the restaurant and bar operations at Creeker's
produced flat revenues and accounted for 12.0% of the increase in costs and
expenses.
-11-
<PAGE>
Marketing. Marketing and promotional expenses were $2.2 million for fiscal year
ended October 31, 1997, an increase of $1.4 million or 174.9% from $796,000 for
fiscal year 1996. Marketing expenses as a percentage of total revenues increased
slightly to 9.1% during fiscal year 1997 compared to 7.5% during fiscal 1996.
The increase in marketing expenses is primarily due to the development and
implementation of new aggressive advertising and promotional campaigns
associated with the Double Eagle.
General and Administrative. General and administrative expenses were $5.4
million for fiscal year 1997, an increase of $2.4 million or 81.8% from $3.0
million for the fiscal year ended October 31, 1996. General and administrative
expenses as a percentage of total revenues decreased to 22.4% during fiscal year
1997 from 28.0% during fiscal 1996. The increase in general and administrative
expenses is primarily due to increased expenses at the Double Eagle Hotel &
Casino of approximately $2.8 million, while overhead expenses at the Company's
corporate offices decreased by approximately $500,000 and remained relatively
flat at Creeker's.
Depreciation. Depreciation was $2.6 million for the fiscal year ended October
31, 1997, an increase of $1.5 million or 142.9% from $1.1 million for fiscal
year 1996. The increase is primarily due to the depreciation expense incurred by
the Double Eagle.
Income from Operations. As a result of factors discussed above, income from
operations was $2.3 million for the fiscal year ended October 31, 1997, an
increase of $3.4 million or 307.4% from a loss of $(1.1) million for fiscal
1996. As a percentage of total revenues, income from operations increased to
9.4% during fiscal year 1997 from a loss of (10.3%) during fiscal 1996.
Interest Expense. Interest expense was $5.2 million for fiscal year 1997, an
increase of $2.8 million or 114.6% from $2.4 million for fiscal 1996. The
increase in interest expense is due to additional debt secured by the Company in
connection with the acquisition of land and as a result of restructured terms of
certain leases agreements.
Net Loss. The net loss for the Company was $(2.9) million for the fiscal year
ended October 31, 1997, a decrease of $(434,000) or 13.0% from a loss of $(3.3)
million in fiscal year 1996.
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, 1997 the Company had cash and cash equivalents totaling $1.9
million and $300,000 available under a revolving line of credit. The revolving
line of credit requires interest payable monthly at the prime rate plus 1.5% and
is secured by a second deed of trust on Creeker's Casino. There was no
outstanding balance under the line at October 31, 1997. Net cash used by
operating activities for fiscal year 1997 was $(1.8) million compared to net
cash provided of $2.5 million in fiscal 1996. Net cash provided by financing
activities amounted to $2.1 million compared to $19.8 million in fiscal year
1996.
In fiscal year 1997, the Company spent $1.5 million on capital expenditures,
primarily related to the purchase of land for use as parking facilities. The
Company anticipates undertaking several expansion projects during the fiscal
year ending October 31, 1998, which will require additional capital
expenditures.
The Company has demonstrated its ability to raise debt and equity capital, as
needed, over the past five years and may seek to raise additional equity capital
in the future in order to finance expansion projects. The Company intends to
seek permanent debt financing in order to take out more expensive debt. 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, 1997
to meet its foreseeable obligations and to pursue a number of growth
opportunities. Other than the proposed hotel room addition to Creeker's Casino
and the expansion at the Double Eagle, including the addition of hotel rooms, a
parking garage, a conference center, and health club facility, all 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.
-12-
<PAGE>
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 42 President, Chief Executive Officer
and Director January, 1992
Gilbert M. Sisneros 58 Vice President and Director March, 1995
Michael S. Smith 38 Secretary, General Counsel and Director January, 1992
Farid E. Tannous 31 Treasurer and Chief Financial Officer February, 1996
Sam Halpern 52 Director January, 1997
</TABLE>
Rudy S. Saenz is founder, President and a Director of the Company and its
subsidiary Double Eagle Resorts, Inc., and its predecessors since January, 1992.
Mr. Saenz is responsible for crafting and implementing the Company's aggressive
growth strategy and is a key contributor to its corporate development. From 1989
through 1992, Mr. Saenz was employed in marketing and new business development
at Hughes Electronics. Previously, he was Member of Technical Staff for five
years where he functioned as design engineer at the Hughes Technology Center.
Rudy received a Bachelors of Science in Engineering Physics from the University
of California at San Diego in 1982 and later pursued graduate studies in
electrical engineering. He also attended graduate school to study business and
economics at the University of Colorado at Boulder.
