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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, 1998
Commission File Number: 0-24846
COLORADO CASINO RESORTS, INC.
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(Exact name of Registrant as specified in its Charter)
Texas 84-1303693
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(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
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(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: $23,225,232.
The aggregate market value of the voting stock held by non-affiliates of the
registrant on April 26, 1999 was approximately $7,778,233 based upon the average
reported closing bid and asked price of such shares. As of April 26, 1999, there
were 38,740,632 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None.
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TABLE OF CONTENTS
PART I
Item 1. Description of Business................................. 3
Item 2. Description of Property................................. 13
Item 3. Legal Proceedings....................................... 13
Item 4. Submission of Matters to a Vote of Security Holders..... 14
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters..................................... 15
Item 6. Management's Discussion and Analysis or Plan of Operation 16
Item 7. Financial Statements.................................... 24
Item 8. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure.................. 24
PART III
Item 9. Directors, Executive Officers, Promoters, and Control
Persons; Compliance with Section 16(a) of the
Exchange Act............................................ 25
Item 10.Executive Compensation.................................. 28
Item 11.Security Ownership of Certain Beneficial Owners and
Management.............................................. 29
Item 12.Certain Relationships and Related Transactions.......... 30
Item 13.Exhibits and Reports on Form 8-K........................ 31
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PART I
Item 1. Description of Business
General
Colorado Casino Resorts, Inc. owns, develops and operates gaming properties. The
Company currently owns and operates two casino properties in Cripple Creek,
Colorado -- The Double Eagle Hotel & Casino ("The Double Eagle") and Creeker's
Casino ("Creeker's Casino"). The Double Eagle is the largest casino/hotel in
Cripple Creek. This five-story casino/hotel is prominently located at the main
entrance to Cripple Creek and offers customers 158 guest rooms, a 45,000
square-foot casino with over 600 slot machines and five blackjack tables, two
bars, an 85-seat restaurant, an entertainment stage, and a gift shop. The
Company's second casino, Creeker's Casino, is a 19,000 square-foot casino
located in the center of Cripple Creek's gaming district with approximately 200
slot machines, two bars, and a restaurant.
Corporate Background
The Company developed and opened The Double Eagle in 1996 and acquired and began
operating Creeker's in 1995. Prior to the acquisition of Creeker's, the
Company's operations were primarily devoted to acquiring land for future
development, identifying potential acquisition candidates and obtaining required
gaming and other licenses and financings. Management of the Company began
efforts to develop casino operations in Cripple Creek a year after Colorado
gaming was legalized in 1991. Through Lyric Development Company, Inc. and
certain related predecessor companies ("Lyric"), management began acquiring land
in Cripple Creek, one of three cities permitted to have limited stakes gaming in
Colorado. In 1992 and 1993, Lyric acquired nine lots in Cripple Creek for a
total $4.35 million, including the land where The Double Eagle now stands.
In January 1994, Lyric entered into a reverse merger transaction with Airline of
the Virgin Islands, Inc. ("AVI"), a reporting company under the Securities
Exchange Act of 1934 ("Exchange Act") with no assets or operations. AVI was
originally incorporated under the laws of the Virgin Islands in 1982 and
reincorporated in the State of Texas in March 1993. In the merger transaction,
Lyric contributed its land holdings in exchange for approximately 77% of the
then issued and outstanding voting stock of AVI, the surviving entity. Upon
completion of the merger, the Company changed its corporate name from AVI to
Colorado Casino Resorts, Inc.
In March 1995, the Company acquired Creeker's Casino in a merger transaction
with Creeker's, Inc. which was accounted for as a pooling of interests, and the
Company's common stock began trading on the NASDAQ SmallCap Market under the
symbol "CCRI." In 1996, the Company developed and opened The Double Eagle, the
largest casino/hotel in Cripple Creek and one of the largest casinos/hotels in
the State of Colorado. In August 1996, the Company transferred the assets and
liabilities of The Double Eagle to a wholly-owned subsidiary, Double Eagle
Resorts, Inc., a Colorado corporation.
The Company's principal executive offices are currently located at 304 South 8th
Street, Suite 201, Colorado Springs, Colorado 80905. In 1999, the Company plans
to relocate its principal executive offices to One North Nevada Avenue, Suite
200, Colorado Springs, Colorado 80905. The telephone number is (719) 635-7047.
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The Double Eagle
The Double Eagle is the largest casino/hotel in Cripple Creek. Located at the
start of Bennett Avenue, The Double Eagle provides superior access and
visibility to gaming patrons and tourists arriving in the city of Cripple Creek.
The Company believes that The Double Eagle is the premier gaming facility in the
Cripple Creek. Unlike most casinos in Cripple Creek, that are converted historic
structures with little or no hotel accommodations and few non-gaming amenities,
The Double Eagle is a modern casino/hotel, newly constructed in 1996. The
five-story Double Eagle has 45,000 square-foot of gaming space featuring over
600 slot machines and five blackjack tables. The Double Eagle also offers 158
hotel rooms and suites, a total of 400 parking spaces with free valet parking
and shuttle transportation, an 85-seat restaurant, Lombard's Bar & Grill, two
bars, an entertainment stage, and a gift shop offering a variety of items
bearing The Double Eagle name. The Double Eagle has been designed as a modern,
state-of-the-art hotel and casino inspired by the grandeur of Las Vegas casinos.
The exterior design of The Double Eagle is based on the historic structures
which existed in the city of Cripple Creek at the turn of the century while the
interior is fashioned on a "Roaring 20's" theme, including elegant winding
staircases, a stained glass-like barrel ceiling, and colorful three-dimensional
casino signs. It currently employs 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.
Creeker's Casino
Creeker's Casino is located at the corner of 3rd Street and Bennett Avenue in
the center of Cripple Creek in a three-story building that has been designed to
resemble a Victorian-style historic structure of the late 1800s. Within its
19,000 square-foot casino, Creeker's Casino offers 200 slot machines, two bars,
a restaurant featuring buffet-style meals, and entertainment areas, including an
arcade area for the children of gaming patrons. Creeker's currently employees 73
people and is open seven days a week from 8:00 a.m. to 2:00 a.m., as limited by
Colorado gaming regulations.
Business and Marketing Strategy
The Company controls approximately 15% of the slot machines in the Cripple Creek
market. Commencing in May 1998, the Company launched an aggressive campaign to
increase its market share of the total amount wagered in Cripple Creek (commonly
referred to as the "handle" in the gaming industry) and its market share of the
total "win" in Cripple Creek (generally determined by subtracting from the
handle the amount paid out to gaming patrons). This aggressive growth strategy
commenced with the optimization of the casino floor, which included:
o Increasing payout percentages on all slot machines; and
o Increasing utilization factors by reducing the number of machines
to optimal levels; and
o Increasing the variety of game types.
The Company continues to monitor payout percentages of its slot machines to
ensure that they remain competitive.
Furthermore, statistical analysis was also employed to monitor the handle of the
Company's casinos, to profile game performance by denomination, to adjust mix,
location, and number of machines, and to establish a customer database with the
ultimate goal of maximizing "play." As a result, during the following six months
The Double Eagle proceeded to gain market share, first exceeding its fair share
in July - just three months after implementing the strategy. During the last six
months of fiscal 1998, win market share approached fair share at 14.16% share of
total revenues with 14.35% of the city's slot machines. This represents an
improvement when compared to 14.27% share of total revenues
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with 15.72% of total slot machines reported during the same six-month period in
fiscal year 1997. In fiscal 1999 the trend continues, however with a slight dip
in December due to higher number of jackpots (low hold percentage).
Increased slot play is also encouraged through the use of "slot clubs." The
"Gold Premier Club" at the Double Eagle and "Winner's Circle" at Creeker's slot
clubs and the use of a computerized player tracking system, that 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 Gold Premier Club, 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 Gold Premier Club based on their point totals
with various cash and gift prizes. During fiscal year 1998, Creeker's signed up
nearly 8,000 members to the Gold Premier Club while The Double Eagle welcomed
20,000 new members to the club. Currently, Creeker's and The Double Eagle have a
combined total of 95,000 members in their database.
The Company also seeks to increase its share of the Cripple Creek casino market
through increased and better targeted marketing programs and promotional
activities. The objective of the Company's marketing programs and promotional
activities is to develop and expand a loyal customer base at its casinos. In
order to promote this strategy and enhance its perceived image, The Double Eagle
retained the marketing and advertising services of Zimmerman, Laurent, and
Richardson & Associates ("ZLR") in mid-May, 1998. ZLR launched an aggressive
marketing campaign, complete with the creation of a new image, new and
innovative print advertising collateral, comprehensive direct-mail marketing
programs, and creative radio and billboard advertising concepts. The objective
was to maximize the exposure of the "new" Double Eagle, with emphasis on the new
"looser" slot machines and the frequency and magnitude of jackpots paid.
Furthermore, a new Director of Marketing was recently hired to continue the
momentum started by ZLR.
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 discounts on buffet
meals, 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 growth strategy by
improving its overall image and effectiveness through new and innovative
marketing programs, a redesigned casino floor layout with higher payback
percentages, and the introduction of a VIP lounge for qualified players. In
addition to free weekday slot tournaments and special events, The Double Eagle
hosts live entertainment and music acts at its piano bar and lounge. Responding
to the needs of its customers, management recently changed the menu at Lombard's
Bar & Grill. The new menu features a greater selection of popular items served a
la carte and a buffet was added with service offered throughout the day.
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
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1800s 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.
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 presently one of three venues for gaming in the
State of Colorado. The other two are Black Hawk and Central City. Cripple Creek
operated approximately 28.7% of the gaming devices and generated 23.6% of the
gaming revenues reported by these three cities during the calendar year ended
December 31, 1998.
Cripple Creek is the second largest gaming jurisdiction with over $113 million
in revenues in calendar year 1998. In 1997, gaming revenues amounted to nearly
$108 million, growing by $5.27 million, or 5.12%, from the $103 million reported
in 1996. This increase was fostered by a 7.48% increase in positions, from 4,249
in 1996 to 4,567 in 1997, while win per position decreased by 1.78%, from $66.33
in 1996 to $65.17 in 1997. In 1998, revenues increased by $5.27 million, or
4.88%, to over $113 million from $108 million. However, this increase came with
a 11.25% reduction in positions, from 4,567 in 1997 to 4,053 in 1998, while win
per position revenues increased by 22.0%, from $65.17 in 1997 to $79.51 in 1998.
The table below set forth information obtained from the Colorado Division of
Gaming regarding gaming revenue by market from calendar year 1995 through 1998:
GAMING REVENUE BY MARKET
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($ in Thousands) 1995 1996 %Change 1997 %Change 1998 % Change
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Cripple Creek $ 94,029 $102,873 9.4% $107,959 5.0% $113,230 4.88%
Central City $ 94,468 $ 88,870 (5.9)% $ 87,714 (1.3)% $ 93,980 7.14%
Black Hawk $195,856 $219,911 12.3% $235,768 7.2% $272,008 15.37%
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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 dollar bill denominations of up to $100.
Although there are currently 17 casinos in Cripple Creek, 11 are small, with an
average of 128 gaming devices. As of December 31, 1998, the total number of
gaming devices in Cripple Creek was 3,951. Many of the casinos are located in a
single storefront and offer no amenities; five of the casinos have 100 slot
machines or less. There are only nine casinos, including both Creeker's and The
Double Eagle, that have more than 200 slot machines. These five casinos contain
nearly 72.6% of the total positions in Cripple Creek. 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 services and amenities offered by The
Double Eagle represent management's belief that the casinos that 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 that
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,
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management believes that the timely opening of The Double Eagle has secured a
competitive 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 others 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 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 that 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, and service-driven environment in which gaming becomes an exciting,
fun, energetic activity. Although, one new license was issued during the year
for the addition of 100 new slot machines, the closure of the four casinos
represents a reduction of 600 slot machines from the city-wide total. 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
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.
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, that 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 but failed to receive the requisite voter
approval. Future initiatives, if passed, could significantly increase the
competition for gaming customers, thereby adversely affecting the
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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.
In the future, the Company anticipates expanding 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, including
identification of suitable partners (if needed), the availability of financing,
obtaining necessary financing, 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, that
may negatively affect the Company's reported operating performance for the
periods the costs are expensed.
Employees
As of April 24, 1999, the Company employed 353 persons, of which 331 are
employed on a full-time basis, including cashiers, dealers, housekeepers, food
and beverage service personnel, facilities maintenance staff, and accounting and
marketing personnel. Of the total, 73 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.
Operational Controls
The Colorado Gaming Commission has established strict rules with regard to the
supervision and control of all gaming activities in Colorado casinos, including
security and cash control systems. The Company employs these controls and
paperwork systems to insure internal integrity and compliance with the
applicable regulations. The Company's casinos are also required to obtain an
annual audit report from an independent certified public accounting firm, which
in turn is required to make certain unannounced inspections. There are dozens of
closed circuit cameras which have been installed in the Company's casinos with
taping devices in place to record play at all times. These tapes and live action
are regularly monitored by the Company and reviewed by the Colorado Gaming
Commission to ensure the integrity of gaming activities at the Company's
casinos.
Colorado Gaming Regulations
The State of Colorado created the Division of Gaming within the Department of
Revenue to license, implement, regulate, and supervise the conduct of limited
stakes gaming. The Director of the Division of Gaming (the "Director"), under
the supervision of the five-member Colorado Gaming 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. The Director 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. The Director also may conduct detailed background
investigations of persons who loan money to licensees.
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The Colorado Gaming Commission is empowered to issue five types of gaming and
gaming-related licenses. The failure or inability of the Company, or persons
associated with the Company, to maintain necessary gaming licenses would have a
material adverse effect on the operations of the Company. All persons employed
by the Company, and involved, directly or indirectly, in the Company's gaming
operations in Colorado also are required to obtain a Colorado gaming license.
Casino licenses must be renewed annually, and key and support employee licenses
must be renewed every two years.
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
the right to receive profits, in more than three retail gaming licensees in
Colorado. The Colorado Gaming Commission has ruled that a person does not have
an ownership interest in a licensee if: (i) such person has less than a 5%
interest in an institutional investor which has an ownership interest in a
publicly traded retail licensee (a "Licensee") or in a publicly traded company's
affiliated with a Licensee; (ii) such person has a 5% or more ownership interest
in an institutional investor which has less than a 5% ownership interest in a
publicly traded Licensee or in a publicly traded company affiliated with a
Licensee; (iii) such person is an institutional investor which has less than a
5% ownership interest in a publicly traded Licensee or in a publicly traded
company affiliated with a Licensee; (iv) such person is an institutional
investor which possesses voting securities of a publicly traded Licensee or in a
company affiliated with a Licensee in a fiduciary capacity and not for its own
account (unless such person exercises voting rights with respect to 5% or more
of such publicly traded company's outstanding voting securities); (v) such
person is a broker or dealer registered under the Exchange Act which possesses
voting securities of a publicly traded Licensee or of a publicly traded company
affiliated with a Licensee for the benefit of its customers and not for such
person's own account and which does not exercise voting rights with respect to
5% or more of such publicly traded Licensee's voting securities; (vi) such
person is a broker or dealer registered under the Exchange Act and has an
ownership interest in voting securities of a publicly traded Licensee or of a
publicly traded company affiliated with a Licensee as a market maker in such
voting securities (unless such person exercises voting rights with respect to 5%
or more of such outstanding voting securities); (vii) such person is an
underwriter of voting securities of a publicly traded Licensee or of a publicly
traded company affiliated with a Licensee and has an interest in such voting
securities during the course of an underwriting (unless such person exercises
voting rights with respect to 5% or more of such publicly traded company's
outstanding voting securities); provided, however, that such underwriter may not
possess such an interest in such voting securities longer than 90 days after the
beginning of such underwriting; or (viii) such person possess voting securities
of a publicly traded Licensee or of a publicly traded company affiliated with a
Licensee in such person's capacity as a book-entry transfer facility (unless
such person exercises voting rights with respect to 5% or more of such publicly
traded company's outstanding voting securities). For purposes of the above
discussion, a person is not be deemed to have an "ownership interest" in a
Licensee if such person's sole ownership interest in such Licensee is through
the ownership of less than 5% of the voting securities of (a) such Licensee, if
such Licensee's securities are publicly traded, or (b) a publicly traded company
affiliated with such Licensee. The Company's and its shareholders' business
opportunities in Colorado are limited to such interests that comply with the
Colorado Regulations and Colorado Gaming Commission's rules.
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 Colorado Gaming Commission has ruled that a person
does not have a "substantial interest" in a manufacturer, distributor, operator,
or retailer Licensee if it directly or indirectly owns less than 5% of the
voting securities of a Licensee.
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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 shareholders of the Company, may
be required to supply the Colorado Gaming Commission with substantial
information, including, but not limited to, personal, criminal and financial
background information, date of birth, source of funding information, a sworn
statement that such person or entity is not holding his or her interest for any
other party, fingerprints, and a photograph. Such information, investigation and
licensing as an "associated person" automatically will be required of each
person (other than certain institutional investors discussed below) who directly
or indirectly own 10% or more of a legal, beneficial, or voting interest in the
Company. Such persons must report his or her interest and file appropriate
applications for a finding of suitability within 45 days after acquiring such
interest. Each person directly or indirectly having a 5% or more interest in the
Company must report his or her interest to the Colorado Gaming Commission within
10 days after acquiring such interest, may be required to provide additional
information, and must be found suitable as required by the Division or the
Colorado Gaming Commission. If certain institutional investors provide certain
information to the Colorado Gaming Commission, such investors, at the Colorado
Gaming Commission's discretion, may be permitted to own up to 14.99% of the
Company before being required to be found suitable. All licensing and
investigation fees must be paid to the Division by the person or entity in
question.
The Colorado Gaming 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 shareholders of a licensed privately held corporation, (iii) all
officers, directors, and shareholders holding either a 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 who have a relationship similar to that of an officer, director, or
shareholder 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 a limited stakes
gaming operation, (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 stakes gaming operations, equipment, devices,
or premises, (viii) all persons who may influence the operation of a Licensee in
any material manner, and (ix) all persons who may have access to gaming proceeds
or the accounting or reporting therefor.
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 Gaming Commission or the Director, promptly must provide
to the Colorado Gaming Commission or Director all written gaming contracts and
summaries of verbal gaming contracts. Information which may be requested
includes financial history, financial holdings, real and personal property
ownership, interest 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 such person would be suitable
to be licensed by the Colorado Gaming Commission. Failure to provide all
information requested constitutes sufficient grounds for the Director or the
Colorado Gaming 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 Gaming 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.
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An application for licensure or suitability may be denied for any cause deemed
reasonable by the Colorado Gaming Commission or the Director, as appropriate.
