SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ___________ to ____________.
Commission file number 0-28068
Colorado Gaming & Entertainment Co.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 84-1242693
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1700 Lincoln Street, 49th Floor, Denver, Colorado 80203
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code(303)863-2400
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check (X) 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 ___
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check (X) mark whether the registrant has filed all
documents and reports required to be filed by Section 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court.
Yes X No ___
Number of shares of common stock outstanding at October 31, 1996: 5,138,888
Colorado Gaming & Entertainment Co.
Form 10-Q
Index
Page
Part 1 FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets - as of September 30, 1996 and 1
December 31, 1995.
Consolidated Statements of Operations - for the three months 2
ended September 30, 1996, for the period June 7
through September 30, 1996, for the three months
ended September 30, 1995, for the period January 1
through June 6, 1996, and for the nine months
ended September 30, 1995.
Consolidated Statements of Cash Flows - for the period 3
June 7 through September 30, 1996, January 1
through June 6, 1996 and for the nine months ended
September 30, 1995.
Notes to Consolidated Financial Statements 4-8
Item 2. Management's Discussion and Analysis 9-15
PART II OTHER INFORMATION 16-17
SIGNATURES 18
<TABLE>
Colorado Gaming & Entertainment Co.
Consolidated Balance Sheets
(In thousands, except shares amounts)
<CAPTION>
Reorganized Company (a) Predecessor Company
September 30, 1996 December 31, 1995
----------------------- --------------------
(unaudited)
ASSETS
<S> <C> <C>
Cash $ 4,815 $ 3,623
Inventories 92 85
Accounts receivable, net 201 226
Prepaid expenses 405 638
-------------- ---------------
Total current assets 5,513 4,572
Property, equipment and leasehold improvements, net 42,374 32,127
Restricted funds in escrow (Note 2) 259 -
Excess reorganization value, net (Note 1) 18,511 -
Other assets, net 814 981
-------------- ---------------
Total assets 67,471 37,680
-------------- ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of notes payable 1,990 -
Accounts payable 821 404
Accrued interest 1,907 -
Accrued expenses 3,372 3,953
-------------- ---------------
Total current liabilities 8,090 4,357
-------------- ---------------
Senior secured notes payable (Note 3) 50,000 -
Other notes payable, net of current portion (Note 3) 4,953 -
Liabilities subject to compromise - 186,460
-------------- ---------------
Total non-current liabilities 54,953 186,460
-------------- ---------------
Total liabilities 63,043 190,817
-------------- ---------------
Common stock, $.01 par value, 20 million and 50 million
shares authorized, respectively, 5,138,888 and
11,786,235 issued and outstanding (Note 4) 51 118
Warrants issued - 7,000
Additional paid-in capital 14,896 2,162
Accumulated deficit (10,519) (162,417)
-------------- ---------------
Total stockholders' equity (deficit) 4,428 (153,137)
-------------- ---------------
Total liabilities and stockholders' equity (deficit) $ 67,471 $ 37,680
============== ===============
</TABLE>
(a) Due to the Reorganization and implementation of fresh start accounting
pursuant to SOP 90-7, financial statements for the Reorganized Company (periods
starting June 7, 1996) are not comparable to those of the Predecessor Company.
See Notes to Consolidated Financial Statements for additional information.
The Notes to Consolidated Financial Statements are an integral part of
these balance sheets.
<TABLE>
Consolidated Statements of Operations
(In thousands, except per data share)
<CAPTION>
Reorganized Company (a) Predecessor Company
Unaudited
------------------------------------------------------------------------------------------
Three Months June 7, 1996 Three Months January 1,1996 Nine Months
Ended Through Ended Through Ended
September September 30, September 30, June 6, 1996 September 30,
30, 1996 1996 1995 1995
-------------- ---------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
Revenue:
Casino $ 13,973 $ 17,073 $ 11,718 $ 19,126 $ 34,101
Food and beverage 999 1,215 1,083 1,288 2,887
Other 40 47 80 32 235
-------------- ---------------- ----------------- ----------------- ----------------
Gross revenue 15,012 18,335 12,881 20,446 37,223
Less: Promotional allowances (387) (465) (441) (464) (1,116)
-------------- ---------------- ----------------- ----------------- ----------------
Net revenue 14,625 17,870 12,440 19,982 36,107
Operating Expenses:
Casino 3,678 4,269 3,244 5,544 9,762
Gaming taxes 2,548 3,308 2,431 3,614 6,993
Food and beverage 928 1,128 790 1,299 2,340
General and administrative:
Casino 723 917 792 1,249 2,594
Corporate 955 1,102 1,523 902 5,726
Marketing 1,903 2,338 1,571 2,349 4,330
Depreciation and amortization 1,813 2,209 1,178 1,882 3,529
Pre-opening (26) 315 - 47 -
Reorganization items 106 106 442 2,290 700
Impairment of assets and other expenses - - - 5,318
-------------- ---------------- ----------------- ----------------- ----------------
Total operating expenses 12,628 15,692 11,971 19,176 41,292
Income (loss) from operations 1,997 2,178 469 806 (5,185)
Interest expense (1,743) (2,146) (6,076) (579) (16,052)
Interest income 49 59 43 66 333
Loss on disposition of assets (71) (71) (51) (244) (124)
Equity in loss of GPRI - - (3,070) - (15,256)
-------------- ---------------- ----------------- ----------------- ----------------
Income (loss) before income tax expense
and extraordinary items 232 20 (8,685) 49 (36,284)
Income tax expense (Note 5) - - - - -
-------------- ---------------- ----------------- ----------------- ----------------
Net income (loss) before extraordinary
gain 232 20 (8,685) 49 (36,284)
Extraordinary gain from reorganization
items - - - 164,358 -
-------------- ---------------- ----------------- ----------------- ----------------
Net income (loss) $ 232 $ 20 $ (8,685) $ 164,407 $ (36,284)
============== ================ ================= ================= ================
Net income per common share (b) $ .05 $ 0.00 $ N/A $ N/A $ N/A
============== ================ ================= ================= ================
</TABLE>
(a) Due to the Reorganization and implementation of fresh start accounting
pursuant to SOP 90-7, financial statements for the Reorganized Company
(periods starting June 7, 1996) are not comparable to those of the Predecessor
Company. See Notes to the Financial Statements for additional information.