Gilbert M. Sisneros is Vice President and a Director of the Company and its
subsidiary, Double Eagle Resorts, Inc. since March, 1995. Mr. Sisneros was one
of the original founders of Creeker's Casino in 1991 and, as its General
Manager, has been instrumental in driving its success. He also acted as General
Manager for the Double Eagle Hotel & Casino during its first year of operations.
Prior to founding Creeker's, Mr. Sisneros was owner and President of Metro
Wholesale, Inc., a food supply company in Colorado Springs since 1981. Gilbert
studied business law at Weatherford College in Texas and later studied business
and finance at Colorado Mountain College.
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 Member of Technical Staff in various divisions
of Hughes Electronics. In June of 1994, Farid received an MBA in finance and
accounting from the University of Chicago Graduate School of Business. He also
holds a Masters (1990) and a Bachelors (1988) of Science in Electrical
Engineering from the University of Southern California.
Michael S. Smith is Secretary, General Counsel and a Director of the Company
since January, 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. Michael received a Bachelors of
Arts from Marquette University in 1981 and a Juris Doctor degree in 1984.
Sam Halpern was elected as Director of the Company and has been sitting on the
Board since January, 1997. Mr. Halpern is President of Indela Holdings, Inc. and
a managing member of Indela CamelSquare, LLC and CamelSquare Executive Suites.
He is also a principal trustee of the Gregory Halpern Charitable Trust. Since
1990, he has served as Director and Chief Financial Officer of a diversified
family investment portfolio. Sam is a graduate of the United States Military
Academy at West Point.
-13-
<PAGE>
Item 10. Executive Compensation
<TABLE>
<CAPTION>
The table below sets forth executive compensation for the period 1995 through
1997 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>
Rudy S. Saenz 10/31/97 $113,160 none none none none
President & CEO 10/31/96 $148,000 $220,000 none none none
10/31/95 $120,453 none none none none
- ---------------------------------------------------------------------------------------------------------------------------
Gilbert M. Sisneros 10/31/97 $99,885 none none none none
Vice President 10/31/96 $148,000 $220,000 none none none
10/31/95 $232,962 none none none none
- ---------------------------------------------------------------------------------------------------------------------------
Michael S. Smith 10/31/97 none none none none none
Secretary & 10/31/96 none none none none none
General Counsel 10/31/95 none none none none none
- ---------------------------------------------------------------------------------------------------------------------------
Farid E. Tannous 10/31/97 $77,658 $15,000 none none none
Treasurer & CFO 10/31/96 $48,462 none none none none
- ---------------------------------------------------------------------------------------------------------------------------
</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, except for Mr.
Sam Halpern, function in a full-time capacity. Mr. Halpern received no
compensation for his services as director for the Company.
<TABLE>
<CAPTION>
The table below sets forth information concerning the exercise of options during
1997 along with the aggregate 1997 year-end option holdings of the officers of
the Company:
AGGREGATED OPTION EXERCISES IN 1997 AND YEAR-END OPTION VALUES
COMMON STOCK
- --------------------------------------------------------------------------------------------------------------------
Number of securities Value of unexercised
underlying options at in-the-money
Shares Acquired Value October 31, 1997 options at
Name on Exercise Realized Exercisable/Unexercisable October 31, 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Rudy S. Saenz none none none 210,000/0 $26,250
Michael S. Smith none none 45,000/60,000 $3,750
Farid E. Tannous none none 20,000/80,000 $0
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
During the year, Messrs. Rudy S. Saenz and Gilbert M. Sisneros each surrendered
options to purchase 250,000 shares of the Company's common stock at the exercise
price of $2.00 per share.
<TABLE>
<CAPTION>
The table below sets forth information concerning grants of options during 1997
to the officers and key employees of the Company under a Non-Qualified Stock
Option Plan:
OPTION GRANTS OF 1997 - 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>
Michael Beck 100,000 100% $2.00 August, 2004
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
On May 30, 1997, the Company issued a warrant to Gemini Ventures, LLC, giving
the holder the right to purchase 1,400,000 shares of the Company's common stock
at the exercise price of $2.50 per share expiring on May 30, 2002. The warrant
was issued in connection with the conversion of the Series One, Convertible
Preferred Stock.
On October 31, 1997, the Company issued a warrant to Financial Multi-Media
Group, Inc. giving the holder the right to purchase 200,000 shares of the
Company's common stock at the exercise price of $2.00 per share expiring on
October 31, 2002. The warrant was issued as partial consideration for investor
relations services rendered to the Company.
