<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
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, 1997
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.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1242693
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
12596 WEST BAYAUD AVE, SUITE 450, LAKEWOOD, COLORADO 80228
(Address of principal executive offices)
(Zip Code)
(303) 716-5600
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
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 X No
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check 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 November 12, 1997: 5,236,091
<PAGE>
Colorado Gaming & Entertainment Co.
Form 10-Q
Index
Page
----
Part I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets - as of September 30, 1997 and 1
December 31, 1996.
Consolidated Statements of Operations - for the three and 2
nine months ended September 30, 1997, for the three months
ended September 30, 1996, for the period June 7 through
September 30, 1996, and January 1 through June 6, 1996.
Consolidated Statements of Cash Flows - for the nine months 3
ended September 30, 1997, for the period June 7 through
September 30, 1996 and January 1 through June 6, 1996.
Notes to Consolidated Financial Statements 4-6
Item 2. Management's Discussion and Analysis 7-10
PART II OTHER INFORMATION 11-13
SIGNATURES 14
<PAGE>
Colorado Gaming & Entertainment Co.
Consolidated Balance Sheets
(In thousands, except share amounts)
<TABLE>
September 30, 1997 December 31, 1996
------------------ -----------------
(unaudited)
<S> <C> <C>
ASSETS
Cash $ 5,503 $ 5,758
Accounts receivable, net 249 217
Inventories 118 106
Prepaid expenses 666 406
------- -------
Total current assets 6,536 6,487
Property, equipment and leasehold improvements, net 41,875 41,322
Excess reorganization value, net 16,971 18,256
Other assets, net 649 983
------- -------
Total assets $66,031 $67,048
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of notes payable and credit facility 1,082 1,959
Accounts payable 558 804
Accrued interest 2,171 542
Accrued expenses 3,401 3,483
------- -------
Total current liabilities 7,212 6,788
------- -------
Senior secured notes payable 52,883 52,883
Other notes payable and credit facility, net of current portion 893 2,508
------- -------
Total non-current liabilities 53,776 55,391
------- -------
Total liabilities 60,988 62,179
------- -------
Common stock, $.01 par value, 20 million shares
authorized, 5,236,091 and 5,138,888 issued and
outstanding, respectively 52 51
Additional paid-in capital 4,706 4,626
Retained earnings 285 192
------- -------
Total stockholders' equity 5,043 4,869
------- -------
Total liabilities and stockholders' equity $66,031 $67,048
------- -------
------- -------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of
these consolidated balance sheets.
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<PAGE>
Colorado Gaming & Entertainment Co.
Consolidated Statements of Operations
(In thousands, except per share data)
<TABLE>
Three Months Three Months Nine Months June 7, 1996 January 1, 1996
Ended Ended Ended Through Through
September 30, September 30, September 30, September 30, June 6, 1996
1997(a) 1996(a) 1997(a) 1996(a)
------------- ------------- ------------- ------------- ---------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Casino $13,442 $13,973 $38,833 $17,073 $ 19,126
Food and beverage 926 999 2,520 1,215 1,288
Other 76 40 195 47 32
------- ------- ------- ------- --------
Gross revenue 14,444 15,012 41,548 18,335 20,446
Less: promotional allowances (354) (387) (1,094) (465) (464)
------- ------- ------- ------- --------
Net revenue 14,090 14,625 40,454 17,870 19,982
Operating Expenses:
Casino 3,547 3,678 10,586 4,269 5,544
Gaming taxes 2,973 2,548 7,953 3,308 3,614
Food and beverage 921 928 2,550 1,128 1,299
General and administrative:
Casino 742 723 2,186 917 1,249
Corporate 689 955 2,102 1,102 902
Marketing 1,829 1,903 5,311 2,338 2,349
Depreciation and amortization 976 1,813 4,035 2,209 1,882
Pre-opening -- (26) -- 315 47
Reorganization items 4 106 10 106 2,290
(Gain) Loss on disposition of assets (15) 71 88 71 244
------- ------- ------- ------- --------
Total operating expenses 11,666 12,699 34,821 15,763 19,420
Income from operations 2,424 1,926 5,633 2,107 562
Interest expense (1,691) (1,743) (5,090) (2,146) (579)
Interest income 5 49 68 59 66
------- ------- ------- ------- --------
Income before income tax provision and
extraordinary gain 738 232 611 20 49
Income tax provision (372) -- (518) -- --
------- ------- ------- ------- --------
Net income before extraordinary gain 366 232 93 20 49
Extraordinary gain from reorganization -- -- -- -- 164,358
------- ------- ------- ------- --------
Net income $ 366 $ 232 $ 93 $ 20 $164,407
------- ------- ------- ------- --------
------- ------- ------- ------- --------
Net income per common share(b) $ 0.07 $ 0.05 $ 0.02 $ 0.00 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
(period starting June 7, 1996) are not comparable to those of the Predecessor
Company. See Notes to the Consolidated 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.
