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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_____________
FORM 10-K
(Mark One)
/ / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the fiscal year ended December 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from ___________ to ____________.
Commission file number 0-28068
COLORADO GAMING & ENTERTAINMENT CO.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 84-1242693
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
12596 WEST BAYAUD 80228
LAKEWOOD, COLORADO (Zip Code)
(Address of Principal Executive Offices)
(303) 716-5600
(Registrant's Telephone Number, Including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
(None)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock (Par Value $0.01 Per Share)
Title of Class
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 ___
Indicate by check mark if there are no delinquent filers to disclose herein
pursuant to Item 405 of Regulation S-K, and there will not be any delinquent
filers to disclose, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
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 March 26,1997: 5,138,888
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement relating to the 1996 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Report.
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PART 1
ITEM 1. BUSINESS
GENERAL
Colorado Gaming & Entertainment Co. ("CG&E" or the "Company") develops,
owns and operates gaming and related entertainment facilities. The Company
owns and operates, through wholly owned subsidiaries, BWBH, Inc. ("BWBH" or
"Bullwhackers Black Hawk") and BWCC, Inc. ("BWCC" or "Bullwhackers Central
City") two of the largest casinos in terms of number of slot machines in the
historic mining towns of Black Hawk and Central City, Colorado, respectively.
In addition, the Company owns and operates, through a wholly owned
subsidiary, Silver Hawk Casino, Inc., a third gaming facility, in Black Hawk
(the "Silver Hawk Casino"), which opened on June 26, 1996 (Bullwhacker's
Black Hawk, Bullwhacker's Central City and Silver Hawk Casino are referred to
as the "Colorado Casinos"). In addition, through a wholly owned subsidiary,
Millsite 27 Inc. ("MS27"), the Company owns a parking lot with a capacity of
approximately 375 cars, which is located directly between, and is used by,
Bullwhackers Black Hawk and the Silver Hawk Casino. References in this
Annual Report on Form 10-K to Colorado Gaming & Entertainment Co. ("CG&E" or
the "Company") include its subsidiaries unless the context requires
otherwise.
Colorado law currently permits limited stakes gaming (with a maximum
single bet of $5.00) in three historic mining towns: Black Hawk and Central
City, adjacent towns located approximately 35 miles from Denver, and Cripple
Creek, located approximately 45 miles from Colorado Springs and 110 miles
from Denver. Gaming operations also exist on two Native American reservations
in Southwest Colorado. Colorado law only permits casinos to offer slot
machines and the table games of blackjack and poker.
REORGANIZATION
As a result of the financial difficulties of a riverboat gaming project
undertaken by a wholly owned subsidiary of the Predecessor Company in New
Orleans, Grand Palais Riverboat, Inc. ("GPRI"), the Predecessor Company,
BWBH, BWCC and MS27 sought protection under Chapter 11 of the United States
Bankruptcy Code on November 7, 1995. The First Amended Joint Plan of
Reorganization (the "Reorganization") of the Company, BWBH, BWCC and MS27 was
confirmed on April 8, 1996 and became effective on June 7, 1996 (the
"Effective Date"). As a result, among other things, the Company has
significantly reduced its consolidated debt and no longer has any interest in
GPRI. For purposes of the discussion within, references to the "Predecessor
Company" refer to the Company prior to the Reorganization.
THE COLORADO CASINOS
BULLWHACKERS BLACK HAWK. Bullwhackers Black Hawk opened on July 17,
1992 and is currently one of the largest gaming facilities, in terms of
number of slot machines, in Black Hawk. It is located on a prime site at the
town's main intersection of Colorado State Highway 119 (the primary access
road to Interstate 70, which leads to Denver) and Gregory Street (which
connects Black Hawk to Central City). Bullwhackers Black Hawk is housed in a
36,000 square foot facility which contains approximately 12,000 square feet
of gaming space on four levels. The casino currently has approximately 600
slot machines and fifteen tables games. The facility has one bar on each
level, a 176-seat full service restaurant and office space. Bullwhackers
Black Hawk utilizes a Victorian theme in its interior design, featuring a
winding grand staircase and a glass-enclosed elevator connecting the various
levels of the 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 that intends
to meet or exceed all relevant license standards. Kids Quest will be solely
responsible for the day-to-day operations of the day care facility. The
Company will receive 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. The day-care facility will be for the exclusive use of the
patrons of the Colorado Casinos. 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. The Company has entered into a guaranteed
maximum price contract with the general contractor. The opening of the day
care facility is currently scheduled for the Summer of 1997. The Company
pursued this project, in part, as a result of a new law in Colorado which
prohibits children from lingering in the gaming areas of a casino. The
Company believes the day care facility will give it a competitive advantage
with other casinos that do not have such a facility, although there can be no
assurance that the day care facility will result in increased visitation and
revenues at the Company's casinos. No other casinos in the Black Hawk-Central
City market currently have, or have announced plans to build a day care
facility.
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BULLWHACKERS CENTRAL CITY. Bullwhackers Central City opened on June 15,
1992 and is currently one of the largest gaming facilities, in terms of
number of slot machines, in Central City. It is located at one of the town's
two main intersections, and is adjacent to a public parking facility and two
of Central City's other large casinos. This 31,000 square foot facility
contains approximately 8,750 square feet of gaming space on four levels.
Bullwhackers Central City currently has approximately 400 slot machines and
four table games. The facility has one bar on each level, a 126-seat full
service restaurant, a retail shop and office space. Bullwhackers Central
City also utilizes a Victorian theme in its interior design.
The Company believes that proximity to parking is extremely important to
Central City casinos and the Colorado market in general. However, except for
the largest casino in Central City, none of the casinos currently operating
in Central City offer on-site parking for more than 50 cars immediately
adjacent to their facilities. There are several public parking lots in
Central City offering parking for a total of approximately 550 cars,
including a 200-space public lot across from Bullwhackers Central City. To
alleviate the difficulties associated with a lack of adequate parking, the
Company implemented several busing programs in conjunction with other Central
City casino operators, which offer cash promotions and other incentives
designed to enhance incremental patron visitation and play, particularly
during off-peak periods.
SILVER HAWK CASINO. Silver Hawk Casino is an approximately 12,000
square foot four-story building constructed in 1993, that was operated as a
casino by an unaffiliated third party for less than 90 days in 1993 before it
was closed. The Company purchased the Silver Hawk Casino on April 12, 1996.
The Company completed minor interior remodeling, installed approximately 230
slot machines and three table games and reopened the facility on June 26,
1996.
The purchase price for the Silver Hawk land and building was $2.7
million, of which $900,000 was paid in cash and the balance was financed by
the seller and payable pursuant to a promissory note secured by a first deed
of trust on the facility. The initial cash portion of the purchase price was
financed through borrowings under a Debtor-in-Possession credit facility
("DIP Facility"), while the Company was in bankruptcy and was later
refinanced through a $12.5 million credit facility ("Credit Facility"). The
Company paid in full the outstanding balance owed to the seller with
available cash on June 18, 1996.
PARKING LOT. The Company owns an approximately 3.25-acre parking lot
located between Bullwhackers Black Hawk and Silver Hawk Casino. The Company
believes that proximity to parking is extremely important in Black Hawk and
that on-site parking is currently inadequate for many Black Hawk casinos.
Although the town of Black Hawk has developed an approximately 3,000-space
public parking facility which serves all of the Black Hawk casinos by a
low-cost shuttle service, the location of, and access to, the municipal
parking facility are generally considered to be inadequate by most casino
patrons. The Company believes that the few gaming facilities that offer
substantial parking at or close to the facility generate higher revenues per
gaming device than gaming facilities that do not offer adequate parking. The
Company believes its parking lot gives Bullwhackers Black Hawk and Silver
Hawk Casino a competitive advantage over casinos in Black Hawk that offer
fewer parking spaces or less convenient parking.
Because of the importance of convenient close-in parking to maximize
casino revenue, the Company completed development of the parking lot site
into a paved and lighted parking facility staffed for valet service with 260
parking spaces in April 1994. Subsequently, the Company announced plans to
construct, in phases, an approximate 500-space parking garage on the parking
lot site for which it previously received the requisite local zoning
approvals. The parking garage was expected to cost approximately $6 million
to build. In preparation for construction of the parking garage, the Company
completed environmental remediation and excavation work, which included the
excavation of a substantial portion of the mountain located in the back of
the 3.25 acre site, at a cost of approximately $1.3 million.
Upon completion of the excavation work in June 1996 and the subsequent
repaving of the parking lot, the number of cars which could be parked on the
parking lot at any one time increased from 260 cars to approximately 375
cars, a 45% increase in capacity. The Company then analyzed whether the cost
of constructing the parking garage was justified given the fact that it had
achieved 75% of the desired parking capacity for only a fraction of the total
capital cost anticipated to be spent on the parking garage and decided to
delay indefinitely the construction of the parking garage.
In late 1996, the Company evaluated whether it could cost-effectively
excavate the remaining portion of the mountain to its property line to further
expand the capacity of the parking lot. The Company concluded that the
additional excavation would cost approximately $1.3 million and would add
approximately 120 additional parking spaces. The Company has elected to
undertake this additional parking expansion project and as part of the project,
has also elected to construct a new valet facility to increase customer
convenience at the parking lot
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and to enhance access to the Kids Quest child care facility. The valet
facility is expected to cost approximately $300,000. The entire parking
expansion project, which commenced in early February 1997, is expected to be
completed by June 1997. During construction, the Company expects to
experience some business disruption.
GROWTH STRATEGY
CONSULTING AGREEMENT. The Company has entered into a consulting
agreement with another company in the business of providing gaming
consulting/management services to Native American Indian tribes. The
companies will use their joint resources to pursue obtaining contractual
arrangements with various Native American tribes to provide consulting
services for new and existing Native American gaming projects. As of
December 31, 1996, the Company has expended $120,000 and has committed to
expend a maximum of $220,000 over the next twelve months, under this
agreement. The Company expects to fund its on-going commitment through
available working capital.
MEMORANDUM OF UNDERSTANDING. 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 combining the Bullwhackers
Central City with the Lady Luck casino, which is adjacent to Bullwhackers
Central City. There are unresolved issues and negotiations have not been
concluded. The agreement is subject to numerous contingencies, including the
negotiation and execution of definitive agreements, completion of due
diligence and approval by the appropriate regulatory agencies, including
gaming and liquor agencies, and each company's board of directors. There can
be no assurance that the companies will reach an agreement or that the
necessary approvals will be obtained. Under the proposed terms, the Company
would manage the combined facility.
OTHER. Although the Company intends to focus on its existing
operations, it continues to review and evaluate potential opportunities to
apply existing management expertise to additional gaming operations in
Colorado and in other jurisdictions such as those described above. The
Company's ability to acquire additional gaming facilities in Colorado without
disposing of existing facilities is limited by the fact that no entity may
hold more than three Colorado gaming licenses or more than three gaming
tavern liquor licenses or more than one type of liquor license. The Company
currently holds, through its subsidiaries, the maximum number of gaming and
liquor licenses allowed in Colorado. See " - Colorado Gaming Regulations"
and " - Non-Gaming Regulation." In evaluating potential opportunities the
Company will look for opportunities with either a value orientation or
sustainable rate of growth. Although the Company is currently exploring
several potential opportunities, there can be no assurance that such
opportunities will be available on terms acceptable by the Company or that if
completed that such opportunities will be successful.
THE COLORADO GAMING MARKET
GENERAL. Black Hawk and Central City are historic mining towns made
famous during the gold rush of 1859. Prior to the advent of casino gaming in
October 1991, Black Hawk, and, to a greater extent, Central City, were
popular tourist towns, especially in the summer. Casino gaming is currently
the main draw to the towns and gaming establishments have displaced many of
the former tourist-related businesses.
Customers for casinos in Black Hawk and Central City are primarily "day
trippers" from the Denver metropolitan area. Approximately 2.1 million
people live in the Denver metropolitan area, approximately 2.4 million people
live within a 50-mile radius, and approximately 2.8 million people live
within a 100-mile radius, of Black Hawk and Central City. Black Hawk and
Central City are located approximately 35 miles west of Denver and
approximately ten miles from Interstate 70, the main east-west artery
connecting Denver with many of Colorado's premier ski resorts.
MARKETING STRATEGY. The Company targets primarily customers in the
Denver metropolitan area. The Company seeks to attract customers to the
Colorado Casinos by: (i) offering first-class facilities with comfortable
and efficient layouts; (ii) providing ample parking which is more convenient
than that provided by many of its competitors; (iii) promoting customer
awareness through marketing of the Bullwhackers name and theme; (iv)
providing excellent customer service with a motivated staff; (v) utilizing
strategic busing programs; (vi) offering customer promotions; (vii) providing
desirable food products and refreshments; and (viii) providing incentives to
higher-value repeat customers.