-14-
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
<TABLE>
<CAPTION>
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:
- ---------------------------------------------------------------------------------------------------------------
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 10,933,610 28.28%
Colorado Springs, CO 80905
- ---------------------------------------------------------------------------------------------------------------
Common Gilbert M. Sisneros
$0.001 par value 304 S. 8th Street, Suite 201 10,878,610 28.14%
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 Sam Halpern 2,250,000 5.82%
$0.001 par value 4350 E. Camelback Rd., Suite F100
- ---------------------------------------------------------------------------------------------------------------
Phoenix, AZ 85018
Common All Officers and Directors 24,064,720 62.24%
$0.001 par value as a group (four persons)
- ---------------------------------------------------------------------------------------------------------------
Common Total shares issued/outstanding 38,665,632 100.00%
- ---------------------------------------------------------------------------------------------------------------
</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, 1997, 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 $72,000 during
fiscal year 1997. Mr. Smith received no compensation for his services as
director.
Item 13. Exhibits and Reports on Form 8-K
None.
-15-
<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 27th day of January,
1998.
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 27, 1998 /s/ Rudy S. Saenz
--------------------
Rudy S. Saenz
President and Chief Executive Officer,
Director
January 27, 1998 /s/ Gilbert M. Sisneros
--------------------------
Gilbert M. Sisneros
Vice President, Director
January 27, 1998 /s/ Farid E. Tannous
-----------------------
Farid E. Tannous
Treasurer and Chief Financial Officer
January 27, 1998 /s/ Michael S. Smith
-----------------------
Michael S. Smith
Secretary and General Counsel, Director
January 27, 1998 /s/ Sam Halpern
-----------------------
Sam Halpern
Director
-16-
<PAGE>
COLORADO CASINO RESORTS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditor's Report
.................................................................... F-2
Consolidated Balance Sheets......................................... F-3
Consolidated Statements of Operations .............................. F-5
Consolidated Statements of Shareholders' Equity .................... F-6
Consolidated Statements of Cash Flows .............................. F-7
Notes to Consolidated Financial Statements ......................... F-9
F-1
<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, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended October 31, 1997 and 1996. 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, 1997 and 1996,
and the consolidated results of their operations and their cash flows for the
years ended October 31, 1997 and 1996, in conformity with generally accepted
accounting principles.
Richey, May & Co., P.C.
Denver, Colorado
December 17, 1997
F-2
<PAGE>
COLORADO CASINO RESORTS, INC.
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
OCTOBER 31,
ASSETS 1997 1996
------ --------------------- -------------------
<S> <C> <C>
CURRENT ASSETS
Cash and temporary investments $1,962,486 $2,828,994
Inventory 182,641 251,662
Advances to officers -- 379,617
Other current assets 567,678 553,992
--------------------- -------------------
TOTAL CURRENT ASSETS 2,712,805 4,014,265
--------------------- -------------------
REAL ESTATE HELD FOR FUTURE DEVELOPMENT 4,504,970 4,504,970
--------------------- -------------------
LAND, BUILDING AND EQUIPMENT
Land 11,601,658 7,071,644
Building 23,637,572 23,085,250
Furniture and equipment 8,520,407 12,832,717
Accumulated depreciation (3,259,534) (1,520,102)
--------------------- -------------------
TOTAL LAND, BUILDING AND EQUIPMENT 40,500,103 41,469,509
--------------------- -------------------
OTHER ASSETS
Debt issue costs 593,675 224,195
Other 64,301 89,288
--------------------- -------------------
TOTAL OTHER ASSETS 657,976 313,483
--------------------- -------------------
TOTAL ASSETS $48,375,854 $50,302,227
===================== ===================
</TABLE>
[THIS SECTION INTENTIONALLY LEFT BLANK]
The accompanying notes are an integral part of these consolidated financial
statements
F-3
<PAGE>
COLORADO CASINO RESORTS, INC.
