SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the Second Quarter Ended: June 30, 1996
Commission File Number: 0-28068
COLORADO GAMING & ENTERTAINMENT CO.
formerly known as Hemmeter Enterprises, Inc.
One Norwest Center, 1700 Lincoln, 49th Floor, Denver, CO 80203
(303) 863-2400
State of Incorporation: Delaware
I.R.S. Employer Identification No.: 84-1242693
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(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 NO X
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 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 June 30, 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 - for June 30, 1996 and 1
December 31, 1995.
Consolidated Statement of Operations - for the period 2
June 7 through June 30, 1996, January 1
through June 6, 1996, April 1 through June 6,
1996 and the for the six and three months
ended June 30, 1995.
Consolidated Statements of Cash Flows - for the period 3
June 7 through June 30, 1996, January 1
through June 6, 1996 and for the six months ended
June 30, 1995.
Notes to Consolidated Financial Statements 4-8
Item 2. Management's Discussion and Analysis 9-13
PART II OTHER INFORMATION 14-20
SIGNATURES 21
Colorado Gaming & Entertainment Co.
Consolidated Balance Sheets
(In thousands)
Reorganized Predecessor
Company (a) Company
June 30, 1996 December 31, 1995
(unaudited)
ASSETS
Cash $ 5,369 $ 3,623
Inventories 94 85
Accounts receivable 260 226
Prepaid expenses 598 638
Total current assets 6,321 4,572
Property, equipment and leasehold
improvements, net 43,488 32,127
Restricted funds in escrow (Note 3) 509 -
Excess reorganization value, net (Note 1) 18,676 -
Other assets, net 776 981
Total assets $ 69,770 $ 37,680
LIABILITIES AND EQUITY
Current portion of notes payable 1,347 -
Accounts payable (Note 2) 5,671 404
Accrued expenses 3,532 3,953
Total current liabilities 10,550 4,357
Senior secured notes payable (Note 4) 50,000 -
Other notes payable (Note 4) 5,272 -
Liabilities subject to compromise - 186,460
Total non-current liabilities 55,272 186,460
Total liabilities 65,822 190,817
Common stock, $.01 par value,
20 million and 50 million
authorized, respectively,
5,138,888 and 11,786,235
issued and outstanding (Note 5) 51 118
Warrants issued - 7,000
Additional paid in capital 14,653 2,162
Accumulated deficit (10,756) (162,417)
Total Stockholders equity (deficit) 3,948 (153,137)
Total liabilities and
stockholders equity (deficit) $ 69,770 $ 37,680
(a) Due to the Reorganization and implementation of fresh start
reporting, financial statements for the new Reorganized Company
(period 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.
Consolidated Statement of Operations
(In thousands)
Unaudited
June 7, April 1, Three January 1, Six
1996 1996 Months 1996 Months
Through Through Ended Through Ended
June 30, June 6, June 30, June 6, June 30,
1996 1996 1995 1996 1995
(a)
Revenue:
Casino $ 3,100 $ 8,577 $ 11,197 $ 19,126 $ 22,383
Food and beverage 215 568 916 1,288 1,804
Other 7 13 89 32 155
Gross revenue 3,322 9,158 12,202 20,446 24,342
Less: Promotional
allowances (77) (199) (352) (464) (675)
Net revenue 3,245 8,959 11,850 19,982 23,667
Operating Expenses:
Casino 591 2,376 3,247 5,544 6,518
Gaming taxes 760 1,612 2,341 3,614 4,562
Food and beverage 200 565 781 1,299 1,551
General and administrative:
Casino 194 523 989 1,249 1,802
Corporate 147 387 1,567 902 4,200
Marketing 435 1,190 1,450 2,349 2,759
Depreciation and
amortization 396 787 1,218 1,882 2,351
Pre-opening 341 47 - 47 -
Reorganization Items - 1,222 500 2,290 500
Impairment of assets
and other expenses - - 3,634 - 5,077
Total operating
expense 3,064 8,709 15,727 19,176 29,320
Income from operations 181 250 (3,877) 806 (5,653)
Interest expense (403) (460) (5,517) (579) (9,976)
Interest income 11 43 76 66 289
Loss on disposition of
assets - (112) (73) (244) (73)
Equity in loss of GPRI - - (7,810) - (12,187)
Income (loss) before
income tax expense and
extraordinary items (211) (279) (17,201) 49 (27,600)
Income tax expense
(Note 6) - - - - -
Net Income (loss) before
extraordinary gain (211) (279) (17,201) 49 (27,600)
Extraordinary gain from
reorganization items - 164,358 - 164,358 -
Net income (loss) $ (211) $164,079 $(17,201) $164,407 $(27,600)
Net loss per common
share (b) $ (0.04) N/A N/A N/A N/A
(a) Due to the Reorganization and implementation of fresh start
reporting, financial statements for the new Reorganized Company
(period 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 reporting, they are not comparable
to subsequent periods.
The Notes to Consolidated Financial Statements are an integral
part of these financial statements.
Colorado Gaming & Entertainment Co.
Consolidated Cash Flows
(in thousands)
Unaudited
June 7, January 1, Six
1996 1996 Months
Through Through Ended
June 30, June 6, June 30,
1996 1996 1995
(a)
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net Income (Loss) $ (211) $164,407 $(27,600)
Adjustment to reconcile
net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 396 1,882 2,351
Noncash compensation expense - - 128
Equity in loss of GPRI - - 12,187
Impairment of assets - - 1,000
Non cash interest expense 398 495 10,669
Extraordinary gain from
reorganization - (164,358) -
Loss on disposition of assets - 244 73
Non cash reorganization items - 1,825 500
Change in working capital 1,611 822 3,141
Net cash provided by
operating activities 2,194 5,317 1,449
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for capital
improvements (2,090) (3,885) (1,631)
Net change in restricted funds (2) (507) 4,208
Contributions to GPRI - - (7,642)
Advances to affiliates - - (510)
Net cash used in
investing activities (2,092) (4,392) (5,575)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from other notes payable 0 5,824 2,000
Repayments of other notes payable
and capital leases (1,801) (3,304) (1,331)
Cash (used in) provided by
financing activities (1,801) 2,520 669
INCREASE/DECREASE IN CASH (1,699) 3,445 (3,457)
CASH, at beginning of period 7,068 3,623 5,643
CASH, at end of period $ 5,369 $ 7,068 $ 2,186
(a) Due to the Reorganization and implementation of fresh start
reporting, financial statements for the new Reorganized Company
(period 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
JUNE 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 and 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 the
investment in GPRI was reduced to zero in the 1995 period.