(b) The weighted average number of common shares outstanding and net income per
common share for the Predecessor Company have not been presented because, due to
the Reorganization and implementation of fresh start accounting, they are not
comparable to subsequent periods.
The Notes to Consolidated Financial Statements are an integral part of
these financial statements.
<TABLE>
Colorado Gaming & Entertainment Co.
Consolidated Cash Flows
(in thousands)
<CAPTION>
Unaudited
......................................................
June 7, 1996 January 1,1996 Nine Months
Through Through Ended
September June 6, 1996 September
30,1996 30, 1995
(a)
-------------- ---------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 20 $ 164,407 $ (36,284)
Adjustment to reconcile net income
(loss) to Net cash provided by
operating activities:
Depreciation and amortization 2,209 1,882 3,529
Noncash compensation expense 120 - 128
Equity in loss of GPRI - - 15,256
Non cash interest expense 1,919 495 15,666
Extraordinary gain from reorganization - (164,358) -
Loss on disposition of assets 71 244 124
Change in working capital and other (3,120) 2,647 5,210
-------------- ---------------- --------------
Net cash provided by operating
activities 1,219 5,317 3,629
-------------- ---------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for capital improvements (2,633) (3,885) (1,882)
Net change in restricted funds 248 (507) 4,209
Contributions to GPRI - - (7,727)
Advances to affiliates - - (1,503)
-------------- ---------------- --------------
Net cash used in investing activities (2,385) (4,392) (6,904)
-------------- ---------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from other notes payable 2,559 5,824 2,000
Repayments of other notes payable and
capital leases (3,646) (3,304) (1,638)
-------------- ---------------- --------------
Net cash (used in) provided by
financing activities (1,087) 2,520 362
-------------- ---------------- --------------
INCREASE/DECREASE IN CASH (2,253) 3,445 (2,913)
CASH, at beginning of period 7,068 3,623 5,643
-------------- ---------------- --------------
CASH, at end of period $ 4,815 $ 7,068 $ 2,730
============== ================ ==============
</TABLE>
(a) Due to the Reorganization and implementation of fresh start accounting
pursuant to SOP 90-7, financial statements for the Reorganized Company
(periods starting June 7, 1996) are not comparable to those of the Predecessor
Company. See Notes to the Financial Statements for additional information.
The Notes to Consolidated Financial Statements are an integral part of
these financial statements.
COLORADO GAMING & ENTERTAINMENT CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(1) ORGANIZATION AND BASIS OF PRESENTATION
Colorado Gaming & Entertainment Co. ("CG&E") and its subsidiaries
(collectively referred to as the "Company"), formerly known as Hemmeter
Enterprises, Inc. (referred to as the "Predecessor Company" or "HEI" for the
period prior to June 7, 1996), was incorporated in August 1993 to develop, own
and operate gaming and related entertainment facilities. On July 26, 1995,
certain creditors filed an involuntary petition under Chapter 11 of the Federal
Bankruptcy Code against the Predecessor Company's wholly-owned subsidiary, Grand
Palais Riverboat, Inc. ("GPRI"). On July 28, 1995, GPRI converted its petition
to a voluntary petition under Chapter 11 of the Federal Bankruptcy Code in the
United States Bankruptcy Court for the Eastern District of Louisiana (the
"Court"). On November 7, 1995, the Predecessor Company, including three of its
subsidiaries, also filed for Chapter 11 bankruptcy (the bankruptcy proceedings
referred to as the "Reorganization"). On May 3, 1996, as part of the Company's
overall restructuring, the Predecessor Company's stock interest in GPRI was sold
to Casino America, Inc. pursuant to the Plan of Reorganization confirmed in the
GPRI bankruptcy case. Consideration, consisting of cash, stock and notes
totaling approximately $59 million, was allocated among the GPRI creditors,
which included the Predecessor Company's senior secured creditors. Accordingly,
the Predecessor Company received no consideration from the sale of GPRI.
Concurrently with this stock sale, all claims against the Predecessor Company
related to GPRI were released. This transaction had no financial statement
impact on the Predecessor Company in the 1996 period, as its investment in GPRI
had been reduced to zero in the 1995 period.
On June 7, 1996 (the "Effective Date"), CG&E and three of its subsidiaries
emerged from bankruptcy. In general, the Reorganization provided for resolution
of all claims against the Predecessor Company and obligations of the Predecessor
Company pending as of November 7, 1995, the Chapter 11 filing date, as well as
resolution of certain legal disputes, in exchange for the issuance of new
indebtedness and new common stock (see Notes 3 and 4). Upon the Effective Date,
the Predecessor Company's name was changed to Colorado Gaming & Entertainment
Co.
Three wholly-owned subsidiaries, BWBH, Inc., BWCC, Inc., and Silver Hawk
Casino, Inc. own and operate limited stakes gaming facilities in Colorado,
individually known as Bullwhackers Black Hawk, Bullwhackers Central City, and
the Silver Hawk Saloon & Casino, respectively. Millsite 27, Inc., also a
wholly-owned subsidiary of CG&E, owns a surface parking facility, used by BWBH,
Inc. and Silver Hawk Casino, Inc.