Specifically, the Colorado Gaming Commission and the Director must deny a
license to any applicant who (i) fails to prove by clear and convincing evidence
that he or she is qualified; (ii) fails to provide information and documentation
required by law or requested by the Director or the Colorado Gaming Commission
(iii) has been, or is a director, officer, general partner, shareholder, limited
partner, or other person who has a financial or equity interest in the
applicant, and 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, has served a
sentence for any felony or certain misdemeanors in any correctional facility
within the last 10 years, 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 Gaming Commission or the
Director determines that a person or entity is unsuitable to own interests in
the Company, the Company may be sanctioned; such sanctions may include the loss
by the Company of its approvals and licenses.
The Colorado Gaming Commission does not need to approve in advance a public
offering of voting securities, but does require a filing of notice and
additional documents with regard to such public offering. The Colorado Gaming
Commission must receive notice of a public offering of voting securities to be
registered with the Securities and Exchange Commission ("Commission") no later
than 10 business days after the initial filing of the registration statement
with the Commission, or for any other type of public offering, 10 days prior to
the public use or distribution of any offering document if (i) the Licensee is
not a publicly traded corporation, or (ii) the Licensee is a publicly traded
corporation which intends to use the proceeds of such offering to pay for the
construction of Colorado gaming facilities, to acquire any interest in Colorado
gaming facilities, to finance operation of Colorado gaming facilities, or to
retire or extend obligations incurred for one or more purposes set forth above.
Under the Colorado Regulations, the Colorado Gaming 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 Colorado
Regulations require anyone who has a material relationship to or a material
involvement with a Licensee, including a director or officer of a corporation or
any person who exercises significant influence upon the management or affairs of
a corporation, such as the Company, to file for a finding of suitability if
required by the Colorado Gaming Commission.
In addition to its authority to deny an application for a license or
suitability, the Colorado Gaming Commission has jurisdiction to disapprove a
change in corporate ownership, including investors, lenders or anyone who may
have an interest in gaming proceeds of a Licensee and may have such authority
with respect to any entity which is required to be found suitable by the
Colorado Gaming Commission. The Colorado Gaming Commission has the power to
require the Company 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 Gaming Commission. Except as otherwise provided in the definition
of "ownership interest," the Company may not sell any interest in the Company
without the prior approval of the Colorado Gaming Commission. Ongoing reporting
to the Colorado Gaming Commission is required. Each Licensee must report, at
least quarterly, the names and addresses of any person, including a lending
agency, who may share in the revenues of limited stakes gaming, whether as
owner, assignee, landlord, or otherwise. This requirement extends
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to anyone to whom an interest or share in the profits of limited stakes gaming
have been pledged or hypothecated as security for a debt, the performance of an
act, or a contract of sale. Licensees are also required to notify the Director
in writing of any criminal conviction and any pending criminal charge, within 10
days of arrest, summons, or conviction. Licensees are also required to report
any known or suspected violations of Colorado's gaming laws to the Division.
Failure to report any required information may lead to revocation or summary
suspension of the Licensee's license.
The Company's casinos must meet certain architectural requirements, fire safety
standards and standards for access for disabled persons. The casinos also must
not exceed certain gaming square footage limits as a total of each floor and the
entire building. The casinos may operate only between 8:00 a.m. and 2:00 a.m.,
and may permit only individuals 21 years or older to gamble in the casinos. It
must limit all permitted games to a maximum single bet of $5.00. The casinos may
not provide credit to its gaming patrons and no Licensee may provide credit to
any person for the purpose of gaming.
Colorado Liquor Regulations
The sale of alcoholic beverages is subject to licensing, control, and regulation
by certain Colorado state and local authorities (the "Liquor Agencies").
Alcoholic beverage licenses are revocable and non-transferable. State and local
licensing authorities have full power to deny, limit, condition, suspend, or
revoke any such licenses. Persons or entities which directly or indirectly own
5% or more of the Company or its casinos must file applications with and are
subject to investigation by the Liquor Agencies. The Liquor Agencies also may
investigate persons who, directly or indirectly, loan money to liquor licensees.
Violation of the state alcoholic beverage laws may constitute a criminal
offense, and violators may be subject to criminal prosecution, incarceration,
and fines.
There are various classes of alcoholic beverage licenses under the Colorado
Liquor Code. A retail gaming tavern license or a hotel and restaurant liquor
license may be issued to persons who are licensed pursuant to Colorado law. A
retail gaming tavern licensee may sell malt, vinous, or spirituous liquors only
by individual drinks for consumption on the premises and must also make
available sandwiches or light snacks or contract with concessionaires to provide
food services within the same building as the licensed premises. A hotel and
restaurant liquor license requires the service of meals and that meals equal a
fixed minimum percent of food and beverage sales. In no event may any person
hold more than or have an interest in more than three retail gaming tavern
licenses. Also, a person may not have an interest in more than one type of
liquor license. The Double Eagle and Creeker's both hold a retail gaming tavern
license for their casino and restaurant operations. Accordingly, no person with
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.
Taxation
Colorado law further provides that up to a maximum of 40% of AGP may be payable
by a Licensee for the privilege of conducting gaming. AGP is generally defined
as the total amounts wagered less all payments to players. With respect to games
of poker, AGP means those sums wagered in a hand retained by the Licensee as
compensation, which must be consistent with the minimum and maximum amounts
established by the Colorado Gaming Commission. Currently, the gaming tax on AGP
is: 2% on the first $2 million of AGP; 4% on AGP from $2 million to $4 million;
14% on AGP from $4 million to $5 million; 18% on AGP from $5 million to $10
million; and 20% on AGP over $10 million. The gaming tax is paid monthly, with
Licensees required to file returns by the 15th of the
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following month. Each year, the Colorado Gaming Commission establishes the
gaming tax for the following twelve months.
The Colorado Gaming Commission requires all gaming Licensees to pay an annual
device fee for each slot machine, blackjack table and poker table. The current
annual state device fee, established October 1, 1996, is $75. The city of
Cripple Creek also assesses and collects its own device fees. The current annual
device fee in Cripple Creek is $1,200 per device. There is no statutory limit on
state or city device fees, which may be increased at the discretion of the state
or city.
Item 2. Description of Property
In addition to the land underlying The Double Eagle and Creeker's, the Company
owns the following properties in Cripple Creek: (i) 15 lots comprising a full
city block that lies immediately to the south of The Double Eagle; (ii) six
acres located within walking distance of The Double Eagle that are used
primarily for valet parking purposes; (iii) three lots located in close
proximity to Creeker's Casino that are used for customer parking; and (iv) 13
lots located at the corner of 4th Street and Myers Avenue that are currently
held for investment. Each lot is 25 feet wide by 125 feet deep. In addition, the
Company leases: (a) a total of 15 lots (for $3,000 per month) in close proximity
to The Double Eagle that the Company uses for customer parking; (b) a total of
14 lots (for $7,000 per month) in close proximity to The Double Eagle that the
Company uses for additional customer parking. Pursuant to the Colorado
Regulations, individuals under the age of 21 are not permitted to gamble or
loiter in casinos.
The Company also leases approximately 2,700 square feet of office space at 304
South Eighth Street, Suite 201, Colorado Springs, Colorado from an unaffiliated
party. The lease has rental payments totaling $28,308 through the end of the
term, which expired on July 31, 1998. The Company plans to relocate its
corporate offices to One City Centre, One South Nevada Blvd., Colorado Springs,
Colorado 80903. However, this location, also owned and managed by the same
unaffiliated party from which the Company currently rents, is pending
completion. The Company has negotiated an extension of its lease on a
month-by-month basis at the same rate until relocating to its completed new
office location.
Item 3. Legal Proceedings
Except for non-material litigation incident to our ordinary course of business,
the Company is not a party to any litigation that could have a material adverse
effect on our business or results of operations, except for the following:
A former employee has filed both a worker's compensation claim and an EEOC claim
(discrimination) against the Company. At this time, and based upon the facts
known, it is undetermined whether the dollar amount is material and the
likelihood of success.
Also, during the first quarter of fiscal year 1999, two creditors indicated
that, absent an agreed upon payment schedule, they may refer certain matters to
collection. On February 11, 1999, the Company was in arrears to Young Electric
Sign Company ("YESCO") by $76,646. YESCO threatened suit if payment of at least
one-third of the arrears is not made. In such event, YESCO may elect to
accelerate all outstanding amounts owed--between $250,000 and $300,000. At
present, the Company intends to cure the arrearage within the next thirty to
forty-five calendar days. Absent payment of at least a portion of the arrearage,
the filing of a lawsuit is probable. On November 19, 1998, Pikes Peak
International Raceway ("PPIR") asserted that the Company was indebted to it in
the amount of $68,039. PPIR has not threatened suit, nor has it manifested an
intent to file suit. On December
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15, 1998, the Company made a payment proposal to PPIR. As of April 24, 1999,
PPIR has not responded to the payment proposal. At present, the probability of
settlement or the filing of a lawsuit is undetermined.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
The Common Stock began trading in the NASDAQ SmallCap Market on March 29, 1995
under the symbol "CCRI.". 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.
Fiscal Year Ending October 31, 1997:
High Low
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
Fiscal Year Ending October 31, 1998:
High Low
First Quarter............................................. $2 $15/16
Second Quarter............................................ $3 1/8 $1 9/16
Third Quarter............................................. $2 15/16 $1 1/8
Fourth Quarter............................................ $1 7/16 $ 13/16
As a result of the Company's restatements and reclassifications of its financial
results for the fiscal years ended October 31, 1997 and 1996, the Company was
delayed in filing this Annual Report on Form 10-KSB and its Quarterly Report on
Form 10-QSB for the period ended January 31, 1999. Due to these late filings,
the Company has received notice from the NASDAQ Stock Market to delist the
Company's Common Stock from its SmallCap market, the Company has requested a
hearing with NASDAQ to, among other things, explain the cause of the delay in
filing these financial reports and to seek the continued listing of its common
stock. The hearing is set for April 29, 1999. There can be no assurance that the
Company will be successful in this endeavor.
At October 31, 1998, the Company had approximately 207 holders of record of our
voting common stock; management estimates that the Company has approximately
1,250 additional beneficial holders of our common stock held in names of brokers
and securities depositories. Of the current holders of its common stock, Messrs.
Saenz and Sisneros together beneficially own approximately 56% of the Company.
The Company has not paid or declared cash distributions or dividends on our
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 our earnings, financial condition, capital
requirements, and other factors.
During fiscal year 1998, the Company issued options to purchase 20,000 shares of
Common Stock of the Company to each of Messrs. Beck, Farruggio, and Norton. The
Company has granted Mr. DiMascio 75,000 restricted shares of Common Stock and an
option to purchase 75,000 shares of Common Stock at an exercise price of $1.67
per share, which restricted stock and option vest over a three-year period in
consideration of his service as a director of the Company until February 1999.
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Item 6. Management's Discussion and Analysis or Plan of Operation
The Company has made several restatements and reclassifications to the Company's
1997 and 1996 fiscal year financial statements. The restatements relate
principally from: (i) the reclassification and accounting for the Company's slot
machines, other leased assets and its licensed software; (ii) interest and other
expenses related to the Company's convertible preferred stock, stock warrants,
convertible debentures, tokens and chips and computer player tracking system;
and (iii) the reclassification of certain one-time casino revenue to
extraordinary gain. A detailed description of the restatements is discussed in
"NOTE 3 TO CONSOLIDATED FINANCIAL STATEMENTS" on page F-12 hereof.
The results described herein reflect the consolidated operations of the Company
and its wholly-owned operating subsidiaries, Double Eagle Resorts, Inc. and
Creeker's, Inc., for the fiscal year ended October 31, 1998 compared with the
same period in fiscal year 1997, as restated.
Results of Operations
The Company reported revenues, net of promotional allowances, for the fiscal
year ended October 31, 1998 of $23,225,232, an increase of $302,096 or 1.32%
from the Company's net operating revenues of $22,923,136 for the fiscal year
ended October 31, 1997. Total operating expenses were $26,937,766 for the twelve
months ended October 31, 1998, increasing by $3,291,544, or 13.92% from
$23,646,222 reported in 1997. Approximately $1,255,000 of the increase is
attributable to a one-time expense related to an asset impairment loss on land
held for future development. Total operating expenses as a percentage of total
revenues increased to 116% from 103% reported in the comparable period of 1997.
Casino. Casino revenues accounted for approximately 83% of the net operating
revenues in fiscal year 1998. For the twelve months ended October 31, 1998
casino revenues were $19,379,052, representing a decrease of $175,734 from the
$19,554,786 reported in 1997. Management attributes this decrease to its
decision in the third quarter of fiscal 1998 to increase the payout percentage
of all slot machines at the Double Eagle. Slot machine revenues generally
consist of the total amount wagered (i.e., the handle) less the amounts paid out
to customers. Historically, the Company's slot machines have had a lower payout
percentage than the slot machines of its competitors in Cripple Creek.
Management believes that its decision to increase the payout percentage of its
slot machines will result in an increased handle that, as customers become aware
of the change, will offset the increased payout percentage and thereby increase
overall casino revenues over time. Management continues to monitor the payout
percentage of its gaming devices and may further adjust such percentages in the
future in order to maximize casino revenues.
Costs and expenses of casino operations were $10,875,905 for the fiscal year
ended October 31, 1998, an increase of $1,058,524 or 10.78% from the $9,817,381
reported in 1997. The net increase in costs and expenses of casino operations is
attributable to higher payroll expenses. Casino costs and expenses as a
percentage of casino revenues increased to 56.12% for the 1998 period compared
to 50.20% from the comparable period in 1997.
Rooms. Room revenues accounted for approximately 10.1% of the net operating
revenues in the 1998 period. During this period, room revenues were $2,344,092,
representing a decrease of 11.75% from the $2,656,258 reported in the 1997
period. The reduction in such revenues during the 1998 period is primarily
attributable to the Company's decision made at the beginning of the 1998 period
to improve the hotel operating results by decreasing room rates and, at the same
time, hotel expenses. Costs and expenses of hotel operations remained relatively
flat at $1,764,548 compared to $1,746,804 from the 1997 period. Costs and
expenses as a percentage of room revenues increased
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to 75.3% in the twelve months ended October 31, 1998 as compared to 65.8% during
the comparable period in 1997.
Food and Beverage. Food and beverage revenues accounted for approximately 11.2%
of total revenues in the 1998 period. During this period, food and beverage
revenues were $2,608,486, representing an increase of $257,376, or 10.9%, from
the $2,351,110 reported in the 1997 period. The increase in food and beverage
revenues is attributable in part to management's decision to introduce a buffet
concept as well as revising the restaurant and bar menus to include lower priced
items during the third quarter. Costs and expenses of food and beverage were
$3,211,008 for the 1998 period, up $306,709 from $2,904,299 recorded in the 1997
period. Costs and expenses as a percentage of food and beverage revenues
decreased to 123.1% in the 1998 period from 123.5% in the 1997 period,
reflecting the cost savings derived from the newly introduced buffet format. The
Company is in the process of implementing a review of its restaurant operations
with the goal to improve profitability. Among other things, the Company is
considering converting Lombard's Bar & Grill to less formal dining in an effort
to reduce labor, cost of goods, and other expenses while increasing margins on
restaurant items.
Other. Other consists of revenues generated from the Company's gift shop and
parking lot operations. During fiscal year 1998, the Company implemented a
policy of charging a $5.00 parking fee at its parking lots located in close
proximity to its properties. This fee is then refundable from its casino once
the customer has demonstrated patronage. Other revenues were $643,168 in fiscal
1998, up $448,622, or 230.6% from $194,546 reported in the 1997 period. This
increase is mainly attributable to the parking fees collected in fiscal year
1998. Refunded parking fees are recognized as a marketing expense.
Marketing. Marketing expenses were $2,769,879 for the fiscal year ended October
31, 1998, up significantly by $1,155,397 or 71.56% from the $1,614,482 reported
in the 1997 period. In the third quarter of 1998, the Company increased its
marketing and advertising expenditures to promote the recently implemented
growth strategy, including the payment of a retainer and related expenses to its
new marketing firm - ZLR. Marketing expense also includes cash disbursements
made to patrons upon the redemption of promotion coupons and Gold Premier
Club/Winners Circle points. Marketing expenses as a percentage of total revenues
increased to 11.93% for the twelve months ended October 31, 1998 compared to
7.04% reported in 1997.
General and Administrative. General and administrative expenses were $3,555,697
for the twelve months ended October 31, 1998, down $512,443 or 12.60% from the
$4,068,140 reported in the 1997 period. The reduction in general and
administrative expense was primarily due to management's effort to trim down
corporate overhead expenses. General and administrative expenses as a percentage
of total revenues decreased to 15.31% for the fiscal year ended October 31, 1998
from 17.75% for the comparable period in 1997.
Depreciation and Amortization. Depreciation and amortization remained relatively
flat at $3,505,759 for the fiscal year ended October 31, 1998, compared to
$3,495,116 reported in 1997.
See Effect of New Depreciation Method and Change in Lives below.
Impairment of Land Held for Future Development. During fiscal 1998, management
reviewed the carrying value of its land held for future development to evaluate
its fair value. Based on comparable sales of land in the near vicinity, the fair
value of the land was computed at $3,250,000 for the 13 lots owned by the
Company. As a result, the Company realized an impairment loss of approximately
$1,255,000.
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Loss from Operations. As a result of the factors discussed above, the Company
recognized a loss from operations of $3,712,534 for the fiscal year ended
October 31, 1998 as compared to a loss of $723,086 recorded in the 1997 period.
Approximately $1,255,000 of the loss is a one-time, non-cash expense related to
the impairment loss recognized primarily on the land held for future
development.
Interest Expense. Interest expense was $6,171,032 for the twelve months ended
October 31, 1998, an increase of $417,022, or 7.25% from the $5,754,010 reported
for the comparable period in 1997. The increase in interest expense is primarily
attributable to additional draw down on the revolving credit facility. Total
interest expense includes $1,744,216 and $1,783,002 to related parties for 1998
and 1997, respectively.
Effect of New Depreciation Method and Change in Lives. During fiscal 1998,
management reevaluated the periods of amortization of its long-lived assets and
revised its estimates of useful lives. Also, prior to fiscal year 1998, the
Company had used accelerated methods of depreciation as well as the
straight-line method. The effect of the change in the estimated lives of its
long-lived assets and the change from accelerated methods to the straight-line
method of depreciation resulted in an increase of $520,439 and a decrease of
$457,016, respectively, in depreciation from the year ended October 31, 1998.
Net Loss. The net loss for the Company was $9,408,330 for the fiscal year ended
October 31, 1998, an increase of $4,095,388 or 77.08% from the net loss of
$5,312,942 reported in the 1997 period.
Liquidity and Capital Resources
The Company has financed its operations and capital expenditures principally
with borrowings from private investors, the sale of equity securities in private
transactions, and bank borrowings.
At October 31, 1998, the Company had cash and cash equivalents totaling
$1,573,519 and $1,344,705 of additional liquidity under the Foothill Credit
Facility, which is described below. Net cash used by operating activities was
$1,074,766 for the twelve-months ended October 31, 1998. Cash used by investing
activities totaled $291,600 for the year ended October 31, 1998 with property
and equipment additions amounting to $313,592. Net cash provided by financing
activities was $977,398 for the twelve-months ended October 31, 1998. Net
borrowings amounted to $13,655,296 of which approximately $12,267,509 was used
to repay long-term debt and certain capital lease obligations.