On June 7, 1996 (the Effective Date ), CG&E and its three
subsidiaries emerged from bankruptcy. In general, the
Reorganization provided for resolution of all claims against the
Predecessor Company and amounts 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 5 and 6). Upon the Effective
Date, the name of HEI was changed to Colorado Gaming &
Entertainment Co.
Three wholly-owned subsidiaries, BWBH, Inc., BWCC, Inc., and
Silver Hawk Casino, Inc. (collectively referred to as the
Colorado Casinos ) 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 June 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 entities under
reorganization, before considering liabilities. The estimated
value for these entities totaled approximately $65 million. The
reorganization value of the Company 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 (period
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. These unaudited consolidated financial statements
should be read in conjunction with the financial statements and
notes for the year ended December 31, 1995, included in the
Company s Registration Statement on Form 10/A.
(2) ACCOUNTS PAYABLE
Accounts payable consists of the following (in thousands):
June 30, December 31,
1996 1995
____ ____
Trade accounts payable $ 2,746 $ 404
Reorganization payable 2,925 -
_________ _________
$ 5,671 $ 404
_________ ______
A substantial portion of the trade accounts payable relates
to the excavation costs for the surface parking facility,
equipment and other pre-opening expenses for the Silver Hawk
Saloon & Casino. Reorganization payables relates to amounts due
to professionals engaged by the Company during the Reorganization
proceedings. All such payments to the professionals require
approval of the Court.
(3) RESTRICTED FUNDS IN ESCROW
Pursuant to various agreements with the City of Black Hawk,
Environmental Protection Agency ( EPA ), and the excavation
contractor, the Company was required to deposit funds in certain
escrow accounts to guarantee payment of environmental remediation
and other excavation costs related to the Company s surface
parking lot improvements. As of June 30, 1996 the escrowed funds
totaled $509,000. Subsequent to the end of the quarter a
majority of these funds were released from the escrow accounts by
the trustee, pursuant to the escrow agreements.
(4) DEBT/NOTES PAYABLE
Senior Secured Notes
On the Effective Date of the Company s Reorganization, 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 will accrue at
a rate of 12% per annum, and is payable semi-annually. CG&E 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 on terms identical to the New Notes. The New
Notes are secured by substantially all the assets of the Company,
including the common stock of the operating subsidiaries.
Credit Facility
On June 7, 1996, 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 facilities, including a $5 million construction
line, a $5 million equipment financing line and up to a $3.5
million working capital line. 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 loans have varying terms
ranging from three to five years from when the funds are
borrowed. As of June 30, 1996, the Company had drawn
approximately $3 million on the equipment portion of the Credit
Facility and approximately $1.3 million under the working capital
line. 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.
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 commencing September 7, 1996. The $3 million note
has been reduced by amounts received by CAI in respect of its
claims filed in the chapter 11 bankruptcy case filed by GPRI.
Accordingly, 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.
(5) 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. Upon 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 was issued 138,888 shares
of common stock on the Effective Date. Also on the Effective
Date, 416,667 shares were reserved to be issued to executive
management pursuant to the 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 based on the Company meeting certain performance criteria.
Once granted, the shares are fully vested. The first grant will
be on June 7, 1997.
(6) TAXES
Prior to the current period, the Company has never produced
taxable income. For the six months ended June 30, 1996, the
Company reported net income of approximately $164 million.
However, of this amount $164.5 million related to an
extraordinary gain from Reorganization items such as forgiveness
of indebtedness and the write-up of the Company s depreciable
assets related to the adoption of fresh-start reporting.
Accordingly, no provision for income taxes was recorded in the
current period. The Company s effective income tax expense for
the six months ended June 30, 1996 is as follows (in thousands):
Statutory tax rate applied to $ 65,715
pre-tax income
Extraordinary gain from recording
excess reorganization value (7,470)
Change in valuation allowance (58,245)
________
Actual income tax expense $ -
________
Excess reorganization value is an intangible asset recorded
due to the adoption of fresh-start reporting, which has no
benefit for tax purposes.
Deferred tax assets and liabilities are comprised of the
following:
June 30 December 31
1996 1995
____ ____
(Unaudited)
Current:
Accrued vacation &
gaming liabilities $ 184 $ 184
Non-Current:
Depreciable basis of
fixed assets (461) 3,053
Cancellation of
indebtedness (55,035) -
Impairment of assets 2,565 5,832
Reorganization items - 4,287
Deferred interest - 404
Capital loss on RCJV 8,646 8,646
Net operating loss
carryforwards 49,410 41,148
______ _______
Net Deferred tax assets 5,309 63,554
Valuation allowance (5,309) (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. The Company currently has net
operating loss carryforwards totaling approximately $124 million,
which expire beginning in 2008. Substantially all NOL s will be
used in 1997 upon the recognition of cancellation of indebtedness
income (discussed below). 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 Internal Revenue Code (the Code ). As a result,
utilization of any remaining net operating loss carryforwards
( NOL s ) and certain other tax assets will be limited going
forward. These NOL s include the separate company net operating
loss generated by GPRI in 1995, which the Company may
reattribute to the parent pursuant to applicable sections of
the Code.
Significant tax liabilities were recorded in the current
period due to the Company s Reorganization. The Company s fixed
assets were written-up due to the adoption of fresh start
accounting, which has no benefit for tax purposes. Secondly, the
Company realized approximately $137.6 million in cancellation of
indebtedness income on the Effective Date. Pursuant to the
applicable sections of the Code, this gain may be excluded from
taxable income. This excluded income will result in a reduction
of the parent company s tax attributes, elimination of its NOL s
and significantly reduces the tax basis of its assets. Only
NOL s and other tax assets at the subsidiary level will survive
this cancellation of indebtedness event, which are reflected as
net deferred tax assets in the above table at June 30, 1996.
(7) SUPPLEMENTAL FINANCIAL INFORMATION (Unaudited)
Earnings before interest, taxes, depreciation and
amortization ( EBITDA ) of the Colorado Casinos for the three and
six month periods ended June 30, 1996 and 1995 excluding any
reorganization and impairment charges are shown as follows (in
thousands):
Three months ended Six months ended
__________________ ________________
June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995
_____________ _____________ _____________ ___________
Casino revenues $ 12,204 $ 11,850 $ 23,227 $ 23,667
Casino expenses 8,446 8,808 16,235 17,192
______________ _____________ _____________ __________
Casino operating
profit 3,758 3,042 6,992 6,475
Pre-opening
(Silver Hawk) 388 - 388 -
Corporate expenses 534 1,567 1,048 4,203
_______________ ___________ ______________ ________
EBITDA $ 2,836 $ 1,475 $ 5,556 $ 2,272
_______________ ___________ ______________ ________
Item 2. Management s Discussion and Analysis of Financial
Condition and Results of Operations.
