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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended March 31, 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)
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(Former Name, Former Address and Former Fiscal Year, if Changed Since
Last Report)
Indicate by check X whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check X mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
--- ---
Number of shares of common stock outstanding at May 13, 1997: 5,138,888
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Colorado Gaming & Entertainment Co.
Form 10-Q
Index
Page
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Part 1 FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets - as of March 31, 1997 and 1
December 31, 1996.
Consolidated Statements of Operations - for the 2
three months ended March 31, 1997 and 1996.
Consolidated Statements of Cash Flows - for the 3
three months ended March 31, 1997 and 1996.
Notes to Consolidated Financial Statements 4-7
Item 2. Management's Discussion and Analysis 8-11
PART II OTHER INFORMATION 11-12
SIGNATURES 13
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Colorado Gaming & Entertainment Co.
Consolidated Balance Sheets
(In thousands, except shares amounts)
March 31, December 31,
1997 1996
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(unaudited)
ASSETS
------
Cash $ 6,152 $ 5,758
Accounts receivable, net 240 217
Inventories 98 106
Prepaid expenses 764 406
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Total current assets 7,254 6,487
Property, equipment and leasehold improvements, net 41,331 41,322
Excess reorganization value, net 18,000 18,256
Other assets, net 825 983
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Total assets $67,410 $67,048
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LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current portion of notes payable and credit facility 1,765 1,959
Accounts payable 1,182 804
Accrued interest 2,142 542
Accrued expenses 3,582 3,483
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Total current liabilities 8,671 6,788
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Senior secured notes payable (Note 2) 52,883 52,883
Other notes payable and credit facility, net of
current portion (Note 2) 1,213 2,508
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Total non-current liabilities 54,096 55,391
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Total liabilities 62,767 62,179
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Common stock, $.01 par value, 20 million shares
authorized, 5,138,888 issued and outstanding 51 51
Additional paid-in capital (Note 3) 4,746 4,626
Retained earnings (deficit) (154) 192
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Total stockholders' equity 4,643 4,869
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Total liabilities and stockholders' equity $67,410 $67,048
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The Notes to Consolidated Financial Statements are an integral part of these
consolidated balance sheets.
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Colorado Gaming & Entertainment Co.
Consolidated Statements of Operations
(In thousands, except per data share)
Three Months Three Months
Ended Ended
March 31, 1997(a) March 31, 1996
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(Unaudited) (Unaudited)
Revenue:
Casino $12,455 $10,549
Food and beverage 834 720
Other 63 19
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Gross revenue 13,352 11,288
Less: promotional allowances (379) (266)
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Net revenue 12,973 11,022
Operating Expenses:
Casino 3,563 3,168
Gaming taxes 2,267 2,002
Food and beverage 852 735
General and administrative:
Casino 746 726
Corporate 751 512
Marketing 1,725 1,159
Depreciation and amortization 1,577 1,095
Reorganization items -- 1,068
Loss on disposition of assets 124 133
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Total operating expenses 11,605 10,598
Income from operations 1,368 424
Interest expense (1,742) (120)
Interest income 28 24
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Income (loss) before income tax provision (346) 328
Income tax provision (Note 4) -- --
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Net income (loss) $ (346) $ 328
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Net income per common share (b) $ (0.07) N/A
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(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 to previous periods.
The Notes to Consolidated Financial Statements are an integral part of these
consolidated financial statements.
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Colorado Gaming & Entertainment Co.
Consolidated Cash Flows
(in thousands)
<TABLE>
Three Months Three Months
Ended Ended
March 31, 1997(a) March 31, 1996
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(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (346) $ 328
Adjustment to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 1,577 1,095
Noncash compensation expense 120 --
Loss on disposition of assets 124 133
Change in working capital and other 1,827 1,319
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Net cash provided by operating activities 3,302 2,875
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CASH FLOWS USED IN INVESTING ACTIVITIES:
Expenditures for capital improvements (1,461) (407)
Net change in restricted funds 42 --
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Net cash used in investing activities (1,419) (407)
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CASH FLOWS USED IN FINANCING ACTIVITIES:
Repayments of other notes payable and
capital leases (1,489) --
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Net cash used in financing activities (1,489) --
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INCREASE IN CASH 394 2,468
CASH, at beginning of period 5,758 3,623
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CASH, at end of period $ 6,152 $6,091
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</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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COLORADO GAMING & ENTERTAINMENT CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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
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.
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 three month period ended March 31, 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.