FRESH START REPORTING
In accordance with AICPA Statement of Position 90-7, "Reporting by Entities
in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), the Company was
required to adopt "fresh-start" accounting on the Effective Date. The impact of
the adoption of fresh-start reporting is reflected in the September 30, 1996
consolidated balance sheets. In adopting fresh-start reporting, the Company,
with the assistance of its financial advisors and third-party appraisals,
estimated its reorganization value, which represents the fair value of the
Company, before considering liabilities. The estimated value for the Company and
its subsidiaries totaled approximately $65 million. The reorganization value of
the Company and its subsidiaries was determined by consideration of several
factors, including the discounted residual value of the Company's cash flows and
comparable sales. Any excess of the reorganization value over the fair market
value of the net assets is reported as excess reorganization value and will be
amortized over an 18.5-year period.
The adjustments to reflect the consummation of the Reorganization
(including the gain on extinguishment of debt and other pre-petition
liabilities) and the adjustment to record assets and liabilities at their fair
values have been reflected in the unaudited consolidated financial statements.
Accordingly, a vertical black line is shown in the consolidated financial
statements to separate post-Reorganization operations from those prior to June
7, 1996, which have not been prepared on a comparable basis.
The accompanying unaudited consolidated financial statements and related
notes of the Company post-Reorganization (periods beginning June 7, 1996) and
the Predecessor Company pre-Reorganization (periods prior to June 7, 1996) have
been prepared in accordance with generally accepted accounting principles for
interim financial reporting. In the opinion of management, all adjustments
considered necessary for fair presentation of financial position, results of
operations and cash flows have been included.
(2) RESTRICTED FUNDS IN ESCROW
Pursuant to various agreements with the City of Black Hawk and the United
States Environmental Protection Agency ("EPA"), the Company was required to
deposit funds in certain escrow accounts to guarantee payment of environmental
remediation and other costs related to the Company's parking lot improvements.
As of September 30, 1996 the escrowed funds totaled $259,000.
(3) DEBT/NOTES PAYABLE
SENIOR SECURED NOTES
On the Effective Date, the Company's outstanding senior secured notes
totaling $174 million (the "Old Notes"), and other notes payable to Resort
Income Investors, Inc. ("RII") totaling $2 million, were canceled and $50
million in 12% Senior Secured Pay-In-Kind Notes due 2003 (the "New Notes") were
issued on a pro rata basis to the holders of the Old Notes and RII. Interest on
the New Notes accrues at a rate of 12% per annum, and is payable semi-annually.
The Company may, at its option, pay interest on the New Notes interest payment
dates of December 1, 1996, and June 1, 1997, through the issuance of additional
notes, with terms substantially identical to the terms of the New Notes. The New
Notes are secured by substantially all the assets of the Company, including the
common stock of the Company's operating subsidiaries. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
CREDIT FACILITY
On the Effective Date, the Company entered into a $12.5 million revolving
credit facility (the "Credit Facility") with Foothill Capital Corporation. The
Credit Facility is segregated into several different sub facilities, including a
$5 million construction facility, a $5 million equipment financing facility, a
$3.5 million working capital facility and a $1 million Silver Hawk facility. No
more than $12.5 million of borrowings may be outstanding at any time. Borrowings
under the Credit Facility are subject to a 1% financing fee and accrue interest
at prime plus 2.375%. The sub facilities have varying terms ranging from three
to five years from when the funds are borrowed. As of September 30, 1996, the
Company had drawn approximately $3.8 million on the equipment portion of the
Credit Facility, the majority of which was used to refinance pre-petition
equipment financing of the Company, and approximately $1.0 million under the
Silver Hawk facility. Borrowings are secured by a first priority lien and
security interest in substantially all of the real and personal property owned
or leased by the Company. The Credit Facility replaced a Debtor-in-Possession
facility, also provided by Foothill Capital Corporation, during the Company's
bankruptcy.
OTHER NOTES
Pursuant to the Reorganization, the Company issued two unsecured promissory
notes to Capital Associates International, Inc. ("CAI") in the respective
principal amounts of $1.6 million and $3 million, both accruing interest at the
rate of 9% per annum. The $1.6 million note is due in 10 equal quarterly
installments which commenced September 7, 1996. As of September 30, 1996,
approximately $1.5 million is outstanding on this note. The $3 million note has
been reduced by approximately $2.3 million received by CAI on account of its
claims filed in the Chapter 11 bankruptcy case filed by GPRI. The outstanding
balance on the $3 million note is in the range of between $500,000-700,000
depending on the ultimate resolution of the exact amount received by CAI from
GPRI distributions to be credited against the note. Accordingly, the Company has
reflected $700,000 of the second note as an obligation in the accompanying
consolidated balance sheet, although this amount might be reduced as discussed
above.
(4) EQUITY
Pursuant to the Reorganization, the Predecessor Company's common stock and
warrants were canceled on the Effective Date. The Reorganization also provided
for the amendment and restatement of the Company's certificate of incorporation
and bylaws. The new charter authorized 20 million shares of $.01 par value
common stock. On the Effective Date, 5 million shares of common stock of CG&E
were issued on a pro rata basis to the holders of Old Notes and RII. In
addition, the Company's President and Chief Executive Officer received 138,888
shares of common stock. The Company recorded $243,000 of reorganization expense
related to this stock based on the assumed fair market value of the stock on
the Effective Date.
Also on the Effective Date, 416,667 shares of common stock of the Company
were reserved to be issued to executive management and non employee directors
pursuant to the Company's Management Stock Incentive Plan (the "Stock Plan").
The Stock Plan provides for shares to be issued to certain management
individuals annually, for the next three years, subject to the Company meeting
certain performance criteria. Once granted, the shares are fully vested. The
first grant is scheduled for June 7, 1997.
(5) TAXES
Prior to the current fiscal year, the Company has never produced net income
or taxable income. For the nine months ended September 30, 1996, the Company
reported net income of approximately $164.4 million, of which $164.4 million
related to an extraordinary gain from Reorganization items. Specifically of
these Reorganization items $137.8 million relates to the cancellation of
indebtedness ("COD") income and the remaining $26.6 million related to gains
recorded for the write up of the Company's assets due to the adoption of "fresh
start" accounting on the Effective Date. These events are not included in
taxable income and, accordingly, no provision for income taxes was recorded in
the current period.