The Notes to Consolidated Financial Statements are an integral part
of these consolidated financial statements.
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<PAGE>
Colorado Gaming & Entertainment Co.
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
Nine Months June 7, 1996
Ended Through January 1, 1996
September 30, September 30, Through
1997(a) 1996(a) June 6, 1996
-------------- ------------- --------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 93 $ 20 $ 164,407
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,035 2,209 1,882
Deferred income tax expense 518 -- --
Noncash compensation expense 81 120
Extraordinary gain from reorganization -- -- (164,358)
Loss on disposition of assets 88 71 244
Change in working capital and other 1,216 (1,201) 3,142
----------- ----------- -----------
Net cash provided by operating activities 6,031 1,219 5,317
CASH FLOWS USED IN INVESTING ACTIVITIES:
Expenditures for capital improvements (3,950) (2,633) (3,885)
Net change in restricted funds 156 248 (507)
----------- ----------- -----------
Net cash used in investing activities (3,794) (2,385) (4,392)
CASH FLOWS USED IN FINANCING ACTIVITIES:
Proceeds from credit facility 1,000 2,559 5,824
Repayments of other notes payable, capital leases
and credit facility (3,492) (3,646) (3,304)
----------- ----------- -----------
Net cash (used in) provided by financing
activities (2,492) (1,807) 2,520
(DECREASE) INCREASE IN CASH (255) (2,253) 3,445
CASH, at beginning of period 5,758 7,068 3,623
----------- ----------- -----------
CASH, at end of period $ 5,503 $ 4,815 $ 7,068
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
(a) Due to the Reorganization and implementation of fresh-start accounting
pursuant to SOP 90-7, financial statements for the Reorganized Company (period
starting June 7, 1996) are not comparable to those of the Predecessor Company.
See Notes to the Consolidated Financial Statements for additional information.
The Notes to Consolidated Financial Statements are an integral part
of these consolidated statements.
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<PAGE>
COLORADO GAMING & ENTERTAINMENT CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(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" for the period
prior to June 7, 1996), was incorporated in August 1993 to develop, own and
operate gaming and related entertainment facilities. 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 for the benefit of Bullwhackers
Black Hawk and the Silver Hawk Casino. On June 7, 1996 (the "Effective Date"),
CG&E and three of its subsidiaries emerged from bankruptcy (the bankruptcy
proceeding is referred to as the "Reorganization").
FRESH-START REPORTING
In accordance with AICPA Statement of Position 90-7, "Financial 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 adjustments to reflect the consummation of the Reorganization (including
the extraordinary 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 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.
INTERIM REPORTING
The accompanying unaudited consolidated financial statements and related
notes of the Company 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.
Operating results for the nine month period ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report in the Form 10-K for the year ended December 31, 1996.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with the
1997 presentation. Such reclassifications had no impact on the Company's net
income.
(2) NOTES PAYABLE
SENIOR SECURED NOTES
The Senior Secured Notes (the "Notes") have an outstanding principal
amount of $52.9 million as of September 30, 1997. Interest on the Notes
accrues at a rate of 12% per annum, and is payable semi-annually in June and
December.