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 was reduced to zero in the 1995 period.
On the Effective Date the Company s Reorganization became
effective. Pursuant to the Reorganization, the following events
occurred:
$176 million of senior secured debt was canceled and $50
million in new debt was issued.
All outstanding common stock and warrants were canceled and
5 million shares of new common stock 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
reporting in accordance with
SOP 90-7 resulting in adjustment of the Company s common
stockholder equity and the carrying values of assets and
liabilities. Accordingly, 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.
Results of Operations
For the Three Months Ended June 30, 1996 as Compared to the Three
Months Ended June 30, 1995
The Company s net revenue increased 3%, to $12.2 million for
the second quarter of 1996, from $11.8 million for the second
quarter of 1995. The increase in revenue is primarily
attributable to increased growth in the overall Black Hawk market
as well as the opening of the Company s expanded parking lot in
Black Hawk on June 7, 1996. The Company s Black Hawk facility
produced a 10% increase in revenues for the quarter, despite the
fact that the Black Hawk facility s operations were negatively
affected by construction activities relating to expansion of the
parking lot which began April 1 and ended in early June. The
revenue gains in Black Hawk were offset somewhat by significant
revenue declines at the Company s Central City property. The
overall Central City market, which was relatively flat year to
year, continues to struggle to compete with the Black Hawk
market, which continues to offer 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 and hotel rooms. The Company continues
to evaluate the Central City market and its operations there and
continues to assess a number of strategic alternatives. The
Silver Hawk casino located in Black Hawk adjacent to the
Company s expanded surface parking lot, opened for business on
June 26, 1996 and contributed approximately $164,000 in net
revenue for the five days in June.
Expenses directly related to casino operations, including
casino expense, gaming taxes and food and beverage expense
decreased 5% to $6.1 million for the second quarter of 1996, as
compared to $6.4 million for the second quarter of 1995. The
decrease is due to certain labor efficiencies and other cost
saving programs implemented in late 1995 and early 1996. As a
result casino expense was 50% of net revenue in the second
quarter of 1996 as compared to 54% of net revenue for the second
quarter of 1995.
Marketing expense increased to $1.6 million for the second
quarter of 1996, as compared to $1.4 million in the second
quarter of 1995. The increase is primarily due to the
implementation of an additional customer bussing program in an
effort to sustain business levels at the Company s Central City
property.
Casino general and administrative expense decreased to
$717,000 in the second quarter of 1996, as compared to $989,000
for the second quarter of 1995. The decrease is due primarily to
reduced staffing levels at Central City and savings in the
Company s insurance programs.
Corporate expenses decreased to $534,000 for the second
quarter of 1996 as compared to $1.6 million for the second
quarter of 1995. These reductions included the elimination of
most corporate positions, combining corporate offices with the
Colorado Casino offices and terminating the use and subsidy of a
corporate aircraft, all beginning in the second quarter of 1995.
The Company incurred $388,000 in pre-opening expense during
the second quarter related to its Silver Hawk casino which opened
for business on June 26, 1995.
Reorganization and other impairment charges totaled $1.2
million for the second quarter of 1996, as compared to $4.1
million in the second quarter of 1995. Reorganization expenses
are costs related to the Company s Reorganization. In the 1995
period, impairment charges related to the write-off of certain
affiliate receivables and certain debt and equity offering costs,
for financings which were not completed.
Operating Income. Income from operations increased to
$484,000 for the second quarter of 1996, as compared to a $3.9
million loss in the second quarter of 1995. The increase in
operating income is attributable to the $4.1 million in
reorganization and other impairment charges incurred in the 1995
period and a reduction of corporate expenses from the 1995
period.
Interest expense totaled $863,000 for the second quarter of
1996, as compared to $5.5 million for the second quarter of 1995.
The Company did not record any interest expense during the
Reorganization period on its debt obligations in default. On a
pro forma basis, based on the reorganized capital structure,
interest charges for the second quarter of 1996 would have been
approximately $1.6 million.
For the Six Months Ended June 30, 1996 as Compared to the Six
Three Months Ended June 30, 1995
The Company s net revenue decreased 2%, to $23.2 million for
the six months ended June 30, 1996, from $23.7 million for the
six months ended June 30, 1995. The decrease in revenue is due
to significant revenue declines at the Company s Central City
property, and unusually severe weather in the central Colorado
Rockies in January 1996. The Company s Black Hawk facility has
produced a 6% increase in revenues for the six months, despite
the fact Black Hawk s operations were negatively affected by the
construction activities relating to expansion of the parking lot
which began April 1 and ended in early June. The revenue gains
in Black Hawk were offset by significant revenue declines at the
Company s Central City property due to a continued competitive
market. The Central City market, which was relatively flat 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 certain other competitors which offer
substantially more amenities in terms of on-site parking and
hotel rooms. The Silver Hawk casino located in Black Hawk
adjacent to the Company s expanded parking lot, opened for
business on June 26, 1996 and contributed approximately $164,000
in net revenue for the five days in June. The initial results
for June and the month of July, are exceeding management s
expectations, however, it is premature to estimate whether these
results will continue.
Expenses directly related to casino operations, including
casino expense, gaming taxes and food and beverage expense
decreased 5% to $12.0 million for the six months ended June 30,
1996, as compared to $12.6 million for the six months ended June
30, 1995. The decrease in expenses is due to certain labor
efficiencies and other cost saving programs implemented in late
1995 and early 1996.
Marketing expense remained constant at $2.8 million for both
the six months ended June 30, 1996 and 1995.
Casino general and administrative expenses decreased to $1.4
million for the six months ended June 30, 1996, as compared to
$1.8 million for the six months ended June 30, 1995. The
decrease primarily relates to reductions in staffing at the
Central City property and decreased insurance costs.
Corporate expense was reduced to $1 million for the six
months ended June 30, 1996, as compared to $4.2 million for the
six months ended June 30, 1995. These reductions included the
elimination of most corporate positions, combining corporate
offices with the Colorado Casino offices and terminating the use
and subsidy of a corporate aircraft, all beginning in the second
quarter of 1995.
Depreciation and amortization expense decreased to $2.3
million for the six months ended June 30, 1996 as compared to
$2.4 million for the six months ended June 30, 1995. Due to the
increased book basis of the Company s assets as a result of
adopting fresh start accounting, depreciation and amortization
charges going forward will be substantially greater.
The Company incurred $388,000 in pre-opening expense for the
six months ended June 30, 1996 related to its Silver Hawk casino
which opened on June 26, 1995.