Deferred tax assets and liabilities are comprised of the following:
September 30 December 31
1996 1995
(Unaudited)
Current:
Accrued vacation & gaming liabilities $ 208 $ 184
Non-Current:
Depreciable basis of fixed assets (593) 3,053
Allowance of bad debt 3,873 5,832
Reorganization items 1,927 4,287
Deferred interest - 404
Capital loss on RCJV - 8,646
Net operating loss carryforwards 2,345 41,148
---------- ---------
Net Deferred tax assets 7,760 63,554
Valuation allowance (7,760) (63,554)
---------- ---------
$ - $ -
========== =========
The net deferred tax asset valuation allowance is equal to the full amount
of the net deferred tax asset because the realization of such asset is dependent
upon future taxable income, which is uncertain. Due to the adoption of "fresh
start" accounting, any reduction in the valuation allowance will be credited
against excess reorganization value, rather than the traditional treatment as a
credit to income tax expense in the statement of operations.
The Company's tax position changed significantly as a result of the
Reorganization. The Company disposed of its stock interest in GPRI, thus
eliminating GPRI's net operating loss carryforwards ("NOL's"), capital loss on
its investment in RCJV, and other tax assets, from the tax assets as of December
31, 1995. The Company's fixed assets were written-up due to the adoption of
fresh start accounting, which has no benefit for tax purposes. Additionally, the
Company realized approximately $137.8 million in COD income on the Effective
Date. Pursuant to the applicable sections of the Internal Revenue Code (the
"Code"), this gain is excluded from taxable income. This excluded income,
however, resulted in a reduction of the parent company's tax attributes,
specifically the elimination of the parent Company's NOL's. Only NOL's and
depreciable tax assets at the subsidiary level will survive this cancellation of
indebtedness event. Also, certain bad debt allowances which were reserved for
book, but may be used as future tax deductions will survive at the parent level
and subsidiary level.
After the sale of GPRI stock and the reduction of tax attributes resulting
from cancellation of indebtedness, the Company's pre ownership change NOL's
total approximately $5.9 million. These losses will begin to expire in 2008. In
addition, the Company will likely generate a post change NOL in 1996 of
$261,000. The Reorganization provided for the issuance of new common stock to
satisfy the Company's indebtedness and resulted in an "ownership change" under
Section 382 of the Code. The ownership change will limit the use of the
Company's pre-ownership change NOL's to approximately $520,000 per year.
The post-ownership change NOL's will be available without limitation.
(6) SUPPLEMENTAL FINANCIAL INFORMATION (Unaudited)
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
of the Colorado Casinos for the three and nine month periods ended September 30,
1996 and 1995 excluding any reorganization and impairment charges are shown as
follows (in thousands):
Three Months Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
----------------------- ----------------------
Net revenues $ 14,625 $ 12,440 $ 37,852 $ 36,107
Casino expenses 9,780 8,828 26,015 26,019
Casino operating profit 4,845 3,612 11,837 10,088
Pre-opening (Silver Hawk) (26) - 362 -
Corporate expenses 955 1,523 2,004 5,726
---------- ---------- ---------- ----------
EBITDA $ 3,916 $ 2,089 $ 9,471 $ 4,362
========== ========== ========== ==========
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The discussion below and under Item 5 of Part II of this Report on
Form 10-Q contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange"), that involve risks, uncertainties, and other factors which may
cause the Company's actual performance to be materially different from the
projections expressed or implied by such statements. Such factors include, among
others, increased competition, economic conditions in the greater Denver
metropolitan area, changes in gaming or liquor regulation or tax rates,
inclement weather, success of the Company's marketing initiatives, number of
visitors to Black Hawk and Central City.
OVERVIEW
On May 3, 1996 as part of the Company's overall restructuring, the
Company's stock interest in GPRI was sold to Casino America, Inc. pursuant to
the GPRI Plan of Reorganization. Consideration, consisting of cash, stock and
notes totaling approximately $59 million, was given to GPRI creditors, including
the Company's senior secured creditors. Accordingly, the Company received no
consideration from the sale of GPRI. Concurrently with this stock sale, all
claims against the Company related to GPRI were released. This transaction had
no financial statement impact on the Company in the 1996 period, as the
Company's investment in GPRI had been reduced to zero in the 1995 period.
On the Effective Date the Company emerged from bankruptcy. Pursuant to the
Reorganization, the following events occurred:
- - $176 million of senior secured debt of the Company was canceled and $50
million in new debt of the Company was issued.
- - All outstanding common stock and warrants of the Company were canceled
and 5 million shares of new common stock of the Company was issued on a
pro rata basis to the holders of the Old Notes and RII.
- - Certain unsecured liabilities totaling approximately $1.2 million were
canceled.
- - The Company changed its name to Colorado Gaming & Entertainment Co.
Also on the Effective Date, the Company adopted fresh start accounting in
accordance with SOP 90-7, resulting in adjustment of the Company's common
stockholders' equity and the carrying values of assets and liabilities. As a
result, the Company's post-Reorganization balance sheets and statements of
operations are not prepared on a consistent basis of accounting with its
pre-Reorganization balance sheets and statements of operations. In connection
with its Reorganization, a substantial amount of pre-bankruptcy liabilities of
the Company were converted to equity or otherwise discharged and significant
adjustments were made to reflect the resolution of certain liabilities. The
cancellation of debt and other reorganization related entries resulted in $164.4
million extraordinary gain in the 1996 period. Accordingly, the Company's net
income for the nine months ended September 30, 1996 period is almost solely
attributable to the extraordinary gain from the reorganization activities.