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<PAGE>
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 $3.5 million revolving line of credit, a $5 million equipment facility and a
$5 million construction facility. All draws on the construction facility were
required to be made before September 30, 1997. The Company did not utilize the
available proceeds under the construction facility, and, accordingly, such
portion expired on September 30, 1997. Under terms of the Credit Facility,
borrowings accrue interest at prime plus 2.375% and the Company is charged a
0.5% unused line fee and certain service fee charges. The different sub-
facilities have varying terms ranging from three to five years from the time
funds are borrowed, but in no event beyond June 7, 2001. In July 1997, the
Company repaid the outstanding balance of $1.0 million on the revolving line of
credit from available cash. In addition, the Company made $327,000 of
scheduled principal payments in the third quarter of 1997. As of September 30,
1997, the Company had an outstanding balance of approximately $435,000 on the
equipment facility line, representing the total outstanding indebtedness on the
entire Credit Facility.
OTHER NOTES
The Company has two outstanding unsecured promissory notes payable to
Capital Associates International, Inc. ("CAI") in the remaining principal
amounts of $856,000 and $670,000, as of September 30, 1997. Both notes accrue
interest at the rate of 9% per annum. The first note is due in ten equal
quarterly installments which commenced in September 1996. The Company made a
required principal payment of $160,000 on September 7, 1997. The second note
is payable in four quarterly installments, the first payment of which commences
in September 2000.
(3) TAXES
For the nine months ended September 30, 1997, the Company recorded a
$518,000 deferred income tax provision. The Company recognized depreciation
charges totaling approximately $767,000, related to the amortization of excess
reorganization value, which is not deductible for income tax purposes. Such
income tax expense triggered the utilization of certain deferred tax assets
available to the Company, and, accordingly, no income tax is currently payable.
The recognition of such deferred tax assets was offset by a like reduction in
the valuation allowance, which was recorded as a credit to excess
reorganization value in the accompanying consolidated balance sheets.
The net deferred tax asset as of September 30, 1997 and December 31, 1996,
is comprised of the following (in thousands):
September 30, December 31,
1997 1996
------------ ------------
(Unaudited)
Current:
Accrued vacation & gaming liabilities $ 291 $ 458
Non-Current:
Difference in asset basis 686 458
Recognition of legal settlement 564 740
Impairment of assets 1,208 3,860
Net operating loss carryforwards 4,592 2,343
----------- -----------
Net deferred tax assets 7,341 7,859
Valuation allowance (7,341) (7,859)
----------- -----------
$ -- $ --
----------- -----------
----------- -----------
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<PAGE>
The net deferred tax asset valuation allowance is equal to the full amount
of the gross deferred tax asset because the realization of such asset is
dependent upon future taxable income, which is uncertain. The Company
currently has net operating losses ("NOL's") totaling approximately $12.2
million, which expire beginning in 2008. The Company recognized $7.1 million
tax losses in the 1997 period due to the write-off of certain receivables which
were either settled, or the Company received no value through
foreclosure/bankruptcy proceedings. Utilization of NOL's generated prior to
the Effective Date are limited to approximately $520,000 annually. Utilization
of any NOL's generated subsequent to the Effective Date are unlimited.
(4) COMMITMENT AND CONTINGENCIES
Effective August 22, 1997, the Company entered into an Agreement and Plan
of Merger pursuant to which it would be acquired by a U.S. subsidiary of
Ladbroke Group plc ("Ladbroke"). Under the proposed terms of the transaction,
holders of the Company's common stock will be entitled to receive $6.25 in cash
for each share held. On October 21, 1997, Ladbroke's due diligence period
under the Merger Agreement expired. On that date, Ladbroke and the Company
entered into an Amendment to the Merger Agreement adding certain covenants and
conditions to the transaction. The proposed transaction remains subject to a
number of conditions, including stockholders' approval (for which a meeting is
expected to be convened in December) and receipt of various regulatory
approvals, none of which can be assured. If approved, closing for this
transaction is anticipated to occur late in the first quarter or early in the
second quarter of 1998.