Reorganization and other impairment charges totaled $2.3
million for the six months ended June 30, 1996, as compared to
$5.6 million for the six months ended June 30, 1995.
Reorganization expenses are costs directly related to the
Company s Reorganization.
Operating Income. Income from operations increased to
$908,000 for six months ended June 30, 1996, as compared to a
$5.7 million loss for the six months ended June 30, 1995. The
increase in operating income is primarily attributable to the
$5.6 million in one-time reorganization and other impairment
charges incurred in the 1995 period, and a reduction of corporate
expense from the 1995 period.
Interest expense totaled $982,000 for the six months ended
June 30, 1996, as compared to $10 million for the six months
ended June 30, 1995. The Company did not record any interest
expense during the reorganization period on its debt obligations
in default. On a pro forma basis, based on the reorganized
capital structure interest for the second quarter would have been
approximately $3.3 million.
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 interest payments
until the New Notes are due in 2003.
Also on the Effective Date, the Company closed on the Credit
Facility with Foothill Capital Corporation. The Credit Facility
provides for loans up to $12.5 million in the form of several sub
facilities including a construction line of $5 million, an
equipment financing line of $5 million and a revolving line for
up to $3.5 million. At no point may the aggregate borrowings
exceed $12.5 million. Borrowings under the credit facility are
subject to a 1% financing fee and accrue interest at prime plus
2.375%. The loans 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.
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 Debtor-in-Possession Credit
Facility provided by Foothill Capital Corporation (the DIP
Facility ). The $1.8 million note payable to the seller accrued
interest at 9.5% per annum, and provided for monthly principal
and interest payments on a 20 year amortization schedule. The
seller of Silver Hawk also 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.
Certain other 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.
The Company opened the Silver Hawk Casino on June 26, 1996.
The Silver Hawk had been closed since 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. As of June 30, the vast
majority of these costs, totaling approximately $2.0 million,
were unpaid. The Company paid for 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 excavation of the Company s surface parking lot in Black
Hawk commenced on April 1, 1996 and concluded on June 7, 1996.
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, capacity of the surface
parking lot was increased from 260 cars to approximately 400
cars, a 50% increase in capacity. The Company is analyzing
whether to construct the parking garage given the fact that it
has achieved 80% of the desired parking capacity for only a
fraction of the total capital cost anticipated to be spent on the
parking garage. The Company is also considering the benefit of
avoiding the business disruption that would occur during the
parking garage construction project. 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 pending market conditions.
During the Reorganization, the Company incurred substantial
bankruptcy related expenses including the expenses of attorney s,
accountants, and financial advisors. The Company anticipates the
total unpaid billings to such professionals are approximately
$2.9 million, reflected in accounts payable in the accompanying
balance sheet as of June 30, 1996. The Company anticipates
making these payments in the third quarter from a combination of
available cash and borrowings from the Credit Facility.
Subsequent to the end of the second quarter, the Company
entered into an agreement with New Horizon Kids Quest III, Inc.
( Kids Quest ), a provider of childcare to the casino industry.
The agreement provides for Kids Quest to operate a licensed day
care facility adjacent to the Company s Black Hawk casino. Kids
Quest will be soley responsible for the day-to-day operations of
the daycare facility. The Company will receive a percentage of
revenues from the Kids Quest operations. The Company is
obligated to construct a daycare facility for use by Kids Quest.
The initial cost estimates for the daycare facility are
approximately $1 million.
The Company believes that the 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.
I.PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A. The Chapter 11 Bankruptcy. On November 7, 1995, HEI,
and certain of its wholly-owned subsidiaries, BWBH, Inc., BWCC,
Inc. and Millsite 27, Inc., commenced their voluntary bankruptcy
cases under Chapter 11 of the United States Bankruptcy Code (the
Chapter 11 Cases ) in the United States Bankruptcy Court for the
District of Delaware. On December 27, 1995, the Chapter 11 Cases
were transferred to the United States Bankruptcy Court for the
Eastern District of Louisiana (the Court ).
On April 8, 1996, the Court entered its Order confirming the
First Amended Plan of Reorganization of HEI and the three
subsidiaries. On the Effective Date, all of the conditions
precedent to the effectiveness of the Plan of Reorganization were
satisfied.
Upon the Effective Date, the name of HEI was changed to
Colorado Gaming & Entertainment Co. As part of the
Reorganization, CG&E was discharged from any liability to, and
has no ownership interest in, GPRI. Additionally, upon the
Effective Date the following significant events occurred:
1. New 12% Senior Secured Notes. CG&E issued $50
million of 12% Senior Secured Pay-In-Kind Notes Due 2003 (the
New Notes ) on a pro rata basis to holders of the Predecessor
Company s Old Notes and to RII, which held a secured claim in the
Chapter 11 Cases. The New Notes were issued on the Effective
Date under an Indenture and other customary security documents
between the Company and Fleet National Bank, as trustee.
The New Notes mature on June 1, 2003 and are secured by,
among other things, a first priority lien and security interest
in substantially all of the real and personal property owned or
leased by the Company, subject only to the liens securing the
Credit Facility, and a collateral pledge of the stock of the
operating subsidiaries. Interest on the New Notes accrues at the
rate of 12% per annum. Interest is payable commencing December
1, 1996 and semi-annually thereafter on June 1 and December 1 of
each year. CG&E may, at its option, pay interest on the New
Notes on the interest payment dates of December 1, 1996, and June
1, 1997, through the issuance of additional notes on terms
identical to the New Notes.
2. New Common Stock. Pursuant to the Reorganization,
all shares of common stock of the Predecessor Company outstanding
immediately prior to the Effective Date were canceled and, on the
Effective Date, 5 million shares of common stock of CG&E were
issued on a pro rata basis to the holders of the Old Notes and
RII. The 5 million shares of common stock constitute 100% of the
issued and outstanding capital stock of CG&E, subject to being
diluted to 90% by certain stock grants to be provided to senior
management employees and non-employee directors. In connection
with such stock grants to senior management, under the Employment
Agreement entered into on the Effective Date with Stephen J.
Szapor, Jr., the Company s President and Chief Executive Officer,
Mr. Szapor was awarded 138,888 shares of common stock of CG&E on
the Effective Date, or 2.5% of CG&E on a fully diluted basis.
3. Foothill Capital Corporation. On the Effective
Date, the Company entered into the $12.5 million Credit Facility.