RESULTS OF OPERATIONS
For the Three Months Ended September 30, 1996 as Compared to the Three
Months Ended September 30, 1995
The Company's net revenue increased 18%, to $14.6 million for the third
quarter of 1996, from $12.4 million for the third quarter of 1995. The increase
in revenue is primarily attributable to the addition of the Silver Hawk casino
which commenced operations on June 26, 1996. In addition, continued overall
growth in the Black Hawk market and completion of the Company's expanded parking
lot in Black Hawk which opened on June 7, 1996, contributed to the increased
revenues at the Company's Bullwhackers Black Hawk property. The Silver Hawk
contributed approximately $2.3 million in net revenues for the quarter.
Management believes the Silver Hawk revenues, which exceeded management's
expectations, were a result of customer trial of the new facility in Black Hawk,
the first new facility to open in Black Hawk in over a year. In addition, the
Silver Hawk opened during the historically busy summer season, which contributed
to the initial strong revenue figures. Accordingly, the Company currently
anticipates that Silver Hawk revenues will be substantially lower in future
quarters.
The Company's Bullwhackers Black Hawk facility produced a 6% increase in
revenues for the quarter compared to the third quarter of 1995. The revenue
gains in Black Hawk were partially offset by significant revenue declines at the
Company's Bullwhackers Central City property. The overall Central City market,
which was down approximately 6% for the quarter, year to year, continues to
struggle to compete with the Black Hawk market, which offers better access and
parking convenience. The Company's facility in Central City has not been able to
compete effectively with other competitors in Black Hawk and Central City which
offer substantially more amenities in terms of on-site parking, location, access
and to a lesser extent hotel rooms. The Company continues to evaluate the
Central City market and its operations to assess a number of strategic
alternatives.
Expenses directly related to casino operations, including casino expense,
gaming taxes and food and beverage expense increased 11% to $7.2 million for the
third quarter of 1996, as compared to $6.5 million for the third quarter of
1995. The increase is due to the addition of the Silver Hawk operations and
increased business levels at the Bullwhackers Black Hawk facility.
Marketing expense increased 19% to $1.9 million for the third quarter of
1996, as compared to $1.6 million for the third quarter of 1995. The increase is
due to marketing efforts related to the initial opening period of the Silver
Hawk and the implementation of an additional customer busing program in an
effort to sustain business levels at the Company's Central City property.
Casino general and administrative expense decreased 9% to $723,000 in the
third quarter of 1996, as compared to $792,000 for the third quarter of 1995.
The decrease primarily relates to reduction staffing at the Central City
property and decreased insurance costs.
Corporate expenses decreased 36% to $955,000 for the third quarter of 1996,
as compared to $1.5 million for the third quarter of 1995. These reductions
included the elimination of most corporate positions, combining corporate
offices with the Colorado Casino offices and other cost savings. Offsetting
these corporate reductions in the third quarter of 1996 was a charge of
approximately $460,000 relating to compensation expense for senior management
based upon implementation of the Company's new Cash Bonus Plan and the
Management Incentive and Non-Employee Director Stock Plan.
Depreciation expense increased 50% to $1.8 million for the third quarter of
1996, as compared to $1.2 million for the third quarter of 1995. The increased
depreciation charges is due to the increased basis of the Company's assets due
to the adoption of "fresh start" accounting, primarily the excess reorganization
value, and depreciation charges related to the newly acquired and operating
Silver Hawk casino.
Operating Income. Income from operations increased 326% to $2.0 million for
the third quarter of 1996, as compared to a $469,000 in the third quarter of
1995. The increase in operating income is primarily attributable to $900,000 in
operating income from the Silver Hawk casino and decreased corporate expense.
The Silver Hawk results benefited from a low 2% tax rate during the quarter as a
result of the graduated gaming tax structure in Colorado. In the third quarter
of 1997 it is likely that the tax rate at the Silver Hawk will be 18%, thus
substantially affecting the property's operating profit in future periods.
Interest expense decreased 72% to $1.7 million for the third quarter of
1996, as compared to $6.1 million for the third quarter of 1995. The lower
interest charges are due to the Company's lower overall outstanding debt balance
as a result of the Reorganization.
For the Nine Months Ended September 30, 1996 as Compared to the Nine Months
Ended September 30, 1995
The Company's net revenue increased 5%, to $37.9 million for the nine
months ended September 30, 1996, from $36.1 million for the nine months ended
September 30, 1995. The $1.8 million increase in revenue is due to $2.5 million
in revenue generated by the Silver Hawk casino, located in Black Hawk adjacent
to the Company's expanded parking lot, which opened for business on June 26,
1996. The initial results for Silver Hawk through September, exceeded
management's expectations. Management believes that these results are in part
due from initial customer trial of the new facility in Black Hawk, the first new
facility to open in Black Hawk in over a year. In addition, the Silver Hawk
opened during the historically busy summer season, which contributed to the
initial strong revenue figures. Accordingly, the Company currently anticipates
that Silver Hawk revenues will be substantially lower in future quarters.
The Company's Bullwhackers Black Hawk facility has produced a 5% increase
in revenues for the nine months, despite the fact Bullwhackers Black Hawk's
operations were negatively affected by construction activities relating to
expansion of the Company's parking lot which began April 1 and ended in early
June. The revenue gains in Black Hawk, however, were offset by significant
revenue declines at the Company's Bullwhackers Central City property. The
Central City market, which is down 5% year to year, continues to struggle to
compete with Black Hawk, which continues to offer better access and parking
convenience. The Company's facility in Central City has not been able to compete
effectively with another competitor which offers substantially more amenities in
terms of on-site parking, hotel rooms, location and access to the facility.
Expenses directly related to casino operations, including casino expense,
gaming taxes and food and beverage expense increased less than 1% to $19.2
million for the nine months ended September 30, 1996, as compared to $19.1
million for the nine months ended September 30, 1995. The decrease in expenses
is due to certain labor efficiencies and other cost saving programs implemented
in late 1995 and early 1996, offset by additional expenses related to the Silver
Hawk operations.