In July 1998, the Company's subsidiary, Double Eagle Resorts, Inc., secured a
credit facility ("Foothill Credit Facility") from Foothill Capital Corporation
("Foothill") which permits The Double Eagle to borrow up to a maximum of
$15,000,000. At October 31, 1998, availability under the Foothill Credit
Facility was $15,000,000, of which the Company had used $13,655,296: (i) to
repay three mortgage note payables totaling approximately $10,199,000, which
accrued interest between 11.5 and 12% per year; (ii) for working capital
(approximately $500,000); and (iii) for a cash payment of $1,850,000 in
connection with the purchase of gaming devices that were previously leased from
International Game Technology ("IGT"). The Foothill Credit Facility bears
interest at the greater of 8% or the prime rate plus 2% (10.0% at October 31,
1998), and is secured by a first mortgage lien on The Double Eagle (including
the adjacent parking lot) and a lien on the equipment and other personal
property of Double Eagle Resorts, Inc. As of April 14, 1999, the interest rate
was increased to the prime rate plus 3%. The Company has guaranteed Double
Eagle's obligations under the Foothill Credit Facility, which guarantee is
secured by a pledge of the Company's equity interest in The Double Eagle.
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At October 31, 1998, the Company was in technical default under the Foothill
Credit Facility, which requires Double Eagle Resorts, Inc. to maintain EBITDA
(Earnings Before Interest, Taxes, Depreciation and Amortization, as defined) of
at least four million ($4,000,000), measured on a rolling 12 month basis
(annualized to the extent required), tested at the end of each fiscal month.
Double Eagle Resorts, Inc.'s EBITDA for the fiscal year ending October 31, 1998
did not satisfy this covenant. The Company has obtained a one-time waiver of the
October 31, 1998 default from Foothill. Unless the Company meets its forecasts,
it is unlikely the Company will satisfy its obligations under this agreement
during the next fiscal year. See NOTE 19 TO THE CONSOLIDATED FINANCIAL
STATEMENTS contained herein.
Effective May 1, 1998, the Company purchased the slot machines and other gaming
devices that it previously leased from IGT. The purchase price for the gaming
devices was $5,172,721, including approximately $2,000,000 in past due payments
under the previous leases. The Company used approximately $1,850,000 of the
availability under the Foothill Credit Facility to purchase the gaming devices
and issued IGT a 12% note in the principal amount of $3,406,238 for the
remainder of the purchase price. Monthly payments of $50,000 are required under
this note, with the balance due in July 1999. The note to IGT is secured by the
purchased gaming devices.
At October 31, 1998, the Company had $44,022,355 of liabilities due within one
year, but only $2,145,172 in current assets, resulting in a negative current
ratio of 0.04:1.0. The Company's outstanding indebtedness imposes significant
debt service obligations on the Company and poses significant risks to the
Company. See "Forward-Looking Statements and Risk Factors--Substantial
Leverage." Moreover, the Company is in payment default on several of its debt
obligations. Management will seek to negotiate payment plans or otherwise reach
a satisfactory resolution with each of its creditors with whom the Company has
defaulted in its obligations. No assurance can be given that the Company will be
successful in restructuring its various debt obligations.
In addition to its current debt levels, the Company's growth strategy includes
the acquisition and development of new casinos or hotel/casinos and the
construction of a 400 space parking garage and conference center adjacent to The
Double Eagle. There is a shortage of convenient parking in Cripple Creek.
According to a 1998 study prepared by the City of Cripple Creek, visitors to
Cripple Creek viewed the shortage of parking as the area's biggest drawback. The
Company believes that access to convenient parking is one of the most important
competitive factors in the market. Based upon the experience of casinos in
Blackhawk, Colorado, the Company believes that a new parking garage offering
patrons convenient covered access to The Double Eagle would result in increased
business at The Double Eagle. If constructed and as presently contemplated, the
mezzanine of the new parking facility is intended to include a 5,000 square-foot
conference center complete with meeting rooms, current audio-video equipment,
bar and kitchen facilities, health spa and outdoor patio. The conference center
would be connected by an enclosed walkway to The Double Eagle's main casino
floor and hotel reception desk. With these new facilities, the Company would
market The Double Eagle to conventions and other groups seeking quality meeting
space. The Company expects that such facilities would increase the occupancy
rate of The Double Eagle, especially mid-week and in the winter months. The cost
of the parking garage and conference center is currently estimated at
$6,500,000.
The implementation of this growth strategy will require the Company to obtain
significant additional debt or equity financing. The Company is currently
evaluating a debt refinancing to replace a significant portion of the Company's
current debt as well as to provide the funds to construct the parking garage and
conference center. There can be no assurance that the Company will be able to
obtain this or any other financing in the amounts it requires, especially in
light of the Company's current financial condition.
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If the Company is unsuccessful in raising additional financing or unsuccessful
in satisfactorily renegotiating its debt obligations with its current lenders,
the Company is not expected to have sufficient cash to fund operations for the
next twelve months and would be required to take some or all of the following
actions in order to conserve its cash resources: (i) postpone the implementation
of its growth strategy, including the construction of the parking garage and
conference center; (ii) implement significant cost controls or otherwise reduce
operations; (iii) sell one or more of its assets; or (iv) engage in a merger or
other form of corporate reorganization. If such actions are inadequate to
generate sufficient cash to meet its debt obligations and support its
operations, the Company would be required to seek protection under applicable
bankruptcy laws.
Year 2000 Compliance
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a
two-digit year is commonly referred to as the Year 2000 compliance issue. As the
Year 2000 approaches, such systems may be unable to accurately process certain
date-based information.
The Company is in the process of identifying and modifying all significant
hardware and software applications that will require modification to ensure Year
2000 compliance. Relying primarily on internal resources, the Company has
completed a preliminary audit of its significant hardware and software
applications. This audit revealed that the player tracking software that the
Company licenses from IGT and certain personal computers used in the Company's
casino operations may not presently be Year 2000 compliant. The Company has been
advised by IGT and personal computer manufacturer that such systems will be Year
2000 compliant by August 1999. The estimated cost to address the Company's Year
2000 issues is not expected to have a material impact on the Company's business,
operations or financial condition. If the modification of the Company's hardware
and software compliance is not timely completed or is not fully effective, the
Year 2000 problem may have a serious negative impact on the operations of the
Company.
Although the Company has communicated with its external service providers and
vendors to ensure that the providers and vendors are taking the appropriate
action to address Year 2000 issues and has not received any notice from such
persons that their operations will not be Year 2000 compliant, there can be no
assurance that the systems of third parties on which the Company's systems rely
will be timely converted.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"), the Company is hereby
providing cautionary statements identifying important factors that could cause
the Company's actual results to differ materially from those projected in
forward-looking statements (as such term is defined in the Reform Act) made by
or on behalf of the Company herein or orally, whether in presentations, in
response to questions or otherwise. Any statements that express, or involve
discussions as to, expectations, beliefs, plans, objectives, assumptions or
future events or performance (often, but not always, through the use of words or
phrases such as "intends," "plans," "will result," "are expected to," "will
continue," "is anticipated," "estimated," "projection" and "outlook") are not
historical facts and may be forward-looking and, accordingly, such statements
involve estimates, assumptions, and uncertainties which could cause actual
results to differ materially from those expressed in the forward-looking
statements. Such uncertainties include the risk factors set forth below. They
also include the following conditions or uncertainties: (i) risk associated with
real estate ownership, operations and development, including
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environmental liabilities, worker's strikes, construction delays, obtaining
building permits and necessary zoning changes; (ii) illiquidity of real estate
holdings; (iii) imposition of new regulatory requirements affecting the Company;
(iv) the delay or failure to properly manage growth; (v) effect of uninsured
loss; and (vi) breakdown of water, sewage or other municipal services in Cripple
Creek and other conditions beyond the control of the Company. The Company
cautions that actual results or outcomes could differ materially from those
expressed in any forward-looking statements made by or on behalf of the Company.
Any forward-looking statement speaks only as of the date on which such statement
is made, and the Company undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time, and it is not possible for
management to predict all of such factors. Further, management cannot assess the
impact of each such factor on the business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
Independent Auditor's Report Contains Going Concern Explanatory Paragraph;
Losses from Operations
The report of the Company's independent public auditors contains an explanatory
paragraph which states that the Company's current working capital deficiency and
net losses raise substantial doubt about the Company's ability to continue as a
going concern. At October 31, 1998, the Company's current liabilities exceeded
its current assets by $41,877,183. The Company incurred a net loss of $9,408,330
for the year ended October 31, 1998. Pursuant to its business strategy, the
Company intends to restructure its debt, seek additional financing, and reduce
operating expenses while increasing revenues through an expanded marketing
campaign. See "Item 1. Business - Business and Marketing Strategy." If the
Company is unsuccessful in these endeavors, it is not expected to have
sufficient cash to fund operations for the next twelve months. The Company's
recent operations have been financed and are expected to continue to be financed
primarily through sales by the Company of its equity and debt securities.
Substantial Leverage
The Company has a significant amount of indebtedness. The following chart shows
certain important credit statistics at October 31, 1998.
At October 31, 1998
Total indebtedness.......................... $41,977,596
Shareholders' deficiency.................... $(2,163,277)
Ratio of earnings to fixed charges.......... (*)
The Company's substantial indebtedness could have important consequences to the
Company, including:
o make it more difficult for the Company to satisfy its obligations
to its creditors; o increase the Company's vulnerability to
general adverse economic and industry conditions;
o limit the Company's ability to fund future working capital,
capital expenditures, research and development costs, and other
general corporate requirements;
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<PAGE>
o limit the Company's flexibility in planning for, or reacting to,
changes in the Company's business and the industry in which the
Company operates;
o place the Company at a competitive disadvantage compared to its
competitors that have less debt; and
o limit the Company's ability to borrow additional funds.
(*) Earnings did not cover fixed charges by $3,712,534 for the year ended
October 31, 1998.
Seasonality
Cripple Creek is a mountain tourist town and its gaming market is subject to
seasonal fluctuations. This seasonality will cause quarterly fluctuations in the
Company's revenues and net earnings. Typically, gaming revenues are greater in
the summer tourist season and are lower from October to April. In addition, snow
and ice can render the mountain roads leading to and from Cripple Creek
extremely hazardous. Consequently, seasonal fluctuations may increase in years
with above-average snowfall or other inclement weather conditions.
Competition
The Company's casino operations face intense competition. In Cripple Creek, the
Company's two casinos compete against 16 other casinos. Statewide, there are a
total of approximately 50 gaming establishments, including two Indian tribes in
Southwest Colorado that offer limited stakes, casino- style gaming on their
reservations. Some of the Company's competitors have greater financial
resources, experience, and expertise than does the Company. Due in part to the
intense competition, a number of casinos in Cripple Creek have ceased operations
and others have filed for bankruptcy protection. The Company also generally
competes with other forms of legalized gaming, casinos located outside Colorado,
state-sponsored lotteries, video poker in restaurants, bars and hotels, pari-
mutuel betting on horse racing, dog racing and jai-alai, sports bookmaking, and
bingo.
The legalization of gaming in or near Colorado Springs or Denver, Colorado,
would adversely impact the Company's operations. Colorado law requires statewide
voter approval to expand gaming into any location other than the three permitted
locals of Cripple Creek, Black Hawk, and Central City. Six initiatives to expand
gaming to other locations have been placed on Colorado ballots since 1992. All
six initiatives have failed by at least a two to one margin, including a 1994
vote to permit gaming in Manitou Springs (located near Colorado Springs,
approximately 40 miles from Cripple Creek), which failed by a margin of 93% to
7%. Although the initiatives to expand gaming have failed in the past, the
possibility exists that voters will expand limited stakes gaming in Colorado. In
addition, the legalization of other types of gaming in Colorado, such as video
lottery terminals in dog and horse tracks, could adversely impact the Company's
operations.
Colorado Gaming Regulations
The ownership and operation of casinos in Colorado is subject to strict state
regulation. Colorado gaming law permits legalized limited stakes gaming in the
cities of Central City, Black Hawk, and Cripple Creek, Colorado. "Limited stakes
gaming" is defined as the use of slot machines and the card games of blackjack
and poker, each with a maximum single bet of $5.00. As compared to gaming in
jurisdictions with unlimited stakes gaming, the $5.00 per bet limit in Colorado
restricts revenues that the Company (and its in-state competitors) derive from
card games. In addition, no more than 35% of the square footage of any building
and no more than 50% of any one floor of such building may be used for gaming.
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<PAGE>
Colorado gaming laws also make it 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/operator gaming licenses in Colorado. The Company
currently has an interest in two such licenses. Accordingly, our expansion
opportunities in Colorado are limited to one additional license. Gaming licenses
and related approvals are deemed to be privileges under Colorado law, and no
assurance can be given that it will receive any new licenses, permits, or
approvals that it may require in the future or that existing ones will be
renewed or will not be revoked. See "Item 1 Description of
Business--Governmental Regulations."
Lack of Geographic Diversity
Currently, all of the Company's hotel and casino operations are located in
Cripple Creek, Colorado. The Company is therefore exposed to conditions that are
specific to Colorado and the Cripple Creek market. These include complications
caused by weather or road closure, road construction on primary access routes,
changes in local and state governmental laws and regulations (including changes
in laws and regulations affecting gaming operations and taxes) and natural and
other disasters. If there is a downturn in gaming operations in Cripple Creek,
the Company will be more adversely affected than if it had significant gaming
operations in other gaming markets. Furthermore, since the Company obtains most
of its revenues from slot machines, a decrease in the popularity of slot
machines could adversely impact the Company's operations.
Growth Strategy
The Company's long-term growth strategy focuses on developing or acquiring
additional casinos located outside the State of Colorado. The Company's ability
to expand to additional locations will depend on a number of factors, including:
o identifying suitable sites in jurisdictions where gaming is
legalized;
o obtaining the necessary gaming and liquor licenses and other
permits required to operate a casino;
o resolving risks typically associated with any new construction;
and o obtaining additional financing on acceptable terms.
Any expansion to locations outside the United States will further involve all of
the risks of foreign operations. These include currency controls, unforeseen
local regulations, shortages of skilled workers and political instability. Many
of these factors are beyond the Company's control. No assurance can be given
that the Company will be able to expand successfully to additional locations.
Even if such plans are successfully completed, the Company must manage its
growth. This will require the Company to add and train new personnel, evaluate
our management structure, expand its management information systems and control
its operating expenses. All of these risks should be viewed in light of the
Company's limited staff and limited capital.
Gaming Taxes
The State of Colorado imposes a gaming tax based on our adjusted gross proceeds
from gaming operations. (Adjusted gross proceeds is generally defined as the
total amounts wagered less all payments to players). The Casinos in Colorado are
currently subject to the following tax rates:
o 2% on the first $2 million of AGP;
o 4% on AGP from $2 million to $4 million;
o 14% on AGP from $4 million to $5 million;
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<PAGE>
o 18% on AGP from $5 million to $10 million; and
o 20% on AGP over $10 million.
Effective July 1 of each year, the Colorado Gaming Commission establishes the
gaming tax for the next 12 months. In addition, the State of Colorado has
imposed an annual device fee of $75 and the city of Cripple Creek has imposed an
annual device fee of $1,200, for each gaming device installed on gaming
premises. Tax rates or fees applicable to our casinos may be increased in the
future, either by the Colorado electorate, legislation or action by the Colorado
Gaming Commission or the city of Cripple Creek. Additionally, from time to time,
certain federal legislators have proposed the imposition of a federal tax on
gaming revenues. Any such increase in taxes could be detrimental to the
Company's operations.
Pending Report from the National Gambling Impact Study Commission
The U.S. Congress has created the National Gambling Impact and Policy Commission
to conduct a comprehensive study of all matters relating to the economic and
social impact of gaming in the U.S. The National Gambling Impact and Policy
Commission must issue a report by June 20, 1999 containing its findings and
conclusions, together with recommendations for legislation and administrative
action. Any such recommendations, if enacted into law, could adversely affect
the gaming industry, including the Company's operations.
Potential Liability for Serving Liquor to our Patrons
The Company may be subject to "dram shop" laws. Generally, dram shop laws impose
liability on licensed alcoholic beverage servers for injuries or damages caused
by negligent service of alcohol to visibly intoxicated persons or to minors, if
such service is the proximate cause of the injury or damage and such injury or
damage is reasonably foreseeable. The Company maintains liquor liability
insurance as part of comprehensive general liability insurance, which management
believes is adequate to protect against potential "dram shop" liability claims.
Nonetheless, it is possible that the Company could be subject to a judgment in
excess of our insurance coverage in the future or that it may not be able to
continue to maintain such insurance coverage at reasonable costs, or at all.
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
During fiscal year ended October 31, 1998, the Company changed its independent
accountants from Richey, May & Co., P.C. to the firm of Moore Stephens, P.C. as
the Company's new independent accountants. The decision to change accountants
was recommended and approved by the Company's audit committee.
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<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters, and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The following table sets forth information regarding the officers and directors
of the Company as of April 25, 1999:
Name Age Positions Held Since
- ---- --- -------------- -----
Michael S. Smith 40 Interim President and Chief Executive
Officer, Secretary, General Counsel,
and Director January, 1992
Gilbert M. Sisneros 60 Vice President and Director March, 1995
Farid E. Tannous 32 Treasurer and Chief Financial Officer February, 1996
Michael Beck 43 Director February, 1998
Salvatore DiMascio 59 Director June, 1998
Sam Halpern 57 Director January, 1997
Steve Norton 64 Director February, 1998
Rudy S. Saenz 44 Director January, 1992
Joseph M. Farruggio 47 Vice President and General Manager February 1998
of The Double Eagle
Michael S. Smith has served as Secretary, General Counsel, and a Director of the
Company since January 1992 and Interim President and Chief Executive Officer. In
March 1999, Mr. Smith was appointed the Company's Interim Chief Executive
Officer and President. Mr. Smith has also been a self-employed attorney in
Denver, Colorado since 1992. Prior to joining the Company, he was an attorney
with the law firm of McKenna & Cueno in Denver, Colorado. Mr. Smith received a
bachelor of arts degree from Marquette University in 1981 and a juris doctor
degree in 1984.
Gilbert M. Sisneros has served as 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 in 1991. He also acted as General
Manager for The Double Eagle 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. Mr. Sisneros studied business
law at Weatherford College in Texas and later studied business and finance at
Colorado Mountain College.
Farid E. Tannous has served as Treasurer and Chief Financial Officer of the
Company since February 1996. From September 1994 until 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 a member of the
technical staff in various divisions of Hughes. In June 1994, Mr. Tannous
received a masters of business administration degree in finance and accounting
from the University of Chicago Graduate School of Business. He also holds a
masters degree and a bachelor of science degree in electrical engineering from
the University of Southern California.
Michael Beck has served as a Director of the Company since February 1998. Mr.