-6-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
The discussion below and under Item 5 of Part II of this Report on Form
10-Q and elsewhere herein contain forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
Such Section 21E provides certain "safe harbor" protections for
forward-looking statements in order to encourage companies to provide
prospective information about their businesses. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance, competition, growth opportunities, source and uses of
capital, future development or expansion activities, and underlying
assumptions and other statements which are other than statements of
historical facts. Such statements may be identified by the use of
forward-looking terminology such as "might," "may," "would," "could,"
"expect," "anticipate," "estimate," "likely," "believe," or "continue" or the
negative thereof or other variations thereon or comparable terminology. Such
forward-looking statements involve a number of risks, uncertainties and other
factors that may significantly affect the Company's liquidity and results of
operations in the future and, accordingly, actual results may differ
materially from those expressed in any forward-looking statements.
The forward-looking statements set forth in this Report on Form 10-Q are
based upon various assumptions, many of which are based, in turn, upon further
assumptions, including, without limitation, management's examination of
historical operating trends, data contained in the Company's records, and
other data available from third parties. Although the Company believes that
such assumptions were reasonable when made, because such assumptions are
inherently subject to significant uncertainties and contingencies which are
difficult or impossible to predict and are beyond the Company's control, there
can be no assurance, and no representation or warranty is made, that
management's expectations, beliefs, or projections will result or be achieved
or accomplished. In addition to the other factors and matters discussed
elsewhere herein, factors that, in the view of the Company, could cause actual
results to differ materially from those discussed in the forward-looking
statements include: (i) leverage and debt service, (ii) financing and
refinancing efforts, (iii) competition, (iv) inclement weather, (v) changes in
general economic conditions in the Denver metropolitan area, (vi) changes in
state and local gaming laws, regulations or tax rates, (vii) risks related to
development and construction activities, (viii) changes in management or
control of the Company, (ix) significant changes in competitive factors
affecting the Company, (x) significant changes from expectations in actual
capital expenditures and operating expenses, and (xi) occurrences affecting the
Company's ability to obtain funds from operations, debt or equity to finance
needed capital expenditures and other investments.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AS COMPARED TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1996
The Company's net revenue decreased 3%, to $14.1 million for the third
quarter of 1997 from $14.6 million for the third quarter of 1996. The decrease
in revenue is primarily due to the strong initial operating results achieved by
the Silver Hawk Casino upon its opening in 1996, its first full quarter of
operations. During the 1996 period, the Silver Hawk Casino generated an
additional $630,000 in revenues compared to the 1997 period which the Company
primarily attributes to unusually high customer visitation and trial because
the Silver Hawk Casino was newly opened. Offsetting the decline of the Silver
Hawk was growth of approximately 6%, or $480,000, at the Company's Bullwhackers
Black Hawk facility as a result of the opening of the expanded parking in May
1997 and the opening of the Kids Quest day care facility in July 1997. The
increase in revenues in Black Hawk were offset by a decrease in revenues of
approximately 5%, or $460,000, at the Company's Bullwhackers Central City
facility as a result of a continued overall decline in the Central City market.
Additionally, competitive pressures, intensified by the opening of a
competitors major parking expansion in June 1997, contributed to the decline in
Central City.
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<PAGE>
Expenses directly related to casino operations increased 3% to $7.4
million for the third quarter of 1997, as compared to $7.2 million for the
third quarter of 1996. The increase primarily relates to a 17%, or $400,000,
increase in gaming taxes in the 1997 period due to higher tax rates for the
period.
Marketing expense decreased 5% to approximately $1.8 million for the third
quarter of 1997, as compared to $1.9 million for the third quarter of 1996.
The decrease is primarily due to the additional costs associated with initial
marketing efforts for the opening of the Silver Hawk Casino in the 1996
quarter.