Marketing expense increased 9% to $4.7 million for the nine months ended
September 30, 1996, as compared to $4.3 million for the nine months ended
September 30, 1995. The increase is due to marketing efforts related to the
initial opening period of the Silver Hawk casino and implementation of
additional customer busing programs in an effort to sustain business levels at
the Company's Central City property.
Casino general and administrative expenses decreased 15% to $2.2 million
for the nine months ended September 30, 1996, as compared to $2.6 million for
the nine months ended September 30, 1995. The decrease primarily relates to
reductions in staffing at the Central City property and decreased insurance
costs.
Corporate expense was reduced 64% to $2.0 million for the nine months ended
September 30, 1996, as compared to $5.7 million for the nine months ended
September 30, 1995. These reductions included the elimination of most corporate
positions, combining corporate offices with the Colorado Casino offices and
other cost savings. Offsetting these corporate reductions for 1996 includes a
charge of approximately $460,000 relating to deferred compensation expense for
senior management based upon implementation of the Company's new Cash Bonus Plan
and the Stock Incentive Plan.
Depreciation and amortization expense increased 17% to $4.1 million for the
nine months ended September 30, 1996 as compared to $3.5 million for the nine
months ended September 30, 1995. The increased depreciation charges is due to
the increased basis of the Company's assets, primarily the excess reorganization
value, and depreciation charges related to the newly acquired Sliver Hawk
casino.
The Company incurred $362,000 in pre-opening expense for the nine months
ended September 30, 1996 related to its Silver Hawk casino which opened on June
26, 1995.
Reorganization and other impairment charges decreased 60% to $2.4 million
for the nine months ended September 30, 1996, as compared to $6.0 million for
the nine months ended September 30, 1995. Reorganization expenses are costs
directly related to the Company's Reorganization.
Operating Income. Income from operations increased 42% to $3.0 million for
nine months ended September 30, 1996, as compared to a $5.2 million loss for the
nine months ended September 30, 1995. The increase in operating income is
primarily attributable to the $6.0 million in one-time reorganization and other
impairment charges incurred in the 1995 period and the reduction of corporate
expenses. To a lesser extent the increase in operating income was also
attributable to $666,000 in operating income from the Silver Hawk casino. The
Silver Hawk results benefited from a low 2% tax rate during the quarter as a
result of the graduated gaming tax structure in Colorado.
Interest expense decreased 83% to $2.7 million for the nine months ended
September 30, 1996, as compared to $16.1 million for the nine months ended
September 30, 1995. The lower interest charges are due to no interest charges
being recorded during the bankruptcy proceedings and a lower overall outstanding
debt balance upon emerging from bankruptcy as a result of the reorganization.
INCOME TAX CONSIDERATIONS
Since inception, the Company has generated significant losses, and net
operating loss carry forwards ("NOL's") for tax purposes. However, as a result
of the Reorganization, all but approximately $5.9 million of the NOL's will be
lost, and the NOL's that survive will be limited as a result of the Company's
ownership change. Additionally, while "fresh start" accounting required the
Company to significantly increase the book bases of its assets, the tax bases of
those assets generally remain at their historical bases. Also, it is likely that
the Company will generate taxable income in future periods, which will be
mitigated to some extent by the remaining NOL's and certain other tax assets the
Company may be able to utilize. Accordingly, in future periods the Company may
record and/or pay income tax, while recording a loss for financial reporting
purposes due to the increased book depreciation charges as a result of the
increased book bases of the Company's assets.
LIQUIDITY AND CAPITAL RESOURCES
On the Effective Date of the Company's Plan of Reorganization, June 7,
1996, the Company's outstanding Old Notes totaling $174 million, and certain
other notes payable to RII totaling $2 million, were canceled and $50 million in
12% Senior Secured Pay-In-Kind Notes Due 2003 were issued on a pro rata basis to
the holders of the Old Notes and the RII notes. The New Notes are secured by
substantially all the assets of the Company and require semi-annual interest
payments commencing on December 1, 1996. On the first two interest payment
dates, December 1, 1996 and June 1, 1997, interest on the New Notes may, at the
Company's option, be paid by issuing additional notes in lieu of cash interest
payments. As a result, the Company will have the option of deferring
approximately $6 million in cash interest payments until the New Notes are due
in 2003.
Also on the Effective Date, the Company closed on a Credit Facility with
Foothill Capital Corporation ("Foothill"). The Credit Facility provides for
loans up to $12.5 million in the form of several sub facilities including a
construction facility of $5 million, an equipment financing facility of $5
million, a revolving facility for up to $3.5 million and a Silver Hawk facility
for $1 million. The aggregate borrowings may not exceed $12.5 million at any
time. Borrowings under the Credit Facility are subject to a 1% financing fee and
accrue interest at prime plus 2.375%. The sub facilities have varying terms,
ranging from three to five years from the date funds are borrowed. The Credit
Facility is secured by first liens on substantially all the Company's assets and
are senior, in terms of lien rights, to the New Notes. The Credit Facility
replaced a $7.0 million Debtor-in-Possession Facility (the "DIP Facility"), also
from Foothill. Certain equipment financing, with a principal balance totaling
$3.9 million, was retired prior to and on the Effective Date in accordance with
the Reorganization for $3.1 million (realizing an $800,000 discount) with
proceeds from the DIP Facility and Credit Facility. This equipment refinancing ,
the Silver Hawk down payment, accrued interest and certain expenses, altogether
totaling approximately $4.3 million, were replaced or borrowed on the Effective
Date from the Credit Facility. In the third quarter, the Company repaid $1.3
million of these costs which were borrowed under the revolving line and drew
down $1 million funds available under the Silver Hawk line. Accordingly, as of
September 30, 1996 the Company has approximately $ 4.8 million outstanding under
the Credit Facility.