In particular, the Company has used extensive marketing programs to build
customer awareness, including television, radio, print and direct mail. The
Company believes that Bullwhackers enjoys among the highest name recognition of
all casinos located in Colorado, a fact which the Company attributes in part to
the success of its marketing campaigns. The Company has also developed
promotional offerings centered around the Bullwhackers theme of offering a fun,
exciting gaming atmosphere, including providing gift items and a cash-back
reward system based upon level of play through membership in the "Bullwhackers
Five Star Players Club." The
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Company also has instituted a popular busing program known as the "Bullride."
The Bullride operates at least four times per day from Golden, a western
Denver suburb, to and from Black Hawk and Central City, and between the two
towns, and carries an average of 2,500 patrons per week.
The Company has upgraded most of its slot machines by installing bill
validators or purchasing new slot machines with bill validators thereby
increasing customer play. Bill validators allow patrons to use paper
currency rather than tokens or coins in slot machines. This capital
expenditure program is expected to increase the competitiveness of the
Colorado Casinos within their markets by increasing the convenience and
therefore the usage of the slot machines. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
COMPETITION
Competition in the Black Hawk and Central City gaming market, which
forms the primary gaming market in Colorado, is intense. Bullwhackers
Central City is located approximately one and one-half miles from
Bullwhackers Black Hawk and the Silver Hawk Casino is located across the
Company's parking lot from Bullwhackers Black Hawk. Due to their proximity,
the Colorado Casinos compete for some of the same target markets of customers
in the Denver metropolitan area. However, the Company believes that its
primary competition for the Colorado Casinos are other casinos operating in
Black Hawk and Central City, of which there are approximately 34 as of
December 31, 1996, and, secondarily, casinos operating in Cripple Creek, of
which there are approximately 25 as of December 31, 1996. More experienced,
nationally recognized casino operators from other areas of the country have
entered, or have recently announced plans to enter, the Colorado gaming
market, including Harvey's, Riviera Holdings, Inc., Harrahs's, Lady Luck,
Bullseye Gaming, ITT Sheraton, Anchor Gaming, and Fitzgerald's, many of which
have substantially greater financial and marketing resources than the
Company. Because Colorado does not limit the total number of gaming licenses
available for issuance in Colorado and there are no minimum facility size
requirements, the Company expects the number of gaming facilities and gaming
devices to continue to increase.
The Company believes that the primary competitive factors in the Black
Hawk-Central City market are location, availability and convenience of
parking, number of slot machines and gaming tables, types and pricing of
amenities, name recognition, and overall atmosphere. The Company believes it
generally competes favorably on these factors, although Bullwhackers Central
City offers less convenient parking than some of its competitors and Silver
Hawk Casino is smaller and currently has less name recognition than some of
its direct competitors.
According to the Colorado Division of Gaming, there were 59 gaming
facilities operating in Colorado at the end of 1996, with a total of 13,066
slot machines and 253 table games. Of these, 19 facilities, 5,225 slot
machines and 111 table games were located in Black Hawk; 15 facilities, 3,259
slot machines and 60 table games were located in Central City; and 25
facilities, 4,582 slot machines and 87 table games were located in Cripple
Creek. For the year ended 1996, the average daily adjusted gross proceeds
(determined by deducting the amount paid out to patrons from gross proceeds,
and sometimes referred to as the casino's "win") per slot machine was $111.77
in Black Hawk, $67.53 in Central City and $63.43 in Cripple Creek. The
cumulative win for slot machines in Black Hawk as a market was $181 million
in 1995 and $204 million in 1996, compared with the cumulative win for slot
machines in Central City as a market of $86 million and $83 million in 1995
and 1996, respectively. Central City facilities have not been able to
compete effectively with facilities in Black Hawk, as demonstrated by the
decline in the gross gaming win in Central City for 1995 to 1996. Generally,
Black Hawk casinos offer substantially more on-site parking and more
convenient location and access, which is a significant competitive advantage
in the Colorado market.
The Company believes that since October 1991, approximately 12 casinos
in Black Hawk and 20 casinos in Central City have ceased operations. In
addition, several operators, including the Company, have reduced staffing and
others have closed temporarily or reduced their square footage and/or hours
of operations. The Company believes that the casinos that failed did so for a
variety of reasons, including inferior design, inconvenient parking,
inadequate size, inexperienced management and undercapitalization.
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 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 Silver
Hawk Casino with another opportunity to capture visitors to Black Hawk
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from the Denver metropolitan area, thereby potentially reducing traffic flow
and customer visits to Bullwhackers Black Hawk and Silver Hawk.
Among the projects currently under construction in Black Hawk are a
joint venture of the Gilpin Hotel and Jacobs Entertainment of a new 35,000
square foot casino, with 52 hotel rooms, 250 parking spaces and 750-1,000
slot machines. Additionally, the Black Hawk Brewery, which is currently
contemplating to commence construction in April 1997, developed by Bullseye
Gaming, will offer 500 slot machines and 10 table games when open. In
Central City, Harvey's Wagon Wheel, currently the largest casino in Central
City, is constructing a parking garage. The current casinos under
construction or expected to commence construction in the near term, will
provide an additional 25-30% in capacity, in terms of slot machines, in Black
Hawk. Such increase in capacity 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 recently announced project
between Rivera Holdings, Inc. and Eagle Gaming to construct the largest
facility in Black Hawk to date. 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 competitive
projects may be completed and open to the public by mid-1998. 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 Central City and, accordingly, may have a material adverse
effect on the Company's consolidated results of operations and financial
position.
Several lobbying groups placed initiatives for additional Colorado
limited stakes gaming venues, including Denver, on the November 1992, 1994
and 1996 statewide ballots. Although each of these initiatives was defeated
by a wide margin, similar initiatives, legislation or regulation could be
introduced in the future. The enactment of any initiatives, legislation, or
regulations legalizing gaming elsewhere in Colorado could, and if gaming
closer to Denver was legalized would, have a material adverse effect on the
Company's consolidated results of operations and financial position.
In addition to competing with other gaming facilities in Colorado, the
Company competes to a lesser degree, both for customers and in potential
future gaming sites, with gaming facilities nationwide, including casinos in
Nevada and Atlantic City, many of which have substantially greater financial
resources and experience in the gaming business. The Company also competes
with other forms of gaming on both a local and national level, including
state-sponsored lotteries, charitable gaming and pari-mutuel wagering, among
others, and competes for entertainment dollars generally with other forms of
entertainment. The recent expansion of legalized casino gaming to new
jurisdictions throughout the United States may also affect competitive
conditions. Although the Company's focus is the Colorado gaming market, it
is considering gaming ventures in other locations that the Company believes
present favorable opportunities, and may pursue such opportunities if its
resources allow it to do so. See "-Growth Strategy." However, its ability
to capitalize on such opportunities is expected to be limited due to
competition for such opportunities from more experienced and financially
stronger entities.
A decline in the Denver economy, a decline in the Black Hawk-Central
City gaming market, or increased competition for Denver metropolitan area
residents from other gaming jurisdictions both inside and outside Colorado,
could have a material adverse effect on the Company's consolidated results of
operations, financial position and cash flows.
COLORADO GAMING REGULATIONS
The State of Colorado created the Colorado Division of Gaming within the
Department of Revenue to license, implement, regulate and supervise the
conduct of limited stakes gaming. The Director of the Division, under the
supervision of the Colorado Limited Gaming Control Commission (the "Gaming
Commission"), has been granted broad power to ensure compliance with Colorado
law and regulations adopted thereunder (collectively, the "Colorado
Regulations"). The Director of the Division (i) may inspect, without notice,
premises where gaming is being conducted; (ii) may seize, impound or remove
any gaming device; (iii) may examine and copy all of a licensee's records;
(iv) may investigate the background and conduct of licensees and their
employees; and (v) may bring disciplinary actions against licensees and their
employees. He may also conduct detailed background checks of persons who
loan money to or invest money in a licensee.
It is illegal to operate a gaming facility without a license issued by
the Gaming Commission. The Gaming Commission is empowered to issue five
types of gaming and gaming-related-licenses. The licenses are revocable and
non-transferable. The failure or inability of the Company, BWBH, BWCC,
Silver Hawk, or
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associated persons to maintain necessary gaming licenses will have a material
adverse effect on the operations of the Company.
The Gaming Commission closely regulates the suitability of persons
owning or seeking to renew an interest in a gaming license, and the
suitability of a licensee can be adversely affected by persons associated
with the licensee. Additionally, any person or entity having any direct
interest in the Company or any casino directly or indirectly owned by the
Company may be subject to administrative action, including personal history
and background investigations. The actions of persons associated with the
Company and its management employees, over whom the Company may have no
control, could jeopardize any licenses held by the Company in Colorado.
Bullwhackers Black Hawk, Bullwhackers Central City and Silver Hawk
Casino were granted retailer/operator licenses concurrently with their
respective openings. These licenses are subject to continued satisfaction of
suitability requirements. The current licenses for the Bullwhackers Casinos
expire on December 2, 1997 and the license for the Silver Hawk expires on
June 24, 1997. There can be no assurance that the Company will successfully
renew its licenses in a timely manner or at all.
All persons employed by the Company who are involved, directly or
indirectly, in gaming operations in Colorado also are required to obtain a
support gaming license prior to commencing employment. In addition, "Key"
licenses are issued to "key employees," which include any executive, employee
or agent of a licensee having the power to exercise a significant influence
over decisions concerning any part of the operations of a licensee. At least
one key license holder must be on the premises of each Colorado Casino at all
times. All licenses are revocable, non-transferable and valid only for the
particular location initially authorized, except that support and key
employee licenses move with the approved individual and are not location
specific. Messrs., Szapor, Mayer, Rabin, Stephens and the Company's four
independent directors, among others, all hold key licenses in Colorado.
As a general rule, under the Colorado Regulations, it is a criminal
violation for any person to have a legal, beneficial, voting or equitable
interest, or right to receive profits, in more than three retail/operator
gaming licenses in Colorado. The Company currently has three such licenses,
one each for Bullwhackers Black Hawk, Bullwhackers Central City and the
Silver Hawk Casino. Accordingly, any expansion opportunities that the
Company may have in Colorado are limited absent the disposition of one of the
Colorado Casinos. In addition, this limitation may affect the ability of
certain persons to own the Company's stock. Under the Colorado Regulations,
the definition of an "interest" in a licensee excludes ownership of less than
5% of a publicly traded company. Pursuant to the Colorado Regulations, a
licensee that elects to register its common stock under Section 12(g) of the
Exchange Act is considered to be publicly traded. The Company registered its
common stock effective on the Effective Date and, accordingly, is considered
a publicly traded company within the meaning of the Colorado Regulations.
Any owner of any interest in a Colorado licensee, where such licensee is not
publicly traded or of a 5% or more interest in a publicly traded licensee is
precluded from owning more than 5% of the Company's stock.
Under the Colorado Regulations, any person or entity having any direct
or indirect interest in a gaming licensee or an applicant for a gaming
license, including but not limited to the Company and stockholders of the
Company, may be required to supply the Gaming Commission with substantial
information, including but not limited to, personal background and financial
information, source of funding information, a sworn statement that such
person or entity is not holding his interest for any other party, and
fingerprints. Such information, investigation and licensing as an
"associated person" is automatically required of all persons who directly or
indirectly own 10% or more of a direct or indirect legal, beneficial or
voting interest in the Colorado Casinos, through their ownership of the
Company, as a publicly traded licensee. Such persons (other than certain
institutional investors discussed below) must report their interest and apply
to the Gaming Commission for a finding of suitability within 45 days after
acquiring such interest. Persons directly or indirectly having an interest
between 5% and 9.99% in a publicly held licensee must report their interest
to the Gaming Commission within ten days after acquiring their interest and
may be required to provide additional information and may be required to be
found suitable by the Gaming Commission. Institutional investors may be
permitted to own up to 14.99% of the Colorado Casinos, through their
ownership of the Company, before a finding of suitability will be required;
provided, however, that such institutional investors must provide a
certification within 45 days of acquiring such ownership of various matters
relative to their ownership was acquired for investment purposes only. The
Gaming Commission maintains the right to request information from any person,
directly or indirectly interested, regardless of their level of ownership, in
or employed by a licensee. An application for license or a finding of
suitability may be denied for any reason deemed reasonable by the Gaming
Commission or the Director of the Division. All licensing and investigation
fees must be paid by the person in question. The associated person
investigation fee currently is $48 per hour.
If the Gaming Commission determines that a person or entity is not
suitableto own a direct or indirect
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voting interest in the Company, the Company may be sanctioned unless the
person or entity disposes of its voting interest. Sanctions may include the
loss by any of the Colorado Casinos of their licenses. In addition, the
Colorado Regulations prohibit a licensee or any affiliate of a licensee from
paying dividends, interest or other remuneration to any person found to be
unsuitable, or recognizing the exercise of any voting rights by any person
found to be unsuitable. The Colorado Regulations require an operating casino
licensee to include in its corporate charter provisions which permit the
repurchase of the voting interests of any person found to be unsuitable. The
Company's Certificate of Incorporation includes the required provisions.