The Credit Facility provides the Company with several different
facilities for various purposes, including a $3.5 million
revolving facility for working capital, a $5.0 revolving a
facility for equipment purchases and equipment refinancing and a
$5.0 million parking garage construction facility. However, the
maximum amount outstanding on these facilities in the aggregate
at any one time may not exceed $12.5 million. The Credit
Facility is secured by a first priority lien and security
interest in substantially all of the real and personal property
owned or leased by the Company. Advances made under the various
facilities of the Credit Facility accrue interest at the rate of
prime plus 2.375% and are amortized over periods varying between
36 and 60 months from the date of borrowing. As of June 30,
1996, the Company has drawn on approximately $4.3 million of the
available credit under the Credit Facility, of which
approximately $1.3 million has been drawn under the working
capital facility and approximately $3.0 million has been drawn
under the equipment facility.
4. Silver Hawk Acquisition. On April 12, 1996, the
Company purchased certain real property and improvements located
in Black Hawk, Colorado, known as the Silver Hawk Saloon &
Casino. At the time of the purchase, the Silver Hawk Saloon &
Casino was not operating. Subsequent to the purchase, the
property was remodeled, gaming devices were installed and a
gaming license was obtained on June 24, 1996, which expires June
24, 1997. All other applicable regulatory licenses were duly
obtained, including a liquor license, and the property was
reopened as the Silver Hawk Saloon & Casino on June 26, 1996.
The purchase price for the Silver Hawk casino was $2.7
million, of which $900,000 was paid in cash through borrowings on
the Predecessor Company s DIP facility and $1.8 million was
financed by the seller. The seller 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 paid off in full the outstanding
balance owing the seller with available cash on June 18, 1996.
5. Regulatory Approvals. The Colorado Limited Gaming
Control Commission (the Gaming Commission ) on May 20, 1996,
approved of the change in ownership of the Company caused by the
Reorganization. In addition, the gaming licenses for BWBH, Inc.,
the owner of the Bullwhackers Black Hawk casino, and BWCC, Inc.,
the owner of the Bullwhackers Central City casino, were renewed
through December 2, 1996. Prior to the expiration of the
licenses, the Company must appear before the Gaming Commission
and renew the licenses for the customary one-year period.
Although the Company knows of no reason why the licenses would
not be renewed, there can be no assurance that the licenses will
in fact be renewed in a timely manner. Failure to receive
renewal of the applicable gaming (and liquor) licenses would have
a material adverse effect on the Company s consolidated results
of operation.
Additionally, upon the Effective Date, Stephen J. Szapor,
Jr. became a director of CG&E. As discussed in the Registration
Statement on Form 10/A, Alan L. Mayer, Senior Vice President,
Chief Legal Counsel and Secretary, and Richard S. Rabin, Senior
Vice President of Operations, were named interim directors of
CG&E pending regulatory approval of the other four persons
nominated to become directors. As of June 30, 1996, none of the
four nominated persons had received the applicable regulatory
approval. Subsequent to June 30, 1996, Mr. Franklin S. Wimer
received the required regulatory approval and has begun service
on the board of directors.
6. Capital Associates Litigation. During June 1995,
CAI filed an action against the Company, Christopher B. Hemmeter
and Mark M. Hemmeter in the District Court for the City and
County of Denver, Colorado, seeking to enforce guarantees
allegedly provided by the defendants of an equipment lease
provided to GPRI. On September 14, 1995, the court granted
summary judgment in favor of CAI and against the defendants in
the amount of approximately $4.5 million, plus interest.
During July 1995, CAI also filed an action against the
Company, Messrs. Szapor and Mayer in the District Court for the
City and County of Denver, Colorado, alleging that, among other
things, the defendants negligently and fraudulently induced CAI
into entering into certain equipment financing. Messrs. Szapor
and Mayer filed answers denying the allegations and asserted a
counterclaim against CAI for abuse of process.
On February 6, 1996, both CAI lawsuits were settled, subject to
the occurrence of the Effective Date of the Reorganization. Upon
the Effective Date, therefore, CAI dismissed both lawsuits with
prejudice and released all claims asserted therein and Messrs.
Szapor and Mayer released their counterclaim. In accordance with
the settlement, on the Effective Date, the Company issued two
unsecured promissory notes to CAI in the respective principal
amounts of approximately $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 commencing
September 7, 1996. The $3 million note has been reduced by
amounts received by CAI in respect of its claims filed in the
chapter 11 bankruptcy case filed by GPRI. Accordingly, 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.
7. Litigation Trust. Upon the Effective Date, a
Litigation Trust was formed with the exclusive right to enforce,
in its sole discretion, any and all causes of action of the
debtors in the Chapter 11 Cases. Accordingly, certain claims of
the Company against third parties were transferred to the
Litigation Trust. The Trustee of the Litigation Trust will
initially be the directors of the Company who will determine
whether to pursue any such claims. Any amounts received in
respect of such claims by the Litigation Trust will benefit the
holders of the Old Notes and RII. Included among the transfer of
claims to the Litigation Trust was the derivative action filed in
September 1995 against the pre-Effective Date directors of the
Predecessor Company by Daniel P. Robinowitz, a pre-Effective Date
stockholder of the Predecessor Company.
Claims that the Company may have against affiliates of the
Predecessor Company for outstanding receivables that such
affiliates owe to the Company were not transferred to the
Litigation Trust. Such claims remain with the Company and any
amounts received by the Company on account of such claims will
benefit the Company. All affiliate receivables have been fully
reserved and, it is unlikely that the Company will receive any
amounts in respect of such claims.
All other legal proceedings pending against the Predecessor
Company prior to the Effective Date were settled pursuant to the
Reorganization. There are no legal proceedings pending against
the Company after the Effective Date which could reasonably be
believed to have a material adverse effect on the Company s
consolidated results of operation.
ITEM 2. CHANGES IN SECURITIES
None (see the reference to New Notes and Common Stock made
in Item 1 above).
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
A. Expanded Parking Facility. The Company owns an
approximately 3.25 acre site located between the Bullwhackers
Black Hawk casino site and the Silver Hawk casino. Because of
the importance of convenient close-in parking to maximizing
casino revenue, in April 1994, the Company completed development
of the 3.25 acre site into a paved and lighted surface parking
facility staffed for valet service with a capacity of
approximately 260 cars. The Company previously announced plans
to construct in phases an approximately 500-space parking garage
on the surface parking lot, for which it previously received the
requisite local zoning approvals. 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.
The Company previously announced that it would delay
construction of the parking garage until after the busy summer
gaming season. 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, capacity of the
surface parking lot was increased from 260 cars to approximately
400 cars, a 50% increase in capacity. The Company is analyzing
whether to construct the parking garage given the fact that it
has achieved 80% of the desired parking capacity for only a
fraction of the total capital cost anticipated to be spent on the
parking garage. The Company is also considering the benefit of
avoiding the business disruption that would occur during the
parking garage construction project. 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 pending market conditions.