In April 1996, the Company purchased the Silver Hawk Casino, which was not
operating at the time, for $2.7 million, of which $900,000 was borrowed under
the DIP Facility. The remaining $1.8 million was financed by a note payable to
the seller which accrued interest at 9.5% per annum, and providing for monthly
principal and interest payments on a 20 year amortization schedule. The seller
of the Silver Hawk is an elected official of Black Hawk. A statute in Colorado
prohibits an elected official from having an "interest" in a gaming license. To
avoid any potential regulatory interpretation that the seller would have an
"interest" in the Silver Hawk gaming license, thereby detrimentally affecting
the Company's ability to obtain the gaming license, the Company retired the
seller's note from available cash on June 18, 1996. The Company opened the
Silver Hawk Casino on June 26, 1996. The Silver Hawk had been closed since 1993.
Prior to opening, the Company refurbished the interior, outfitted the Silver
Hawk with equipment (including slot machines) and incurred certain other
pre-opening expenses. The Company paid for approximately half of these costs in
July by financing $1.1 million in slot machines from funds available under the
Credit Facility and paid the remaining costs from available cash.
The Company's development plan for its Black Hawk properties included the
construction of a 500 space parking garage on the site of its surface parking
lot located between its Bullwhackers Black Hawk and Silver Hawk casino. The
excavation of the Company's surface parking lot in Black Hawk commenced on April
1, 1996 and concluded on June 7, 1996. The parking garage was expected to cost
approximately $6 million. In connection with readying the Surface Parking Lot
for construction, the Company completed additional environmental remediation and
excavation work, at a cost of approximately $1.3 million. Total costs incurred
on the project was $1.3 million, which was paid from available cash. Upon
completion of the extensive excavation work, which included the excavation of a
substantial portion of the mountain located on the back part of the 3.25 acre
site, and the subsequent repaving of the Surface Parking Lot, the number of cars
which can be parked on the Surface Parking Lot at any one time increased to
approximately 375 cars, a 45% increase over the previous number of parking
spaces. Based on this increase, the Company analyzed whether to construct the
parking garage given the fact that it had achieved 75% of the desired parking
capacity for only a fraction of the total capital cost anticipated to be spent
on the parking garage. The Company also considered the benefit of avoiding the
business disruption that would occur during the massive parking garage
construction project. Accordingly, the Company has concluded that it will
indefinitely delay the construction of the parking garage as it continues to
re-evaluate the long-term utilization of the site in light of market conditions,
which may include expanding its surface parking capacity further.
During the Reorganization, the Company incurred substantial bankruptcy
related expenses including the fees and expenses of attorneys, accountants, and
financial advisors. The Company paid such professionals approximately $3.1
million from the available cash during the second and third quarters.
The Company has entered into an agreement with a nationally recognized
company known as Kids Quest to operate a licensed child care facility adjacent
to Bullwhackers Black Hawk. Kids Quest will be solely responsible for the
day-to-day operations of the day care facility. The Company will receive 10-15
percent of revenues from the operations of the day care facility. The Company
will construct the day care facility for use by Kids Quest. However,
construction of the facility is subject to reaching agreement with Kids Quest on
certain issues and obtaining necessary permits and financing, and no assurance
can be given that the necessary agreements will be reached or the necessary
permits or financing obtained on satisfactory terms. The preliminary cost
estimates for the day care facility is approximately $1.3 million, although the
actual costs could be higher. The opening of the day care facility is currently
scheduled for the Spring of 1997. The Company pursued this project, in part, as
a result of a new law in Colorado which took effect October 1, 1996, and
prohibits children from lingering in the gaming areas in the casino. The Company
believes the day care facility, if constructed and opened, will provide the
Company with a competitive advantage over other casinos that do not have such a
facility, although there can be no assurance that the day care facility will
operate in a manner that produces increased visitation and revenue to its
casinos. The company believes that no other casino in Black Hawk/Central City
market currently have, or have announced plans to build, a day care facility.
On September 26, 1996, the Colorado Limited Gaming Control Commission
established new gross revenue tax rates (gross revenue being generally defined
as the total amount wagered less the total amount paid out in prizes) for the
fiscal year 1996-97, which commenced October 1. The old and new tax rates are
set forth in the following table:
Revenue 1995-96 1996-97
------- ------- -------
Up to $2 Million 2% 2%
Over $2 Million to $4 Million 8% 4%
Over $4 Million to $5 Million 15% 14%
Over $5 Million to $10 Million 18% 18%
Over $10 Million 18% 20%
The Company expects to pay between $300,000-400,000 in additional gaming
taxes in fiscal year 1996-97 as a direct result of the change in the tax rates.
The Company has also entered into an agreement with another company in the
business of providing gaming consulting/management services to Native American
Indian tribes. The companies will use their joint resources to pursue/ obtaining
contractual arrangements with various Native American tribes to provide
consulting services for new and existing Native American gaming projects. The
Company has committed between $150,000 and $300,000 over the next twelve months,
based on the initial term and/or the extension of this agreement, which
commitment the Company expects to fund through available working capital.
Pursuant to the Indenture dated as of June 7, 1996, by and between the
Company and Fleet National Bank, as Indenture Trustee, the Company has the
option, through and including June 1, 1997, on each interest payment date (as
defined by the Indenture), to pay the interest on the Company's $50 million
issue of 12% Senior Secured Pay-in-Kind Notes due 2003 by the issuance of
additional Notes. Although the Company has not yet made a final decision as to
the Interest Payment Date of December 1, 1996, the Company currently anticipates
paying the interest by the issuance of notes in the amount of approximately $2.9
million.
The Company recently signed a memorandum of understanding with Gold Coin,
Inc., a subsidiary of Lady Luck Corporation, to explore the possibility of
combining the Company's Bullwhackers Central City facility with the Lady Luck
casino, which is adjacent to the Company's Bullwhackers Central City casino. The
agreement is subject to numerous contingencies including the negotiation of
definitive agreements, completion of due diligence and approval by the
appropriate regulatory agencies and each companies' board of directors. There
can be no assurance that the companies' will reach an agreement or that the
necessary approvals will be obtained. Under the proposed terms, the Company
would manage the combined facility.