A person or entity may not sell, lease, purchase, convey, acquire or
pledge an interest in an entity licensed to conduct limited stakes gaming in
Colorado without the prior approval of the Gaming Commission, except for a
less than 5% interest in a publicly traded corporation.
The Gaming Commission also has the right to request information from any
person directly or indirectly interested in, or employed by, a licensee, and
to investigate the moral character, honesty, integrity, prior activities,
criminal record, reputation, habits and associations of (i) all persons
licensed pursuant to the Colorado Limited Gaming Act, (ii) all officers,
directors and stockholders of a licensed privately held corporation, (iii)
all officers, directors and stockholders holding either a 5% or greater
interest or a controlling interests in a licensed publicly traded
corporation, (iv) all general partners and all limited partners of a licensed
partnership, (v) all persons which have a relationship similar to that of an
officer, director or stockholder of a corporation (such as members and
managers of a limited liability company), (vi) all persons supplying
financing or loaning money to any licensee connected with the establishment
or operation of limited gaming, and (vii) all persons having a contract,
lease or ongoing financial or business arrangement with any licensee, where
such contract, lease or arrangement relates to limited gaming operations,
equipment, devices or premises.
In addition, under the Colorado Regulations, every person who is a party
to a "gaming contract" with an applicant for a license, or with a licensee,
upon the request of the Gaming Commission or the Director, promptly must
provide to the Gaming Commission or Director all information which may be
requested concerning financial history, financial holdings, real and personal
property ownership, interests in other companies, criminal history, personal
history and associations, character, reputation in the community, and all
other information which might be relevant to a determination whether a person
would be suitable to be licensed by the Gaming Commission. Failure to provide
all information requested constitutes sufficient grounds for the Director or
the Gaming Commission to require a licensee or applicant to terminate its
"gaming contract" (as defined below) with any person who failed to provide
the information requested. In addition, the Director or the Gaming
Commission may require changes in "gaming contracts" before an application is
approved or participation in the contract is allowed. A "gaming contract" is
defined as an agreement in which a person does business with or on the
premises of a licensed entity.
An application for license or suitability may be denied for any cause
deemed reasonable by the Gaming Commission or the Director, as appropriate,
including the failure to disclose any arrest on the application. If the
Gaming Commission determines that a person or entity is unsuitable to own
interests in the Company, then the Company, and/or any of the Colorado
Casinos may be sanctioned, which may include the loss by the Company, and/or
any of the Colorado Casinos of their respective approvals and licenses.
The Gaming Commission does not require advance approval of a public
offering of securities, but rather requires a filing of notice and additional
documents with regard to such public offering prior to such public offering.
Under the Colorado Regulations, the Gaming Commission may, at its discretion,
require additional information and prior approval of such public offering.
The Company may not sell any interest in any of the Colorado Casinos without
the prior approval of the Gaming Commission.
The Colorado Casinos may operate only between 8:00 a.m. and 2:00 a.m.,
and may permit only individuals 21 years or older to gamble in the casino.
Slot machines, blackjack and poker are the only permitted games, with a
maximum single bet of $5.00. The Colorado Casinos may not provide credit to
gaming patrons, although at the current time, there is no regulatory
definition of "credit." The Colorado Regulations restrict the percentage of
space a casino may use for gaming to 50% of any floor and 35% of the overall
square footage of the building in which the casino is located. Effective
October 1 of each year, the Gaming Commission establishes the gross gaming
revenue tax rate for the ensuing twelve months. Under the Colorado
Constitution, the rate can be increased to as much as 40%. Colorado has both
raised and lowered gaming tax rates since they were initially set in 1991.
Currently, the maximum gaming tax rate is 20%. These regulations and taxes
adversely affect the Colorado Casinos' ability to generate revenues and
operating profits. See "- Non-Gaming Regulation - Taxation."
The Company believes that it is presently in material compliance with
all applicable gaming rules and regulations.
8
<PAGE>
NON-GAMING REGULATION
LIQUOR REGULATION. The sale of alcoholic beverages is subject to
licensing, control and regulation by applicable state and local agencies (the
"Liquor Agencies"). The current liquor licenses for BWBH and BWCC, which
were recently renewed, expire in January and February, 1998, respectively.
The Silver Hawk liquor license expires in June 1997 and is in the process of
being renewed.
All liquor licenses are renewable, are revocable and are not
transferable. The Liquor Agencies have full powers to limit, condition,
suspend or revoke any liquor license. Any such disciplinary action could,
and any failure to renew or other revocation of any of its liquor licenses
would, have a material adverse effect upon the operations of the Company.
Under Colorado law, it is a criminal violation for any person or entity
to own a direct or indirect interest in more than one type of alcoholic
beverage license or more than three gaming tavern liquor licenses. Each
Colorado Casino has a gaming tavern liquor license. Accordingly, the
Company's expansion opportunities in Colorado are limited by such licensing
restriction. Furthermore, no person that holds an interest in the Company may
hold any direct or indirect legal, equitable or voting interest in any other
Colorado alcoholic beverage licensee, and vice versa.
TAXATION. Gaming operators in Colorado are subject to state and local
taxes and fees in addition to ordinary federal and state income taxes. Black
Hawk and Central City have imposed annual license fees, currently $750 and
$1,265, respectively, for each gaming device installed in a casino. Colorado
currently imposes an annual device fee of $75 for each gaming device
installed in a casino. The Colorado Casinos operate as licensed gaming
establishments pursuant to the Colorado Limited Gaming Act and, accordingly,
are required to make monthly gaming tax payments to the State of Colorado.
These rates are subject to annual revision with a maximum rate of 40%. The
latest annual revision, which became effective October 1, 1996, is calculated
as a percentage of adjusted gross proceeds (casino net win). The gaming tax
rates for the previous three gaming years are set forth in the following
table:
Annual Tax Annual Tax Rate
Rate from Effective
Annual Gross Proceeds 10/94 to 9/96 10/96
--------------------- ------------- ---------
First $2 million............ 2% 2%
Next $2 million............. 8% 4%
Next $1 million............. 15% 14%
Next $5 million............. 18% 18%
Proceeds over $10 million... 18% 20%
EMPLOYEES
The Company employs approximately 575 persons, including cashiers,
dealers, food and beverage service, facilities maintenance, accounting,
marketing and human resources personnel. Several of the Company's employees
hold key licenses in Colorado. See "-Colorado Gaming Regulations." No labor
unions currently represent any employees of the Company. A standard package
of employee benefits is provided to full-time employees. The Company
believes that its employee relations are satisfactory.
SEASONALITY AND INCLEMENT WEATHER
Because the Colorado Casinos are located in the Rocky Mountains, they
are subject to sudden and severe winter storms. Access to Central City and
Black Hawk, which are both located ten miles from Interstate 70, is made via
a two-lane secondary road. In bad weather, and in the winter months
generally, this access road is difficult to traverse, which reduces the
number of patrons traveling to Black Hawk and Central City, and, accordingly,
negatively affects the Company's operating results during these periods. As
a result, the Colorado Casinos' business tends to be seasonal, with the
highest level of activity occurring during the summer months.
The sites of Bullwhackers Black Hawk and Silver Hawk Casino are located
in a 100-year flood plain. To date, the Company has not experienced any
flooding resulting in damage to the casino. The Company believes it carries
adequate flood insurance on Bullwhackers Black Hawk facility. There can be
no assurance that Bullwhackers Black Hawk will not suffer flood damage in the
future or that any damage will be adequately covered by insurance.
PRIVATE SECURITIES LITIGATION REFORM ACT
9
<PAGE>
Certain statements in this Form 10-K which are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, such as statements relating to future
competition, financing and refinancing sources and availability, plans for
future development or expansion activities and capital expenditures. Such
statements can be identified by the use of forward-looking terminology such
as "might," "may," "will," "would," "could," "except," "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 and uncertainties that may significantly
affect the Company's liquidity and results of operattions in the future and,
accordingly, actual results may differ materially from those expressed in any
forward-looking statements. Such risks and uncertainties include, but are
not limited to, those related to leverage and debt service and ability,
financing and refinancing efforts, inclement weather, general economic
conditions in the Denver metropolitan area, changes in gaming laws,
regulations or tax rates and risks related to development and construction
activities.
ITEM 2. PROPERTIES
The Company owns, through wholly owned subsidiaries, the Colorado
Casinos and the parking lot including, with the exception of Bullwhackers
Black Hawk, the land underlying the buildings. The Company leases the land
underlying Bullwhackers Black Hawk pursuant to a 23-year land lease expiring
in 2014. The terms of the land lease require base minimum payments for the
calendar year 1996 through 1999 of $150,000 per quarter. The base minimum
quarterly payments increase thereafter for each five-year period for the
balance of the lease term, up to a maximum of $195,000 per quarter.
Additional rent in the amount of 1.9% of Bullwhackers Black Hawk's adjusted
gross revenue is payable monthly in arrears throughout the term of the lease.
The lease contains a buy-out provision which allows the Company to buy the
land subject to the lease on or after November 1, 2001 at a price equal to
nine times the annual base minimum rent payments in effect when the buy-out
is exercised.
During Bankruptcy, the Company entered into an amended sublease for
approximately 19,500 square feet of office space located in Denver, Colorado
and provided for interim rent of approximately $7,500 per month which the
Company occupied as its corporate offices through February 1997. In March,
the Company relocated its corporate offices to Lakewood, Colorado pursuant to
a new $10,000 a month lease, which expires April 2002, and the amended
sublease was terminated upon execution of this new lease.
ITEM 3. LEGAL PROCEEDINGS
GENERAL. The Company is or may become a defendant in pending or
threatened legal proceedings in the ordinary course of business. The
Company's management believes that the ultimate resolution of all such
currently pending legal proceedings will not have a material adverse impact
on the Company's financial position or results of operations.
REORGANIZATION. Pursuant to the Reorganization, certain claims by the
Predecessor Company against third parties are assigned to the Litigation
Trust established in connection with the Reorganization. The Litigation
Trust consists of the members of the Company's Board of Directors. All legal
proceedings pending against the Predecessor Company prior to the Effective
Date was settled pursuant to the Reorganization. The determination by the
Litigation Trust whether or not to pursue any causes of action assigned to it
will have no material impact on the Company or the Colorado subsidiaries.
ENVIRONMENTAL MATTERS. The Black Hawk and Central City gaming
districts, including the Colorado Casino sites, are located generally within
the Central City/Clear Creek Superfund site (the "Site") as designated by the
Environmental Protection Agency (the "EPA"), pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
("CERCLA"). The Site includes numerous specifically identified areas of mine
tailings and other waste piles from former gold mine operations that are the
subject of ongoing investigation and clean-up by the EPA and the Colorado
Department of Public Health and Environment (the "CDPHE"). CERCLA requires
remediation of sites from which there has been a release or threatened
release of hazardous substances and authorizes the EPA to take any necessary
response actions at Superfund sites, including authorizing potentially
responsible parties ("PRPs") to clean up or contribute to the clean-up of a
Superfund site. PRPs are broadly defined under CERCLA, and include past and
present owners and operators of a site. CERCLA imposes strict liability on
PRPs, and courts have commonly held PRPs to be jointly and severally liable
for all response costs.
Although the Colorado Casinos are not within any of the specific areas of the
Site currently identified by the EPA for investigation or remediation, the site
on which the parking lot was constructed was identified as requiring
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<PAGE>
remediation in connection with the construction of the parking lot. That
remediation was completed in June 1994. When the Company expanded the
parking lot in June 1996, additional environmental remediation of hazardous
soil was required. Such additional remediation was completed, at the
direction and approval of the EPA and CDPHE, prior to December 31, 1996.
The Company, through independent environmental consultants, conducted both
Phase I and Phase II environmental examinations of the real property
underlying the Bullwhackers Casinos and obtained subsequent follow-up
reports. Based on these examinations, the Company is not aware of any
environmental problems affecting the Bullwhackers Casinos which are likely to
result in material costs to the Company. Although the Company has not
conducted environmental evaluations of the real property underlying the
Silver Hawk Casino facility, it does not believe that there are any
environmental problems affecting the Silver Hawk Casino site which are likely
to result in material costs to the Company. No assurance can be given,
however, that the Company will not subsequently discover significant
environmental problems at any of its Colorado properties. Furthermore, the
EPA or other governmental authorities could broaden their investigations and
identify additional areas within the Site, including the Colorado Casino
sites, for remediation. If any of the Colorado Casinos were included in
additional areas of concern within the Site, the Company could be identified
as a PRP and any liability related thereto could have a material adverse
effect on the Company. Furthermore, environmental conditions at any of the
Company's Colorado properties could have, or could in the future have, a
detrimental impact on adjacent or nearby properties or persons. No assurance
can be given that no such impact on a third party will arise in the future,
nor that such an impact, if it arises, will not have a material adverse
impact on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
Not Applicable
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information with respect to each individual
who is an executive officer of the Company:
Name Age Position(s)
- ---- --- -----------
Stephen J. Szapor, Jr. 37 Chief Executive Officer,
President and Director
Alan L. Mayer 35 Senior Vice President,
Chief Legal Officer and Secretary
Richard J. Rabin 50 Senior Vice President of Operations
Robert J. Stephens 29 Vice President of Finance and
Treasurer
Jack Breslin 42 Vice President of Marketing
STEPHEN J. SZAPOR, JR. has served as President and Chief Executive
Officer of the Company since August 1995 and as a director since June 7,
1996, the Effective Date. Mr. Szapor served as Executive Vice President and
Chief Financial Officer from March 1995 until August 1995. From July 1994
until joining the Company, he served as the Chief Operating Officer and a
member of the board of directors of Sahara Gaming Corporation, and from June
1993 until July 1994, he was the Executive Vice President/Chief Financial
Officer of Sahara Gaming Corporation. From October 1986 until June 1993, Mr.