Corporate expenses decreased 28% to $689,000 for the third quarter of
1997, as compared to $955,000 for the third quarter of 1996. The decrease
primarily relates to a charge of approximately $460,000 in the 1996 period
relating to compensation expense for senior management based upon
implementation of the Company's Cash Bonus Plan and the Management Incentive
and Non-Employee Director Stock Plan. However, in the 1997 period, the
Company incurred approximately $180,000 of legal, financial advisory and other
professional fees relating to the proposed merger pursuant with Ladbroke. The
Company expects to incur an additional $350,000 of such fees in the fourth
quarter relating to the proposed merger.
Depreciation and amortization expense decreased 44% to $1.0 million for
the third quarter of 1997, as compared to $1.8 million for the third quarter of
1996. The decrease in depreciation and amortization charges is due to a
substantial amount of equipment at Bullwhackers Black Hawk and Bullwhackers
Central City becoming fully depreciated. The Company anticipates depreciation
and amortization charges to decrease for the remainder of 1997.
Income from operations increased 26% to $2.4 million for the third quarter
of 1997, as compared to a $1.9 million in the third quarter of 1996. The
increase in operating income is primarily attributable to the decrease in
depreciation and corporate expenses as discussed above.
Interest expense was consistent at $1.7 million for the third quarters of
1997 and 1996.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AS COMPARED TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1996
The Company's net revenue increased 7% to $40.5 million for the first nine
months of 1997, compared to $37.9 million for the first nine months of 1996.
The increase in revenue is primarily due to the addition of the Silver Hawk
Casino, which did not commence operations until June 26, 1996 and generated an
additional $2.5 million of revenues in the 1997 period. Continued overall
growth in the Black Hawk market contributed to a 3% or $880,000 increase in
revenues at the Company's Bullwhackers Black Hawk facility for 1997 compared to
1996. However, the benefit to the Company's revenue growth in Black Hawk was
negatively affected by the business disruption as a result of the construction
activities related to the Company's parking expansion, which commenced in late
January and was completed in late May. Bullwhackers Black Hawk's revenue
increase was offset by a 9% or $825,000 decrease in revenues at Bullwhackers
Central City, as a result of the continued overall weakness in the Central City
market.
Expenses directly related to casino operations increased 10% to $21.1
million for the first nine months of 1997, as compared to $19.1 million for the
first nine months of 1996. The increase primarily relates to expenses incurred
by the Silver Hawk Casino operations of approximately $1.8 million, which
operated for the full nine months in the 1997 period. Additionally, gaming tax
was $1.0 million or 15% greater in the 1997 period compared to the 1996 period
due to an increase in the highest gaming tax rate, and higher revenues
generated by Bullwhackers Black Hawk and the Silver Hawk casino in the 1997
period.
-8-
<PAGE>
Marketing expense increased 13% to $5.3 million for the first nine months
of 1997, as compared to $4.7 million for the first nine months of 1996. The
increase is primarily due to the implementation of certain cash-back promotions
in an effort to sustain business levels at Bullwhackers Central City, which
cost approximately $350,000 for the 1997 period, and a full year marketing and
promotions for the Silver Hawk casino, which accounted for an additional
$200,000 in the 1997 period.
Casino general and administrative expense remained constant at $2.2
million in 1997 as compared to 1996. The Company has been able to hold
administrative costs, primarily human resources, accounting, finance and
insurance, at the same level as the 1996 period even after accounting for the
addition of the Silver Hawk Casino.
Corporate expenses increased 5% to $2.1 million for the first nine months
of 1997, as compared to $2.0 million for the first nine months of 1996. The
increase primarily relates to $240,000 of legal, financial advisory and other
professional fees related to the proposed merger with Ladbroke, partially
offset by a decrease of $120,000 for insurance premiums.
Depreciation and amortization expense decreased 2% to $4.0 million for the
first nine months of 1997, as compared to $4.1 million for the first nine
months of 1996. The decrease in depreciation and amortization charges is due
to a substantial amount of equipment at Bullwhackers Black Hawk and
Bullwhackers Central City becoming fully depreciated. This decrease was offset
by increased depreciation and amortization charges of $660,000 due to the
increased basis of the Company's assets due to the adoption of "fresh-start"
accounting on June 7, 1996 and depreciation charges related to the Silver Hawk
Casino. The Company anticipates depreciation and amortization charges to be
substantially lower than the 1996 period for the remainder of 1997.