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS (CONTINUED)
OCTOBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
------------------------------------ ---------------- ----------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $530,193 $649,895
Accrued other expenses 1,296,994 3,248,414
Interest payable, related parties 506,593 1,142,000
Due to officers 62,745 --
Current portion, long-term debt, related party -- 7,676,209
Current portion, long-term debt 1,220,964 6,015,931
Current portion, capital lease obligations 630,425 1,535,656
----------------- -----------------
TOTAL CURRENT LIABILITIES 4,247,914 20,268,105
----------------- -----------------
LONG-TERM DEBT, RELATED PARTY 7,879,324 412,125
LONG-TERM DEBT 20,851,322 8,238,993
CONVERTIBLE DEBENTURES, RELATED PARTY 5,516,988 5,199,739
CONVERTIBLE DEBENTURES -- 2,500,000
CAPITAL LEASE OBLIGATIONS 2,065,010 5,785,285
----------------- -----------------
TOTAL LIABILITIES 40,560,558 42,404,247
----------------- -----------------
COMMITMENTS AND CONTINGENCIES (NOTE K)
STOCKHOLDERS' EQUITY
Preferred convertible stock, Series One, $10 par value,
5,000,000 shares
authorized, None and 250,000
issued and outstanding, respectively -- 2,500,000
Common stock, $.001 par value, 100,000,000 shares
authorized, 38,665,632 and 34,537,711 issued and
outstanding, respectively 38,666 34,537
Paid-in capital 15,777,125 10,467,270
Accumulated deficit (8,000,495) (5,103,827)
----------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 7,815,296 7,897,980
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $48,375,854 $50,302,227
================= =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-4
<PAGE>
COLORADO CASINO RESORTS, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended Year Ended
October 31, October 31,
1997 1996
---------------- ---------------
<S> <C> <C>
REVENUE
Casino $20,412,260 $9,685,118
Hotel and gift shop 2,388,498 507,825
Restaurant and bar 1,202,791 363,200
Other 72,373 59,175
---------------- ---------------
Total revenue 24,075,922 10,615,318
---------------- ---------------
EXPENSES
Casino 7,708,363 2,957,923
Hotel and gift shop 1,111,469 398,263
Restaurant and bar 2,787,231 1,210,615
Marketing 2,189,359 796,428
General and administrative 5,395,685 2,968,804
Pre-opening costs -- 2,298,763
Depreciation 2,616,877 1,077,368
---------------- ---------------
Total expenses 21,808,984 11,708,164
---------------- ---------------
Income (Loss) From Operations 2,266,938 (1,092,846)
NONOPERATING INCOME (EXPENSES)
Interest income 11,371 173,942
Interest expense (5,174,977) (2,411,857)
---------------- ---------------
Total nonoperating income (expense) (5,163,606) (2,237,915)
---------------- ---------------
NET LOSS $(2,896,668) $(3,330,761)
================ ===============
Net Loss Per Common Share $(0.0791) $(0.1035)
================ ===============
Weighted Average Common Shares Outstanding 36,606,794 32,170,990
================ ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-5
<PAGE>
COLORADO CASINO RESORTS, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 1997 AND 1996
Preferred Stock Common Stock
--------------------------------------------- Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
--------- ------------ ------------ -------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
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 -- -- 614,770 614 1,124,386 -- 1,125,000
Preferred stock issued 350,000 3,150,000 -- -- -- -- 3,150,000
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,
preferred stock into debt (400,000) (4,000,000) -- -- -- -- (4,000,000)
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
Conversion of Series One,
preferred stock into common stock (250,000) (2,500,000) 1,400,000 1,400 2,498,600 -- --
Conversion of convertible
debentures into into common stock -- -- 2,627,921 2,629 2,661,355 -- 2,663,984
Common stock issued -- -- 100,000 100 149,900 -- 150,000
Net loss -- -- -- -- -- (2,896,668) (2,896,668)
--------- ------------------------- -------- ----------- ------------ ----------
BALANCE, OCTOBER 31, 1997 None $None 38,665,632 $38,666 $15,777,125 $(8,000,495) $7,815,296
========= ============ ============ ======== =========== ============ ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-6
<PAGE>
COLORADO CASINO RESORTS, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended
October 31, October 31,
1997 1996
----------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,896,668) $(3,330,761)
Noncash items
Depreciation and amortization 2,616,877 1,077,368
Amortization of debt issue costs 611,520 600,939
(Gain) loss on sale of fixed assets 18,693 (14,467)
Interest converted to debt or equity 481,233 326,492
(Increase) decrease in:
Inventory 69,021 (201,777)
Other current assets (13,686) (466,107)
Other assets 24,987 41,497
(Decrease) increase in:
Accounts payable (119,702) 596,920
Interest payable, related parties (635,407) 1,142,000
Accrued other expenses (1,951,420) 2,722,928
----------------- --------------
Net cash provided (used) by operating activities (1,794,552) 2,495,032
----------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase/construction of land, building, and equipment (1,542,242) (21,058,919)
Proceeds from sale of fixed assets -- 30,000
Proceeds from matured investments -- 450,000
Advances (to) from officers 379,617 (280,000)
----------------- --------------
Net cash used by investing activities (1,162,625) (20,858,919)
----------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
[THIS SECTION INTENTIONALLY LEFT BLANK]
F-7
<PAGE>
COLORADO CASINO RESORTS, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year Ended Year Ended
October 31, October 31,
1997 1996
----------------- ----------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from (to) officers 62,745 15,000
Borrowings, long-term debt 3,468,828 10,040,000
Borrowings, long-term debt, related party -- 8,355,000