Szapor held several executive positions with Hollywood Casino Corporation
including Assistant to the President and Vice President--Strategic Planning.
Mr. Szapor has also held financial and accounting positions with Merrill
Lynch & Co. and Arthur Andersen LLP. He holds a key license from the Gaming
Commission and is a Certified Public Accountant. Mr. Szapor's employment
agreement with the Company provides that he shall serve as President and
Chief Executive Officer and as a director during the term of his employment.
See "-Employment and Consulting Agreements."
ALAN L. MAYER has served as Senior Vice President, Secretary and Chief
Legal Officer of the Company and its predecessors since September 1992 and as an
interim director from the Effective Date through January 1997. From 1987 to
1992, Mr. Mayer was associated with Isaacson, Rosenbaum, Woods & Levy in Denver,
where he specialized in real estate, land use planning, finance, corporate and
gaming law. Mr. Mayer is a
11
<PAGE>
member of the American Bar Association, the Colorado Bar Association, the
California Bar Association and the International Association of Gaming
Attorneys. He is licensed to practice law in California and Colorado. He
holds a key license from the Gaming Commission and is President of the
Casino Owners Association of Colorado. See "-Employment and Consulting
Agreements."
RICHARD J. RABIN has served as Senior Vice President of Operations of
the Company since March 1996 and as an interim director from the Effective
Date through October 1996. Mr. Rabin served as Vice President, Finance &
Administration of the Company from August 1995 until March 1996. From 1994
until joining the Company, he served as Chief Financial Officer of a
riverboat gaming facility operated by Sahara Gaming Corporation in Missouri
and then as General Manager of a gaming facility operated by Sahara Gaming
Corporation in Nevada. From 1991 to 1994, Mr. Rabin was Chief Financial
Officer and Vice President and, beginning in 1993, also General Manager, of
the Glory Hole Saloon and Gambling Hall in Central City, Colorado. From 1985
until 1991, Mr. Rabin served in various positions in the gaming industry in
Reno, Nevada. Mr. Rabin holds a key license from the Gaming Commission and is
a Certified Public Accountant. See "-Employment and Consulting Agreements."
ROBERT J. STEPHENS has served as Vice President of Finance since
September 1996. He served as Controller, Chief Accounting Officer and
Treasurer of the Company from August 1995 until September 1996. Previously,
Mr. Stephens served in various finance and accounting positions since joining
the Company in May 1994. From 1990 to 1994 Mr. Stephens was associated with
Arthur Andersen LLP. Mr. Stephens is a Certified Public Accountant.
JACK BRESLIN has served as Vice President of Marketing since February
1997. Mr. Breslin served as President and Partner of CCI Advertising, Inc. in
New Jersey, which produced campaigns for Horseshoe Casinos, Sands Hotel and
Casino, Atlantic City, Santa Fe Casino, Las Vegas, Gold River in Laughlin,
Nevada and several other casinos and riverboats throughout the country from
1991 to February, 1997. Prior to that, Mr. Breslin served as in-house
Creative Director for Trump's Castle Casino Resort in New Jersey.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDERS MATTER
(a) MARKET INFORMATION. The Company's Common Stock has traded on the NASDAQ
Electronic bulletin board system, under the symbol "CGME" since October 1996.
No established public trading market for the Company's Common Stock exists.
There are only, limited sporadic and infrequent trades of the Common Stock,
consequently there are no reliable quotations of trading prices. Based upon
information supplied to NASDAQ by the reporting brokers and information
supplied to the Company by certain makers, NASDAQ Trading Market Services and
such brokers reported the following range of high and low sales price for
each quarter since the Common Stock became registered under the Securities
Exchange Act of 1934 on the Effective Date:
QUARTER ENDED HIGH LOW
------------- ---- ---
June 30, 1996 $3.50 $2.50
September 30, 1996 4.25 3.50
December 31, 1996 5.00 4.00
The most recent trade of the Company's Common Stock was $4.50 per share
on January 13, 1997.
(b) HOLDERS. The approximate number of record holders of the Company's
Common Stock as of March 26, 1997 was approximately 50.
(c) DIVIDENDS. Since the Effective Date, the Company has neither declared
nor paid dividends on the Common Stock and does not anticipate paying
dividends in the foreseeable future. The Company intends to follow a policy
of retaining any earnings either to repay borrowings under the Company's
credit facility, finance the Company's growth, or for general corporate
purposes. In addition, the Company's credit facility and the Indenture
restrict the Company from paying cash dividends. Payment of dividends in the
future will be determined by the Company's Board of Directors and will depend
upon, among other things, the Company's future earnings, operations, capital
requirements, contractual restrictions in the Company's debt or other
instruments, and such other factors the Board of Directors may deem relevant.
Item 6. SELECTED FINANCIAL DATA
12
<PAGE>
The selected consolidated financial data set forth below for each of the
last five fiscal years ended December 31 is derived from the Company's
Consolidated Financial Statements and Notes. Due to the Reorganization,
comparisons of 1996 results to prior periods may be of limited use in
determining operating or other financial trends in the Company's business.
This data should be read in conjunction with the Consolidated Financial
Statements of the Company and the Notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" contained in
this Form 10-K.
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT SHARE DATA
Years Ended December 31,
---------------------------------------------
1992(a) 1993 1994(b) 1995(b)
------- -------- -------- --------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues . . . . . . . . . . . . $ 17,045 $ 38,468 $ 45,474 $ 47,428
Operating Expenses:
Impairment of assets and
predevelopment expense . . . . . . - - 10,804 11,347
Reorganization items . . . . . . . - - - 17,910
Other operating expenses . . . . . 25,349 35,310 47,631 44,807
Income (loss) from operations . . . . (8,304) 3,158 (12,961) (26,636)
Interest expense . . . . . . . . . . 3,000 6,987 18,822 18,664
Equity loss in unconsolidated
subsidiary . . . . . . . . . . . . - - (2,323) (70,277)
------- -------- -------- --------
Net loss . . . . . . . . . . . . . . $(11,241) $ (3,829) $(32,331) $(115,216)
------- -------- -------- --------
------- -------- -------- --------
Net loss per common share(b) . . . . N/A N/A N/A N/A
------- -------- -------- --------
------- -------- -------- --------
Weighted average common
shares(b) . . . . . . . . . . . . N/A N/A N/A N/A
Jan. 1,1996 June 7, 1996 (c)
through through
June 6, 1996 December 31,1996
------------ ----------------
STATEMENT OF
OPERATIONS DATA:
Net revenues . . . . . . . . . . . . $19,982 $30,680
Operating Expenses:
Reorganization items . . . . . . . 2,290 308
Other operating expenses . . . . . 17,130 26,402
Income from operations . . . . . . . 562 3,970
Interest expense . . . . . . . . . . 579 3,867
Extraordinary gain from
reorganization . . . . . . . . . . 164,358 --
-------- -------
Net income . . . . . . . . . . . . . $164,407 $ 192
-------- -------
-------- -------
Net income per common share(b) . . . N/A $ 0.04
-------- -------
-------- -------
Weighted average common
shares(b) . . . . . . . . . . . . N/A 5,138,888
</TABLE>
13
<PAGE>
<TABLE>
As of December 31,
------------------
1992 1993 1994(d) 1995(b) 1996
------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents.................. $ 1,676 $ 12,944 $ 7,977 $ 3,623 $ 5,758
Total assets................. 35,181 143,622 141,093 37,680 67,048
Long-term debt (excluding
current portion)............. 35,064 139,595 155,675 - 55,391
Liabilities subject to
compromise................... - - - 186,460 --
Total stockholders'
equity (deficit)............. (10,002) (4,693) (36,824) (153,137) 4,869
</TABLE>
(a) Reflects operating results for the period from June 15, 1992 to December
31, 1992 for Bullwhackers Central City and the period from July 17, 1992 to
December 31, 1992 for Bullwhackers Black Hawk.
(b) The weighted average number of common shares outstanding and net income per
common share for the Predecessor Company (periods through June 6, 1996)
have not been presented because, due to the Reorganization and
implementation of fresh start reporting, they are not comparable to
subsequent periods and irrelevant.
(c) Commencement of fresh-start reporting in connection with the
Reorganization, effective June 7, 1996.
(d) GPRI was consolidated with the Company and its other wholly owned
subsidiaries for the Company's fiscal year ended December 31, 1994, but was
not consolidated with the Company and its other wholly owned subsidiaries
for the Company's fiscal year ended December 31, 1995 because the Company
no longer "controlled" GPRI (as determined by generally accepted accounting
principles) following the commencement of the GPRI Bankruptcy Case. See
Consolidated Financial Statements and Notes thereto.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
OVERVIEW
The Predecessor Company was formed to develop, own and operate the
Bullwhackers casinos in Colorado and, subsequently, through its wholly owned
subsidiary Grand Palais Riverboat, Inc. ("GPRI"), developed, owned and
operated a riverboat gaming facility on the Mississippi River adjacent to
downtown New Orleans. The Predecessor Company's riverboat gaming facility
commenced operations on March 29, 1995, and due to substantial operating
losses, stopped operations on June 6, 1995. In 1996, the Company purchased
the Silver Hawk Casino to own and operate this casino in Black Hawk, Colorado.
Prior to closing its riverboat gaming operations, GPRI had incurred
substantial obligations, including construction costs overruns, equipment
purchases, and trade payables, for which it had no funds available or
financial ability to pay. On July 26, 1995, three creditors of GPRI filed a
Chapter 7 involuntary bankruptcy petition against GPRI in the United States
Bankruptcy Court for the Eastern District of Louisiana (the "Court"). On
July 27, 1995, GPRI converted the petition into a voluntary petition under
Chapter 11 of the Federal Bankruptcy Code in the United States Bankruptcy
Court for the Eastern District of Louisiana. On May 3, 1996 as part of the
Company's overall restructuring, the Predecessor Company's equity interest in
GPRI was sold to Casino America, Inc. pursuant to GPRI's bankruptcy
reorganization. Consideration, consisting of cash, stock and notes, totaling
approximately $59 million, was given to GPRI creditors, including the
Predecessor 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 Predecessor Company's investment in GPRI was reduced to zero
in 1995.
In June 1995, the Predecessor Company received "Notices of Default"
from the trustee of its $140 million Senior Secured Pay-In-Kind Notes (the
"Old Notes"), alleging that the Predecessor Company was in default under
various provisions of the Old Notes Indenture. The alleged defaults
included, among other matters, violations related to the issuance of certain
additional indebtedness, the termination of riverboat gaming operations, the
numerous liens filed against the Riverboat Project and the failure to file
audited financial statements on a timely basis. On November 7, 1995, the
Predecessor Company and three of its wholly owned subsidiaries (BWBH, Inc.
BWCC, Inc. and Millsite 27, Inc.), filed voluntary petitions for
reorganization under Chapter 11 of the Federal Bankruptcy Code in the
District of Delaware as contemplated by the negotiations with the Company's
bondholders. The Chapter 11 case subsequently was transferred to the Court.
The Company's Reorganization became effective on June 7, 1996, the
"Effective Date". Pursuant to the Reorganization, the following events
occurred:
- $176 million of outstanding senior secured debt was canceled and $50
million in new debt, consisting of the Company's 12% Senior Secured
Pay-In-Kind Notes Due 2003 (the "Notes"), was issued.
- All existing common stock and warrants of the Predecessor Company were
canceled and 5 million newly authorized shares of common stock were
issued to the Company's senior secured creditors.
- Certain unsecured indebtedness totaling approximately $1.2 million was
canceled.
- The Company changed its name to Colorado Gaming & Entertainment Co.
Also on the Effective Date, the Company adopted fresh-start accounting
in accordance with AICPA Statement of Position SOP 90-7 resulting in
adjustment of the Company's stockholders' 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, a substantial amount of pre-bankruptcy liabilities of the
Company was converted to equity or otherwise discharged and significant
adjustments were made to reflect the resolution of certain liabilities.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO
THE YEAR ENDED DECEMBER 31, 1995.