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 March 31, 1997. Interest on the Notes accrues at a rate
of 12% per annum, and is payable semi-annually. On June 1, 1997, at the option
of the Company, interest on the Notes (but not on any previously issued
additional Notes issued in payment of interest) may be payable either in cash or
through the issuance of additional Notes. The Company has elected to pay the
June 1, 1997 interest payment in cash. Thereafter, the Company will be required
to pay all interest on the Notes in cash.
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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 parking garage construction facility. Generally, borrowings under the
Credit Facility are subject to a 1% financing fee and accrue interest at prime
plus 2.375%. The different facilities have varying terms ranging from three to
five years from when the funds are borrowed, but in no event past June 7, 2001.
On March 28, 1997, the Company repaid an unscheduled principal payment of $1.0
million under the equipment financing line, in addition to the $327,000
scheduled principle payments for the first quarter of 1997. Accordingly, as of
March 31, 1997, the Company had an outstanding balance of approximately $1.1
million on the Credit Facility under the equipment facility line.
OTHER NOTES
The Company has two outstanding unsecured promissory notes payable to
Capital Associates International, Inc. ("CAI") in the remaining principal
amounts of $1.2 million and $670,000, both accruing interest at the rate of 9%
per annum. The first note is due in ten equal quarterly installments which
commenced in September of 1996. The Company made a required principal payment
of $153,000 on March 7, 1997. After certain credited prepayments from the sale
of assets in the Grand Palais Riverboat, Inc. reorganization, the second note is
payable in four quarterly installments of principal and interest, which
commences in September 2000.
(3) EQUITY
The Management Stock Incentive and Non-Employee Director Stock Plan
provides for shares to be issued to certain management individuals and
non-employee directors annually, over the next three years based on the Company
meeting certain performance criteria. The Company records the compensation
expense for these grants in corporate general and administrative expense in the
accompanying consolidated income statement. Once granted, the shares are fully
vested. It is anticipated that the first grant of 124,610 shares will vest on
June 7, 1997. The Company recorded $120,000 of compensation expense in the
first quarter of 1997 related to the anticipated grants to be made on June 7,
1997.
(4) TAXES
For the three months ended March 31, 1997, the Company recorded no income
tax provision due to its loss position. The Company did record, however,
depreciation charges totaling approximately $256,000, related to the
amortization of excess reorganization value, which is not deductible for tax
purposes. Should the Company record book income in the future, it is likely
that the Company's effective tax rate may be higher than the statutory tax rate.
However, the Company recorded no tax asset in the first quarter of 1997 due to
its history of losses and uncertainty of achieving profitability in the future.
The net deferred tax asset as of March 31, 1997 and December 31, 1996 is
comprised of the following (in thousands).
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1997 1996
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(Unaudited)
Current:
Accrued vacation & gaming liabilities $ 421 $ 458
Non-Current:
Difference in asset basis 616 458
Recognition of legal settlement 683 740
Impairment of assets 3,458 3,860
Net operating loss carryforwards 2,716 2,343
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Net Deferred tax assets 7,894 7,859
Valuation allowance (7,894) (7,859)
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$ -- $ --
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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 NOL's totaling approximately $7.2 million, which expire beginning in 2008.
Pursuant to the Reorganization, the old shares of common stock were canceled and
newly authorized common stock was issued to the Company's senior secured
creditors, effecting an ownership change as defined in section 382 of the
Internal Revenue Code. The effect of this ownership change limits the
utilization of NOL's generated prior to the Effective Date to approximately
$520,000 annually. NOL's generated subsequently to the Effective Date will be
unlimited.
(5) COMMITMENT AND CONTINGENCIES
The Company is currently in the process of expanding its parking lot, which
is expected to provide capacity for approximately an additional 120 cars. The
construction activity primarily consists of additional excavation from the
Company's current parking lot to the Company's property line. Management
believes that these activities have caused disruption in the first quarter to
the Company's existing parking lot, limiting the current parking capacity and
consequently have negatively effected the revenues and operating results. The
total cost of the project is approximately $1.3 million, of which $285,000 had
been paid as of March 31, 1997. As of May 13, 1997, the Company has paid
$700,000 in total towards the parking expansion. The parking expansion is
anticipated to be completed by the end of May 1997. The Company has also
elected to construct a new valet facility to increase customer convenience and
to enhance access to the Kids Quest child care facility. The valet facility is
expected to cost approximately $300,000, of which $45,000 has been paid as of
March 31, 1997. The Company intends to fund the remaining balances due on these
projects with available cash from operations or by borrowing the funds from the
revolving portion of the Credit Facility.