Repayments, long-term debt (1,231,894) (842,130)
Repayments, long-term debt, related party (209,010) (1,000,000)
Debt and stock issue costs -- (1,025,134)
Issuance of common stock -- 1,125,000
Issuance of preferred stock -- 3,150,000
----------------- ----------------
Net cash provided by financing activities 2,090,669 19,817,736
----------------- ----------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (866,508) 1,453,849
CASH AND CASH EQUIVALENTS, BEGINNING 2,828,994 1,375,145
----------------- ----------------
CASH AND CASH EQUIVALENTS ENDING $1,962,486 $2,828,994
================= ================
NONCASH INVESTING AND FINANCING ACTIVITIES
ACTIVITIES
NONCASH INVESTING ANG FINANCING ACTIVITIES
Common stock issued for debt $2,663,984 $1,912,430
================= ================
Common stock issued for property and services $150,000 $--
================= ================
Preferred stock converted to common stock $2,500,000 $3,150,000
================= ================
Preferred stock converted to debt $-- $4,000,000
================= ================
Land, building and equipment financed through debt $3,970,555 $7,794,338
================= ================
Capital lease renegotiated to operating lease $3,996,633 $--
================= ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-8
<PAGE>
COLORADO CASINO RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Operations. Colorado Casino Resorts, Inc. (the Company),
through its wholly owned subsidiaries, Creeker's, Inc. (Creeker's) and
Double Eagle Resorts, Inc. (Double Eagle), owns and operates a casino and a
hotel/casino in Cripple Creek, Colorado. Creeker's casino has 234 slot
machines and two blackjack tables. As of October 31, 1997, the Double Eagle
hotel/casino has 158 hotel rooms, 617 slot machines and five blackjack
tables. The Double Eagle hotel opened on July 27, 1996 and the casino
opened on August 29, 1996. The Company considers the operation of its
casinos as a single business segment.
The Company formed Double Eagle as a wholly owned subsidiary during fiscal
1996 and in August 1996 transferred related assets and liabilities to the
Double Eagle in the net amount of $15,315,296 in a tax-free exchange.
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.
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.
During fiscal 1997, the Colorado Division of Gaming revised regulations
that had required casinos to be liable for the progressive base jackpots
they have established. Accordingly, the Company reduced its progressive
jackpot liability and increased its casino revenues by $1,099,399, the
amount of its previously accrued base jackpots, during the year ended
October 31, 1997.
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 Double
Eagle and has a carrying value of $4,504,970 at October 31, 1997 and 1996.
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 market value. Land, building and
equipment are stated at cost, subject to review for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable. Furniture and equipment are being depreciated
over their estimated useful lives of 5-7 years using straight-line and
accelerated methods. Building and improvements are being depreciated over
their estimated useful lives of 40 years on a straight-line basis. Building
and improvements include $1,301,049 of capitalized interest of which $None
and $1,241,199 was incurred for the years ended October 31, 1997 and 1996,
respectively.
Debt Issue Costs. Debt issue costs are being amortized over the life of the
related loans using the effective interest method.
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 $1,267,847 and $385,432, for the years ended October 31,
1997 and 1996, respectively.
F-9
<PAGE>
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Advertising Expense. Advertising costs are expensed as incurred.
Pre-opening Costs. Pre-opening 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. 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.
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 $5,176,300 and $972,058, for the years ended October 31, 1997,
and 1996, respectively. The Company's cash balances with financial
institutions typically exceed FDIC insured limits.
Recently Issued Accounting Standards. In February, 1997, the Financial
Accounting Standards Board (FASB) issued SFAS No. 128-Earnings Per Share.
SFAS No. 128 establishes standards for computing and presenting earnings
per share (EPS) and requires a dual presentation of basic and dilutive EPS.
SFAS No. 128 is effective for financial statements issued for periods ended
after December 15, 1997 and earlier adoption is not permitted. Basic EPS as
calculated in accordance with SFAS No. 128 would not be materially
different from primary EPS as presented in these financial statements.
In June 1997, the FASB issued SFAS No. 130-Reporting Comprehensive Income.
SFAS No. 130 requires the reporting and display, in a full set of
general-purpose financial statements, of all items that required to be
recognized under accounting standards as components of comprehensive
income. SFAS No. 130 is effective for financial statements issued for
periods beginning after December 15, 1997 and reclassification of financial
statements for earlier periods for comparative purposes is required. The
adoption of SFAS No. 130 will not have a material impact on these financial
statements.
In June 1997, the FASB issued SFAS No. 131-Disclosures about Segments of an
Enterprise. SFAS No. 131 establishes standards for the way that public
companies report information about their operating segments, products and
services, geographic areas, and major customers. SFAS No. 131 is effective
for periods beginning after December 15, 1997 and requires restatement of
information presented for prior periods. The adoption of SFAS No. 131 will
not have a material impact on these financial statements.