The Company's net revenue increased 7%, to $50.7 million in 1996, from
$47.4 million in 1995. The
15
<PAGE>
increase in revenue is primarily attributable to the addition of the Silver
Hawk Casino. 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 $3.9 million in net revenue from that date through
year end. In addition, continued overall growth in the Black Hawk market and
completion of the Company's expanded parking lot, which opened on June 7,
1996, contributed to the increase in the Company's net revenue. Bullwhackers
Black Hawk produced a 6% increase in revenues in 1996, despite the fact that
Bullwhackers Black Hawk's operations were negatively affected by the
construction activities relating to expansion of the parking lot which began
April 1 and ended June 7. The revenue gains in Black Hawk were offset by
significant revenue declines at Bullwhackers Central City due to competition
in an overall declining market. The Central City market, which was down
approximately 6% for the year, continues to struggle to compete with Black
Hawk, which offers better access and parking convenience. Bullwhackers
Central City has not been able to compete effectively with certain other
competitors in Central City which offer substantially more amenities such as
on-site parking and hotel rooms.
Expenses directly related to casino operations, including casino labor
expense, gaming taxes and food and beverage expense increased 3% to $25.3
million in 1996, as compared to $24.5 million in 1995. The increase is due
to the addition of the Silver Hawk Casino operations and the increased
business levels at Bullwhackers Black Hawk. However, as a percentage of net
revenue, casino expenses decreased to 50% in 1996 from 52% in 1995. The
decrease is due to certain labor efficiencies and other cost saving programs
implemented in late 1995 and early 1996, particularly at Bullwhackers Central
City in an effort to sustain profitability in light of the revenue decreases.
The decrease is also due to the benefit the Company received from the
revised gaming tax rates of approximately $110,000 in the fourth quarter.
However, as a result of the revised gaming tax rates, on a forward looking
basis, the Company estimates gaming taxes could increase by approximately
$300,000 to $400,000 based on the increase in the top tax rate.
Marketing expense increased 10% to $6.4 million in 1996, as compared to
$5.8 million in 1995. This increase is due to marketing efforts related to
introduction of Silver Hawk Casino to the market and the implementation of
additional customer busing programs and certain other promotions in an effort
to sustain business levels at Bullwhackers Central City.
Casino general and administrative expenses decreased 13% to $2.8 million
in 1996, as compared to $3.2 million in 1995. The decrease primarily relates
to reductions in staffing at Bullwhackers Central City and decreased
insurance costs.
Corporate expense decreased 59% to $2.8 million in 1996, as compared to
$6.9 million in 1995. These reductions included the elimination of most
corporate positions and terminating the use and subsidy of a corporate
aircraft, all beginning in the second quarter of 1995. Offsetting a portion
of these corporate reductions for 1996 includes a charge for approximately
$720,000 relating to incentive compensation expense for senior management
based upon implementation of the Company's new Cash Bonus Plan and the Stock
Incentive Plan subsequent to the Reorganization. Of the $720,000 incurred,
approximately $270,000 was a result of a noncash charge related to stock
compensation.
Depreciation and amortization increased 23% to $5.9 million in 1996 as
compared to $4.8 million in 1995. The increased depreciation charges are
due to the increased book basis of the Company's assets, primarily the excess
reorganization value at Bullwhackers Black Hawk. The Company was required to
adjust the carrying value of its assets to fair value when adopting
fresh-start accounting. Also, depreciation charges increased due to the
addition of the Silver Hawk Casino.
The Company incurred $362,000 in pre-opening expense in 1996 related to
the Silver Hawk Casino.
Reorganization and other impairment charges totaled $2.6 million in
1996, as compared to $28.9 million in 1995. Reorganization expenses are
costs directly related to the Company's Reorganization and consisted
primarily of professional fees in the 1996 period. Impairments are
write-offs, primarily due to the write-off of affiliate receivables in the
1995 period.
Interest expense decreased 76% to $4.4 million in 1996, as compared to
$18.7 million in 1995. The decrease in interest expense is primarily due to
the reduction of debt pursuant to the Reorganization. Additionally, the
Company did not record any interest expense during the Reorganization period
November 1995 through June 6, 1996 on its debt obligations in default. On a
pro forma basis, based on the reorganized capital structure, interest for
1996 would have been approximately $7 million.
FOR THE YEAR ENDED DECEMBER 31, 1995 AS COMPARED TO THE YEAR ENDED
DECEMBER 31, 1994.
As of December 31, 1994, the accounts of GPRI were consolidated with
those of the Predecessor
16
<PAGE>
Company. Because of the GPRI Bankruptcy proceedings and Casino America
Agreement in 1995, it was determined that the Predecessor Company did not
"control" GPRI and, therefore, GPRI no longer met the consolidation criteria
pursuant to Statement of Financial Accounting Standards No. 94,
"Consolidation of All Majority-Owned Subsidiaries." Accordingly, effective
January 1, 1995, the Predecessor Company's investment in GPRI was accounted
for under the equity method. Under the equity method, original investments
are recorded at cost and adjusted by the Company's share of undistributed
losses of the investee. Although GPRI's results of operations were
consolidated with the results of operations of the Company and its other
wholly owned subsidiaries for the Company's fiscal year ended December 31,
1994, and were not consolidated for the Company's fiscal year ended December
31, 1995, GPRI's only operating item in 1994 was the preopening expense of
$2.6 million discussed below. Therefore, with the exception of this item,
the Company's 1995 results of operations which do not include GPRI are
comparable to the Company's 1994 results of operations which do include GPRI.
The Company's net revenue increased to $47.4 million in 1995 as compared
with $45.5 million in 1994, representing a 4% increase in net revenues. The
growth is primarily attributable to increased revenues at Bullwhackers Black
Hawk resulting from the fact that Bullwhackers Black Hawk had the benefit of
the parking lot, which opened in April 1994, for all of 1995, as opposed to
only eight months during 1994. Additionally, Bullwhackers Black Hawk
benefited from the overall market growth in Black Hawk of 14% in 1995. The
revenue growth at Bullwhackers Black Hawk was offset by a slight decrease in
Bullwhackers Central City net revenues.
Expenses directly related to the casinos, including casino labor
expense, gaming taxes and food and beverage expense decreased by 3% to an
aggregate of $24.5 million for 1995 as compared to an aggregate $25.6 million
for 1994. Casino expense was 52% of net revenue at the Bullwhackers Casinos
for 1995 as compared 56% of net revenue at the Bullwhackers Casinos for 1994.
Casino general and administrative expenses decreased 3% to $3.2 million
in 1995, as compared to $3.3 million in 1994, due to cost reductions as part
of the Company's restructuring implemented in the fourth quarter of 1995.
Corporate expense decreased 43% to $6.9 million in 1995, as compared to
$12.0 million in 1994. The decrease is due to the Company's reduced
corporate group during the second half of 1995. During the second quarter of
1995, the Company began to implement significant cost reductions at the
corporate level as part of the Company's restructuring. Most corporate
positions were eliminated, the use and subsidy of a corporate airplane was
terminated and professional and consulting fees were eliminated. In addition,
the Company substantially reduced its predevelopment activity in early 1995
due to the Company's lack of financial resources.
Marketing expense increased 53%, to $5.8 million for 1995 as compared to
$3.8 million for 1994. The increase primarily relates to the increased
promotional costs due to increased business volume and the increasingly
competitive nature of the market.
Depreciation and amortization expense increased to $4.8 million for 1995
as compared to $4.3 million for 1994, representing a 9% increase. The
increase primarily reflects a full year of depreciation on the improvements
of the parking lot in 1995.
There were no pre-opening costs for 1995 as compared to $2.6 million of
pre-opening costs for 1994. Pre-opening costs in 1994 consisted of
expenditures incurred to prepare the New Orleans riverboat gaming facility
for opening.
Impairment of asset charges were $10.9 million for 1995 as compared to
$6.9 million for 1994. In 1995, the impairment charges resulted primarily
from approximately $6.4 million reserve established for affiliate company
receivables determined to be uncollectible, $2.7 million of capitalized
interest related to construction of the Riverboat Project. which was
written-off subsequent to the closure of the riverboat operations, and $1.5
million of capitalized offering costs which were written-off once certain
initial public offering and debt registration efforts were abandoned. In the
1994 period, these charges related to a $5.9 million charge for the write-off
of the Company's Mexican Investment and a $1 million allowance for affiliate
receivables.
Reorganization expense in 1995 totaled approximately $17.9 million as
compared to none in 1994. Reorganization expenses are costs directly related
to the Company's Chapter 11 reorganization and consist primarily of
professional fees and the write-off of unamortized debt placement costs.
Interest expense totaled $18.7 million for 1995 as compared to $18.8
million for 1994. The Company ceased accruing interest on the Old Notes and
on certain of its Bullwhackers Casino equipment financing as of
17
<PAGE>
November 7, 1995 because of the Predecessor Company's Bankruptcy filing.
LIQUIDITY AND CAPITAL RESOURCES
On the Effective Date, the Company's outstanding Old Notes totaling $174
million, and certain notes payable to an affiliate totaling $2 million, were
canceled and $50 million in Notes were issued on a pro rata basis to the
holders of the Old Notes and the notes payable to an affiliate. The 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 Notes may, at the Company's option, be paid by issuing additional notes
in lieu of cash interest payments. On December 1, 1996, the Company elected
to make its first interest payment by issuing $2.9 million of additional
Notes.
Also on the Effective Date, the Company closed on a credit facility (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 working capital 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, but in no event past June 7, 2001.
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 Notes. As
of December 31, 1996, the Company had an outstanding balance of approximately
$2.4 million under the equipment financing line. The Credit Facility
replaced a $7 million Debtor-in-Possession ("DIP") facility also provided by
Foothill Capital Corporation on the Effective Date.
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 Casino down payment, accrued interest and
certain borrowing expenses, altogether totaling approximately $4.3 million,
were replaced or borrowed on the Effective Date from the Credit Facility.
Subsequently, the Company repaid $1.9 million of this amount from operating
cash flows, resulting in an outstanding debt balance under the Credit
Facility to $2.4 million as of December 31, 1996.
In April 1996, the Company purchased the Silver Hawk Casino, which had
not been operating for several years, for $2.7 million. Of the $2.7 million
purchase price, $900,000 was borrowed under the DIP Facility and $1.8 million
was financed by a 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 Company retired the seller's note from available
cash on June 18, 1996.
The Company opened the Silver Hawk Casino on June 26, 1996. Prior to
opening, the Company refurbished the interior, outfitted the facility with
equipment (including slot machines) and incurred certain other pre-opening
expenses. The Company paid for these costs, totaling $2.0 million by
financing $1.1 million in slot machines from funds available under the Credit
Facility and paid the remaining costs from available cash. Subsequently,
the Company repaid the $1.1 million from available cash flows.
Upon completion of the excavation work in June 1996 and the subsequent
repaving of the parking lot, the number of cars which could be parked on the
parking lot at any one time increased from 260 cars to approximately 375
cars, a 45% increase in capacity. The Company then analyzed whether the cost
of constructing the parking garage was justified given the fact that it had
achieved 75% of the desired parking capacity for only a fraction of the total
capital cost anticipated to be spent on the parking garage and decided to
delay indefinitely the construction of the parking garage.
In late 1996, the Company evaluated whether it could cost-effectively
excavate the remaining portion of the mountain to its property line to
further expand the capacity of the parking lot. The Company concluded that
the additional excavation would cost approximately $1.3 million and would add
approximately 120 additional parking spaces. The Company has elected to
undertake this additional parking expansion project and as part of the
project, has also elected to construct a new valet facility to increase
customer convenience at the parking lot and to enhance access to the Kids
Quest child care facility. The valet facility is expected to cost
approximately $300,000. The entire parking expansion project, which commenced
in early February 1997, is expected to be completed by June 1997. During
construction, the Company expects to experience some business disruption.
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 that intends
to meet or exceed all relevant license standards. Kids Quest will be solely
responsible for the day-to-day operations of the day care facility. The
Company will receive percentage rent from Kids Quest for the use of the
18
<PAGE>
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. The day-care facility will be for the exclusive use of the
patrons of the Colorado Casinos. 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. The Company has entered into a guaranteed
maximum price contract with the general contractor. The opening of the day
care facility is currently scheduled for the Summer of 1997. The Company
pursued this project, in part, as a result of a new law in Colorado which
prohibits children from lingering in the gaming areas of a casino. The
Company believes the day care facility will give it a competitive advantage
with other casinos that do not have such a facility, although there can be no
assurance that the day care facility will result in increased visitation and
revenues at the Company's casinos. No other casinos in the Black Hawk-Central
City market currently have, or have announced plans to build a day care
facility. The Company expects to fund this project through available working
capital.