Income from operations increased 107% to $5.6 million for the first nine
months of 1997, as compared to $2.7 million for the first nine months of 1996.
The increase in operating income is primarily attributable to approximately
$300,000 of additional operating income from the Silver Hawk Casino in 1997,
which was operational for the full nine months period in 1997, and non-
recurring expenses consisting of $362,000 of pre-opening expense relating to
the opening of the Silver Hawk Casino and $2.4 million in one-time
reorganization charges in the 1996 period.
Interest expense was $5.1 million for the first nine months of 1997, as
compared to $2.7 million for the first nine months of 1996. The increase in
interest expense is due to the fact that no interest was being charged on the
Company's pre-petition indebtedness while the Company was in bankruptcy. The
Company was in bankruptcy through June 6 of the 1996 period.
INCOME TAX CONSIDERATIONS
For the nine months ended September 30, 1997, the Company recorded a
$518,000 deferred income tax provision. While the Company posted pre-tax
income of $611,000, the Company recognized depreciation charges totaling
approximately $767,000, related to the amortization of excess reorganization
value, which is not deductible for income tax purposes. Such taxable income
triggered the utilization of certain deferred tax assets available to the
Company, and, accordingly, no income tax is currently payable. The recognition
of such deferred tax assets was offset by a like reduction in the valuation
allowance, which was recorded as a credit to excess reorganization value in the
accompanying consolidated balance sheets.
LIQUIDITY AND CAPITAL RESOURCES
DEBT
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 $3.5 million revolving facility a $5 million equipment facility and a $5
million
-9-
<PAGE>
construction facility. All draws on the construction facility were required
to be made before September 30, 1997. The Company did not utilize the
available proceeds the construction facility, and, accordingly, such portion
expired on September 30, 1997. Under terms of the Credit Facility, borrowings
accrue interest at prime plus 2.375% and the Company is charged a 0.5% unused
line fee and certain service fee charges. The different sub-facilities have
varying terms ranging from three to five years from the time funds are
borrowed, but in no event beyond June 7, 2001. In July 1997, the Company
repaid the outstanding balance of $1.0 million on the revolving line of credit
from available cash. In addition, the Company made $327,000 of scheduled
principal payments in the third quarter of 1997. As of September 30, 1997,
the Company had an outstanding balance of approximately $435,000 on the
equipment facility line, representing the total outstanding indebtedness on
the entire Credit Facility.
The Senior Secured Notes ("Notes") have an outstanding principal amount of
$52.9 million as of September 30, 1997. Interest on the Notes accrues at a
rate of 12% per annum, and is payable semi-annually in June and December.
OTHER OPPORTUNITIES
The Company responded to a Request for Proposal ("RFP") issued by the
government of Ontario, Canada, to develop and operate multiple charity gaming
clubs in Ontario. In responding to the RFP, the Company and its partners
formed Diamond Gaming of Ontario Inc. ("Diamond Gaming"). Diamond Gaming's
shareholders are a newly formed subsidiary of the Company which owns 45% of
Diamond Gaming, a subsidiary of Ogden Corporation (45% owner) and Diamond
Gaming Services Inc. (10% owner). On September 30, 1997, the Ontario Gaming
Control Commission announced that Diamond Gaming was the successful bidder to
develop and operate charitable gaming clubs in the cities of Kingston and
Belleville, Ontario. The development and opening of the Kingston and
Belleville facilities remain contingent upon a number of items, including
entering into an operating agreement with the Ontario Gaming Control
Commission, reaching an agreement with property owners and local municipalities
on specific sites, and obtaining zoning and other local approvals, none of
which can be assured. The Company currently estimates that the two clubs in
Kingston and Belleville will require an initial investment of approximately
$3.7 million in the aggregate. The Company's share of such investment is
approximately 50% of that amount, which it intends to fund from cash flow from
operations or borrowings under the revolving portion of the Credit Facility or
yet to be determined financings on the projects. As of September 30, 1997, the
Company has incurred approximately $50,000 in connection with this project,
which is reflected as corporate expense in the accompanying consolidated
statements of operations. There can be no assurance that all conditions
remaining to develop and operate the Belleville and Kingston charity gaming
clubs will be met or that both or either of the Belleville and Kingston charity
gaming clubs will be developed and become operational.