Reclassifications. Certain reclassifications have been made to prior years'
balances to conform to the current financial statement presentation.
B. ADVANCES TO OFFICERS
Officers advanced funds to the Company in the amount of $1,100,138 and
$15,000, for the years ended October 31, 1997 and 1996, respectively. The
Company advanced funds to officers in the amount of $657,776 and $280,000,
for the years ended October 31, 1997 and 1996, respectively. Outstanding
advances to (from) officers amounted to $(62,745) and $379,617 at October
31, 1997 and 1996, respectively. Advances to officers are unsecured, due on
demand and non-interest bearing.
F-10
<PAGE>
<TABLE>
<CAPTION>
C. LONG-TERM DEBT, RELATED PARTIES
Long-term debt, related parties consists of the following at October 31,:
1997 1996
------------ -----------
<S> <C> <C>
Notes payable, stockholder, dated November 1995-March 1996, extended
January 15, 1997, interest at 14.10% per annum, principal due January
28, 1999 or upon permanent financing, collateralized
by Creeker's, Inc. common stock $2,087,500 $2,087,500
Notes payable, stockholder, dated November 1995-March 1996 extended
January 15, 1997, interest at 20.10% per annum, principal due January
28, 1999 or upon permanent financing, collateralized
by Creeker's, Inc. common stock 5,267,500 5,267,500
Note payable, related limited partnership, unsecured, dated September
1992, payable in monthly installments of $17,777 including interest at
16% per annum, with a final payment due
November 1, 1999 524,324 733,334
------------- ------------
Total long-term debt, related parties 7,879,324 8,088,334
Less current portion -- 7,676,209
------------- ------------
$7,879,324 $412,125
============= ============
</TABLE>
<TABLE>
<CAPTION>
Total related party interest expense under all debt arrangements (including
the convertible debenture) amounted to $1,347,869 and $1,660,506, for the
years ended October 31, 1997, and 1996, respectively.
D. LONG-TERM DEBT
Long-term debt consists of the following at October 31,:
1997 1996
------------ ----------
<S> <C> <C>
Note payable, corporation, dated April 1996, amended September 1997,
payable in monthly installments, interest payable at 12% per annum,
remaining balance due November 15, 1998, collateralized by
deed of trusts and personal property $7,588,889 $5,540,000
Note payable, corporation, redemption of preferred stock, unsecured,
dated July 1996, interest payable at 18% per annum,
principal due July 1999 4,000,000 4,000,000
Notes payable, corporation, unsecured, dated January-July 1997, interest
payable at 18% per annum, principal due January-February
1999 2,350,000 --
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 30, 1999, and every
3.5 years thereafter, not to exceed 12% or be less than 4%, remaining
principal due November 2025,
collateralized by deed of trust 2,042,272 2,055,484
Note payable, corporation, dated September 1997, interest only payable
quarterly at 9% per annum, with the principal balance due
January 2003, collateralized by deeds of trust and personal 1,730,853 --
property
Mortgage payable, individual, dated September 1995, payable in monthly
installments of $7,875, including interest at 9% per
annum, due August 31, 2000, collateralized by deed of trust 1,050,000 1,050,000
F-11
<PAGE>
D. LONG-TERM DEBT (Continued)
1997 1996
--------------- -----------
Note payable, financial institution, assumed June 1997, payable in
monthly installments of $9,369, including interest at prime plus 1.5%,
(10% total rate at October 31, 1997), with remaining
principal balance due September 1999, collateralized by deed of 879,147 --
trust
Note payable, corporation, dated October 1995, payable in monthly
installments of $31,092 including interest at 11% per annum, with a
final payment due October 19, 1998, collateralized by gaming
equipment 769,943 949,576
Note payable, financial institution, dated September 26, 1997, payable
in monthly installments of $7,052 including interest at prime plus 1.5%
(10% total rate at October 31, 1997), remaining
principal due October 1, 2002, collateralized by deed of trust 650,000 --
Mortgage payable, individual, dated October 1992 modified August 1995,
payable in monthly installments of $3,400, including interest at 8% per
annum, with a final principal payment due
November 2006, collateralized by deed of trust 262,715 285,070
Notes payable, various corporations, dated March 1995, to July 1997,
payable in aggregate monthly installments of $31,269 including interest
at 8% to 12.50% per annum, due May 1998 to June
2000, collateralized by various equipment 748,467 374,794
------------- -------------
Total long-term debt 22,072,286 14,254,924
Less current portion 1,220,964 6,015,931
------------- -------------
$20,851,322 $8,238,993
============= =============
</TABLE>
The $879,147 loan agreement with the financial institution restricts
payment of related party loan principal until all amounts under the loan
agreement have been repaid.