B. 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 contain unacceptable levels of mercury and
lead within the soil, and thus are 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 be between
$100,000 and $200,000.
C. 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
potentially 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, the Silver Hawk Saloon
& Casino and the entire Central City market 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, Silver Hawk Saloon &
Casino and Bullwhackers Central City.
Among some of the announced projects: 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 an $80-90 million project with a 45,000 square foot casino,
1,200 slot machines and 1,000 parking spaces, with a possible
hotel in the second phase; the Black Hawk Brewery has shown
drawings of 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 that would benefit
from the proposed new intersection off of State Highway 119, 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.
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 as soon as
Spring 1997. 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.
D. Taxes. Effective October 1 of each year, the Gaming
Commission is constitutionally required to establish the gross
gaming revenue tax rate for the ensuing 12 months. Under the
Colorado Constitution, the Gaming Commission could increase the
tax rate to as much as 40%. Since the establishment of gaming in
Colorado, the Gaming Commission has in various years raised,
lowered and kept the same tax rate from the preceding year. For
the fiscal year 1995-96, the Gaming Commission promulgated an
annual gross revenue tax (gross revenue being generally defined
as the total amount wagered less the total amount paid out in
prizes) of 2% of the gross gaming revenue up to and including $2
million, 8% of the gross gaming revenue up to and including $4
million, 15% of the gross gaming revenue up to and including $5
million and 18% of gross gaming revenue in excess of $5 million.
While it is difficult to speculate on what the Gaming Commission
may do this year, the industry believes that a tax increase may
be possible beginning October 1, 1996. Any material increase in
the tax rate could have a material adverse effect on the
Company s consolidated results of operation.
E. Kids Quest. Subsequent to the end of the second
quarter, the Company entered into an agreement with New Horizon
Kids Quest III, Inc. ( Kids Quest ), a provider of childcare to
the casino industry. The agreement provides for Kids Quest to
operate a licensed day care facility adjacent to the Company s
Black Hawk casino. Kids Quest will be soley responsible for the
day-to-day operations of the daycare facility. The Company will
receive a percentage of revenues from the Kid s Quest operations.
The Company is obligated to construct a daycare facility for use
by Kids Quest. The costs for the daycare facility are
approximately $1 million.
II.ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits are filed with or
incorporated by reference in this Quarterly Report on Form 10-Q.
Exhibit Description
_______ ___________
No.
___
2.1 Disclosure Statement for First Amended Joint
Plan of Reorganization of Hemmeter Enterprises,
BWBH, Inc., BWCC, Inc. and Millsite 27, Inc.
(Filed as Exhibit 2.1 to the Company s
Registration Statement on Form 10/A (File No. 0-
28068)(the Form 10/A ) and incorporated by
reference herein).
2.2 First Amended Joint Plan of Reorganization of
the Hemmeter Enterprises, Inc., BWBH, Inc.,
BWCC, Inc. and Millsite 27, Inc. (Filed as
Exhibit 2.2 to the Form 10/A and incorporated by
reference herein).
3.1 Amended and Restated Articles of Incorporation
of Hemmeter Enterprises, Inc. (Filed as Exhibit
3.2 to the Form 10/A and incorporated by
reference herein).
3.2 Amended and Restated By laws of Hemmeter
Enterprises, Inc. (Filed as Exhibit 3.2 to the
Form 10/A and incorporated by reference herein).
4.1 Indenture between Colorado Gaming &
Entertainment Co., BWBH, Inc., BWCC, Inc.,
Millsite 27, Inc. and Silver Hawk Casino, Inc.
and Fleet National Bank, as Trustee. (Filed as
Exhibit 4.1 to the Form 10/A and incorporated by
reference herein).
4.2 Registration Rights Agreement. (Filed as Exhibit
4.2 to the Form 10/A and incorporated by
reference herein).
10.1 Amended and Restated Loan and Security
Agreement, dated as of June 4, 1996 between
Foothill Capital Corporation, BWBH, Inc.,
Millsite 27, Inc. and Silver Hawk Casino, Inc.
(Filed as Exhibit 10.8 to the Form 10/A and
incorporated by reference herein).
10.2 Colorado Gaming & Entertainment Co. Management
Stock Incentive Plan. (Filed as Exhibit 10.25 to
the Form 10/A and incorporated by reference
herein).
10.3 Colorado Gaming & Entertainment Co. Cash Bonus
Plan. (Filed as Exhibit 10.26 to the Form 10/A
and incorporated by reference herein).
10.4 Consulting Agreement between Hemmeter
Enterprises, Inc. and Christopher B. Hemmeter.
10.5 Consulting Agreement between Hemmeter
Enterprises, Inc. and Mark M. Hemmeter.
10.6 Employment Agreement between Hemmeter
Enterprises, Inc. and Stephen J. Szapor, Jr.
(Filed as Exhibit 10.29 to the Form 10/A and
incorporated by reference herein).
10.7 Employment Agreement between Hemmeter
Enterprises, Inc. and Alan L. Mayer. (Filed as
Exhibit 10.30 to the Form 10/A and incorporated
by reference herein).
10.8 Employment Agreement between Hemmeter
Enterprises, Inc. and Richard Rabin. (Filed as
Exhibit 10.31 to the Form 10/A and incorporated
by reference herein).
(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: August 14, 1996
/s/ Robert Stephens
Robert Stephens
Chief Accounting Officer and Treasurer
Date: August 14, 1996
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT ("Agreement") is made and
entered into as of the 7th day of June, 1996, by and between
Colorado Gaming & Entertainment Co., a Delaware corporation,
formerly known as Hemmeter Enterprises, Inc. ("CG&E"), whose
address for purposes of notice hereunder is 1700 Lincoln, 49th
Floor, Denver, CO 80203, and Christopher B. Hemmeter
("Consultant"), whose address for purposes of notices hereunder
is 2090 Sunrise Hill, Los Angeles, CA 90049.
WHEREAS, CG&E desires to engage Consultant to perform
certain consulting services on behalf of CG&E and Consultant
desires to be retained for such consulting services, on the terms
and conditions more particularly described below.
NOW, THEREFORE, in consideration of the mutual promises
and covenants herein described, the parties agree as follows:
1. Engagement. CG&E hereby engages Consultant as an
independent contractor to perform the Services more particularly
described below and Consultant hereby accepts such engagement
upon the terms and conditions hereinafter set forth.