The Company distributed a Request for Consent to the holders of the Notes.
The Request for Consent sought to waive and amend certain provisions of the
Indenture governing the Notes necessary to permit the Company to participate in
the development and operation of the charity gaming clubs in Ontario and to
allow the Company to borrow money or obtain other financing from Ladbroke and
its affiliates to the same extent as the Company is permitted under the
Indenture to borrow money or obtain other financing from financial institutions
and other senior lenders. The Company has received executed Consents
representing approximately 95% of the outstanding Notes, and, accordingly, the
items for which consent was requested were approved. All holders who returned
an executed consent will receive a consent fee of 0.25% of the outstanding
principal balance of the Notes held by such holder.
NEGATIVE WORKING CAPITAL
As of September 30, 1997, the Company's current liabilities exceeded its
current assets, resulting in negative working capital. Since the Company
emerged from bankruptcy on June 7, 1996, the Company has used cash generated
from operations to pay down debt under the Credit Facility ahead of schedule
and
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to pay construction costs for its parking lot expansion and Kids Quest
construction. Management believes this strategy maximizes the return on its
excess cash. Additionally, should the Company have additional working capital
needs, it is able to borrow up to $3.5 million under the revolving portion of
the Credit 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 and debt service payments. However, there is no assurance that 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 financing 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 Company's
bondholders and the lender under the Credit Facility.
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<PAGE>
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
A. LADBROKE. Effective as of August 22, 1997, the Company entered into
an Agreement and Plan of Merger to be acquired by a U.S. subsidiary of Ladbroke
Group plc ("Ladbroke"). Under the proposed terms of the transaction, holders
of the Company's common stock will be entitled to receive $6.25 in cash for
each share held. On October 21, 1997, Ladbroke's due diligence period under
the Merger Agreement expired. On that date, Ladbroke and the Company entered
into an Amendment to the Merger Agreement adding certain covenants and
conditions to the transaction. The proposed transaction remains subject to a
number of conditions, including stockholders' approval (for which a meeting is
expected to be convened in December) and receipt of various regulatory
approvals, none of which can be assured. If approved, closing of this
transaction is anticipated to occur late in the first quarter or early second
quarter of 1998.
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 State Highway 119, providing these projects with the initial
opportunity to capture visitors to Black Hawk from the Denver metropolitan
area. In contrast, Bullwhackers Black Hawk and the Silver Hawk Casino are
located at the northern end of Black Hawk at the second major intersection off
State Highway 119. In addition, the Colorado Department of Transportation has
begun construction on a third major intersection off State Highway 119 between
the two current intersections. This additional intersection will, when
completed, provide the casinos south of Bullwhackers Black Hawk and the Silver
Hawk Casino with another opportunity to capture visitors to Black Hawk from the
Denver metropolitan area, thereby potentially reducing traffic flow and
customer visits to Bullwhackers Black Hawk and Silver Hawk.
Currently, there are two major projects under construction in Black Hawk.
The first is a joint venture between Black Hawk Gaming & Development Co., the
50% owner and operator of the Gilpin Hotel Casino, and Jacobs Entertainment,
for a new 35,000 square foot casino, with 52 hotel rooms, 250 parking spaces
and approximately 750-1,000 slot machines. It is currently anticipated that
this project will be open during the summer or fall of 1998. The second
significant project on which construction has commenced is the Isle of Capri
Black Hawk, which is owned by subsidiaries of Casino America, Inc. and Nevada
Gold & Casinos, Inc. The Isle of Capri project is expected to include a 55,000
square foot casino with 1,100 slot machines, 24 table games and 1,000 on-site
parking spaces. It is expected to open in late 1998 or early 1999. The new
gaming capacity being developed may dilute existing operators' win per unit and
revenue, including the Company's. Accordingly, such increase in capacity may
have a material adverse effect on the Company's results of operations.