<TABLE>
<CAPTION>
Future maturities of long-term debt and convertible debentures are as
follows at October 31, 1997:
Years Ended October 31, Unrelated Related Party Total
------------------------- ------------------ ------------------ ------------------
<S> <C> <C> <C>
1998 $1,220,964 $-- $1,220,964
1999 15,203,764 13,396,312 28,600,076
2000 1,147,765 -- 1,147,765
2001 72,406 -- 72,406
2002 597,128 -- 597,128
Thereafter 3,830,259 -- 3,830,259
------------------ ------------------ ------------------
$22,072,286 $13,396,312 $35,468,598
================== ================== ==================
</TABLE>
Creeker's, Inc. has a $300,000 revolving line of credit agreement with a
financial institution dated September 26, 1997. The line of credit bears
interest at prime plus 1.50% per annum, maturing on October 1, 1998 and
is collateralized by a deed of trust.
F-12
<PAGE>
E. CAPITAL LEASE OBLIGATIONS
<TABLE>
<CAPTION>
Capital lease obligations consist of the following at October 31,:
1997 1996
---------------- ----------------
<S> <C> <C>
Gaming equipment lease payable, renegotiated, imputed interest
accruing at 11.75% per annum with balance due November 1999 $822,425 $4,892,735
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 various equipment and furniture with an
approximate cost of $1,009,441 and a book value
of $794,463 823,853 1,076,443
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 are collateralized by various
equipment with an approximate cost of
$748,523 and a book value of $614,869 546,458 744,140
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 equipment with an
approximate cost of $231,127 and a book value of $173,345 142,557 220,837
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 collateralized by telephone and
audio equipment with an approximate cost of $215,660
and a book value of $177,152 180,589 213,906
Various equipment leases payable in aggregate monthly installments of
$7,333 including interest imputed at 8.16% to 13.85% per annum. The
leases expire May 1999 to July 2000 and are collateralized by equipment
with an approximate cost of $323,441 and a book value of
$192,397 179,553 172,880
------------- ----------------
Total lease obligations 2,695,435 7,320,941
Less current portion 630,425 1,535,656
============= ================
$2,065,010 $5,785,285
============= ================
</TABLE>
<TABLE>
<CAPTION>
Future minimum lease payments under the leases are as follows at October 31, 1997:
Years Ended October 31, Amount
----------------------- -------------------
<S> <C>
1998 $831,646
1999 805,033
2000 1,187,479
2001 297,499
-------------------
Total future lease payments 3,121,657
Less amount representing interest 426,222
===================
$2,695,435
</TABLE>
F. 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 principal 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, 1999. The balance (including interest
added to principal) amounted to $5,516,988 and $5,199,739 at October 31,
1997 and 1996, respectively.
F-13
<PAGE>
G. STOCK OPTIONS AND WARRANTS
<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, 1997
and 1996:
Shares Avg. Option Price
---------------- -------------------------
<S> <C> <C>
Options Outstanding, October 31, 1995 240,000 $1.00
Granted 817,500 $2.00
Surrendered -- --
----------------
Options Outstanding, October 31, 1996 1,057,500 $1.77
Granted 100,000 $2.00
Surrendered (585,000) $2.00
================
Options Outstanding, October 31, 1997 572,500 $1.58
================
</TABLE>
The Company adopted the disclosure requirements, but not the optional
recognition requirements of recently issued SFAS No. 123-Accounting for
Stock Based Compensation. If the Company had elected to recognize
compensation expense based upon the fair value of the options at the
date of grant for awards granted in fiscal 1997 and 1996 the Company's
net loss and loss per share would have approximated the pro forma
amounts below:
<TABLE>
<CAPTION>
October 31, October 31,
1997 1996
=================== ===================
<S> <C> <C>
Pro forma net loss $(2,916,668) $(3,551,486)
=================== ===================
Pro forma net loss per share $(0.0797) $(0.1104)
=================== ===================
</TABLE>
<TABLE>
<CAPTION>
The weighted-average fair value of each option granted in fiscal 1997 and
1996 is estimated on the date of grant using the Black-Scholes
option-pricing model as follows:
October 31, October 31,
Assumptions 1997 1996
----------- ----------------- ----------------
<S> <C> <C>
Risk-free interest rate 5.4% 5.7%
================= ================
Life in years 3 3
================= ================
Volatility 44% 53%
================= ================
Dividend yield 0% 0%
================= ================
Fair Value
Stock options $0.20 $0.27
================= ================
</TABLE>
In connection with the conversion of the Series One, Convertible
Preferred Stock into common stock the Company granted 1,400,000 stock
warrants. Each warrant may be converted into one share of common stock
at a price of $2.50 through May 30, 2002. The Company also granted
200,000 stock warrants to a corporation that provides it with
professional services. The warrants may be converted into 200,000 shares
of common stock at a price of $2.00 through October 31, 2002.