In July 1996, the Company entered into an agreement with New Horizons Kids
Quest III, Inc. ("Kids Quest") which provides that Kids Quest will operate a
day care facility adjacent to Bullwhackers Black Hawk. The day care facility
intends to meet or exceed all relevant license standards. The Company will
receive a percentage rent from Kids Quest for the use of the facility which is
being constructed by the Company. Rent will consist of 10% of the first
$500,000 in revenue and 15% thereafter from the Kids Quest operation. It is
currently anticipated that the day care facility will be operated for the
exclusive use of the patrons of Bullwhacker Black Hawk, Bullwhacker Central City
and the Silver Hawk Casino. The Company is in the process of constructing the
day care facility for use by Kids Quest at an estimated cost of approximately
$1.5 million. As of March 31, 1997, the Company has paid $350,000 towards this
project. As of May 13, 1997, the Company has paid $561,000 of the total cost of
the project. The opening of the day care facility is currently scheduled to
precede the July 4th holiday festivities. The Company expects to fund this
project through available working capital or by borrowing the funds from the
revolving portion of the Credit Facility.
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(6) SUPPLEMENTAL FINANCIAL INFORMATION (UNAUDITED)
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
for the three months ended March 31, 1997 and 1996 excluding any reorganization
and disposition of assets charges are shown as follows (in thousands):
Three Months Ended
March 31,
1997 1996
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Net revenues $ 12,973 $ 11,022
Casino expenses 9,153 7,790
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Casino operating profit 3,820 3,232
Corporate expenses 751 512
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EBITDA $ 3,069 $ 2,720
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-7-
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The discussion below and under Item 5 of Part II of this Report on Form
10-Q contains forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934, as amended, that involve risks,
uncertainties, and other factors which may cause the Company's actual
performance to be materially different from the projections expressed or
implied by such statements. Such factors include, among others, increased
competition, economic conditions in the greater Denver metropolitan area,
changes in gaming or liquor regulation or tax rates, inclement weather,
success of the Company's marketing initiatives and the number of visitors to
Black Hawk and Central City. Accordingly, the Company's operating results may
fluctuate from quarter to quarter and the results for any quarter may not be
indicative of results for future quarters.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AS COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 1996
The Company's net revenue increased 18%, to $13.0 million for the first
quarter of 1997, from $11.0 million for the first quarter of 1996. The increase
in revenue is primarily due to the addition of the Silver Hawk Casino, which was
not operating in the 1996 period and generated $1.7 million in revenues in the
1997 period. In addition, continued overall growth in the Black Hawk market
contributed to the increased revenues at Bullwhackers Black Hawk. Bullwhackers
Central City posted a revenue increase of 1%.
Bullwhackers Black Hawk produced a 3% increase in revenues for the quarter
compared to the first quarter of 1996. However, the Company's revenues in Black
Hawk were negatively affected by the business disruption as a result of the
construction activities for the Kids Quest facility and the expanded parking
lot, which commenced in late January.
Expenses directly related to casino operations, including casino expense,
gaming taxes and food and beverage expense increased 14% to $6.7 million for the
first quarter of 1997, as compared to $5.9 million for the first quarter of
1996. The increase is primarily due to the costs incurred in the addition of
the Silver Hawk Casino operations of approximately $500,000 and increased
business levels at Bullwhackers Black Hawk and Central City.
Marketing expense increased 42% to $1.7 million for the first quarter of
1997, as compared to $1.2 million for the first quarter of 1996. The increase
is primarily due to the implementation of an additional customer busing program
and certain cash back promotions in an effort to sustain business levels at
Bullwhackers Central City as well as additional costs associated with the Silver
Hawk Casino operations.
Casino general and administrative expense increased 3% to $746,000 in the
first quarter of 1997, as compared to $726,000 for the first quarter of 1996.
The increase primarily relates to costs associated with the addition of the
Silver Hawk Casino operations.
Corporate expenses increased 47% to $751,000 for the first quarter of 1997,
as compared to $512,000 for the first quarter of 1996. The increase primarily
relates to a charge of approximately $186,000 (including a $120,000 non-cash
charge) 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. Additionally, the Company incurred certain
costs associated with the relocation of its corporate offices, certain severance
costs and expenses related to the proposed ventures in Oregon and Canada.
Depreciation and amortization expense increased 45% to $1.6 million for the
first quarter of 1997, as compared to $1.1 million for the first quarter of
1996. The increased depreciation and
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amortization charges are due to the increased basis of the Company's assets
due to the adoption of "fresh-start" accounting, primarily the amortization
of excess reorganization value, and depreciation charges related to the newly
acquired and operating Silver Hawk Casino.