2. Services. Consultant shall provide CG&E, and all
of its subsidiaries, with a variety of consulting services as
specified by CG&E's management. Specifically, Consultant, upon
reasonable request, shall provide consulting services
("Services") to assist CG&E (i) with respect to gaming regulatory
issues in Colorado and any other jurisdiction where CG&E has a
presence; (ii) in identifying new business opportunities in
gaming and related entertainment businesses in Colorado and other
jurisdictions in the United States and internationally; and (iii)
in evaluating and implementing strategic decisions regarding
CG&E's subsidiary approximately $6 million loan/investment with a
Mexican-based gaming company known as PRINGSA, including, to the
extent specifically asked by management of CG&E, being involved
in negotiations with individuals form PRINGSA.
3. Term. The term of this Agreement shall begin on
the date set forth above and shall continue through, and
automatically terminate at the end of business on, August 31,
1997, unless terminated earlier by CG&E for cause upon 30 days
prior written notice to Consultant.
4. Consideration. For the Services rendered by
Consultant during the term of this Agreement, CG&E shall pay
Consultant $29,166.67 per month. Each monthly payment shall be
made in advance, with the first payment being made upon the
mutual execution hereof for the appropriate pro rata amount for
the period from the date hereof through June 30, 1996, the next
and all succeeding payments being made on the 1st day of the
month for the next following month and the last payment being
made on August 1, 1997, for the monthly period ending on the
expiration of this Agreement. Upon the prior written approval by
ending on the expiration of this Agreement. Upon the prior
written approval by CG&E and within 30 days of the submittal of
appropriate receipts, invoices marked paid or other satisfactory
evidence, reasonable out-of-pocket expenses will be reimbursed to
Consultant. CG&E will not reimburse any out-of-pocket expenses
unless Consultant has received the prior written approval of
CG&E.
5. Right of First Refusal: Gaming Opportunity.
Consultant covenants to CG&E that he shall not participate as an
owner, partner, manager, member, investor, lender, employee,
officer, director, agent or otherwise in any new business
opportunity in the area of casino gaming in any jurisdiction in
the United States or internationally ("Gaming Opportunity")
during the term of this Agreement unless Consultant first
provides all relevant information regarding such Gaming
Opportunity to CG&E. Upon the receipt of all such relevant
information, CG&E shall be given 30 days within which to conduct
its own due diligence of such Gaming Opportunity and determine
whether it desires to pursue an involvement therein. If CG&E
gives notice to Consultant within such 30-day period that it
desires to pursue an involvement in such Gaming Opportunity,
Consultant shall be precluded from participating therein, except
to the extent allowed by CG&E. If CG&E gives notice to
Consultant within such 30-day period that it does not desire to
pursue an involvement in such Gaming Opportunity, Consultant
shall be free to participate therein in any capacity and to any
extent. Gaming Opportunity shall specifically exclude any
matters involving Consultant's current participation in Outlaws
Casino, Ltd., known as Crooks Palace in Black Hawk, Colorado,
provided that such gaming operations do not exceed 250 gaming
devices. To the extent that such gaming operations are expanded
to exceed 250 gaming devices, or there are plans to expand such
gaming operations in excess of 250 gaming devices, such
expansions shall constitute a Gaming Opportunity and be subject
to the terms and provisions hereof. The obligations regarding a
Gaming opportunity hereunder shall terminate upon the expiration
of this Agreement.
6. Trade Secrets. Consultant acknowledges that CG&E
and its subsidiaries have and use certain trade secrets and
proprietary information in the connection with the operation of
its business. Consultant covenants that he shall at all times be
precluded from divulging or otherwise using, directly or
indirectly, any and all trade secrets or other proprietary
information concerning the operation of the business by CG&E and
its subsidiaries, including, but not limited to, information
pertaining to its clients, including slot-club database
information, services, products, earnings, finances or other
information pertaining to CG&E's customers or the products,
business and operations of CG&E and its subsidiaries; provided,
however, that the foregoing shall not apply to information which
is of public record or is generally known, disclosed or available
to the general public or the industry generally. In addition to
any other remedies at law which CG&E has for a violation of any
provision contained in this Paragraph 6, CG&E shall also have all
other remedies at equity, including injunctive relief to restrain
any continuing violation hereof.
7. Independent Contractor. Consultant shall at all
times act as an independent contractor. Nothing in this
Agreement is intended to, or shall create, the relationship of
principal and agent or employer and employee between CG&E and
Consultant. CG&E is not responsible for providing any health,
accident, medical benefits, disability insurance, life insurance
benefits or other insurance benefits to Consultant. It is
Consultant's sole obligation to pay any and all income and self-
employment taxes and Consultant agrees to indemnity CG&E in the
event CG&E is ordered to pay any of such taxes or other expenses
on behalf of Consultant. In addition, by their execution hereof,
both parties specifically acknowledge the following:
CONSULTANT IS NOT ENTITLED TO WORKER'S
COMPENSATION BENEFITS. CONSULTANT IS
OBLIGATED TO PAY FEDERAL AND STATE INCOME TAX
MONIES EARNED PURSUANT TO THIS CONTRACTUAL
RELATIONSHIP.
8. Colorado Law. This Agreement and the parties
respective rights, obligations and duties hereunder shall be
governed by, construed and interpreted in accordance with the
laws of the State of Colorado.
IN WITNESS WHEREOF, the parties have executed this
Agreement as of the day and year first above written.
COLORADO GAMING &
ENTERTAINMENT CO., a Delaware
corporation
/s/ Stephen J. Szapor, Jr.
By: Stephen J. Szapor, Jr.
Title: President
/s/ Christopher B. Hemmeter
CHRISTOPHER B. HEMMETER
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT ("Agreement") is made and entered
into as of the 7th day of June, 1996, by and between Colorado
Gaming & Entertainment Co., a Delaware corporation, formerly
known as Hemmeter Enterprises, Inc. ("CG&E"), whose address for
purposes of notice hereunder is 1700 Lincoln, 49th Floor, Denver,
CO 80203, and Mark M. Hemmeter ("Consultant"), whose address for
purposes of notices hereunder is 4450 Arapahoe, Suite 100,
Boulder, CO 80303.
WHEREAS, CG&E desires to engage Consultant to perform
certain consulting services on behalf of CG&E and Consultant
desires to be retained for such consulting services, on the terms
and conditions more particularly described below.
NOW, THEREFORE, in consideration of the mutual promises and
covenants herein described, the parties agree as follows:
1. Engagement. CG&E hereby engages Consultant as an
independent contractor to perform the Services more particularly
described below and Consultant hereby accepts such engagement
upon the terms and conditions hereinafter set forth.