The Company has entered into a consulting agreement with another company
in the business of providing gaming consulting/management services to Native
American Indian tribes. The companies will use their joint resources to
pursue obtaining contractual arrangements with various Native American tribes
to provide consulting services for new and existing Native American gaming
projects. As of December 31, 1996, the Company has expensed $120,000 and has
committed to expend a maximum of approximately $220,000 in additional funding
over the next twelve months, under this agreement. The Company expects to
fund its ongoing commitment through available working capital.
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 can be 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 Notes and the lender under the Credit Facility.
INCOME TAX CONSIDERATIONS
The Company's Reorganization had a significant effect on the Company's
tax position. Historically, the Predecessor Company had generated a
significant amount of net operating loss carryforwards, of which, the vast
majority will be eliminated pursuant to the cancellation of indebtedness
event effected by the Reorganization. Additionally, the net operating loss
carryforwards which survive the cancellation event will be limited by the
ownership change, which was also effected by the Reorganization. Going
forward, it is likely that the Company will generate taxable income and
accordingly, will recognize income tax expense and be subject to pay income
tax to the extent that the Company's net operating loss carryforwards and
certain other tax assets are limited or not available to mitigate the payment
of such taxes (see Note 7 in the Notes to the consolidated financial
statements for more detailed discussion concerning the Company's tax
position).
ITEM 8. FINANCIAL STATEMENTS
The Consolidated Financial Statements and Notes that constitute Item 8
are attached at the end of this Annual Report on Form 10-K. An index to
these Consolidated Financial Statements and Notes is also included in Item
14(a) of this Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not Applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the directors of the Company, including
directors who are executive officers of the Company, is set forth under the
caption "Election of Directors" in, and is incorporated herein by reference
to Part I, Item 4A, the Company's proxy statement for the June 9, 1997 Annual
Meeting of Stockholders. Information relating to the executive officers of
the Company is set forth under the caption "Executive Officers of the
Registrant" in Part I, Item 4A of this report.
ITEM 11. EXECUTIVE COMPENSATION
19
<PAGE>
Incorporated herein by reference to the Company's proxy statement for
the June 9, 1997 Annual Meeting of Stockholders under the caption " Executive
Compensation".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to the Company's proxy statement for
the June 9, 1997 Annual Meeting of Stockholders under the caption "Security
Ownership of Certain Beneficial Owners and Management".
ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
Incorporated herein by reference to the Company's proxy statement for
the June 9, 1997 Annual Meeting of Stockholders under the caption " Executive
Compensation".
20
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) and (a)(2) Financial Statements and Financial Statement Schedules
INDEX TO FINANCIAL STATEMENTS
Page
----
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants.................................22
Consolidated Balance Sheets..............................................23
Consolidated Statements of Operations....................................24
Consolidated Statements of Stockholders' Equity (Deficit)................25
Consolidated Statements of Cash Flows....................................26
Notes to Consolidated Financial Statements...............................28
All other schedules are omitted because the required information is not
present in amounts sufficient to require submission of the schedule or
because the information required is included in the Consolidated Financial
Statements and Notes thereto.
(a)(3) Exhibits
See Index to Exhibits on page 44.
(b) Reports on Form 8-K
None
21
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Colorado Gaming & Entertainment Co.
We have audited the accompanying consolidated balance sheets of Colorado
Gaming & Entertainment Co (formerly Hemmeter Enterprises, Inc.) and
subsidiaries (the "Company") as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for the period from June 7, 1996 through December 31, 1996,
the period from January 1, 1996 through June 6, 1996 and the two years in the
period ended December 31, 1995. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Colorado Gaming
& Entertainment Co. and subsidiaries as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for the period from June
7, 1996 through December 31, 1996, the period from January 1, 1996 through
June 6, 1996 and the two years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
Denver, Colorado
March 21, 1997.
22
<PAGE>
COLORADO GAMING & ENTERTAINMENT CO.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
Predecessor Company Reorganized Company (a)
December 31, 1995 December 31, 1996
------------------- -----------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents . . . $ 3,623 $ 5,758
Accounts receivable, net . . . . 226 217
Inventories . . . . . . . . . . 85 106
Prepaid expenses . . . . . . . . 638 406
---------- -----------
Total current assets . . . . 4,572 6,487
---------- -----------
PROPERTY, EQUIPMENT AND LEASEHOLD
IMPROVEMENTS, net. . . . . . . . . 32,127 41,322
EXCESS REORGANIZATION VALUE, net
(Note 2) . . . . . . . . . . . . . -- 18,256
OTHER ASSETS, net of accumulated
amortization of $239 and $370,
respectively . . . . . . . . . . . 981 983
---------- -----------
$ 37,680 $ 67,048
---------- -----------
---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable . . . . . . . . $ 404 $ 804
Accrued expenses (Note 2) . . . 3,953 4,025
Current portion of credit
facility . . . . . . . . . . . -- 1,308
Current portion of other notes
payable and capital leases . . -- 651
---------- -----------
Total current liabilities . . 4,357 6,788
---------- -----------
NOTES PAYABLE, net of current
portion:
Senior secured notes payable . . -- 52,883
Credit facility . . . . . . . . -- 1,136
Other notes payable and capital
leases . . . . . . . . . . . . -- 1,372
---------- -----------
-- 55,391
---------- -----------
LIABILITIES SUBJECT TO COMPROMISE . 186,460 --
---------- -----------
Total liabilities . . . . . . 190,817 62,179
---------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE 10)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.01 par value,
2,000,000 shares authorized, none
issued at December 31, 1995,
canceled on June 6, 1996 . . . -- --
Common stock, $.01 par value,
50,000,000 shares authorized,
11,786,235 shares issued and
outstanding at December 31, 1995,
canceled on June 6, 1996 . . . 118 --
Warrants issued, canceled on
June 6, 1996 . . . . . . . . . 7,000 --
Common stock, $.01 par value,
20,000,000 shares authorized,
5,138,888 shares issued and
outstanding at December 31,
1996. . . . . . . . . . . . . . -- 51
Additional paid-in capital . . . 2,162 4,626
Retained earnings (deficit). . . (162,417) 192
---------- -----------
Total stockholders' equity
(deficit). . . . . . . . . . (153,137) 4,869
---------- -----------
$ 37,680 $ 67,048
---------- -----------
---------- -----------
(a) Due to the Reorganization and implementation of fresh-start reporting,
financial statements for the 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 accompanying notes are an integral part of these consolidated balance
sheets.
23
<PAGE>
COLORADO GAMING & ENTERTAINMENT CO.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
January 1,
1996 June 7, 1996
Years Ended December 31, through June through December
1994 1995 6, 1996 31, 1996(a)
--------- --------- ----------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Casino . . . .. . . . . . $ 42,724 $ 44,854 $ 19,126 $ 29,398
Food and beverage . . . . 3,571 3,737 1,288 1,998
Other . . . . . . . . . . 389 286 32 117
--------- --------- ----------- ---------
Gross revenues . . . . . 46,684 48,877 20,446 31,513
Less: promotional. . . . . . (1,210) (1,449) (464) (833)
--------- --------- ----------- ---------
Net revenues . . . . . . 45,474 47,428 19,982 30,680
--------- --------- ----------- ---------
OPERATING EXPENSES:
Casino . . . . . . . . . . 14,247 13,087 5,788 7,884
Gaming taxes and
device fees. . . . . . . . 8,178 8,277 3,614 4,564
Food and beverage . . . . . 3,140 3,173 1,299 2,111
General and administrative:
Casino . . . . . . . . . 3,281 3,223 1,249 1,557
Corporate. . . . . . . . 12,037 6,872 902 1,926
Marketing . . . . . . . . . 3,776 5,806 2,349 4,001
Depreciation and
amortization . . . . . . . 4,307 4,771 1,882 4,044
Pre-opening . . . . . . . . 2,594 -- 47 315
Reorganization items
(Note 1) . . . . . . . . . -- 17,910 2,290 308
Impairment of assets. . . . 6,875 10,945 -- --
--------- --------- ----------- ---------
Total operating
expenses . . . . . . . 58,435 74,064 19,420 26,710
--------- --------- ----------- ---------
INCOME (LOSS) FROM
OPERATIONS . . . . . . . . (12,961) (26,636) 562 3,970
Interest expense (Note 5) . (18,822) (18,664) (579) (3,867)
Interest income . . . . . 1,976 361 66 89
Equity loss of uncon-
solidated subsidiary . . (2,324) (70,277) -- --
--------- --------- ----------- ---------
INCOME (LOSS) BEFORE INCOME
TAX PROVISION. . . . . . . (32,131) (115,216) 49 192
Provision for income taxes. -- -- -- --
--------- --------- ----------- ---------
Net income (loss) before
extraordinary gain . . . . (32,131) (115,216) 49 192
Extraordinary gain from
reorganization items . . . -- -- 164,358 --
--------- --------- ----------- ---------
NET INCOME (LOSS). . . . . . $ (32,131) $ (115,216) $164,407 $192
--------- --------- ----------- ---------
--------- --------- ----------- ---------
NET INCOME PER SHARE(b) . . N/A N/A N/A $ 0.04
--------- --------- ----------- ---------
--------- --------- ----------- ---------
WEIGHTED AVERAGE COMMON
AND EQUIVALENT SHARES
OUTSTANDING . . . . . . . N/A N/A N/A 5,138,888
--------- --------- ----------- ---------
--------- --------- ----------- ---------
</TABLE>
(a) Due to the Reorganization and implementation of fresh-start reporting,
financial statements for the 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 accompanying notes are an integral part of these consolidated statements.
24
<PAGE>
COLORADO GAMING & ENTERTAINMENT CO.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except number of shares)
<TABLE>
Common Stock
---------------------
Additional Retained
Warrants Paid-in Earnings
Shares Amount Issued Capital (Deficit) Total
----------- ------ -------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1993............................ 10,269,641 $ 103 $ 8,266 $2,008 $ (15,070) $ (4,693)
Conversion of common stock to warrants................. (421,854) (4) -- 4 -- --
Net Loss............................................... -- -- -- -- (32,131) (32,131)
----------- ----- ------- ------ --------- ---------
BALANCES, December 31, 1994............................ 9,847,787 99 8,266 2,012 (47,201) (36,824)
Vesting of common stock grants to officers
and directors........................................ 88,667 1 -- 168 -- 169
Warrants of deconsolidated subsidiary
excluded in 1995 period.............................. -- -- (1,266) -- -- (1,266)
Conversion of warrants to common stock................. 1,849,781 18 -- (18) -- --
Net Loss............................................... -- -- -- -- (115,216) (115,216)
----------- ----- ------- ------ --------- ---------
BALANCES, December 31, 1995............................ 11,786,235 118 7,000 2,162 (162,417) (153,137)
Cancellation of Predecessor Company common
stock and warrants and elimination of deficit........ (11,786,235) (118) (7,000) 1,951 162,417 157,250
----------- ----- ------- ------ --------- ---------
BALANCES, June 6, 1996................................. -- -- -- 4,113 -- 4,113
Issuance of new common stock........................... 5,000,000 50 -- -- -- 50
Restricted stock grants to officers
and directors........................................ 138,888 1 -- 513 -- 514
Net income June 7 through December 31, 1996............ -- -- -- -- 192 192
----------- ----- ------- ------ --------- ---------
BALANCES, December 31, 1996............................ 5,138,888 $ 51 $ -- $4,626 $ 192 $ 4,869
----------- ----- ------- ------ --------- ---------
----------- ----- ------- ------ --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
25
<PAGE>
COLORADO GAMING & ENTERTAINMENT CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
January 1,
1996 June 7, 1996
Years Ended December 31, through June through December
1994 1995 6, 1996 31, 1996(a)
-------- --------- ------------ ----------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................ $(32,131) $(115,216) $ 164,407 $ 192
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization.................... 4,307 4,771 1,882 4,044
Loss on retirements of property and equipment.... -- 127 244 150
Equity in loss of unconsolidated subsidiaries.... 2,324 70,277 -- --
Noncash compensation............................. -- 169 -- 513
Predevelopment costs............................. 3,929 -- -- --
Impairment of assets............................. 6,875 11,347 -- --
Noncash interest expense......................... 17,909 17,895 495 3,443
Extraordinary gain from reorganization........... -- -- (164,358) --
Change in working capital and other.............. (499) 1,315 822 (3,110)
Noncash reorganization items..................... -- 15,317 1,825 --
-------- --------- --------- -------
Net cash provided by operating activities........ 2,714 6,002 5,317 5,232
-------- --------- --------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, equipment
and leasehold improvements..................... (31,560) (1,508) (3,885) (3,224)
Investment in development projects............... (3,358) -- -- --
Net restricted funds (placed in) disbursed
from escrow.................................... 52,552 4,209 (507) 244
Investment in unconsolidated subsidiaries........ (20,334) (9,270) -- --
Advances to PRIGSA............................... (5,875) (289) -- --
(Increase) decrease in other assets.............. (5,174) 59 -- --
Advances to affiliates, net...................... (4,402) (1,257) -- --
-------- --------- --------- -------
Net cash used in investing activities............ (18,151) (8,056) (4,392) (2,980)
-------- --------- --------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable to affiliate......... -- 2,000 -- --
Proceeds from debt financing..................... 13,048 -- 5,824 2,392
Payment of debt placement costs,
net of accrued liabilities..................... (38) (315) -- (445)
Repayments of debt financing..................... (2,540) (1,651) (3,304) (5,509)
-------- --------- --------- -------
Net cash provided by (used in)
financing activities........................... 10,470 34 2,520 (3,562)
-------- --------- --------- -------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS......................... (4,967) (2,020) 3,445 (1,310)
CASH AND CASH EQUIVALENTS,
at beginning of period (less $2,334
of cash in subsidiary deconsolidated
in 1995 period).............................. 12,944 5,643 3,623 7,068
-------- --------- --------- -------
CASH AND CASH EQUIVALENTS,
at end of period............................. $ 7,977 $ 3,623 $ 7,068 $ 5,758
-------- --------- --------- -------
-------- --------- --------- -------
</TABLE>
(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 accompanying notes are an integral part of these consolidated statements.