The Company believes that its Credit Facility and its operating cash flows
will provide sufficient liquidity and capital resources for the Company's
operations. However, there is no assurance the Company's estimate of its need
for liquidity and capital resources is accurate or that new business
developments or other unforeseen events will not occur which will increase those
needs. Although no additional financings are contemplated at this time, the
Company may seek additional debt or equity financing if necessary. There can be
no assurance that additional financing will be available, or if available, will
be on terms favorable to the Company. Additionally, debt or equity financing may
require consent from the holders of the New Notes and the lender of the Credit
Facility.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no legal proceedings pending against the Company which, if
determined adversely, would have a material adverse effect on the Company's
consolidated results of operation.
ITEM 5. OTHER INFORMATION
A. Environmental. In the process of completing the environmental
remediation on the Surface Parking Lot, the Company discovered that two small
and confined treatment cells within the Surface Parking Lot contained
unacceptable levels of mercury and lead within the soil, and thus were
classified as hazardous. The Company immediately reported this finding to the
United States Environmental Protection Agency ("EPA") and the Colorado
Department of Public Health and Environment ("CDPHE"). The hazardous soil is
located above the groundwater table. At the direction of the EPA and CDPHE, the
Company placed an asphalt cap over the hazardous soil to prevent infiltration.
While the parties have agreed that the hazardous soil presents minimal impact to
the environment in the short term, the Company has reached an agreement with the
EPA and CDPHE to remove the hazardous soil and dispose of the material at a
hazardous waste landfill prior to December 31, 1996. The Company is currently
analyzing the most efficient way and time period within which to complete the
removal of the hazardous soil. It is currently estimated that the cost of this
removal project will approximate $100,000.
B. Competition. Various published reports detailing additional gaming
projects have been announced for the Town of Black Hawk. The majority of these
projects are along the southern end of Black Hawk at the first major
intersection off of State Highway 119, providing these projects with the initial
opportunity to capture visitors to Black Hawk from the Denver metropolitan area.
Bullwhackers Black Hawk and the Silver Hawk, in contrast, are located at the
northern end of Black Hawk at the second major intersection off of State Highway
119. In addition, the Colorado Department of Transportation is analyzing plans
to construct a third major intersection off of State Highway 119 in between the
two current intersections. This additional intersection, if constructed, would
provide the casinos south of Bullwhackers Black Hawk and the Silver Hawk with
another opportunity to capture visitors to Black Hawk from the Denver
metropolitan, thereby potentially reducing traffic flow and customer visits to
Bullwhackers Black Hawk and Silver Hawk.
Among some of the announced projects are as following: Colorado Central
Station, an existing casino in Black Hawk, has announced both an expansion of
its existing casino and a new 22,000 square foot casino across the street with
600 slot machines, a 120-room hotel and an 800 space parking garage; Caesar's of
Las Vegas, a subsidiary of ITT Sheraton, has established a joint venture to
build approximately $80 million project with a 80,000 square foot casino,
600-700 slot machines and 800 parking spaces; the Black Hawk Brewery has
announced plans for a $23 million project, with 46,000 square feet of gaming
space containing 500-700 slot machines; the Gilpin Hotel has announced a joint
venture with Jacobs Entertainment from Cleveland for a new 35,000 square foot
casino, with 52 hotel rooms, 250 parking spaces and 750-1,000 slot machines; the
Jazz Alley has announced an expansion to roughly 650 slot machines in a highly
themed casino to be known as Virginia City. In Central City, Harvey's Wagon
Wheel, currently the largest casino in Central City, has commenced construction
of a parking garage. While it is difficult to assess the development stage of
each of the announced projects and the likelihood of whether any or all of the
announced projects will eventually be built and at what size, it is reasonably
likely that at least some of the new competition will be completed and open to
the public by early to mid 1998. In addition, as the Town of Black Hawk expands,
both in terms of gaming device capacity and market share, the City of Central
tends to contract in terms of gaming device capacity and market share.
Therefore, should several of the announced competitive projects open, the
increased competition will affect the Company's operations in both Black Hawk
and Central City and, accordingly, may have a material adverse effect on the
Company's consolidated results of operation.
C. Effectiveness of Registration Statement. On October 22, 1996, the
Company's Registration Statement on Form S-1 was declared effective by the
Securities and Exchange Commission. The Registration Statement relates to the
resale of the Company's common stock and 12% senior secured pay-in-kind notes
and was filed to fulfill the Company's requirement under the Registration Rights
Agreement dated as of June 7, 1996, by and among the Company and the initial
Holders (defined therein). The Company will not receive any proceeds from the
sale of the common stock or notes by the Selling Security holders.
D. Lady Luck. The Company recently signed a letter of intent with Gold
Coin, Inc., a subsidiary of Lady Luck Corporation, to explore the possibility of
combining the Bullwhackers Central City facility with the Lady Luck casino,
which is adjacent to the Bullwhackers Central City casino. The agreement is
subject to numerous contingencies including the negotiation of definitive
agreements, completion of due diligence and approval by the appropriate
regulatory agencies as well as each companies' board of directors. Consequently,
there can be no assurance that the companies' will reach an agreement or that
the appropriate approvals will be obtained. Under the proposed terms, the
Company would manage the combined facility.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K:
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Colorado Gaming & Entertainment Co. has duly caused this report to be signed by
the undersigned thereunto duly authorized.
COLORADO GAMING & ENTERTAINMENT CO.,
a Delaware corporation
/s/ Stephen J. Szapor, Jr.
_____________________________________
Stephen J. Szapor, Jr.
President and Chief Executive Officer
Date: November 6, 1996
/s/ Robert Stephens
_____________________________________
Robert Stephens
Vice President of Finance & Treasurer
(Principal Financial Officer)
Date: November 6, 1996
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