Beck has over 19 years experience in hotel/casino management, including previous
management-level positions with the Company. Since March 1998, Mr. Beck has
served as the Vice President of Gaming Operations for Sodak Gaming. Before
joining Sodak Gaming, Mr. Beck was a Vice President of Double Eagle
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<PAGE>
Resorts, Inc., and the general manager of The Double Eagle Hotel from May 1997
to February 1998. Mr. Beck served as Vice President of casino operations at the
Flamingo Hilton, Reno, Nevada from 1996 to 1997 and as the Director of casino
operations at the Flamingo Casino, New Orleans, Louisiana from 1993 to 1996.
Salvatore T. DiMascio has served as a Director of the Company since June 1998.
Since 1986, Mr. DiMascio has been President of DiMascio Venture Management,
Inc., a management and investment firm. From June 1994 until June 1997, Mr.
DiMascio was Executive Vice President and Chief Financial Officer of Anchor
Gaming, a publicly-held diversified gaming company. From 1978 to 1986, Mr.
DiMascio was Senior Vice President and Chief Financial Officer of Conair
Corporation, a manufacturer and marketer of personal and health care products.
Mr. DiMascio is also a Director of Fotoball U.S.A., a publicly-held company
which develops and manufactures custom sports-related products, H.E.R.C.
Products, Inc., a publicly-held company in the water treatment business, and
U.S. Communications Inc., a publicly-held communications company. Mr. DiMascio
is a certified public accountant.
Sam Halpern has served as a Director of the Company since January 1997. Mr.
Halpern is President of Indela Holdings, Inc. and a managing member of Indela
CamelSquare, LLC and CamelSquare Executive Suites, which are real estate
development and leasing companies. 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. Mr. Halpern is a
graduate of the United States Military Academy at West Point.
Steve Norton has served as a Director of the Company since February 1998. Mr.
Norton has served as the president and chief operating officer of Argosy Gaming
Company from January 1993 through April 1997 and Executive Vice President from
April 1997 through February 1998. From 1991 through 1992 he was the president
and Chief Executive Officer of the Gold River Gambling Hall & Resort in
Laughlin, Nevada. He has also served as the President and Chief Operating
Officer of the Sands Hotel & Casino, Las Vegas, Nevada, and the Executive Vice
President of both Resorts International, Inc., and Resorts International Casino
Hotel. He currently is a founding member of the Board of Directors of the
American Gaming Association, past chairman of the Indiana Gaming Association,
past officer and director of the Missouri Gaming Association, and past director
of the Illinois Gaming Association. He is a Fellow of the Educational Institute
of the American Hotel Association, a member of the Indiana Tourism Commission
and a member of the Marketing Advisory Committee of the St. Louis Convention and
Visitors Commission. He has been a guest lecturer at both the Cornell University
School of Hotel Administration and at the University of Nevada, Las Vegas School
of Hotel & Casino Administration. He received a bachelor of science in Business
Administration from Davidson College in 1956.
Rudy S. Saenz has served as Director and founder of the Company and its
subsidiary Double Eagle Resorts, Inc., and its predecessors since January 1992.
In March 1999, Mr. Saenz resigned as the Chief Executive Officer and President
of the Company, positions he had held since inception. From 1992 to 1994, he was
the chief executive officer and director of Lyric, the company that acquired
land in Cripple Creek and merged with the Company in 1994. See "Item 1
Description of Business--Background." From 1989 through 1992, Mr. Saenz was
employed as a Director of Marketing and New Business Development at GM Hughes
Electronics ("Hughes"). Prior thereto, he was employed by Ball Aerospace
Corporation as a Technical Program Manager. Prior thereto, he was employed by
Hughes as a member of the technical staff where he functioned as design engineer
at the Hughes Technology Center. Mr. Saenz received a bachelor of science degree
in engineering physics from the University of California at San Diego in 1982
and later pursued graduate studies in
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<PAGE>
electrical engineering. He also attended graduate school to study business and
economics at the University of Colorado at Boulder.
Joseph M. Farruggio has served as Vice President and General Manager of Double
Eagle Resorts, Inc. and Creeker's Casino Inc. since February 1998. Mr. Farrugio
has over 20 years of experience in the casino industry. From 1991 to 1997, Mr.
Farrugio was associated with Casino America, where he served as Director of
Casino Operations and General Manager for the Par-a-dice Riverboat Casino. Mr.
Farrugio opened three casinos for Casino America and was named Vice President
and General Manager of the Isle of Capri Casino. From 1982 to 1991, Mr. Farrugio
served as Director of Casino Marketing at the Tropicana Hotel. Mr. Farrugio
currently serves as a board member of The Cripple Creek Casino Association and
the Teller County Economic Development Foundation.
Directors' Terms
All directors serve one year terms, until the next annual meeting or until their
replacements are elected and qualified.
Family Relationships
There are no family relationships between any director or executive officer of
the Company.
Compliance with Section 16(a) of the Securities Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires our 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 shareholders 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 our 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, 1998, all Section 16(a) filing
requirements applicable to its officers, directors, and greater than 10%
shareholders were satisfied.
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<PAGE>
Item 10. Executive Compensation
The following table sets forth, for the fiscal years ended October 31, 1998,
1997, and 1996, the compensation paid or accrued by the Company to its former
Chief Executive Officer and below named officers:
<TABLE>
SUMMARY COMPENSATION TABLE
Annual Compensation Awards
Name and Restricted Securities
Principal Other Annual Stock Underlying All Other
Position Year Salary($) Bonus($) Compensation Awards($) Options/SARs Compensation
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Rudy S. Saenz 10/31/98 27,714 -- -- -- -- --
President & CEO 10/31/97 113,160 -- -- -- -- --
10/31/96 148,000 220,000 -- -- 250,000(1) --
Farid E. Tannous 10/31/98 90,192 15,000 -- -- -- --
Treasurer & CFO 10/31/97 77,658 15,000 -- -- -- --
10/31/96 48,462 -- -- -- 100,000 --
</TABLE>
(1) Such options were cancelled by the Board of Directors in 1997.
Directors of the Company who are full-time employees receive no compensation for
their services as directors. The Company's non-employee directors, Messrs.
Halpern, Beck, Norton, and DiMascio, receive no cash compensation for their
services as directors of the Company. The Company has granted each of Messrs.
Beck and Norton immediately exerciseable options to purchase 20,000 shares of
the Company's Common Stock per share at an exercise price of $2.00 per share.
The Company has granted Mr. DiMascio 75,000 restricted shares of Common Stock
and an option to purchase 75,000 shares of Common Stock at an exercise price of
$1.67 per share, which restricted stock and option vest over a three-year
period. See "Item 11. Security Ownership of Certain Beneficial Owners and
Management."
The table below sets forth information concerning the exercise of options during
1998 along with the aggregate 1998 year-end option holdings of the former Chief
Executive Officer and below named officers of the Company:
<TABLE>
AGGREGATED OPTION EXERCISES IN 1998 AND YEAR-END OPTION VALUES
COMMON STOCK
Number of securities Value of unexercised
underlying options at in-the-money
Shares Acquired Value October 31, 1998 options at
Name on Exercise Realized Exercisable/Unexercisable October 31, 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Rudy S. Saenz none none 210,000/0 n/a / n/a
Farid E. Tannous none none 40,000/60,000 n/a / n/a
- ---------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information concerning common stock ownership by
beneficial owners of five percent or more of our common stock and the officers
and directors of the Company:
Amount of
Name and Address Beneficial Percent of
Title of Class of Beneficial Owner Ownership(1) Class
- ------------------------------------------------------------------------------
Common Rudy S. Saenz
$0.001 par value 304 S. 8th Street, Suite 201 21,747,219(2) 55.83%
Colorado Springs, CO 80905
- -------------------------------------------------------------------------------
Common Gilbert M. Sisneros
$0.001 par value 304 S. 8th Street, Suite 201 21,482,219(2) 55.45%
Colorado Springs, CO 80905
- -------------------------------------------------------------------------------
Common Sam Halpern 3,650,000(3) 9.09%
$0.001 par value P.O. Box 1117
Whitefish, MT 59937
- -------------------------------------------------------------------------------
Common Michael S. Smith 77,500(4)
$0.001 par value 304 S. 8th Street, Suite 201 *
Colorado Springs, CO 80905
- -------------------------------------------------------------------------------
Common Farid E. Tannous 60,000(5) *
$0.001 par value 304 S. 8th Street, Suite 201
Colorado Springs, CO 80905
- -------------------------------------------------------------------------------
Common Salvatore T. DiMascio 50,000(6) *
$0.001 par value 304 S. 8th Street, Suite 201
Colorado Springs, CO 80905
- -------------------------------------------------------------------------------
Common Michael Beck 20,000(7) *
$0.001 par value 304 S. 8th Street, Suite 201
Colorado Springs, CO 80905
- -------------------------------------------------------------------------------
Common Steve Norton 20,000(8) *
$0.001 par value 304 S. 8th Street, Suite 201
Colorado Springs, CO 80905
- -------------------------------------------------------------------------------
Common All Officers and Directors 25,674,719 63.32%
$0.001 par value as a group (eight persons)(9)
- -------------------------------------------------------------------------------
Common Total shares issued/outstanding 38,740,632 100.00%
- -------------------------------------------------------------------------------
*Less than 1%.
(1) Unless otherwise indicated, the Company believes that all persons named in
the table have sole voting and investment power with respect to all shares
beneficially owned by them. Each beneficial owner's percentage ownership is
determined by assuming that convertible securities, options or warrants that
are held by such person (but not those held by any other person) and which
are exercisable within 60 days of the date of this report have been
exercised. Calculation of percentage ownership was based on 38,740,632
shares of Common Stock outstanding as of April 21, 1999.
(2) Messrs. Saenz and Sisneros share voting and dispositive powers with respect
to a total of 21,407,219 shares held by Double Eagle Investments, Ltd., a
Colorado limited partnership, and its general partner, Double Eagle
Consolidated, Inc., a Colorado corporation. Mr. Saenz has sole voting and
dispositive power with respect to an additional 340,000 shares, including
210,000 shares subject to options. Mr. Sisneros has sole voting and
dispositive power with respect to an additional 75,000 shares.
(3) Includes 1,400,000 shares underlying a common stock purchase warrant.
(4) Includes 75,000 shares underlying stock options.
(5) Includes 60,000 shares underlying stock options.
(6) Includes 25,000 shares underlying stock options and 25,000 shares of
restricted stock. Does not include 50,000 shares underlying stock options or
50,000 shares of restricted stock which vest more than 60 days from the date
hereof.
(7) Includes 20,000 shares underlying stock options.
(8) Includes 20,000 shares underlying stock options.
(9) Includes all shares described in footnotes 2-8 above.
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<PAGE>
Item 12. Certain Relationships and Related Transactions
Michael S. Smith, Interim President and Chief Executive Officer of the Company
served as the Secretary and General Counsel of the Company in 1998 but did not
receive a salary from the Company for that period. However, in consideration for
legal services rendered to the Company, Mr. Smith received a flat fee monthly
retainer of $6,000 and $20,000 in cash bonuses for a total of $92,000 during
fiscal year 1998. Mr. Smith received no compensation for his services as
director.
In May 1997, the Company modified the conversion feature of the 250,000 shares
of Series One Convertible Preferred Stock ("Series One Preferred Stock") held by
Gemini Ventures, LLC ("Gemini"), a company controlled by Sam Halpern, a director
of the Company. As modified, such shares of Series One Preferred Stock were made
convertible into an aggregate of 1,400,000 shares of Common Stock and a
five-year warrant to purchase an additional 1,400,000 shares of Common Stock at
an exercise price of $2.50 per share. Prior to such modification, the shares of
Series One Preferred Stock were convertible into 1,000,000 shares of Common
Stock and a three-year warrant to purchase an additional 1,000,000 shares of
Common Stock at a exercise price of $4.00 per share. The Series One Preferred
Stock was converted by Gemini in June 1997.
Contemporaneously with the modification of the Series One Preferred Stock held
by Gemini, Gemini extended the maturity date of the promissory note issued by
Gilbert M. Sisneros, a director and Vice President of the Company, to Gemini
from May 30, 1997 to January 28, 1999. Mr. Sisneros, in turn, extended the due
date on this loan to the Company to January 28, 1999, and then further extended
the due date to April 30, 1999, to coincide with a similar extension Mr.
Sisneros received from Gemini. The $2,087,500 note from Mr. Sisneros to Gemini
bears interest at a rate of 14% per year and is secured by a note in the like
amount issued by the Company to Mr. Sisneros. The note issued by the Company is
unsecured, bears interest at a rate of 14.10% per year and matures on January
28, 1999. The proceeds from this loan from Mr. Sisneros to the Company were used
in the construction and development of The Double Eagle. See NOTE 3F TO THE
CONSOLIDATED FINANCIAL STATEMENTS.
In August 1996, the Company did not pursue the renewal of a required license for
a former officer and shareholder of CCRI. To assure the continued operation of
the Company's casinos, Messrs. Saenz and Sisneros agreed to acquire such
person's interest in the Company (including a one-third interest in Double Eagle
Investments, Ltd. and TSC Enterprises) in exchange for a $3,000,000 note bearing
interest at a rate of 7% per year. To assist Messrs. Saenz and Sisneros in
making the $55,443 per month payment due under this note, CCRI has, since
November 1, 1996, advanced a total of approximately $1,057,000 to Messrs. Saenz
and Sisneros. See NOTE 6 TO THE CONSOLIDATED FINANCIAL STATEMENTS.
TSC Enterprises ("TSC") is a Colorado general partnership that is presently
controlled by Messrs. Saenz, Sisneros and a third person. Prior to there being
any related party relationship between the Company and TSC, the Company acquired
13 undeveloped lots from TSC in exchange for the issuance of a 7.05% convertible
promissory note ("TSC Convertible Note") in the principal amount of $4,500,000.
Principal and interest under this unsecured promissory note may be converted
into shares of Common Stock after November 1, 1999 at a conversion rate of $.50
per share. In addition, there remains outstanding approximately $470,083 (and
accrued interest of $222,293 at January 31, 1999) on a September 1992 promissory
note ("TSC Note") issued by the Company to TSC in connection with the
acquisition of four of the nine lots where The Double Eagle now stands. The TSC
Note bears interest at a rate of 16% per year and is unsecured.
-30-
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 18 Letter regarding Change of Accounting Principles from
Moore Stephens dated February 15, 1999.
(b) Reports on Form 8-K Filed During the Company's Fourth Fiscal Quarter:
(1) On September 17, 1998, the Company filed a current report on Form
8-K with the Commission dated September 17, 1998, reporting
information under Item 4, Changes in Registrant's Certifying
Accountant and Item 7, Financial Statements and Exhibits.
(2) On October 1, 1998, the Company filed a current report on Form 8-K
with the Commission dated October 1, 1998, reporting information
under Item 7, Financial Statements and Exhibits.
-31-
<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 our
behalf by the undersigned, thereunto duly authorized this 27th day of April,
1999.
COLORADO CASINO RESORTS, INC.
By: /s/ Michael S. Smith
Michael S. Smith
Interim President and Chief Executive
Officer, Secretary & General Counsel,
Director
/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.
April 27, 1999 /s/ Michael S. Smith
----------------------------------
Michael S. Smith
Interim President and Chief Executive
Officer, Secretary & General Counsel,
Director
April 27, 1999 /s/ Gilbert M. Sisneros
----------------------------------
Gilbert M. Sisneros
Vice President, Director
April 27, 1999 /s/ Farid E. Tannous
----------------------------------
Farid E. Tannous
Treasurer and Chief Financial Officer
April 27, 1999 /s/ Michael Beck
----------------------------------
Michael Beck
Director
April 27, 1999 /s/ Salvatore DiMascio
----------------------------------
Salvatore DiMascio
Director
April 27, 1999 /s/ Sam Halpern
----------------------------------
Sam Halpern
Director
April 27, 1999 /s/ Steve Norton
----------------------------------
Steve Norton
Director
April 27, 1999 /s/ Rudy S. Saenz
----------------------------------
Rudy S. Saenz
Director
-32-
<PAGE>
COLORADO CASINO RESORTS, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
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 [Deficiency]............ F-6
Consolidated Statements of Cash Flows................................... F-7
Notes to Consolidated Financial Statements.............................. F-9
. . . . . . . . .
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITOR
To the Shareholders and Board of Directors
Colorado Casino Resorts, Inc.
Colorado Springs, Colorado
We have audited the accompanying consolidated balance sheets of
Colorado Casino Resorts, Inc. and its subsidiaries as of October 31, 1998 and
1997, and the related consolidated statements of operations, changes in
stockholders' equity [deficiency], and cash flows for the fiscal years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. As more fully discussed
in Note 3 to the accompanying consolidated financial statements, Colorado Casino
Resorts, Inc. has made several restatements to its fiscal 1997 consolidated
financial statements. The consolidated financial statements of Colorado Casino
Resorts, Inc. as of and for the fiscal year ended October 31, 1997, before
restatements, were audited by other auditors whose report dated December 17,
1997, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated 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 its subsidiaries as of October 31,
1998 and 1997, and the consolidated results of their operations and their cash
flows for the fiscal years then ended in conformity with generally accepted
accounting principles.
As discussed in Note 18 to the financial statements, the Company
changed its method of computing depreciation in 1998.
The accompanying financial statements have been prepared assuming
that Colorado Casino Resorts, Inc. will continue as a going concern. As shown in
the accompanying statements of operations, the Company has incurred a net loss
of approximately $9.4 million for the year ended October 31, 1998, and, as of
that date, has an accumulated deficit from inception of approximately $21
million, a stockholders' equity deficiency of approximately $2.1 million, and a
negative working capital of over $40 million. As discussed more fully in Notes
11 and 19 to the financial statements, Colorado Casino Resorts, Inc. is in
technical default of its revolving credit facility, and several of its lease
obligations. The Company's business plan, which is discussed in Note 4 to the
financial statements, contemplates reduced operating losses, and refinancing or
restructuring its debt obligations. Colorado Casino Resorts, Inc.'s ability to
achieve the foregoing elements of its business plan, which may be necessary to
permit the realization of its assets and satisfaction of its liabilities in the
ordinary course of business, is uncertain. Those conditions raise substantial
doubt about Colorado Casino Resorts, Inc.'s ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
February 15, 1999,
Except as to Notes 22 and 16, for which
the dates are March 22, 1999, and
March 31, 1999, Respectively
F-2
<PAGE>
COLORADO CASINO RESORTS, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
October 31,
1 9 9 8 1 9 9 7
[As Restated]
Assets:
Current Assets:
Cash and Cash Equivalents $ 1,573,519 $ 1,962,487
Inventory 96,429 64,396
Advances to Officers 125,443 137,255
Prepaid Device Fees 201,400 209,381
Miscellaneous Receivables -- 153,954
Other Current Assets 148,381 4,348
----------- -----------
Total Current Assets 2,145,172 2,531,821
----------- -----------
Real Estate Held for Future Development 3,250,000 4,504,970
----------- -----------
Land, Building and Equipment - Net 40,459,018 42,492,581
----------- -----------
Other Assets:
Debt Issue Cost 359,819 593,678
Debt Extension Cost 158,100 790,500
Deposits 63,108 64,288
----------- -----------
Total Other Assets 581,027 1,448,466
----------- -----------
Total Assets $46,435,217 $50,977,838
=========== ===========
The Accompanying Notes Are an Integral Part of These Consolidated Financial
Statements.