26
<PAGE>
COLORADO GAMING & ENTERTAINMENT CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
January 1,
1996 June 7, 1996
Years Ended December 31, through June through December
1994 1995 6, 1996 31, 1996(a)
-------- --------- ------------ ----------------
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for interest, net of
amounts capitalized............................ $ 965 $ 579 $ 19 $ 1,020
-------- --------- --------- -------
-------- --------- --------- -------
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Issuance of senior secured notes payable
and other notes payable pursuant to
the Reorganization (Note 1).................... $ -- $ -- $ -- $52,300
-------- --------- --------- -------
-------- --------- --------- -------
Issuance of notes payable and capital
lease obligations for purchases of
property and equipment......................... $ 726 $ 227 $ -- $ --
-------- --------- --------- -------
-------- --------- --------- -------
Issuance of notes payable for accrued
interest obligations........................... $ 17,001 $ 9,416 $ -- $ 2,883
-------- --------- --------- -------
-------- --------- --------- -------
</TABLE>
(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 accompanying notes are an integral part of these consolidated statements.
27
<PAGE>
COLORADO GAMING & ENTERTAINMENT CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(1) ORGANIZATION
ORGANIZATION
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. Three wholly
owned subsidiaries, BWBH, Inc., BWCC, Inc., and Silver Hawk Casino, Inc., own
and operate limited stakes gaming facilities in Colorado (collectively, the
"Colorado Casinos"). Millsite 27, Inc., also a wholly owned subsidiary, owns
a parking lot, opened in 1994 for the use by BWBH, Inc. and Silver Hawk
Casino, Inc. A wholly owned subsidiary of the Predecessor Company, Grand
Palais Riverboat, Inc. ("GPRI"), developed and operated a riverboat gaming
project in New Orleans, Louisiana (the "Riverboat Project"). GPRI's
riverboat gaming operations commenced on March 29, 1995 and ceased on June 6,
1995.
GPRI BANKRUPTCY
The Riverboat Project incurred construction cost overruns and had
substantial operating losses as a result of the failure of the New Orleans
gaming market to develop as anticipated and the resulting failure of the
Riverboat Project to achieve projected revenues. As a result, GPRI
terminated riverboat gaming operations on June 6, 1995. On July 26, 1995,
certain creditors filed an involuntary petition under Chapter 7 of the
Federal Bankruptcy Code against GPRI. On July 27, 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").
Following termination of GPRI operations, the Predecessor Company's
management began assessing the possibility that all or part of the Riverboat
Project could be sold to another gaming operator. After evaluation and
negotiation of potential transactions, the Predecessor Company, certain
creditors and GPRI entered into a letter of intent with Casino America, Inc.
("Casino America Agreement"). 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 Predecessor Company's
reorganization and therefore the GPRI bankruptcy case was effective.
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 bond holders. Accordingly, the
Predecessor Company received no consideration from the sale of GPRI.
Concurrently with this stock sale as provided by GPRI's reorganization, all
claims against the Company related to GPRI were released. This transaction
has no financial statement impact on the Company in the 1996 period, as the
investment in GPRI was reduced to zero in the 1995 period by charging the
$70.3 million of equity in loss of unconsolidated subsidiary against the
investment account.
HEI BANKRUPTCY
In June 1995, the Predecessor Company received "Notices of Default"
from the trustee of its Senior Secured Pay-In-Kind Notes (the "Old Notes")
(See Note 5), alleging that the Predecessor Company was in default under
various provisions of the Old Notes Indenture. The alleged defaults
included, among other matters, violations related to the issuance of certain
additional indebtedness, the termination of riverboat gaming operations,
numerous liens filed against the Riverboat Project and the failure to file
audited financial statements on a timely basis. On November 7, 1995, the
Predecessor Company and three of its wholly owned subsidiaries (BWBH, Inc.
BWCC, Inc. and Millsite 27, Inc.) (collectively, the "Debtor"), filed
voluntary petitions for reorganization under Chapter 11 of the Federal
Bankruptcy Code in the District of Delaware as contemplated by the
negotiations with the bondholders (the bankruptcy proceedings referred to as
the "Reorganization"). The
28
<PAGE>
Chapter 11 case subsequently was transferred to the Court.
On June 7, 1996 (the "Effective Date"), the Company and its three
subsidiaries emerged from bankruptcy and the following events occurred
pursuant to the Reorganization:
1. The existing common stock and warrants of the Predecessor Company were
canceled and 5 million newly authorized shares of common stock was issued to
the Company's senior secured creditors.
2. $176 million of outstanding senior secured debt was canceled and $50
million in principal amount of 12% Senior Secured Pay-In-Kind Notes, due 2003
(the "Notes") (Note 5), was issued.
3. Pursuant to the settlement of certain lawsuits against the Company and
certain of its executive officers, the Company issued two promissory notes to
Capital Associates, Inc. ("CAI"), a secured creditor on both the Predecessor
Company's and GPRI's bankruptcy cases, in total principal amounts of $2.3
million.
4. The amounts outstanding under the DIP Facility (Note 5) was paid in full
and the DIP Facility was terminated. The Company replaced the DIP Facility
with a new $12.5 million credit facility on the Effective Date.
5. Certain unsecured indebtedness totaling $1.2 million was canceled.
6. The Company changed its name to Colorado Gaming & Entertainment Co.
LIABILITIES SUBJECT TO COMPROMISE
Prior to the Effective Date, the Predecessor Company reported certain
secured and unsecured claims which were in existence prior to the bankruptcy
filing under the heading "liabilities subject to compromise." Additional
claims arose subsequent to the petition date resulting from the rejection of
executory contracts and/or leases and from the allowance by the Court of
contingent and/or disputed claims. Creditors and other parties in interest
filed claims with the Court which were substantially in excess of the amounts
recorded in the Predecessor Company's records. These differences were
primarily related to errors, duplicative claims and overstatement of claims.
Liabilities subject to compromise consisted of the following as of December
31, 1995 (in thousands):
Senior Secured Pay-In-Kind Notes . . . $174,274
Notes payable to affiliate . . . . . . 2,122
Equipment financing . . . . . . . . . . 4,169
HEI guarantee of subsidiary debt . . . 4,600
HEI trade payables . . . . . . . . . . 1,295
--------
Total . . . . . . . . . . . . . . $186,460
--------
--------
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 impact of the adoption of fresh-start reporting is
reflected in the December 31, 1996 consolidated balance sheet. 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. The excess
of the reorganization value over the fair market value of the net assets,
totaling $18.8 million, is reported as excess
29
<PAGE>
reorganization value in the accompanying consolidated balance sheet and will
be amortized over an 18.5-year period, which equals the remaining term of
BWBH's land lease.
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 December 31, 1996 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. As a result of adopting fresh start
reporting, the Reorganized Company's consolidated financial statements are
not comparable with those prepared before the Effective Date, including the
historical consolidated financial statements included herein.
SILVER HAWK ACQUISITION
On March 27, 1996, Silver Hawk Casino, Inc. ("Silver Hawk") was
incorporated in Delaware as a wholly owned subsidiary of the Predecessor
Company, for purposes of acquiring and operating a limited stakes casino in
Black Hawk, Colorado. In April 1996, the Company purchased the Silver Hawk
Casino, which was not operating at the time, for $2.7 million, of which
$900,000 was borrowed under the DIP Facility. The remaining $1.8 million was
financed by a note payable to the seller, which accrued interest at 9.5% per
annum, and provided for monthly principal and interest payments on a 20 year
amortization schedule. The Company retired the seller's note from available
cash on June 18, 1996. Additionally, the Company invested an additional $2
million to equip and prepare the Silver Hawk Casino for opening. The Company
commenced gaming operations at the Silver Hawk Casino on June 26, 1996.
(2) SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements of the Reorganized
Company (period beginning June 7, 1996) and the Predecessor Company (periods
prior to June 7, 1996) include the accounts of CG&E and its wholly owned
subsidiaries. Intercompany balances and transactions have been eliminated.
As of December 31, 1994, the accounts of GPRI are consolidated with
those of the Predecessor Company. Because of the GPRI bankruptcy proceedings
and Casino America Agreement in 1995, it was determined that the Predecessor
Company did not "control" GPRI and, therefore, GPRI no longer met the
consolidation criteria pursuant to Statement of Financial Accounting
Standards No. 94, "Consolidation of All Majority-Owned Subsidiaries."
Accordingly, effective January 1, 1995, the Predecessor Company's investment
in GPRI is accounted for under the equity method. Under the equity method,
original investments are recorded at cost and adjusted by the Company's share
of undistributed losses of the investee. Such investment had been reduced to
zero as of December 31, 1995, due to the losses of GPRI.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash in banks, currency located in
the casinos' vaults, coins located in the gaming device hoppers and other
cash used in daily operations. Included in cash and cash equivalents at
December 31, 1995 and 1996 is restricted cash totaling $595,000 and $511,000
respectively, which represents the portion of cash on hand that is required
to be maintained by the Colorado Casinos based on regulations promulgated by
the Colorado Limited Gaming Control Commission (the "Colorado Gaming
Commission").
30
<PAGE>
The Company considers all highly-liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The
carrying amount of cash equivalents approximates fair value due to the
short-term maturity of those investments.
INVENTORIES
Inventories consist of food and beverage, retail and casino supplies.
Inventories are stated at the lower of cost (first-in, first-out basis) or
market.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
In connection with the adoption of fresh-start reporting, the Company
was required to adjust property, equipment and leasehold improvements to fair
value. Such adjustment resulted in an increase in net property, equipment
and leasehold improvements of approximately $8 million with no material
change in the remaining useful lives.
Otherwise, property, equipment and leasehold improvements are stated at
cost. Depreciation and amortization are computed using the straight-line
method over the estimated useful lives of the assets. Costs of major
improvements are capitalized; costs of normal repairs and maintenance are
charged to expense as incurred.
EXCESS REORGANIZATION VALUE
Excess reorganization value is amortized on a straight-line basis over
18.5 years. Accumulated amortization of excess reorganization value was
$577,000 at December 31, 1996. The Company continually evaluates current
events and circumstances in order to determine whether the recorded balance
has been impaired.
ACCRUED EXPENSES
Accrued expenses consisted of the following (in thousands):
December 31,
1995 1996
---- ---
Gaming taxes payable . . . . . $ 537 $ 521
Accrued payroll and
related expenses . . . . . . 1,048 991
Reorganization items . . . . . 1,202 --
Accrued interest . . . . . . . -- 542
Incentive compensation. . . . . -- 454
Accrued gaming liabilities 437 624
Other accruals . . . . . . . . 729 893
------ ------
$3,953 $4,025
------ ------
------ ------
CASINO REVENUES AND PROMOTIONAL ALLOWANCES
In accordance with industry practice, the Company recognizes as casino
revenues the net win from gaming activities, which is the difference between
gaming wins and losses. The retail value of food and beverage furnished to
customers on a complimentary basis is included in gross revenues and then
deducted as promotional allowances. The estimated cost of providing such
promotional allowances is included in casino operating expenses in the
accompanying consolidated statements of operations and totaled approximately
$429,000, $605,000 and $508,000 for the years ended December 31, 1994, 1995
and 1996, respectively.
31
<PAGE>
PRE-OPENING EXPENSES
The Company expenses pre-opening costs as incurred. Pre-opening costs
consist of expenditures incurred prior to the opening of the casinos to
prepare the casinos for business and include labor costs, certain consulting,
marketing and other direct costs. Because GPRI was consolidated in 1994,
pre-opening costs of $2.6 million incurred in 1994 in connection with the
Riverboat Project are reflected in the accompanying 1994 consolidated
statement of operations. The $362,000 reflected in the 1996 periods relate to
pre-opening costs for the Silver Hawk Casino which opened on June 26, 1996.