Income from operations increased 230% to $1.4 million for the first quarter
of 1997, as compared to a $424,000 in the first quarter of 1996. The increase
in operating income is primarily attributable to approximately $500,000 in
operating income from the Silver Hawk Casino in 1997, and the inclusion of $1.0
million of reorganization items incurred in the first quarter of 1996, offset to
the same extent by the increase of depreciation and amortization expense in 1997
as noted above.
Interest expense was $1.7 million for the first quarter of 1997, as
compared to $120,000 for the first quarter 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 for the entire first quarter of 1996.
INCOME TAX CONSIDERATIONS
For the three months ended March 31, 1997, the Company recorded no income
tax provision due to its loss position. The Company did record, however,
depreciation charges totaling approximately $256,000, related to the
amortization of excess reorganization value, which are not deductible for tax
purposes. Should the Company record book income in the future, it is likely
that the Company's effective tax rate may be higher than the statutory tax rate.
However, the Company recorded no tax asset in the first quarter of 1997 due to
its history of losses and uncertainty of achieving profitability in the future.
LIQUIDITY AND CAPITAL RESOURCES
DEBT
The Company's Credit Facility provides for loans up to $12.5 million in the
form of several different sub facilities. Generally, borrowings under the
Credit Facility are subject to a 1% financing fee and accrue interest at prime
plus 2.375%. The different facilities have varying terms ranging from three to
five years from when the funds are borrowed, but in no event past June 7, 2001.
On March 28, 1997, the Company repaid an additional $1.0 million under the
equipment financing line, in addition to the $327,000 scheduled principle
payments for the first quarter of 1997. Accordingly, as of March 31, 1997, the
Company had an outstanding balance of approximately $1.1 million on the Credit
Facility under the equipment facility portion.
The Notes have an outstanding principal amount of $52.9 million as of
March 31, 1997. Interest on the Notes accrues at a rate of 12% per annum,
and is payable semi-annually. On June 1, 1997, at the option of the Company,
interest on the Notes (but not on any previously issued additional Notes
issued in payment of interest) may be payable either in cash or through the
issuance of additional Notes. The Company has elected to pay the June 1,
1997, interest payment in cash. Thereafter, the Company will be required to
pay all interest on the Notes in cash.
EXPANSION AND CONSTRUCTION
The Company is currently in the process of expanding its parking lot, which
is expected to provide capacity for approximately an additional 120 cars. The
construction activity primarily consists of additional excavation from the
Company's current parking lot to the Company's property line. Management
believes that these activities have caused disruption in the first quarter to
the Company's existing parking lot, limiting the current parking capacity and
consequently have negatively effected the revenues and operating results. The
total cost of the project is approximately $1.3 million, of which
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<PAGE>
$285,000 had been paid as of March 31, 1997. As of May 13, 1997, the Company
has paid $700,000 in total towards the parking expansion. The parking
expansion is anticipated to be completed by the end of May 1997. The Company
has also elected to construct a new valet facility to increase customer
convenience and to enhance access to the Kids Quest child care facility. The
valet facility is expected to cost approximately $300,000, of which $45,000
has been paid as of March 31, 1997. The Company intends to fund the
remaining balances due on the these projects with available cash from
operations or by borrowing the funds from the revolving portion of the Credit
Facility.
In July 1996, the Company entered into an agreement with New Horizons Kids
Quest III, Inc. ("Kids Quest") which provides that Kids Quest will operate a
day care facility adjacent to Bullwhackers Black Hawk. The day care facility
intends to meet or exceed all relevant license standards. The Company will
receive a percentage rent from Kids Quest for the use of the facility which is
being constructed by the Company. Rent will consist of 10% of the first
$500,000 in revenue and 15% thereafter from the Kids Quest operation. It is
currently anticipated that the day care facility will be operated for the
exclusive use of the patrons of Bullwhackers Black Hawk, Bullwhackers Central
City and the Silver Hawk Casino. The Company is in the process of constructing
the day care facility for use by Kids Quest at an estimated cost of
approximately $1.5 million. As of March 31, 1997, the Company has paid $350,000
towards this project. As of May 13, 1997, the Company has paid $561,000 of the
total cost of the project. The opening of the day care facility is currently
scheduled to precede the July 4th holiday festivities. The Company expects to
fund this project through available working capital or the revolving portion of
the Credit Facility.