F-3
<PAGE>
COLORADO CASINO RESORTS, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
<TABLE>
October 31,
1 9 9 8 1 9 9 7
[As Restated]
Liabilities and Shareholders' Equity [Deficiency]:
Current Liabilities:
<S> <C> <C>
Revolving Credit Facility $13,655,296 $ --
Accounts Payable 349,320 530,192
Accrued Expenses 1,303,328 731,324
Slot Club Liability 348,949 225,581
Incremental Progressive Slot Liability 374,264 353,396
Current Maturities of Long-Term Debt 10,819,963 1,179,388
Current Maturities of Long-Term Debt - Related Party 7,796,411 --
Convertible Debenture - Related Party 4,500,000 --
Current Maturities of Capital Lease Obligations 629,787 2,732,394
Interest Payable 1,252,825 385,892
Interest Payable - Related Party 1,953,240 633,051
Interest Payable - Convertible Debenture - Related
Party 909,261 --
Due to Officers 30,000 --
Other Current Liabilities 99,711 121,927
----------- -----------
Total Current Liabilities 44,022,355 6,893,145
Long-Term Debt - Less Current Maturities 3,908,702 20,684,629
Long-Term Debt - Related Party -- 7,874,638
Convertible Debenture - Related Party -- 4,500,000
Capital Lease Obligations - Less Current Maturities 667,437 2,965,179
Interest Payable - Convertible Debenture - Related Party -- 1,016,989
----------- -----------
Total Liabilities 48,598,494 43,934,580
----------- -----------
Commitments and Contingencies [16]
Stockholders' Equity [Deficiency]:
Preferred Stock, $10 Par Value, 5,000,000 Shares
Authorized, No Shares Issued or Outstanding -- --
Common Stock, $.001 Par Value, 100,000,000 Shares
Authorized, 38,740,632 and 38,665,632 Shares Issued
and Outstanding, Respectively 38,741 38,666
Paid-in Capital 19,025,188 18,741,968
Deferred Compensation (81,500) --
Accumulated Deficit (21,145,706) (11,737,376)
----------- -----------
Total Stockholders' Equity [Deficiency] (2,163,277) 7,043,258
----------- -----------
Total Liabilities and Stockholders' Equity [Deficiency] $46,435,217 $50,977,838
=========== ===========
</TABLE>
The Accompanying Notes Are an Integral Part of These Consolidated Financial
Statements.
F-4
<PAGE>
COLORADO CASINO RESORTS, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------
<TABLE>
Years ended
October 31,
1 9 9 8 1 9 9 7
------- -------
[As Restated]
Revenues:
<S> <C> <C>
Casino $19,379,052 $19,554,786
Rooms 2,344,092 2,656,258
Food and Beverage 2,608,486 2,351,110
Other 643,168 194,546
----------- -----------
Total Revenues Before Promotional Allowances 24,974,798 24,756,700
Less: Promotional Allowances (1,749,566) (1,833,564)
----------- -----------
Net Revenues 23,225,232 22,923,136
----------- -----------
Expenses:
Casino 10,875,905 9,817,381
Rooms 1,764,548 1,746,804
Food and Beverage 3,211,008 2,904,299
Marketing 2,769,879 1,614,482
General and Administrative 3,555,697 4,068,140
Depreciation and Amortization 3,505,759 3,495,116
Impairment of Land Held for Future Development 1,254,970 --
----------- ----------
Total Expenses 26,937,766 23,646,222
----------- -----------
[Loss] from Operations (3,712,534) (723,086)
----------- -----------
Nonoperating Income [Expenses]:
Interest Income 18,220 11,371
Interest Expense (4,426,816) (3,971,008)
Interest Expense - Related Party (1,744,216) (1,783,002)
----------- -----------
Net Nonoperating [Expense] (6,152,812) (5,742,639)
----------- -----------
Loss Before Income Tax [Benefit], Extraordinary Gain and
Cumulative Effect on Prior Years of Retroactive Application
of New Depreciation Method (9,865,346) (6,465,725)
Income Tax [Benefit] -- (391,946)
----------- -----------
Loss Before Extraordinary Gain and Cumulative Effect
on Prior Years of Retroactive Application of New
Depreciation Method (9,865,346) (6,073,779)
Extraordinary Gain, Less Applicable Income Tax of $391,946 -- 760,837
Cumulative Effect on Prior Years of Retroactive
Application of New Depreciation Method, No Tax
Effect [See Note 18 for Pro Forma Disclosures] 457,016 --
----------- -----------
Net Loss $(9,408,330) $(5,312,942)
=========== ===========
Basic Loss Per Common Share:
Loss Before Extraordinary Item and Accounting Change $ .25 $ .17
Extraordinary Item $ -- $ .02
Accounting Change $ .01 $ --
Net Loss $ .24 $ .15
Weighted Average Common Shares Outstanding 38,667,715 36,603,232
========== ==========
</TABLE>
The Accompanying Notes Are an Integral Part of These Consolidated Financial
Statements.
F-5
<PAGE>
COLORADO CASINO RESORTS, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY [DEFICIENCY]
- ------------------------------------------------------------------------------
<TABLE>
Total
Stockholders'
Preferred Stock Common Stock Paid-in Deferred Accumulated Equity
Shares Amount Shares Amount Capital Compensation Deficit [Deficiency]
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - October 31, 1996 250,000 $2,500,000 34,537,711 $34,537 $12,067,270 $ -- $ (6,424,434) $ 8,177,373
Conversion of Series One, Preferred
Stock into Common Stock [3F] (250,000)(2,500,000) 1,400,000 1,400 2,498,600 -- -- --
Conversion of Convertible Debentures
into Common Stock [3G] -- -- 2,627,921 2,629 2,661,355 -- -- 2,663,984
Common Stock Issued as Partial
Payment of Land Purchase -- -- 100,000 100 149,900 -- -- 150,000
Granting of 200,000 Stock Warrants
for Professional Services [3C] -- -- -- -- 84,912 -- -- 84,912
Capitalized Cost on Induced Conversion
of Debentures [3G] -- -- -- -- 225,931 -- -- 225,931
Capitalized Cost Associated with
Issuance of Warrants and Common
Stock [3F] -- -- -- -- 1,054,000 -- -- 1,054,000
Net Loss -- -- -- -- -- -- (5,312,942) (5,312,942)
----------- ---------- ---------- ------- ----------- -------- ------------ -----------
Balance - October 31, 1997 [As
Restated] [3] -- -- 38,665,632 38,666 18,741,968 -- (11,737,376) 7,043,258
Waived Officers' Salaries -- -- -- -- 161,045 -- -- 161,045
Issuance of 75,000 Common Shares
to Board Member -- -- 75,000 75 122,175 -- -- 122,250
Deferred Compensation to
Board Member -- -- -- -- -- (81,500) -- (81,500)
Net Loss -- -- -- -- -- -- (9,408,330) (9,408,330)
----------- ---------- ---------- ------- ----------- --------- ------------ -----------
Balance - October 31, 1998 -- $ -- 38,740,632 $38,741 $19,025,188 $(81,500) $(21,145,706) $(2,163,277)
=========== ========== ========== ======= =========== ======== ============ ===========
</TABLE>
The Accompanying Notes Are an Integral Part of These Consolidated Financial
Statements.
F-6
<PAGE>
COLORADO CASINO RESORTS, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
<TABLE>
Years ended
October 31,
1 9 9 8 1 9 9 7
------- -------
[As Restated]
Cash Flows From Operating Activities:
<S> <C> <C>
Net Loss $(9,408,330) $(5,312,942)
----------- -----------
Noncash Items:
Depreciation and Amortization [including
cumulative effect adjustment in 1998] 3,048,741 3,495,116
Amortization of Debt Issue Costs 1,264,828 875,017
[Gain] Loss on Sale of Fixed Assets (9,000) 18,693
Waived Officers' Salaries 161,045 --
Amortization of Director's Deferred Compensation 40,750 --
Induced Conversion Expenses on Debentures -- 225,931
Warrants Issued for Professional Services -- 84,912
Impairment of Land Held for Development 1,254,970 --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Inventory (32,033) 187,266
Other Current Assets 17,902 186,309
[Decrease] Increase in:
Accounts Payable (180,872) (119,703)
Incremental Progressive Slot Liability 20,868 (1,641,992)
Slot Club Liability 123,368 225,581
Interest Payable 2,079,394 667,232
Accrued Expenses 572,004 (500,837)
Other Current Liabilities (28,401) 121,927
----------- -----------
Total Adjustments 8,333,564 3,825,452
----------- -----------
Net Cash Used by Operating Activities (1,074,766) (1,487,490)
----------- -----------
Cash Flows from Investing Activities:
Purchase/Construction of Land, Building, and Equipment (313,592) (1,445,187)
Proceeds from Sale of Fixed Assets 9,000 --
Decrease in Deposits 1,180 25,000
Advances to Officers 11,812 379,617
----------- -----------
Net Cash Used by Investing Activities (291,600) (1,040,570)
----------- -----------
Cash Flows From Financing Activities:
Borrowings/Repayments of Advances from Officers 30,000 (137,255)
Net Borrowings under Revolving Credit Facility 13,655,296 --
Payments for Debt Issue Costs (398,569) (981,000)
Repayments of Long-Term Debt - Related Party (78,227) (213,696)
Repayments of Long-Term Debt (10,660,482) (326,385)
Borrowings under Long-Term Debt Agreements -- 4,223,000
Repayments of Capital Lease Obligations (1,570,620) (903,111)
----------- -----------
Net Cash Provided by Financing Activities 977,398 1,661,553
----------- -----------
[Decrease] in Cash and Cash Equivalents - Forward $ (388,968) $ (866,507)
</TABLE>
The Accompanying Notes Are an Integral Part of These Consolidated Financial
Statements.
F-7
<PAGE>
COLORADO CASINO RESORTS, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
<TABLE>
Years ended
October 31,
1 9 9 8 1 9 9 7
------- -------
[As Restated]
<S> <C> <C>
[Decrease] in Cash and Cash Equivalents - Forwarded $ (388,968) $ (866,507)
Cash and Cash Equivalents - Beginning of Years 1,962,487 2,828,994
----------- -----------
Cash and Cash Equivalents - End of Years $ 1,573,519 $ 1,962,487
=========== ===========
Supplemental Cash Flow Information:
Cash Paid for Interest and Income Taxes are as follow:
Interest $ 3,225,379 $ 6,967,843
Income Taxes $ -- $ --
Noncash Investing and Financing Activities:
Common Stock Issued for Debt $ -- $ 2,663,984
=========== ===========
Common Stock Issued for Property and Services $ 122,250 $ 150,000
=========== ===========
Preferred Stock Converted to Common Stock $ -- $ 2,500,000
=========== ===========
Land, Building and Equipment Financed Through Debt $ 2,372,278 $ 3,763,424
=========== ===========
Capital Lease Renegotiated to Long-Term Debt $ 653,581 $ --
=========== ===========
</TABLE>
The Accompanying Notes Are an Integral Part of These Consolidated Financial
Statements.
F-8
<PAGE>
COLORADO CASINO RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
[1] Nature of Operations and Business Risk Factors
Colorado Casino Resorts, Inc. ["CCRI"] is an owner, developer and operator of
gaming properties. At October 31, 1998 and 1997, CCRI owned and operated two
casino properties in Cripple Creek, Colorado -- The Double Eagle Hotel & Casino
["The Double Eagle"] and Creeker's Casino ["Creeker's"]. CCRI began efforts to
develop casino operations in Cripple Creek, Colorado in 1991.
Cripple Creek is one of three cities in the State of Colorado permitted to have
limited stakes gaming. Gaming in Colorado is controlled by the Colorado Limited
Gaming Control Commission [the "Commission]. Limited stakes gaming is defined as
the use of slot machines and card games of blackjack and poker, each with a
maximum single bet of five dollars. As compared to gaming in jurisdictions with
unlimited stakes gaming, the five dollar per bet limit in Colorado restricts
revenues that CCRI derives, however, management believes that slot machine play,
which accounts for over 94% of total gaming revenues, is currently impacted only
marginally by the five dollar limitation.
Colorado casinos may operate only between 8:00 am to 2:00 am, and have certain
square footage limitations placed on them related to how much space in a
location may be used for gaming purposes. Colorado casinos may not provide
credit to its gaming patrons and no licensee may provide credit to any person
for the purpose of gaming. CCRI obtains most of its revenues from slot machines,
and a decrease in the popularity of slot machines [including keno and video
power machines] could adversely impact CCRI's operations. Violation of
Commission gaming regulations could adversely affect CCRI's ability to conduct
gaming operations in the State of Colorado.
Casinos in Cripple Creek draw patrons primarily from Colorado Springs, Colorado,
and, to a lesser extent, from the greater Denver, Colorado area. Cripple Creek
is a mountain tourist town and its gaming market is subject to seasonal
fluctuations. Typically, CCRI's gaming revenues are greater in the summer
tourist season and are lower from October through April. Because all of CCRI's
hotel and casino operations are located in Cripple Creek, Colorado, CCRI is
therefore exposed to conditions that are specific to Colorado and the Cripple
Creek market. These include complications caused by weather or road closures.
The legalization of gaming in or near Colorado Springs, or Denver, Colorado,
would adversely impact CCRI's operations, however, Colorado law requires
statewide voter approval to expand gaming into any location other than the three
aforementioned cities. In addition, passage of the Indian Gaming Regulatory Act
in 1988 has led to increases in Native American gaming operations, and CCRI's
two casinos may compete for customers with casinos located on Indian
reservations.
In 1992 and 1993, CCRI, through certain predecessor companies [principally Lyric
Development Company, Inc. or "Lyric" - See Note 8, Related Parties and Related
Party Transactions], acquired land in Cripple Creek, including the land where
The Double Eagle now stands for $4.35 million. In January 1994, CCRI, formerly
known as Airline of the Virgin Islands, Inc., ["AVI," a reporting company under
the Securities Exchange Act of 1934 with no assets or operations] completed a
reverse merger transaction in which the predecessor companies transferred their
land holdings in exchange for a controlling interest in AVI. Specifically, in
this merger transaction, Lyric contributed its land holdings in exchange for
approximately 80% of the then issued and outstanding voting stock of AVI, the
surviving entity for accounting purposes. Upon completion of the merger, the
corporate name was changed from AVI to CCRI. In March 1995, CCRI acquired
Creeker's Casino in a merger transaction with Creeker's, Inc. that was accounted
for as a pooling of interest. In August 1996, CCRI completed the development and
construction of The Double Eagle and opened it to the public.
The Double Eagle is the largest casino/hotel in Cripple Creek offering 158 guest
rooms, a 45,000 square- foot casino with approximately 600 slot machines and
five blackjack tables, two bars, an approximately 85 seat restaurant, an
entertainment stage, and a gift shop. Creeker's Casino is a 19,000 square-foot
casino with approximately 200 slot machines, two bars and a restaurant. While
there have been unsuccessful attempts to unionize gaming employees during 1998,
none of CCRI's employees are currently represented by a union or any other form
of collective bargaining unit.
F-9
<PAGE>
COLORADO CASINO RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
- ------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies
[A] Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of the CCRI and its wholly-owned subsidiaries
[the "Company"]. All material intercompany balances and transactions have been
eliminated.
[B] 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 disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period.
Actual results could differ from those estimates.
[C] Inventory - Inventory consists of food, beverages and gift shop items and is
recorded at the lower of cost [first-in, first-out method] or market.
[D] Casino Revenues - Casino revenues are the net winnings from gaming
activities, which is the difference between gaming wins and losses.
[E] Tokens and Chips - The cost of tokens and chips used in casino play are
expensed as incurred [See Note 3I].
[F] Slot Club Liability - The Company has established slot "Clubs" for its
preferred players who may insert a special card into slot, keno, and video poker
machines while playing in the Company's casinos to earn "points." Based on their
point totals, members receive various cash and gift prizes. The Company accrues
the cost of points as such points are earned through slot play by members of the
Company's slot clubs [See Note 3H].
[G] Outstanding Gaming Chip Liability - When customers exchange cash for gaming
chips, the Company has a liability as long as those chips are not redeemed or
won by the house. That liability is established by determining the difference
between the total chips placed in service and the actual inventory of chips in
custody or under the control of the casino. The chip liability is adjusted
periodically to reflect an estimate of chips that will never be redeemed [for
example, chips that have been lost or taken as souvenirs].
[H] Promotional Allowances - Gross revenues include the retail amount of rooms,
food, and beverage provided gratuitously to customers, which amounted to
$1,749,566 and $1,833,564 for the years ended October 31, 1998 and 1997,
respectively. When computing net revenues, the retail amount of food and
beverage gratuitously provided to customers is deducted from revenues as
Promotional Allowances.
[I] Cash and Cash Equivalents - The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents.
[J] Concentrations of Credit Risk - Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of cash
and cash equivalents and trade accounts receivable. The Company's trade accounts
receivable consist of amounts due related to its hotel operations. The State of
Colorado does not permit the extension of credit for gaming purposes.
The Company places its cash and cash equivalents with high credit quality
institutions, primarily with banks located in the State of Colorado, to limit
its credit exposure. Cash balances are insured by the FDIC up to $100,000 per
depositor. The Company's cash balances with financial institutions typically
exceed FDIC insured limits. The Company's cash balances on deposit with two
Colorado banks at October 31, 1998, exceeded the balance insured by the FDIC by
approximately $540,000. The Company does not require collateral for its
financial instruments.
F-10
<PAGE>
COLORADO CASINO RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
- ------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
[K] Advertising Expense - Advertising costs are expensed as incurred.
Advertising expense was $1,438,867 and $1,138,868 for the years ended October
31, 1998 and 1997, respectively.
[L] Debt Issue and Extension Costs - Debt issue and extension costs are being
amortized over the life of the related loans.
[M] Income Taxes - Pursuant to Statement of Financial Accounting Standards
["SFAS'] No. 109, "Accounting for Income Taxes," income tax expense [or benefit]
for the year is the sum of deferred tax expense [or benefit] and income taxes
currently payable [or refundable]. Deferred tax expense [or benefit] is the
change during the year in a company's deferred tax liabilities and assets.
Deferred tax liabilities and assets are determined based on differences between
financial reporting and tax basis of assets and liabilities, and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. A valuation allowance is provided for deferred tax
assets not expected to be realized. The Company and its subsidiaries file
consolidated tax returns.
[N] Stock-Based Compensation - The Company follows Accounting Principles Board
Opinion No. 25. "Accounting for Stock Issued to Employees" ["APB Opinion No.