In addition, a number of other casino projects have been announced and are
in various planning stages, including a venture by Riviera Holdings, Inc. to
construct what would be the largest facility in Black Hawk. Additionally,
Bullseye Gaming has announced plans to commence construction in 1997 of the
Black Hawk Brewery, which will offer 500 slot machines and 10 table games when
open. Various other projects have been announced, proposed, discussed or
rumored for the Black Hawk market, including large projects known as "Country
World" and the "St. Moritz". While it is difficult to assess the likelihood
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<PAGE>
and the timing of these proposed projects being completed, it is reasonably
likely that at least some of the proposed competitive projects may be completed
and open to the public by late 1999. In addition, as the town of Black Hawk
has expanded, both in terms of gaming device capacity and market share, the
Central City market has contracted. Therefore, should several of the announced
competitive projects open, the increased competition may adversely affect the
Company's operations in both Black Hawk and, to a greater extent, in Central
City, and, accordingly, may have a material adverse effect on the Company's
consolidated results of operations and financial position.
C. LADY LUCK. In October 1996, the Company signed a memorandum of
understanding with Gold Coin, Inc., a subsidiary of Lady Luck Gaming
Corporation, to explore the possibility of physically combining the
Bullwhackers Central City casino with the adjacent Lady Luck casino. The
parties have spent considerable time negotiating unresolved issues in the form
of the definitive agreements. While negotiations were on-going, the Central
City market continued to deteriorate. The operating results of the casinos on
Main Street continued to decline, particularly since the opening of Harvey's
casino's parking garage in June. In addition, a proposed road, which would
have allowed casino customers to drive directly to Central City from Interstate
70 without going through Black Hawk, may no longer be viable after a Colorado
Court ruled against the City of Central in a lawsuit challenging the road. In
light of these and other factors negatively affecting the prospects for the
Central City market, the Company determined not to pursue the Lady Luck
transaction in its originally proposed form. Although, the parties continue
to discuss alternatives in an attempt to restructure the transaction to benefit
both parties in light of Central City's current market position, no assurance
can be given that any transaction between the parties will occur.
D. COLORADO DEPARTMENT OF TRANSPORTATION. The Colorado Department of
Transportation ("CDOT") intends to complete significant improvements to State
Highway 119, currently the only access route to the casinos, over the course of
the next 6-12 months. While such improvements will be desirable, significant
construction disruption may occur which could substantially reduce the amount
of traffic on State Highway 119. Any significant construction disruption to
State Highway 119 could have a material adverse impact on the Black Hawk and
Central City markets in general, and the Company's results of operations. In
addition, CDOT intends to construct significant improvements at the
intersection of State Highway 119 and 279, the intersection from which cars
enter directly into the Company's parking lot. Any significant construction
disruption at such intersection may have a material adverse impact on the
results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K.
1. On July 29, 1997, the Company filed a Current Report on Form 8-K.
The date of report (date of the earliest event reported) was July
18, 1997. The Company reported under Item 5 that it had entered into
a letter of intent to be acquired by a United States subsidiary of
Ladbroke Group plc.
2. On August 26, 1997, the Company filed a Current Report on Form 8-K.
The date of report (date of the earliest event reported) was
August 22, 1997. The Company reported under Item 5 that it had
entered into a definitive Agreement and Plan of Merger to be acquired
by a United States subsidiary of Ladbroke Group plc.
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<PAGE>
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.
/s/ Stephen J. Szapor, Jr.
--------------------------------------
Stephen J. Szapor, Jr.
President and Chief Executive Officer
Date: November 12, 1997
/s/ Robert J. Stephens
--------------------------------------
Robert Stephens
Vice President of Finance & Treasurer
(Principal Financial Officer)
Date: November 12, 1997
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