The Company responded to a Request for Proposal ("RFP") issued by the
government of Ontario, Canada, to develop and operate charity gaming clubs in
Ontario. In responding to the RFP, the Company entered into a venture known as
Diamond Gaming of Ontario ("Diamond Gaming") with a subsidiary of the Company
(45% owner of Diamond Gaming), a subsidiary of Ogden Corporation (45% owner) and
Diamond Gaming Services, Inc. (10% owner) to apply for several locations. The
government issued a tentative timetable that applicants will be short-listed in
July and selected in August. In addition to being selected by the Ontario
government, the proposed venture is subject to a number of contingencies
including completion of required financing, completion of definitive
documentation and obtaining approval of certain of the Company's lenders. If
Diamond Gaming is selected to develop and operate several charitable gaming
clubs, Diamond Gaming intends to finance the project with 30% equity and 70%
non-recourse debt. As to the equity, the Company's share is currently
anticipated to be approximately $2.5 million, which it intends to fund from cash
flow from operations or borrowing from the revolving portion of the Credit
Facility. The ability of the Company to make its equity contribution is subject
to receiving a consent from its bondholders with regards to restricted
investments.
NEGATIVE WORKING CAPITAL
As of both March 31, 1997 and December 31, 1996, 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 to pay construction costs on the parking expansion and Kids
Quest. 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 under the $3.5 million revolving portion of the Credit
Facility, on which no funds are currently outstanding.
The Company believes that its Credit Facility and its operating cash flows
will provide sufficient liquidity and capital resources for the Company's
operations. However, there is no assurance the Company's estimate of its need
for liquidity and capital resources is accurate or that new business
developments or other unforeseen events will not occur which will increase those
needs. Although no additional 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
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available, will be on terms favorable to the Company. Additionally, debt or
equity financing may require consent from the bondholders and the lender of
the Credit Facility.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no legal proceedings pending against the Company which, if
determined adversely, would have a material adverse effect on the Company's
consolidated results of operation.
ITEM 5. OTHER INFORMATION
A. 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.
One of the major projects currently under construction in Black Hawk is a
joint venture between Black Hawk Gaming & Development Co., 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 by the summer of 1998. In Central City, Harvey's Wagon Wheel, currently
the largest casino in Central City, is constructing a parking garage, which is
anticipated to open during the summer of 1997. The new capacity currently 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 significant project announced by
Caesar's World, and a recently announced project between Rivera Holdings, Inc.
and Eagle Gaming to construct the largest facility in Black Hawk. Additionally,
Bullseye Gaming currently expects to commence construction in the summer of 1997
of the Black Hawk Brewery, which will offer 500 slot machines and 10 table games
when open. While it is difficult to assess each of the announced projects other
than those under construction noted above, 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 competitive projects may be
completed and open to the public by mid-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.
B. CHARITABLE GAMING CLUBS. The Company responded to a Request for
Proposal ("RFP") issued by the government of Ontario, Canada, to develop and
operate charity gaming clubs in Ontario. In responding to the RFP, the Company
entered into a venture known as Diamond Gaming of Ontario ("Diamond Gaming")
with a subsidiary of the Company (45% owner of Diamond Gaming), a subsidiary of
Ogden Corporation (45% owner) and Diamond Gaming Services, Inc. (10% owner) to
apply for
-11-
<PAGE>
several locations. The government issued a tentative timetable that
applicants will be short-listed in July and selected in August. In addition
to being selected by the Ontario government, the proposed venture is subject
to a number of contingencies including completion of required financing,
completion of definitive documentation and obtaining approval of certain of
the Company's lenders. If Diamond Gaming is selected to develop and operate
several charitable gaming clubs, Diamond Gaming intends to finance the
project with 30% equity and 70% non-recourse debt. As to the equity, the
Company's share is currently anticipated to be approximately $2.5 million,
which it intends to fund from cash flow from operations or borrowing from the
revolving portion of the Credit Facility. The ability of the Company to make
its equity contribution is subject to receiving a consent from its
bondholders on restricted investments.
C. 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 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.
D. VIDEO LOTTERY LEGISLATION. The Colorado Legislature recently passed
House Bill 1351, which bill would authorize at a minimum of 500 video lottery
terminals at the six horse and dog tracks located in Colorado, as well as at the
existing casinos. Unless the Governor of Colorado vetoes such legislation, the
bill will become law and will add a significant amount of gaming device capacity
in the Denver metropolitan area. Any such additional capacity 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.
None
-12-
<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: May 13, 1997
/s/ Robert J. Stephens
---------------------------------------------
Robert Stephens
Vice President of Finance & Treasurer
(Principal Financial Officer)
Date: May 13, 1997
-13-
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