25"] with regard to the accounting for its employee stock options. Under APB
Opinion No. 25, compensation expense is recognized only when the exercise price
of options is below the market price of the underlying stock on the date of
grant. The Company applies the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" to non-employee stock-based compensation and the pro
forma disclosure provisions of SFAS No. 123 to employee stock-based
compensation.
[O] Impairment - Long-lived assets of the Company are reviewed at least annually
as to whether their carrying value has become impaired pursuant to SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." SFAS No 121 requires long-lived assets, if impaired, to be
remeasured at fair value, whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. Management also
reevaluates the periods of amortization of long-lived assets to determine
whether events and circumstances warrant revised estimates of useful lives.
[P] Land, Building, and Equipment - Land, building and equipment are stated at
cost. Furniture and equipment are being depreciated over their estimated useful
lives of 3-7 years using the straight-line method. Building and improvements are
being depreciated over their estimated useful lives of 40 years using the
straight-line basis.
In fiscal year 1998, management reevaluated the periods of amortization of its
long-lived assets, including capitalized leased assets, and revised its
estimates of useful lives. Also, prior to fiscal year 1998, CCRI had used
accelerated methods of depreciation as well as the straight-line method. The
effect of the change in the estimated lives of its long-lived assets and the
change from accelerated methods to the straight-line method of depreciation
resulted in an increase of $520,439 and a decrease of $457,016, respectively, in
depreciation for the year ended October 31, 1998. The effect of the change in
depreciation method is reflected as a cumulative effect of an accounting change
in the statement of operations [See Note 18]. The effect of the change in
estimated lives of depreciable assets increased the net loss for the year ended
October 31, 1998, by $520,439.
Routine maintenance and repair costs are charged to expense as incurred and
renewals and improvements that extend the useful life of the assets are
capitalized. Upon sale or retirement, the cost and related accumulated
depreciation are eliminated from the respective accounts and any resulting gain
or loss is reported as income or expense.
F-11
<PAGE>
COLORADO CASINO RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
- ------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
[Q] Net Loss Per Share - The Financial Accounting Standards Board has issued
SFAS No. 128, Earnings per Share, which is effective for financial statements
issued for periods ending after December 15, 1997. Accordingly, earnings [loss]
per share data in the financial statements for the year ended October 31, 1998,
have been calculated in accordance with SFAS No. 128. SFAS No. 128 requires
restatement of all prior period earnings [loss] per share data presented,
however, because of the Company's net loss position, earnings [loss] per share
results would be the same.
SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15, Earnings per
Share, and replaces its primary earnings per share with a new basic earnings per
share representing the amount of earnings for the period available to each share
of common stock outstanding during the reporting period. Basic earnings [loss]
per share is computed by dividing income [loss] available to common stockholders
by the weighted average number of common shares outstanding during the period.
SFAS No. 128 also requires a dual presentation of basic and diluted earnings per
share on the face of the statement of operations for all companies with complex
capital structures. Diluted earnings per share reflects the amount of earnings
for the period available to each share of common stock outstanding during the
reporting period, while giving effect to all dilutive potential common shares
that were outstanding during the period, such as common shares that could result
from the potential exercise or conversion of securities into common stock.
The computation of diluted earnings per share does not assume conversion,
exercise, or contingent issuance of securities that would have an antidilutive
effect on per share amounts [i.e., increasing earnings per share or reducing
loss per share]. The dilutive effect of outstanding options and warrants and
their equivalents are reflected in dilutive earnings per share by the
application of the treasury stock method which recognizes the use of proceeds
that could be obtained upon exercise of options and warrants in computing
diluted earnings per share. It assumes that any proceeds would be used to
purchase common stock at the average market price during the period. Options and
warrants will have a dilutive effect only when the average market price of the
common stock during the period exceeds the exercise price of the options or
warrants. The Company's options and warrants were not included in the
computation of loss per share because to do so would have been antidilutive for
the periods presented, however, such options and warrants could potentially
dilute basic earnings per share in the future.
The dilutive effect of convertible debt is reflected in dilutive earnings per
share by the application of the if-converted method. Convertible debt will have
a dilutive effect only when the amount of interest [net of tax] on a per share
basis is less than basic earnings per share. The Company's convertible debt does
not affect the loss per share calculations because it would be antidilutive for
the years presented, however, such convertible debt could potentially dilute
basic earnings per share in the future.
[R] Reclassifications - Certain prior year items have been reclassified to
conform with the current year's presentation. Other significant
reclassifications are described in Note 3.
[3] Restatements and Reclassifications to 1997 and 1996 Financial Statements
Previously Filed
Management has made several restatements and reclassifications to the Company's
1997 and 1996 fiscal year financial statements. The 1997 restatements and
reclassifications are discussed in the following paragraphs.
[A] Effective August 1, 1996, the Company entered into an agreement to lease 694
gaming devices [principally slot machines] for a period of three (3) years. At
the origination of the lease, management estimated that the economic life of the
gaming devices was four (4) years. Based on the above, the Company classified
this lease as a capital lease and originally recorded an asset and corresponding
liability of $4,892,735 for the present value of the future minimum lease
payments [including the lease purchase option]. However, since the purchase
option was not a "bargain purchase option," as such term in defined is SFAS No.
13, "Accounting for Leases," the present value of the purchase option should not
have been capitalized as part of the capital lease and corresponding liability.
The amount that should have been recorded at the inception of the lease at
August 1, 1996, is $4,121,532 [excluding the non-bargain lease purchase option].
F-12
<PAGE>
COLORADO CASINO RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
- ------------------------------------------------------------------------------
[3] Restatements and Reclassifications to 1997 and 1996 Financial Statements
Previously Filed [Continued]
[A] [Continued] At October 31, 1997, management changed the estimated economic
life of the gaming devices to seven (7) years and changed the classification of
this lease from a capital lease to an operating lease based on an understanding
that this change in estimated economic life required a reevaluation of the
original criterion for lease capitalization. Based on the foregoing, the
remaining balances [after the adjustment described in the preceding paragraph]
of the unamortized net capitalized leased asset [approximately $2,500,000] and
the related liability [approximately $4,000,000] were removed from the Company's
balance sheet.
During the reaudit of its 1997 financial statements, management was advised that
pursuant to SFAS No. 13, "Accounting for Leases," a change in the estimated
economic life of a leased asset does not change the classification of the lease
from a capital lease to an operating lease. Also pursuant to SFAS No. 13, when
the criterion for capitalizing a leased asset is based on the length of the
lease term in relation to the economic life of the leased asset, the
amortization period should be the lease term not the estimated economic life.
The Company's balance sheet at October 31, 1997, has been restated to reflect
the lease as a continuing capital lease, and the amortization period was
restored to three (3) years.
[B] The Company also leases various other assets [See Note 7] and had amortized
their capitalized lease cost over their estimated economic life. Similar to the
situation described in [A], however, because the criterion for capitalizing
these leased assets was based on the lease term in relation to the estimated
economic life of the leased asset, the amortization period should have been the
lease term not the estimated economic life. The effect of recomputing
amortization expense for these leased assets was to increase amortization
expense by approximately $241,000 for the year ended October 31, 1997.
[C] During its 1997 fiscal year, management granted 200,000 stock warrants to a
corporation that provided the Company with professional services. The Company
did not record an expense associated with the issuance of these warrants in its
1997 fiscal year financial statements. Based on the Black- Scholes option
pricing model, and using a risk-free interest rate of 5.4% and an estimated life
for the warrants of 3 years, with an estimated volatility of 75%, results in an
estimated expense related to the issuance of the aforementioned warrants of
approximately $85,000. The Company's 1997 fiscal year financial statements have
been restated accordingly.
[D] During the Company's 1997 fiscal year, management entered into two software
license agreements which were treated as the equivalent of capital leases for
financial reporting purposes. In this regard, assets and liabilities of $310,000
were originally recorded on the balance sheet related to these license
agreements. No assets, however, were acquired as part of these license
agreements, as the licensed software will revert back to the respective
licensors at the end of the license agreements and no other criteria for
capitalization existed. Accordingly, the asset and liability amounts have been
reversed and the license payments originally recorded as reductions of debt and
interest expense of approximately $116,000 have been reclassified to general and
administrative expense in the statement of operations for the year ended October
31, 1997. Additionally, the amount of depreciation recorded that was related to
the allocation of the cost of the improperly recorded asset of approximately
$34,000 has been reversed.
[E] Gaming in the State of Colorado is controlled by the Colorado Limited Gaming
Control Commission [the "Commission"]. In their capacity as regulator of gaming
in the State of Colorado, the Commission issues various regulations, some of
which have internal control and related accounting and financial reporting
implications. In one of their originally issued regulations, the Commission
required that a liability for both base and progressive jackpots be maintained
for applicable slot machines [a progressive jackpot is a slot machine payoff
indicator, in which the payoff increases as the machine is played]. During 1997,
the Commission changed its requirements for maintaining the base jackpots on
slot machines; and, accordingly, the Company derecognized its recorded liability
for base jackpots by increasing its casino revenues by $1,152,783. Because the
extinguishment of the base jackpot liability was mandated by a regulator, the
derecognition of this liability has been reclassified from casino revenues and
presented as an extraordinary gain of $760,837, net of applicable income tax of
$391,946 [$.02 per share].
F-13
<PAGE>
COLORADO CASINO RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
- ------------------------------------------------------------------------------
[3] Restatements and Reclassifications to 1997 and 1996 Financial Statements
Previously Filed [Continued]
[F] On various dates between July 18, 1995 and September 30, 1995, CCRI issued
to Gemini Ventures, LLC ["Gemini"] 250,000 shares of Series One Convertible
Preferred stock ["Series One Preferred Stock"]. Gemini is a company controlled
by Mr. Sam Halpern, a Director of CCRI. Also, as more fully described in Note 8,
Related Parties and Related Party Transactions, Gemini has loaned $2,087,500 to
Mr. Gilbert Sisneros, a Vice President and Director of CCRI, who in turn loaned
the same amount of $2,087,500 to CCRI. In June 1997, the Series One Preferred
Stock was converted into 1,400,000 shares of CCRI Common Stock. Initially, each
share of the Series One Preferred Convertible Stock was convertible into 4
shares of Common Stock [total of 1,000,000 shares] and 4 common stock purchase
warrants [total of 1,000,000 warrants] at $4 per warrant with expiration in
three years. A modification to the conversion feature increased the number of
shares of Common Stock issuable upon conversion of the Series One Preferred
Convertible Stock from 1,000,000 to 1,400,000 shares. Another modification to
the conversion feature increased the number of warrants exercisable from
1,000,000 to 1,400,000, decreased the conversion price from $4 to $2.50 per
warrant, and increased the expiration period from three years to five years. In
consideration for these modifications to the conversion terms of the Series One
Preferred Stock, Gemini extended the maturity date of its loan to Mr. Sisneros
from May 30, 1997 to January 28, 1999. Mr. Sisneros, in turn, extended the due
date on this loan to CCRI to January 28, 1999, and then further extended the due
date to April 30, 1999, to coincide with a similar extension Mr. Sisneros
received from Gemini. A cost associated with the issuance of the above described
additional 400,000 shares of CCRI Common Stock and 400,000 warrants was not
recorded in the Company's financial statements filed in its Form 10-K for the
year ended October 31, 1997. The cost of the issuance of the additional 400,000
shares of CCRI Common Stock and 400,000 warrants is estimated to be $1,054,000,
which cost is being amortized over a 20 month period. For the years ended
October 31, 1998 and 1997, $632,400 and $263,500, respectively, have been
recorded as interest expense representing the allocation of the cost of these
additional issuances.
[G] On January 29, 1996, CCRI issued $1,000,000 of convertible debentures to AJG
Investments Hong Kong, Ltd., and on March 26, 1996, issued $1,500,000 of
convertible debentures to Cameron Capital Management Ltd. These debentures were
converted into a total of 2,627,921 shares of CCRI Common Stock during the 1997
fiscal year. While this convertible debt was being converted to equity
securities of CCRI, CCRI and these debt holders modified the conversion formula
from a conversion price which was discounted to the market price of CCRI common
shares to a fixed conversion price per share, thus placing a floor on the
conversion price. Presuming the market price would not have been reduced by debt
conversion, this modification to the conversion terms resulted in the issuance
of an additional 180,745 shares of CCRI common stock to the debt holders than
the amount provided under the original conversion formula. A cost associated
with the issuance of these additional 180,745 shares of CCRI Common Stock was
not recorded in the Company's financial statements for the year ended October
31, 1997. The cost of the issuance of the additional 180,745 shares of CCRI
Common Stock is estimated to be approximately $226,000, which amount has been
recorded as interest expense for the year ended October 31, 1997.
[H] CCRI established the use of a computerized player tracking system to monitor
the wagering of selected patrons and to provide the Company with information to
assist management in planning and directing its marketing efforts to its
customers. Selected patrons are encouraged to insert their frequent player card
into slot, keno, and video poker machines while playing in the Company's casinos
to earn points. Using the tracking system to track wagering, management rewards
these patrons based on their point total with various cash and gift prizes. The
cost of these points as such points were earned through slot play had not been
accrued in the Company's financial statements. Management estimates the cost of
these points to be $225,581 for the year ended October 31, 1997.
F-14
<PAGE>
COLORADO CASINO RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
- ------------------------------------------------------------------------------
[3] Restatements and Reclassifications to 1997 and 1996 Financial Statements
Previously Filed [Continued]
[I] It had been the Company's policy to capitalize the cost of its tokens and
chips. The total cost of capitalized tokens and chips since the inception of the
Company's casino operations amounted to approximately $118,000. The Company,
however, has not amortized or otherwise expensed any of the cost of its tokens
and chips during the years of their use in the operation of the Company's two
casinos. The Company has restated casino expense to include the write off of its
tokens and chips in 1997 and has adopted a policy of expensing such costs as
incurred.
[J] On April 28, 1997, the El Paso County District Court approved settlement of
a lawsuit which was brought by the Company to enforce an agreement which placed
a time restriction on when certain parties could sell unrestricted common stock
of the Company. As part of the settlement, the Company agreed to issue 25,000
shares of its common stock to these parties in April, 1999. On the court
approved settlement date, the fair value of the Company's common stock was
approximately $2 per share, and, accordingly, the Company is recording a $50,000
settlement cost in its 1997 financial statements.
The Company intends to amend its Form 10-KSB for the year ended October 31,
1997, and its three quarterly reports on Form 10-QSB for the year ended October
31, 1997 to reflect the above restatements and reclassifications.
The net effect of the above restatements on operations for the year ended
October 31, 1997, was an increase in the loss before extraordinary item and net
loss for the year of $2,416,274 [$.07 per share], reflecting retroactive
application of the prior period adjustments to the following components of
operations:
Effect on Net Loss
Increase/[Decrease]
to Amounts
Previously Reported
Casino Operations [3I] $ 118,245
Marketing [3H] 225,581
General and Administrative Expenses [3C], [3D], [3J] 218,294
Depreciation and Amortization [3A], [3B], [3D] 878,238
Interest Expense [3D], [3F], [3G] 975,916
------------
Increase to Loss Before Extraordinary Item and
Net Loss for the Year Ended October 31, 1997 2,416,274
------------
Accumulated Deficit - October 31, 1997, As Previously Reported 8,000,495
Effect of 1996 Restatements 1,320,607
Accumulated Deficit - October 31, 1997, As Previously Reported,
Adjusted for Effect of 1996 Restatements 9,321,102
Accumulated Deficit - October 31, 1997, As Restated $ 11,737,376
--------------------------------------------------- ============
F-15
<PAGE>
COLORADO CASINO RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
- ------------------------------------------------------------------------------
[4] Going Concern Issues and Management's Plans
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern and realization of assets and settlement of
liabilities and commitments in the normal course of business.
As shown in the accompanying financial statements, CCRI has incurred net losses
of $9,408,330 and $5,312,942 for the years ended October 31, 1998 and 1997,
respectively, and has accumulated a deficit since inception of $21,145,706. In
addition, CCRI has $44,022,355 of liabilities due within one year, but only
$2,145,172 in current assets. Management's plans to address these conditions are
discussed in the following paragraphs.
As a key element of its strategy to enhance revenues, cash flow, and
profitability, CCRI is evaluating plans to build a four level, 400 space parking
garage adjacent to The Double Eagle. The parking garage would be directly
accessible to The Double Eagle by way of covered walkways across the alley that
would separate The Double Eagle from the planned garage. As currently planned,
the mezzanine level of the new parking facility would include a 5,000
square-foot conference facility complete with meeting rooms, current audio-video
equipment, bar and kitchen facilities, a small health spa and possibly an
outdoor patio. As currently designed, the conference center would connect by an
enclosed bridge walkway to the main casino floor of The Double Eagle. With these
new facilities, CCRI would market The Double Eagle to conventions and other
groups seeking quality meeting facilities in a gaming environment. CCRI expects
that these facilities could increase the occupancy rate of The Double Eagle,
especially mid-week and in the winter months.
The cost of this parking garage and conference center is estimated to be
$6,500,000; funding for which is expected to come from a debt refinancing. The
Company is currently evaluating a debt refinancing to replace a significant
portion of the Company's debt as well as provide additional capital for the
construction of the parking garage and conference center.
CCRI also plans to increase its share of the Cripple Creek market through
increased and better targeted marketing programs. In this regard, CCRI has
implemented a new media and marketing campaign and has also compiled a
significant database of its customers from its slot clubs and intends to utilize
this database to develop various promotional activities and special events aimed
at its core customers.
While the Company's technical default of its negative covenant obligation to
maintain a minimum trailing twelve month EBITDA under its revolving credit
facility [$13,655,296 at October 31, 1998] has been waived by the lender at
October 31, 1998, unless the Company meets its forecasts, it is unlikely the
Company will satisfy its obligations under this agreement during the next fiscal
year [See Note 19]. Also, over $20,000,000 [including $12,296,411 due to related
parties] of the Company's long-term debt is due during fiscal 1999, plus
interest of over $4,000,000; and the Company is negotiating extensions of these
obligations. Also, the Company is in payment default on several of its leases.
In this regard, management is negotiating payment plans with these creditors,
although no assurance can be given that such extensions can or will be worked
out.
If management is unable to effectuate its operational plan discussed above, and
refinance its debt, the Company may seek protection under applicable bankruptcy
laws, and/or the Company may lose its gaming license, or the Company may
discontinue operations. Factors which may mitigate these occurrences, in
addition to the successful completion of management's operational plan as
discussed above, are an increase in the gaming market in Colorado generally, and
more specifically in Cripple Creek, a reduction of competition in the gaming
market in Cripple Creek, the Company's continued increased market share in
Cripple Creek, and effective cost controls.
F-16
<PAGE>
COLORADO CASINO RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
- ------------------------------------------------------------------------------
[4] Going Concern Issues and Management's Plans [Continued]
There can be no assurance that management's plans to reduce operating losses and
obtain additional financing to fund operations will be successful. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded assets, or the amounts and classification of
liabilities that might be necessary in the event the Company cannot continue in
existence.