2. Services. Consultant shall provide CG&E, and all of
its subsidiaries, with a variety of consulting services as
specified by CG&E's management. Specifically, Consultant, upon
reasonable request, shall provide consulting services
("Services") to assist CG&E (i) with respect to gaming regulatory
issues in Colorado and any other jurisdiction where CG&E has a
presence; (ii) in identifying new business opportunities in
gaming and related entertainment businesses in Colorado and other
jurisdictions in the United States and internationally; and
(iii) in evaluating and implementing strategic decisions
regarding CG&E's subsidiary's approximately $6 million
loan/investment with a Mexican-based gaming company known as
PRINGSA, including, to the extent specifically asked by
management of CG&E, being involved in negotiations with
individuals from PRINGSA.
3. Term. The term of this Agreement shall begin on the
date set forth above and shall continue through, and
automatically terminate at the end of business on, November 30,
1996, unless terminated earlier by CG&E for cause upon 30 days
prior written notice to Consultant.
4. Consideration. For the Services rendered by Consultant
during the term of this Agreement, CG&E shall pay Consultant
$10,416.67 per month. Each monthly payment shall be made in
advance, with the first payment being made upon the mutual
execution hereof for the appropriate pro rata amount for the
period from the date hereof through June 30, 1996, the next and
all succeeding payments being made on the 1st day of the month
for the next following month and the last payment being made on
November 1, 1996, for the monthly period ending on the expiration
of this Agreement. Upon the prior written approval by CG&E and
within 30 days of the submittal of appropriate receipts, invoices
marked paid or other satisfactory evidence, reasonable out-of-
pocket expenses will be reimbursed to Consultant. CG&E will not
reimburse any out-of-pocket expenses unless Consultant has
received the prior written approval of CG&E for each such out-of-
pocket expense. All payments made to Consultant hereunder shall
be made payable to Consultant or such other party as he may
designate.
5. Right of First Refusal; Gaming Opportunity. Consultant
covenants to CG&E that he shall not participate as an owner,
partner, manager, member, investor, lender, employee, officer,
director, agent or otherwise in any new business opportunity in
the area of casino gaming in any jurisdiction in the United
States or internationally ("Gaming Opportunity") during the term
of this Agreement unless Consultant first provides all relevant
information regarding such Gaming Opportunity to CG&E. Upon the
receipt of all such relevant information, CG&E shall be given 30
days within which to conduct its own due diligence of such Gaming
Opportunity and determine whether it desires to pursue an
involvement therein. If CG&E gives notice to Consultant within
such 30-day period that it desires to pursue an involvement in
such Gaming Opportunity, Consultant shall be precluded from
participating therein, except to the extent allowed by CG&E. If
CG&E gives notice to Consultant within such 30-day period that it
does not desire to pursue an involvement in such Gaming
Opportunity, Consultant shall be free to participate therein in
any capacity and to any extent. Gaming Opportunity shall
specifically exclude any matters involving Consultant's current
participation in Outlaws Casino, Ltd., known as Crooks Place in
Black Hawk, Colorado, provided that such gaming operations do not
exceed 250 gaming devices. To the extent that such gaming
operations are expanded to exceed 250 gaming devices, or there
are plans to expand such gaming operations in excess of 250
gaming devices, such expansion shall constitute a Gaming
Opportunity and be subject to the terms and provisions hereof.
The obligations regarding a Gaming Opportunity hereunder shall
terminate upon the expiration of this Agreement.
6. Trade Secrets. Consultant acknowledges that CG&E and
its subsidiaries have and use certain trade secrets and
proprietary information in connection with the operation of its
business. Consultant covenants that he shall at all times be
precluded from divulging or otherwise using, directly or
indirectly, for the benefit of any person, corporation or other
entity, including himself, any and all trade secrets or other
proprietary information concerning the operation of the business
by CG&E and its subsidiaries, including, but not limited to,
information pertaining to its clients, including slot-club
database information, services, products, earnings, finances or
other information pertaining to CG&E's customers or the products,
business and operations of CG&E and its subsidiaries; provided,
however, that the foregoing shall not apply to information which
is of public record or is generally known, disclosed or available
to the general public or the industry generally. In addition to
any other remedies at law which CG&E has for a violation of any
provision contained in this Paragraph 6, CG&E shall also have all
other remedies at equity, including injunctive relief to restrain
any continuing violation hereof.
7. Independent Contractor. Consultant shall at all times
act as an independent contractor. Nothing in this Agreement is
intended to, or shall create, the relationship of principal and
agent or employer and employee between CG&E and Consultant. CG&E
is not responsible for providing any health, accident, medical
benefits, disability insurance, life insurance benefits or other
insurance benefits to Consultant. It is Consultant's sole
obligation to pay any and all income and self-employment taxes
and Consultant agrees to indemnify CG&E in the event CG&E is
ordered to pay any of such taxes or other expenses on behalf of
Consultant. In addition, by their execution hereof, both parties
specifically acknowledge the following:
CONSULTANT IS NOT ENTITLED TO WORKER'S COMPENSATION
BENEFITS. CONSULTANT IS OBLIGATED TO PAY FEDERAL AND
STATE INCOME TAX MONIES EARNED PURSUANT TO THIS
CONTRACTUAL RELATIONSHIP.
8. Colorado Law. This Agreement and the parties
respective rights, obligations and duties hereunder shall be
governed by, construed and interpreted in accordance with the
laws of the State of Colorado.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the day and year first above written.
COLORADO GAMING &
ENTERTAINMENT CO., a Delaware
corporation
/s/ Stephen J. Szapor, Jr.
By:Stephen J. Szapor, Jr.
Title:President
Mark M. Hemmeter
MARK M. HEMMETER
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 5,369,512
<SECURITIES> 0
<RECEIVABLES> 259,641
<ALLOWANCES> 0
<INVENTORY> 93,756
<CURRENT-ASSETS> 6,321,391
<PP&E> 58,480,212
<DEPRECIATION> (14,992,359)
<TOTAL-ASSETS> 69,769,676
<CURRENT-LIABILITIES> 10,549,424
<BONDS> 55,272,199
0
0
<COMMON> 51,389
<OTHER-SE> 3,947,662
<TOTAL-LIABILITY-AND-EQUITY> 69,769,676
<SALES> 1,503,496
<TOTAL-REVENUES> 23,227,372
<CGS> 1,499,090
<TOTAL-COSTS> 15,785,323
<OTHER-EXPENSES> 5,199,821
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 905,696
<INCOME-PRETAX> (162,558)
<INCOME-TAX> 0
<INCOME-CONTINUING> (162,558)
<DISCONTINUED> 0
<EXTRAORDINARY> 164,358,373
<CHANGES> 0
<NET-INCOME> 164,195,815
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