<TABLE>
<CAPTION>
The following options and warrants are outstanding at October 31, 1997:
Number of
Shares Under Exercise Expiration
Options Price Total Date
---------------- ---------------- ---------------- -------------------------
<S> <C> <C> <C> <C>
46,500 $2.00 $93,000 August, 2000
66,500 $2.00 133,000 August, 2001
306,500 $1.22 373,000 August, 2002
66,500 $2.00 133,000 August, 2003
66,500 $2.00 133,000 August, 2004
20,000 $2.00 40,000 August, 2005
================ ================ ================
572,500 $1.58 $905,000
================ ================ ================
F-14
<PAGE>
G. STOCK OPTIONS AND WARRANTS (Continued)
Number of
Shares Under Exercise Expiration
Options Price Total Date
---------------- ---------------- ---------------- -------------------------
30,000 $3.00 $90,000 May, 1998
30,000 $3.00 90,000 January, 2001
1,400,000 $2.50 3,500,000 May, 2002
200,000 $2.00 400,000 October, 2002
---------------- ---------------- ----------------
1,660,000 $2.50 $4,080,000
================ ================ ================
</TABLE>
At October 31, 1997 there were 1,946,500 shares of common stock
exercisable under options and warrants at an average price of $2.27 per share.
H. 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 31, October 31,
1997 1996
--------------------- -----------------
<S> <C> <C>
Deferred Tax Assets-
Net operating loss carryforwards $2,142,000 $875,000
Cash basis tax assets 482,000 809,000
Capitalized construction carrying costs and other 237,000 127,000
--------------------- -----------------
2,861,000 1,811,000
Valuation Allowance (2,861,000) (1,811,000)
===================== =================
Net Deferred Tax Asset $None $None
===================== =================
</TABLE>
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
October 31, October 31,
1997 1996
------------------ ------------------
<S> <C> <C>
Deferred Federal Tax (Benefit) $(985,000) $(1,100,000)
Deferred State Tax (Benefit) (102,000) (98,000)
Valuation Allowance 1,087,000 1,198,000
================== ==================
Income Tax Expense $None $None
================== ==================
</TABLE>
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:
<TABLE>
<CAPTION>
Year Ended Year Ended
October 31, October 31,
1997 1996
------------------ ------------------
<S> <C> <C>
Federal tax at statutory rates $(985,000) $(1,100,000)
State tax, net of federal benefit (102,000) (98,000)
Adjustment of the valuation allowance 1,087,000 1,198,000
------------------ ------------------
Income tax provision $None $None
================== ==================
</TABLE>
At October 31, 1997, the Company has estimated net operating loss
carryforwards of approximately $5,712,000 available to offset taxable income
through 2012.
F-15
<PAGE>
I. 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, 1997 and 1996.
J. CURRENT VULNERABILITY DUE TO CONCENTRATIONS
The majority of the Company's revenues are from slot machines. 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.
K. COMMITMENTS AND CONTINGENCIES
Leases. The Company leases office space under a non-cancelable lease
agreement which expires July, 1998. Total rent expense amounted to
$28,308 and $17,285 for the years ended October 31, 1997 and 1996,
respectively.
Double Eagle leases 586 slot machines under two operating leases with
aggregate monthly payments of $24,102 expiring November 1999 and
November 2000. Double Eagle may purchase the equipment for $1,043,289
at the end of the lease terms.
Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
Year Ended October 31, Amount
- ------------------------------------- ---------------
<S> <C>
1998 $1,693,229
1999 1,693,229
2000 263,570
===============
$3,650,028
===============
F-16
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<CASH> 1,962,486
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 182,641
<CURRENT-ASSETS> 2,712,805
<PP&E> 40,500,103
<DEPRECIATION> 3,259,534
<TOTAL-ASSETS> 48,375,854
<CURRENT-LIABILITIES> 4,247,914
<BONDS> 0
0
0
<COMMON> 38,666
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 48,375,854
<SALES> 24,075,922
<TOTAL-REVENUES> 24,075,922
<CGS> 0
<TOTAL-COSTS> 21,808,984
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,174,977
<INCOME-PRETAX> (2,896,668)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,896,668)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,896,668)
<EPS-PRIMARY> (.079)
<EPS-DILUTED> (.079)
</TABLE>