CCRI's long-term strategy focuses on developing or acquiring additional gaming
properties. CCRI intends to pursue opportunities primarily outside of Colorado
[including locations outside of the United States] in order to diversify its
geographic base of operations. CCRI does not presently have any agreement to
acquire or develop any additional gaming properties.
[5] Capital Stock
CCRI's authorized capital consists of 100,000,000 shares of common stock, par
value $.001 per share ["Common Stock"] and 5,000,000 of preferred stock, par
value $10.00 per share.
The holders of shares of Common Stock of CCRI do not have cumulative voting
rights, which means that the holders of more than 50% of such outstanding
shares, voting for the election of directors, can elect all of the directors of
CCRI. Mr. Rudy S. Saenz, the former President and Chief Executive Officer of
CCRI [See Note 22], and Mr. Gilbert M. Sisneros, a Vice President of the
Company, share voting and dispositive powers with respect to approximately 56%
of the CCRI Common Stock through Double Eagle Investments, Ltd., and its general
partner, Double Eagle Consolidated, Inc. The Common Stock does not convey any
preemptive, subscription or conversion rights to its holders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any series of preferred stock that may be issued in
the future, including voting, dividend, and liquidation rights.
The Company is authorized to issue 5,000,000 shares of preferred stock. The
Board of Directors is authorized to fix, in one or more series, the terms of
preference and conversion of any preferred stock. The Board of Directors has
authorized the issuance of two series of preferred stock. All shares of Series
One Preferred Stock and Series Two Preferred Stock have been converted into
Common Stock in fiscal 1997 and 1996, respectively, and no such shares remain
outstanding or authorized for issuance.
The Series One Preferred Stock was issued to Gemini Ventures, LLC ["Gemini"] on
various dates between July 18, 1995 and September 30, 1995. Gemini is a company
controlled by Mr. Sam Halpern, a Director of CCRI. In addition to its conversion
features, the Series One Preferred Stock included warrants granting Gemini the
right to purchase an additional 1,000,000 shares of CCRI Common Stock. These
features associated with the Series One Preferred Stock were subsequently
modified. The modifications, which are more fully described in Notes 3 and 8,
resulted in the issuance of an additional 400,000 shares of CCRI Common Stock
and the issuance of additional 400,000 warrants. The cost of these modifications
was $1,054,000, of which $632,400 and $263,500 has been expensed for the years
ended October 31, 1998 and 1997, respectively. The Series One Preferred Stock
issued to Gemini was ultimately converted into 1,400,000 shares of CCRI Common
Stock in June 1997.
[6] Advances to Officers
Officers advanced funds to the Company in the amounts of $546,247 and $1,025,000
for the years ended October 31, 1998 and 1997, respectively. The Company
advanced funds to officers in the amounts of $534,435 and $782,638 for the years
ended October 31, 1998 and 1997, respectively. Outstanding advances to officers
amounted to $125,443 and $137,255 at October 31, 1998 and 1997, respectively.
Advances to officers are unsecured, due on demand and non-interest bearing.
F-17
<PAGE>
COLORADO CASINO RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
- ------------------------------------------------------------------------------
[7] Land, Building and Equipment
Land, building, and equipment consist of the following [At Cost]:
October 31,
1 9 9 8 1 9 9 7
[As Restated]
Land and Improvements $11,610,580 $11,610,580
Building 23,164,270 23,164,270
Building Improvements 445,646 434,476
Furniture and Fixtures 2,730,758 2,726,401
Machinery and Equipment 7,896,873 2,873,678
Computer and Office Equipment 252,225 187,777
Leasehold Improvements 13,881 13,881
Equipment under Capital Lease 2,425,730 6,547,262
Other 32,300 --
----------- -----------
Totals 48,572,263 47,558,325
Less: Accumulated Depreciation 8,113,245 5,065,744
----------- -----------
Land, Building, and Equipment - Net $40,459,018 $42,492,581
----------------------------------- =========== ===========
Substantially all assets of CCRI, including those of its subsidiaries, are
either mortgaged, pledged, subject to lien, or otherwise used as collateral for
indebtedness.
The following is a summary of equipment held under capital lease [See Note 11]:
Gaming Equipment $ 542,049 $ 4,663,581
Computer Equipment 405,066 405,066
Transportation Equipment 96,292 96,292
Signs 594,403 594,403
Hotel Furniture and Fixtures 105,354 105,354
Communications Equipment 271,361 271,361
Surveillance Equipment 411,205 411,205
----------- -----------
Total Equipment Held under Capital Leases 2,425,730 6,547,262
Less: Accumulated Depreciation 1,388,619 2,326,804
----------- -----------
Net Equipment Held under Capital Leases $ 1,037,111 $ 4,220,458
--------------------------------------- =========== ===========
Depreciation on assets under capital leases charged to expense for the years
ended October 31, 1998 and 1997, was $1,324,023 and $2,001,826, respectively.
[8] Related Parties and Related Party Transactions
Mr. Rudy S. Saenz, the former President and Chief Executive Officer of CCRI and
a Director of the Company [See Note 22], and Mr. Gilbert M. Sisneros, a Vice
President and Director of the Company, share voting and dispositive powers with
respect to approximately 56% of CCRI Common Stock through Double Eagle
Investments, Ltd., and its general partner, Double Eagle Consolidated, Inc. The
limited partners of Double Eagle Investments, Ltd. are Mr. Saenz and Mr.
Sisneros. The sole shareholders of Double Eagle Consolidated, Inc. are Mr. Saenz
and Mr. Sisneros.
F-18
<PAGE>
COLORADO CASINO RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11
- ------------------------------------------------------------------------------
[8] Related Parties and Related Party Transactions [Continued]
In addition, Mr. Saenz and Mr. Sisneros, and Mr. Peter Tedesco are the three
general partners of TSC Enterprises ["TSC"], a Colorado general partnership.
CCRI acquired thirteen undeveloped lots from TSC in exchange for the issuance of
a 7.05% convertible promissory note in the principal amount of $4,500,000 [See
Note 12]. Accrued interest related to the convertible debt is $909,261 at
October 31, 1998. Also, at October 31, 1998, there remains outstanding $441,411
related to a 1992 unsecured promissory note, bearing interest at 16%, issued by
CCRI to TSC in connection with the acquisition of four of the nine lots where
The Double Eagle now stands. Accrued interest on this unsecured note is $47,084
at October 31, 1998 [See Note 9].
In 1992, CCRI, through certain predecessor companies, principally Lyric
Development Company, Inc. ["Lyric"] acquired land in Cripple Creek, including
the land where The Double Eagle now stands for $4.35 million. In 1994, Lyric
contributed its land holdings in exchange for approximately 80% of the then
issued and outstanding voting stock of Airline of the Virgin Islands, Inc.
["AVI"], a reporting company under the Securities Exchange Act of 1934, having
no assets or operations, in a transaction accounted for as a reverse acquisition
with AVI being the surviving company for accounting purposes [See Note 1]. Upon
completion of the merger, the Company changed its corporate name from AVI to
CCRI. From 1992 to 1994, Mr. Saenz was the chief executive officer and director
of Lyric.
In 1995, CCRI acquired Creeker's Casino in a merger transaction with Creeker's,
Inc. that was accounted for as a pooling of interest. Mr. Sisneros was one of
the original founders of Creeker's, Inc.
Funding for the construction and development of The Double Eagle was indirectly,
but substantively, provided by Euro Investments ["Euro"] and Gemini Ventures,
LLC ["Gemini"] in the amounts of $5,267,500, and $2,087,500, respectively.
Gemini is a company controlled by Mr. Sam Halpern, a Director of CCRI. Mr.
Sisneros acted as the conduit of these funds from Euro and Gemini to CCRI in
that Euro loaned Mr. Sisneros $5,267,500 at 20% interest and then Mr. Sisneros
loaned CCRI $5,267,500 at 20.1% interest, and Gemini loaned Mr. Sisneros
$2,087,500 at 14% interest and then Mr. Sisneros loaned CCRI $2,087,500 at 14.1%
interest. Mr. Sisneros' notes with Euro and Gemini are collateralized by the
notes, in like amount between CCRI and Mr. Sisneros [See Note 9]. CCRI is not a
guarantor of Mr. Sisneros' notes to Euro and Gemini.
On various dates between July 18, 1995 and September 30, 1995, CCRI also issued
to Gemini 250,000 shares of Series One Convertible Preferred Stock ["Series One
Preferred Stock"]. In June 1997, the Series One Preferred Stock was converted
into 1,400,000 shares of CCRI Common Stock. Prior to the conversion, the
conversion features were modified. Initially, each share of the Series One
Preferred Stock was convertible into 4 shares of Common Stock [a total of 1
million shares] and 4 common stock purchase warrants [a total of 1 million
warrants] at $4 per warrant with expiration in three years. One modification to
the conversion terms increased the number of shares of Common Stock issuable
upon conversion of the Series One Preferred Stock from 1,000,000 to 1,400,000.
Another modification to the conversion terms increased the number of warrants
exercisable from 1,000,000 to 1,400,000; decreased the conversion price from $4
to $2.50 per warrant; and increased the expiration period from three years to
five years. The cost associated with modifying the conversion terms of the
Series One Preferred Stock is $1,054,000, of which $632,400 and $263,500 has
been expensed for the years ended October 31, 1998 and 1997, respectively. In
consideration for these modifications to the conversion terms of the Series One
Preferred Stock, Gemini extended the maturity date of its loan to Mr. Sisneros
from May 30, 1997 to January 28, 1999. Mr. Sisneros, in turn, extended the due
date on his loan to CCRI to January 28, 1999, and then further extended the due
date to April 30, 1999, to coincide with a similar extension Mr.
Sisneros received from Gemini.
F-19
<PAGE>
COLORADO CASINO RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12
- ------------------------------------------------------------------------------
[8] Related Parties and Related Party Transactions [Continued]
In August 1996, CCRI ceased pursuing the renewal of a required license of a
former officer and shareholder of CCRI before the Colorado Gaming Commission. To
assure the continued operation of CCRI's casinos, Mr. Saenz and Mr. Sisneros
agreed to acquire such person's interest in CCRI [including a one-third interest
in Double Eagle Investments. Ltd. and TSC Enterprises] in exchange for a
$3,000,000 note bearing interest at a rate of 7% per year. To assist Mr. Saenz
and Mr. Sisneros in making the $55,443 per month payment due under this note,
CCRI has, since November 1, 1996, advanced a total of approximately $1,057,000
to Mr. Saenz and Mr. Sisneros [Also, See Note 6].
Prospectors RV Park leases storage space to Creeker's Casino. During the years
ended October 31, 1998 and 1997, $24,705 and $56,400, respectively, was paid to
Prospectors RV Park. Mr. Peter Tedesco is the owner operator of Prospectors RV
Park. Mr. Tedesco is one of three general partners in TSC Enterprises.
The Company's General Counsel, who is also a director of the Company, does not
receive a salary from the Company. In consideration for his legal services to
the Company, however, the Company has paid him $92,000 and $72,000 for the years
ended October 31, 1998 and 1997, respectively [See Note 22].
[9] Long-Term Debt - Related Parties
Long-term debt, related parties consists of the following [this note should be
read in conjunction with Note 8]:
October 31,
1 9 9 8 1 9 9 7
Notes payable, stockholder, dated November 1995,
interest at 14.10% per annum, principal due
April 30, 1999, collateralized by Creeker's, Inc.
common stock $2,087,500 $ 2,087,500
Notes payable, stockholder, dated November 1995,
interest at 20.10% per annum, principal due
April 30, 1999, 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 441,411 519,638
---------- -----------
Total Long-Term Debt - Related Parties 7,796,411 7,874,638
Less: Current Portion 7,796,411 --
---------- -----------
Totals $ -- $ 7,874,638
------ ========== ===========
Total related party interest expense under all debt arrangements [including the
convertible debenture See Note 12] amounted to $1,744,216 and $1,783,002 for the
years ended October 31, 1998 and 1997, respectively.
F-20
<PAGE>
COLORADO CASINO RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #13
- ------------------------------------------------------------------------------
[10] Long-Term Debt
Long-Term debt consists of the following:
October 31,
1 9 9 8 1 9 9 7
Note payable, corporation, dated April 1996, amended
September 1997, payable in monthly installments,
interest payable at 12% per annum, due November 15,
1998, but was paid off in July 1998 with line of
credit [See Note 19], collateralized by deed of trusts
and personal property $ -- $ 7,588,889
Note payable, corporation, 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 April 1999 2,350,000 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%, due November 2025, collateralized by deed of
trust on the land where Creeker's Casino is situated as
well as the fixtures and improvements situated thereon 2,027,962 2,042,272
Note payable, corporation, dated September 1997, interest
only payable quarterly at 9% per annum, with the
principal balance due January 2003, but was paid off
in July 1998 with line of credit [See Note 19],
collateralized by deeds of trust and personal property -- 1,730,853
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
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], due September 1999, but was paid off
in July 1998 with line of credit [See Note 19],
collateralized by deed of trust -- 879,147
Note payable, corporation, dated December 1995, payable
in monthly installments of $31,092, including interest
at 11% per annum, with a final payment due
October 19, 1998, extended to October 19, 1999,
collateralized by gaming equipment 698,583 769,943
Note payable, corporation, dated May 1996, payable in
monthly installments of $4,444, including interest
at 11% per annum, due June 1998, extended to
October 6, 1999, collateralized by gaming equipment 57,123 66,007
Note payable, corporation, dated July 1998, payable in
monthly installments of $50,000, including interest at
12% per annum, with a final payment due July 31, 1999,
collateralized by gaming equipment 3,349,468 --
----------- -----------
Totals - Forward $13,533,136 $20,477,111
F-21
<PAGE>
COLORADO CASINO RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #14
- ------------------------------------------------------------------------------
[10] Long-Term Debt [Continued]
October 31,
1 9 9 8 1 9 9 7
Totals - Forwarded $13,533,136 $20,477,111
Note payable, financial institution, dated
September 26, 1997, payable in monthly installments
of $7,052 including interest at prime plus 1.5%,
remaining principal due October 1, 2002,
collateralized by deed of trust 631,388 650,000
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 242,191 262,715
Notes payable, various corporations, dated April 1996
through July 1998, payable in aggregate monthly
installments of $30,570 including interest at 8% to
12.0%per annum, due April 1999 through February 2000,
collateralized by various equipment 321,950 474,191
----------- -----------
Total Long-Term Debt 14,728,665 21,864,017
Less: Current Maturities 10,819,963 1,179,388
----------- -----------
Totals $ 3,908,702 $20,684,629
------ =========== ===========
Future maturities of long-term debt and convertible debentures are as follows at
October 31, 1998 [Also See Notes 9 and 12:
Years Ended October 31, Unrelated Related Party Total
1999 $10,819,963 $12,296,411 $23,116,374
2000 1,328,824 -- 1,328,824
2001 45,650 -- 45,650
2002 574,834 -- 574,834
2003 21,188 -- 21,188
Thereafter 1,938,206 -- 1,938,206
----------- ---------- -----------
Totals $14,728,665 $12,296,411 $27,025,076
------ =========== =========== ===========
Creeker's Casino, Inc. had a $300,000 prime plus 1.5% per annum revolving line
of credit agreement with a financial institution dated September 26, 1997,
collateralized by a deed of trust and maturing in October 1, 1998. This line of
credit expired and was not renewed.
F-22
<PAGE>
COLORADO CASINO RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #15
- ------------------------------------------------------------------------------
[11] Capital Leases
Capital lease obligations consist of the following:
October 31,
1 9 9 8 1 9 9 7
Gaming equipment lease payable in monthly installments
of $136,894 including interest imputed at 12.0% per
annum with balance due November 1999 [equipment
was purchased in 1998 - See Note 10 for note payable
in the amount of $3,349,468]. $ -- $ 3,829,038
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. 650,335 823,853
Equipment leases payable in aggregate monthly
installments totaling $21,053 including interest
imputed at 8% and 12% per annum. The leases expire
in August to October, 1999 and are collateralized by
various equipment. 331,695 541,983
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. 70,782 142,557
Equipment leases payable in aggregate monthly installments
totaling $5,289 including interest imputed at 12% per
annum. The leases expire July to September, 2001 and are
collateralized by telephone and audio equipment. 150,790 193,777
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. 93,622 166,365
---------- -----------
Present Value of Net Minimum Lease Payments 1,297,224 5,697,573
Less: Current Maturities 629,787 2,732,394
---------- -----------
Long-Term Lease Obligations $ 667,437 $ 2,965,179
--------------------------- ========== ===========
The Company is in violation of several of its lease agreements for being
delinquent in its lease payments. The Company is working with these lessors to
cure these violations. If the Company is not successful in working out
satisfactory arrangements with these lessors, the lessors have the legal right
to take repossession of the equipment which is subject to the lease.
F-23
<PAGE>
COLORADO CASINO RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #16
- ------------------------------------------------------------------------------
[11] Capital Leases [Continued]
Future minimum lease payments under the leases are as follows at October 31,
1998:
Years Ended
October 31, Amount
1999 $ 750,515
2000 465,214
2001 284,959
2002 --
2003 --
-----------
Total Minimum Lease Payments 1,500,688
Less Amount Representing Interest 203,464
-----------
Present Value of Net Minimum Lease Payments $ 1,297,224
===========
[12] Convertible Debenture - Related Party
On August 18, 1994, the Company purchased real property, currently being held
for future development, from a related party [See Note 8] 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. This debt was collateralized by a deed of trust on
this property, however, a release of deed of trust was executed on April 11,
1996. The debenture is convertible into 9,000,000 shares of Company common stock
at the election of the holder. The conversion of this debt to equity cannot be
exercised prior to November 1, 1999. Accrued interest related to this debt is
$909,261 at October 31, 1998.
[13] Stock Option and Stock Purchase Plans
A summary of the changes in outstanding Common Stock options and warrants is as
follows:
Weighted-Average
Shares Exercise Price
Balance - October 31, 1996 1,087,500 $ 1.81
Granted 1,790,000 $ 2.41
Canceled/Forfeited (585,000) $ 2.00
---------- -------
Balance - October 31, 1997 2,292,500 $ 2.23
Granted 115,000 $ 1.63
Canceled/Forfeited (140,000) $ 2.00
---------- -------
Balance - October 31, 1998 2,267,500 $ 2.19
-------------------------- ========== =======
The exercise price of all options and warrants granted during 1997 was above the
stock price on the grant date. A total of 1,790,000 options and warrants were
granted, with a weighted-average exercise price of $2.41 and a weighted-average
fair value of $.69.
F-24
<PAGE>
COLORADO CASINO RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #17
- ------------------------------------------------------------------------------
[13] Stock Option and Stock Purchase Plans [Continued]
Of the 1,790,000 of options and warrants granted during fiscal 1997, management
granted 200,000 stock warrants at an exercise price of $2.00 to a corporation
that provided the Company with professional services. Based on the Black-Scholes
option pricing model, and using a risk-free interest rate of 5.4% and an
estimated life for the warrants of 3 years, with an estimated volatility of 75%,
results in an estimated expense related to the issuance of the aforementioned
warrants of approximately $85,000 [the weighted average fair value of warrants
granted is approximately $.425].
A total of 115,000 options were granted during 1998. Of these, 75,000 were
granted at an exercise price equal to the stock price on the date of grant.
Accordingly, no compensation expense was recorded for these options. These
options have a weighted-average exercise price of $1.63 and a fair value of
$.87. The exercise price for the remaining 40,000 options granted will be
established at the next shareholders' meeting. Accordingly, the compensation
amount, if any, for the issuance of these stock options will be determined at
that time.
The following table summarizes information about stock options at October 31,
1998:
Exercisable
Outstanding Stock Options Stock Options
Weighted-Average
Range of Remaining Weighted-Average Weighted-Average
Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
- --------------- ------ ---------------- ------------------------------------
N/A 40,000 3.4 Years $ N/A
$ 1.00 240,000 3.8 Years $ 1.00 240,000 $ 1.00
$ 1.63 75,000 3.6 Years $ 1.63 25,000 $ 1.63
$ 2.00 452,500 4.1 Years $ 2.00 312,500 $ 2.00
$ 2.50 1,400,000 3.6 Years $ 2.50 1,400,000 $ 2.50
$ 3.00 60,000 .9 Years $ 3.00 60,000 $ 3.00
--------- ---------- ------- --------- -------
2,267,500 3.6 Years $ 2.19 2,037,500 $ 2.25
========= ========= ======= ========= =======
Pro forma information regarding net loss and net loss per share has been
determined as if the Company had accounted for its employee stock options under
the fair value method prescribed under SFAS No. 123, "Accounting for Stock Based
Compensation." The fair value of these options was estimated at the date of
grant using the Black-Scholes option-pricing model for the pro forma amounts
with the following weighted average assumptions:
October 31,
1 9 9 8 1 9 9 7
------- -------
Risk-Free Interest Rate 5.5% 5.4%
Expected Life 3 Years 3 Years
Expected Volatility 77% 75%
Expected Dividends None None
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
F-25
<PAGE>
COLORADO CASINO RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #18
- ------------------------------------------------------------------------------
[13] Stock Option and Stock Purchase Plans [Continued]
The pro forma amounts are indicated below [in thousands, except per share
amounts]:
Years ended
October 31,
1 9 9 8 1 9 9 7
------- -------
Net Loss as Reported $9,408,330 $5,312,942
Pro Forma Net Loss $9,403,417 $5,796,258
Loss Per Share as Reported $ .24 $ .15
Pro Forma Loss Per Share $ .24 $ .16
[14] Income Taxes
The tax effect of significant temporary differences and carrybacks which gave
rise to the Company's deferred tax assets and liabilities are as follows:
Years ended
October 31,
1 9 9 8 1 9 9 7
------- -------
Deferred Tax Assets:
Net Operating Loss Carryforwards $5,500,000 $ 2,400,000
Cash Basis Tax Assets 433,000 482,000
Slot Club Liability 130,000 85,000
Depreciation and Amortization (380,000) (350,000)
Other 243,000 280,000
---------- ------------
Totals 5,926,000 2,897,000
Valuation Allowance (5,926,000) (2,897,000)
---------- ------------
Net Deferred Tax Asset $ -- $ --
---------------------- ========== ============
The increase in the valuation allowance for the year ended October 31, 1998 is
$3,029,000.
The provision [benefit] for income taxes differs from the amount computed by
applying the statutory federal income tax rate as follows:
Years ended
October 31,
1 9 9 8 1 9 9 7
------- -------
Computed Federal Statutory Tax [Benefit] $(3,400,000) $(2,600,000)
Valuation Allowance to Reduce Deferred Tax Asset 3,400,000 2,600,000
----------- -----------
Actual Income Tax Provision [Benefit] $ -- $ --
------------------------------------- =========== ===========
At October 31, 1997, the Company has estimated net operating tax loss
carryforwards of approximately $6,400,000 available to offset taxable income
through 2012. Effective for tax years beginning after August 5, 1997, the
Taxpayer Relief Act of 1997 generally extends the number of tax years that a net
operating loss for a tax year can be carried forward from 15 years to 20 years.
Accordingly, the estimated tax loss of $9,000,000 for the year ended October 31,
1998, will be available to offset future taxable income through the year 2018.
The utilization of any net operating tax loss carryforward is predicated on the
Company having future taxable income [See Note 4 for Going Concern
considerations]. The Tax Reform Act of 1986 enacted a complex set of rules which
limit a company's ability to utilize net operating loss carryforwards and tax
credit carryforwards in periods following an ownership change. Accordingly, if
the Company should generate taxable income in future years, but undergo a
greater than 50 percent point change in stock ownership, generally within a
three year period, the Company's ability to utilize the net operating tax loss
carryforwards would be impaired.
F-26
<PAGE>
COLORADO CASINO RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #19
- ------------------------------------------------------------------------------
[15] Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," defines
the fair value of a financial instrument as the amount at which the instrument
could be exchanged in a current transaction between willing parties. For certain
instruments, including cash and cash equivalents, accounts payable and accrued
expenses, it was concluded that the carrying amount approximated fair value for
these instruments because of their short maturities. Due to CCRI's financial
condition at October 31, 1998, [See Note 4] management believes it is
impracticable to provide a fair value estimate for debt classified as current at
October 31, 1998, especially since such a large amount of such debt is due to
related parties. Management believes that any attempt to estimate fair values
for debt classified as current at October 31, 1998, would be dependent on
assumptions that are so subjective as to render the estimate meaningless and
potentially misleading. The fair value of the Company's long-term debt at any
given date is estimated based on discounting expected cash flows at estimated
rates, considering existing collateral and considering market conditions and
risks that would be available to the Company for debt instruments of similar
remaining maturities
October 31,
1 9 9 7
-------
Carrying
Amount Fair Value
------ ----------
Convertible Debenture - Related Party $ 4,500,000 $ 4,145,236
Long-Term Debt - Related Party $ 7,874,638 $ 7,752,138
Long-Term Debt - Less Current Maturities $20,684,629 $19,895,370
The fair value of long-term debt less current maturities at October 31, 1998,
[carrying amount $3,908,702] is estimated to be approximately $3,000,000.
[16] Commitments and Contingencies
Litigation - A former employee of the Company has filed both a worker's
compensation claim and an EEOC claim [discrimination] against the Company.
Counsel for the Company has advised that at this stage in the litigation
process, he cannot determine the materiality of the claim amount or offer an
opinion as to its probable outcome.
CCRI is also subject to certain other litigation arising in the ordinary course
of business which, in the opinion of management, will not have a material
adverse effect on the financial position, results of operations, or cash flow of
CCRI. However, as with all contingencies, it is at least reasonably possible
that management's estimates will change within one year due to one or more
confirming events and the effect of such change in estimate could be material.
Leases - The Company leases office space in Colorado Springs, Colorado, as its
corporate headquarters, under a non-cancelable lease agreement which expired
July, 1998. Such lease is currently on a month-to-month basis pending completion
of new office space from the same lessor. Total rent expense amounted to $28,308
and $28,308 for the years ended October 31, 1998 and 1997, respectively. The new
office space lease will be for five years at approximately $62,000 per year.
F-27
<PAGE>
COLORADO CASINO RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #20
- ------------------------------------------------------------------------------
[16] Commitments and Contingencies [Continued]
The Company is in violation of several of its lease agreements for being
delinquent in its lease payments. Management does intend to cure the
delinquencies, however, absent payment of at least a portion of their
delinquencies, the filing of a lawsuit(s) is probable.
[17[ Fourth Quarter Year-End Adjustments
The aggregate effect of year-end adjustments, which are material to the fourth
quarter results, total approximately $2,874,000 and consist principally of
amortization of loan fees ($632,000), asset impairment loss ($1,250,000),
recording of slot club liability ($123,000), write-offs of receivables
($151,000), officers waived salaries ($161,000), issuance of stock to board
members ($41,000), and for various unrecorded liabilities and other audit
adjustments ($516,000).
[18] Change in Depreciation Method for Building and Equipment
Depreciation of building and equipment has been computed using the straight-line
method for the year ended October 31, 1998. Depreciation of building and
equipment since the Company's inception was computed primarily by accelerated
[declining balance] methods. The straight-line method of depreciation was
adopted by management because management believes that the straight-line method
more appropriately reflects its financial results by better allocating the cost
of building and equipment over their respective useful lives, and is the method
predominantly used in the casino industry. The straight-line method of
depreciation has been applied retroactively, and the effect of this retroactive
change in accounting principle is included in statement of operations as a
cumulative effect of an accounting change for the year ended October 31, 1998.
The effect of the change in depreciation method for the year ended October 31,
1998, was to increase the loss before extraordinary item and net loss by
approximately $24,000 [$.0006 per share].
The pro forma amounts shown below for the years ended October 31, 1998 and 1997,
reflect the adjustment for the effect of retroactive application on depreciation
on those years.
Pro forma amounts assuming the new depreciation method is applied retroactively:
October 31,
-----------
1 9 9 8 1 9 9 7
------- -------
Loss Before Extraordinary Item $9,865,346 $ 5,996,002
Loss Per Common Share $ .25 $ .16
Net Loss $9,408,330 $ 5,235,165
Loss Per Common Share $ .24 $ .14
[19] Revolving Credit Facility
The Company has a revolving credit agreement with a financial institution
[Foothill Capital Corporation "Foothill"] whereby the Company can borrow up to
$15,000,000, reducing approximately $208,000 per month beginning November 1,
1998, and limited to specified levels of earnings before interest, taxes,
depreciation and amortization, as defined. The Agreement provides for an
interest rate equal to prime [8% at October 31, 1998] plus 2%, [weighted average
interest rate 10%] and, in addition, requires the Company to pay an anniversary
fee in the amount of .50% of the maximum amount available under the Agreement.
The Agreement provides for automatic annual renewal under specified terms.
Borrowings are collateralized by a first secured position on all of the assets
of Double Eagle Resorts, Inc. In addition, Foothill holds a first secured
position on the land on which the Double Eagle Hotel and Casino is situated, as
well as the certain other real estate held for future development and the Double
Eagle Hotel and Casino parking lot. At October 31, 1998, the Company had
approximately $1,345,000 of additional available credit under the Agreement.
F-28
<PAGE>
COLORADO CASINO RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #21
- ------------------------------------------------------------------------------
[19] Revolving Credit Facility [Continued]
Proceeds from the credit facility were used (i) to repay three mortgage notes
totaling $10,198,889; (ii) for working capital [approximately $500,000]; and
(iii) in connection with the purchase of gaming devices from International
Gaming Technology, Inc. [approximately $1,850,000].
The Agreement requires the Company to maintain specified earnings levels, before
interest, taxes, depreciation and amortization ["EBITDA"] measured on a rolling
twelve month basis, and restricts or limits certain intercompany and other
payments, including dividends, capital expenditures to $1,000,000,- or taking on
additional borrowings. The agreement also precludes The Double Eagle from
disposing of any of its assets other than in the ordinary course of business,
and restricts the percentage increase in compensation to directors and senior
management. At October 31, 1998, the Company is in technical default of its
revolving credit agreement with Foothill regarding the EBITDA requirements, more
specifically, Article 7.20 thereof, which requires The Double Eagle to maintain
EBITDA of at least $4,000,000, measured on a rolling 12 month basis [annualized
to the extent required), tested at the end of each fiscal month. The Double
Eagle's EBITDA did not satisfy this covenant at October 31, 1998. Foothill did,
however, issue to CCRI a one-time waiver to the minimum EBITDA clause at October
31, 1998. Although the Company has not made any subsequent EBITDA calculations,
the Company is in the low end of its seasonal business and unless its
operational performance significantly improves, will not be in compliance with
its EBITDA requirements for fiscal 1999. According to the Agreement, failure to
comply with the EBITDA requirement would allow Foothill to declare its loan
agreement in default, to accelerate all amounts due under the loan agreement,
and to foreclose on all pledged collateral, which includes, among other things,
the land and building where the Double Eagle Hotel & Casino operates.
[20] Real Estate Held For Future Development
In August 1994, the Company acquired property consisting of 40,705 square feet
of land located 80 yards west of the Double Eagle from a real estate partnership
[a related party effective with the acquisition of Creeker's] at a cost of
$4,504,970. The property is being held for future development [See Notes 12 and
8]. In applying the accounting policy described in Note 2[O], management
believes that the carrying amount of this property has become impaired because
of a lack of new casino development in the Cripple Creek market. While this
property is zoned for gaming, most gaming business activity has been in the
purchase of existing gaming establishments rather than in the development of new
casinos on undeveloped land. Based on management's assessment of the market for
similar real estate in Cripple Creek at October 31, 1998, management has
recorded an asset impairment loss of $1,254,970 related to this property for the
year ended October 31, 1998.
[21] New Authoritative Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ["FASB"] issued SFAS No.
130, "Reporting Comprehensive Income," which is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. SFAS No. 130 will
have no impact on the Company's consolidated results of operations, financial
position or cash flows as it is a standard for reporting and display only of
comprehensive income and its components in financial statements. The Company is
in the process of determining its preferred format.
In June 1997, the FASB has issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also established standards for related
disclosures about products and services, geographic areas, and major customers.
SFAS No. 131 is effective for financial statements for fiscal years beginning
after December 15, 1997. Financial statement disclosures for prior periods are
required to be restated for comparative purposes to comply with SFAS 131. The
Company will adopt SFAS No. 131 in the year ended October 31, 1999. Management
has not finalized its analysis of which operating segments it will report on to
comply with SFAS No. 131.
F-29
<PAGE>
COLORADO CASINO RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #22
- ------------------------------------------------------------------------------
[21] New Authoritative Accounting Pronouncements [Continued]
In June 1998, The FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. SFAS No. 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and how it its designated, for
example, gain or loss related to changes in the fair value of a derivative not
designated as a hedging instrument is recognized in earnings in the period of
the change, while certain types of hedges may be initially reported as a
component of other comprehensive income [outside earnings] until the
consummation of the underlying transaction.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application of SFAS No. 133 should be as of the
beginning of a fiscal quarter; on that date, hedging relationships must be
designated anew and documented pursuant to the provisions of SFAS No. 133.
Earlier application of all of the provisions of SFAS No. 133 is encouraged, but
it is permitted only as of the beginning of any fiscal quarter. SFAS No. 133 is
not to be applied retroactively to financial statements of prior periods. The
Company does not currently have any derivative instruments and is not currently
engaged in any hedging activities.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position ["SOP"] 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 provides guidance on the financial reporting of start-up
costs and organization costs, and requires that such costs to be expensed as
incurred. SOP 98-5 applies to all nongovernmental entities and is generally
effective for fiscal years beginning after December 15, 1998. Earlier
application is encouraged in fiscal years for which annual financial statements
previously have not been issued. The adoption of SOP 98-5 is not expected to
have a material impact on results of operations, financial position, or cash
flows of the Company as the Company's current policy is substantially in
accordance with SOP 98-5.
On March 31, 1999, the FASB released a proposal for public comment that would
resolve certain practice issues raised when accounting for stock options. Since
the issuance of APB Opinion 25, "Accounting for Stock Issued to Employees,"
questions have surfaced about its application and differing practices have
developed. The FASB's broad reconsideration of the stock compensation issue
culminated in the issuance of SFAS No. 123, "Accounting for Stock-Based
Compensation," in 1995. SFAS No. 123 permits the continued application of APB
Opinion 25 for employees. However, questions remain about the proper application
of APB Opinion 25 in a number of circumstances. The FASB's proposed
Interpretation would clarify how to apply APB Opinion 25 in certain situations.
The proposed Interpretation includes the following conclusions:
o Once an option is repriced, that option must be accounted for as a variable
plan from the time it is repriced to the time it is exercised. Consequently,
the final measurement of compensation expense would occur at the date of
exercise.
o Employees would be defined as they are under common law for purposes of
applying APB Opinion 25.
o APB Opinion 25 does not apply to outside directors because, by definition, an
outside director cannot be an employee. Accordingly, the cost of issuing stock
options to outside board members will have to be determined on a fair value
basis in accordance with SFAS No. 123, and recorded as an expense in the
period of the grant [the service period could be prospective, however].
F-30
<PAGE>
COLORADO CASINO RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #23
- ------------------------------------------------------------------------------
[21] New Authoritative Accounting Pronouncements [Continued]
o Since APB Opinion 25 was issued in 1972, the terms of many "Section 423" tax
plans have changed from those in existence at the time. Many of those plans
now provide that employees can purchase an employer's stock at the lesser of
85 percent of the stock price at the date of grant or 85 percent of the price
at the date of exercise. This provision is referred to as a "look-back"
option. The FASB decided that plans with a look-back option do not, in and of
themselves, create a compensatory plan.
o A subsidiary may account for parent company stock issued to its employees
under APB Opinion 25 in their separately issued financial statements, provided
the subsidiary is part of the parent's consolidated financial statements.
The FASB's proposed Interpretation would be effective upon issuance, which is
expected in September 1999, but generally would cover plan grants and
modifications that occur after December 15, 1998.
[22] Subsequent Event
Mr. Saenz informed the Company's Board of Directors on March 22, 1999, that he
was tendering his resignation as President and CEO of CCRI. Mr. Saenz will
continue as a Director of the Company. Mr. Michael Smith, CCRI's current
Secretary and General Counsel, was named as CCRI's interim CEO and President.
. . . . . . . . .
F-31
EXHIBIT 18
February 15, 1999
Colorado Casino Resorts, Inc.
Colorado Springs, Colorado 80905
We are providing this letter to the Company for inclusion as an exhibit to
Form 10-K for the year ended October 31, 1998, pursuant to Item 601 of
Regulation S-K.
We have read management's justification for the change in accounting from
accelerated (declining balance) methods of depreciation to the straight-line
method of depreciation for the year ended October 31, 1998. Based on our reading
of the data and discussions with Company officials about their reasoning and
judgment used in making the change, we believe management's justification for
the change is reasonable. Accordingly, we concur that the newly adopted
accounting principle described above is preferable in the Company's
circumstances to the method previously applied.
/s/ Moore Stephens, P.C.
MOORE STEPHENS, P.C.
<TABLE> <S> <C>
<ARTICLE> 5
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This schedule contains summary financial information extracted from the
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</LEGEND>
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Oct-31-1998
<PERIOD-END> Oct-31-1998
<CASH> 1,573,519
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<INVENTORY> 96,429
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<DEPRECIATION> 8,113,245
<TOTAL-ASSETS> 46,435,217
<CURRENT-LIABILITIES> 44,022,355
<BONDS> 41,977,596
0
0
<COMMON> 38,741
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<TOTAL-LIABILITY-AND-EQUITY> 46,435,217
<SALES> 19,379,052
<TOTAL-REVENUES> 23,225,232
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<TOTAL-COSTS> 26,937,766
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<INTEREST-EXPENSE> 6,171,032
<INCOME-PRETAX> (9,865,346)
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<EXTRAORDINARY> 0
<CHANGES> 457,016
<NET-INCOME> (9,408,330)
<EPS-PRIMARY> (.24)
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