REORGANIZATION ITEMS
Reorganization items consist of income, expenses and other costs
directly related to the reorganization of the Company since the Chapter 11
filing and subsequent reorganization efforts.
Reorganization items included in the consolidated statements of
operations consisted of the following (in thousands):
<TABLE>
For the Year
Ended January 1,1996 June 7,1996
December 31, through through
1995 June 6,1996 December 31, 1996
---- ----------- -----------------
<S> <C> <C> <C>
Charge-off of debt discount
and placement costs . . . . . $10,717 $ -- $ --
Loss charged for guarantee
of subsidiary debt . . . . . . 4,600 --
Professional fees . . . . . . . 2,593 2,290 308
------- ------- -----
$17,910 $ 2,290 $ 308
------- ------- -----
------- ------- -----
</TABLE>
INCOME TAXES
The Company accounts for taxes pursuant to Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". SFAS No.
109 requires the measurement of deferred tax assets for deductible temporary
differences and operating loss carryforwards and of deferred tax liabilities
for taxable differences. Measurement of current and deferred tax liabilities
and assets is based on provisions of enacted tax law; the effects of future
changes in tax laws or rates are not anticipated. Deferred tax assets
primarily result from net operating loss carryforwards and impairment of
assets recognized in different periods for financial reporting and tax
purposes.
NET INCOME PER COMMON SHARE
Net income per common share and common equivalent share is computed by
dividing net income by the weighted average number of shares of common stock
and common stock equivalents outstanding during the year. The weighted
average number of common shares outstanding and net income per common share
for the Predecessor Company have not been presented, due to the
Reorganization and implementation of fresh start reporting, because they are
not comparable to subsequent periods.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
current year presentation.
(3) PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET
Property, equipment and leasehold improvements consisted of the following
(in thousands):
32
<PAGE>
December 31,
1995 1996
---- ----
Land and improvements . . . . $ 14,330 $ 12,288
Building and improvements . . 5,764 5,359
Leasehold improvements . . . 7,626 20,935
Gaming equipment, furniture
and fixtures . . . . . . . . 18,570 19,975
Construction-in-progress. . . - 335
--------- ---------
46,290 58,892
Less: accumulated
depreciation . . . . . . . . (14,163) (17,570)
---------- ----------
$ 32,127 $ 41,322
---------- ----------
---------- ----------
Depreciation and amortization are computed using the straight-line method
over the following useful lives:
Useful Lives
------------
Land improvements. . . . . . 15 years
Building and improvements. . 5 - 31.5 years
Leasehold improvements . . . 5 - 23 years
Gaming equipment, furniture
and fixtures. . . . . . . . 5 - 31.5 years
(4) NEW VENUE PROJECTS
For the years ended December 31, 1994, 1995 and 1996, the Company
expensed $3.9 million, $402,000 and $120,000 respectively, for
predevelopment costs related to various potential development opportunities
in new gaming venues throughout North America. The costs incurred
represented design, presentation, research, consulting, regulatory and other
costs associated with pursuing development opportunities in new gaming
venues. The Company expensed these costs as management determined that each
of the potential new gaming venues were no longer viable development
projects. In early 1995, the Company ceased such activities due to its
deteriorating financial condition.
In September 1994, the Predecessor Company entered into an agreement to
invest $6.2 million for a 25% interest in Promociones e Inversiones de
Guerrero S.A. de C.V. ("PRIGSA"), a Mexico based development and gaming
company with operations in Acapulco. As of December 31, 1994, the
Predecessor Company had contributed $5.8 million towards its investment. In
1995, the Predecessor Company contributed its remaining commitment of
approximately $289,000. The Predecessor Company had an option to convert its
contributions to shares of common stock in PRIGSA upon approval by the
Mexican government. Results of PRIGSA operations upon opening in the fall of
1994 were substantially below expectations and, as a result, PRIGSA suffered
significant operating losses. Because the majority of PRIGSA's other debt
securities are in a senior position to PRIGSA's obligation to the Company,
the Company has determined that it is unlikely that the Company's advances
will be repaid or that the Company will otherwise realize its investment in
PRIGSA. Accordingly, as of December 31, 1994, the Company charged-off the
full value of its investment to impairment of assets in the accompanying
consolidated statements of operations.
(5) NOTES PAYABLE
Notes payable consisted of the following (in thousands):
December 31,
33
<PAGE>
1995(1) 1996
------- ----
Secured Pay-In-Kind Notes . . $ 174,274 $ 52,883
Credit facility . . . . . . . - 2,444
Notes payable to gaming
equipment vendors . . . . . 2,623 -
Notes payable to affiliate. . 2,122 -
Other . . . . . . . . . . . . 4,600 2,023
---------- ---------
183,619 57,350
Less: current portion. . . . - 1,959
---------- ---------
$ 183,619 $ 55,391
---------- ---------
---------- ---------
(1) These amounts are included in "liabilities subject to compromise" in
the accompanying December 31, 1995 consolidated balance sheet.
DEBT AFTER THE REORGANIZATION
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%( 10.625% as of December 31, 1996). The loans have varying
terms ranging from three to five years from when the funds are borrowed, but
the entire facility matures on June 7, 2001. As of December 31, 1996, the
Company had an outstanding balance of approximately $2.4 million under the
equipment financing 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 ("DIP"), also provided by Foothill Capital
Corporation. The carrying amount of the Credit Facility is a reasonable
estimate of fair value, as terms of the line reflect current rates.
SENIOR SECURED PAY-IN-KIND NOTES
Pursuant to the Reorganization, the holders of the Old Notes, along with
a senior secured affiliate lender, received, on a pro rata basis, the Notes
having an aggregate principal amount of $50 million. Interest on the Notes
accrues at a rate of 12% per annum, and is payable semi-annually. Through
the first year, at the option of the Company, interest on the Notes will be
payable either in cash or through the issuance of additional Notes.
Thereafter, the Company will be required to pay interest on the Notes in
cash. On December 1, 1996 the Company made interest payments on the Notes by
issuing $2.9 million of additional Notes. The Notes are secured by
substantially all the assets of the Company, including the common stock of
the subsidiaries. In addition, the Notes Indenture includes certain
restrictive covenants. As of December 31, 1996, the fair values of the Notes
is approximately $50.7 million, which are based on quoted market prices. The
Notes are redeemable prior to maturity, in whole or part, at the election of
the Company on or after June 1, 2000, at the redemption prices (expressed as
percentages of principal amount) set forth below plus accrued and unpaid
interest to the redemption date, if redeemed during the 12-month period
beginning on the June 1st in the years indicated below:
Year Redemption Price
---- ----------------
2000 104%
2001 103%
2002 and thereafter 102%
34
<PAGE>
OTHER NOTES
Pursuant to the Reorganization, the Company issued two unsecured promissory
notes to Capital Associates International, Inc. ("CAI") in the respective
principal amounts of $1.6 million and $3 million, both accruing interest at the
rate of 9% per annum. The $1.6 million note is due in 10 equal quarterly
installments which commenced September 7, 1996. The second note in the amount
of $3 million is payable in 20 quarterly installments of principal and interest
(at 9% per annum). Both notes are unsecured. The $3 million note has been
reduced by $2.3 million in funds received by CAI in respect of its claims filed
in the GPRI Bankruptcy. Accordingly, the outstanding balance on the $3 million
note is approximately $700,000 as of December 31, 1996. The Company considers
the estimated fair value of such notes to be the same as its carrying value
since the obligations were entered into as of the Effective Date, and no
significant interest rate fluctuations have occurred since that date.
Aggregate annual maturities of long-term debt, are as follows:
1997 $ 1,959
1998 1,838
1999 --
2000 306
2001 364
Thereafter 52,883
-------
Total $57,350
-------
-------
DEBT BEFORE THE REORGANIZATION
DEBTOR-IN-POSSESSION FINANCING
On December 8, 1995, the Court approved certain financing and security
agreements (the "DIP Facility") designed to provide the Debtor with adequate
financing to operate its businesses during the bankruptcy period. The aggregate
DIP Facility was $7.9 million in the form of revolving credit facilities to
provide up to $2.5 million for working capital purposes, $4.4 million for
equipment refinancing and $1 million to provide financing for the Debtor's
possible acquisition of strategic assets. The term of the DIP Facility was one
year subject to an accelerated maturity based on the Effective Date of the
Reorganization. Upon the Effective Date, the amounts outstanding under the DIP
Facility were paid in full and the DIP Facility was terminated.
Interest on borrowings under the DIP Facility accrued interest at prime
plus 2.75%. Loan fees and other expenses totaling $300,000 were paid to the DIP
Lender and were written off as interest expense on the termination date of the
facility.
SENIOR SECURED PAY-IN-KIND NOTES
On December 21, 1993, the Predecessor Company completed a private offering
of 140,000 units consisting of $140 million aggregate principal amount of the
Old Notes with detachable warrants to acquire 1,750,000 shares, or 10%, of
common stock of the Predecessor Company. The net proceeds from the offering,
after deducting the commissions and other offering expenses were approximately
$131 million. The net proceeds were used to repay construction financing for
the Bullwhackers Casinos and provide funds for the Riverboat Project and for
working capital purposes. The offering expenses of approximately $9 million,
were capitalized as other assets, and were being amortized over the seven-year
term of the Old Notes using the effective interest rate method. As of December
31, 1995, all remaining unamortized discount and offering expenses related to
the Old Notes were written-off as a reorganization item in accordance with SOP
90-7.
Interest on the Old Notes accrued at 12% per annum and was payable
semiannually on June 15 and
35
<PAGE>
December 15, commencing June 15, 1994. Through December 15, 1995, at the
Predecessor Company's option, interest on the Old Notes was payable either in
cash or through the issuance of additional Old Notes. Thereafter, the
Predecessor Company was required to pay interest on the Old Notes in cash.
On June 15 and December 15, 1994, the Predecessor Company made interest
payments on the Old Notes by issuing a total of $17 million of additional Old
Notes. On June 15, 1995, the Predecessor Company made interest payments on
the Old Notes by issuing a total of $9.4 million of additional Old Notes. No
interest payment or issuance of additional Old Notes was made on December 15,
1995, because of the Predecessor Company's bankruptcy filing.
As discussed in Note 1, in June 1995, the Predecessor Company received
"Notices of Defaults" from the trustee of the Old Notes, alleging that
Predecessor Company was in default under various provisions of the Indenture.
As a result of the defaults under the Indenture, the holders of the Old Notes
were entitled to all of the remedies contained in the Indenture, including but
not limited to acceleration of repayment of the Old Notes and foreclosing on the
security pledged by the Predecessor Company to the trustee.
On November 7, 1995, the Predecessor Company filed for Chapter 11
protection. Accordingly, interest totaling approximately $3 million was not
accrued for the period November 7, 1995 to December 31, 1995. Additionally, for
the period from January 1, 1996 through June 6, 1996, interest totaling
approximately $9 million was not recorded due to the Chapter 11 proceedings. As
of December 31, 1995, the total amount of the Old Notes, plus accrued interest
through November 7, 1995, is $174.3 million which amount is included in
"liabilities subject to compromise" in the accompanying December 31, 1995
consolidated balance sheet. On June 6, 1996 the Old Notes were canceled and $50
million of Notes were issued to the Old Note holders.
OTHER NOTES
On May 15, 1995, the Predecessor Company entered into a $4 million working
capital credit facility with an affiliate of the Predecessor Company. The
Predecessor Company borrowed $2 million under this facility, which proceeds were
then invested in GPRI. Borrowings accrued interest at 12% and were due on
September 30, 1995. The Company granted a security interest to the affiliate in
certain of the Company's assets including a subordinated interest in GPRI's
riverboat. The Predecessor Company was unable to repay the $2 million and thus
was in default under this facility. Interest totaling $35,000 was not accrued
from the petition date, November 7, 1995 to December 31, 1995. The $2 million,
plus accrued and unpaid interest through November 7, 1995 totaling $2.1 million,
is included in "liabilities subject to compromise" in the accompanying
consolidated balance sheet as of December 31, 1995. Pursuant to the
Reorganization, the affiliate received Notes and shares of common stock of the
Company as discussed above.
The Predecessor Company financed the acquisition of a portion of the
Bullwhackers Casinos' gaming equipment with notes payable to an equipment vendor
totaling $7 million. Such notes were secured by the gaming equipment and the
proceeds from the gaming equipment and were guaranteed by certain of the
Predecessor Company's stockholders. Monthly principal and interest payments of
$151,000 were required through April 1997. As of the petition date, November 7,
1995, the Predecessor Company stopped accruing interest, totaling $38,000, for
the period from November 7, 1995 to December 31, 1995, and making any repayments
on these notes. The Predecessor Company reached an agreement with the lender
to repay the $2.6 million outstanding balance on the notes for approximately $2
million with proceeds from the DIP Facility realizing a 23% discount for
retiring the notes.
(6) CAPITAL STRUCTURE
CAPITAL STRUCTURE AFTER THE REORGANIZATION
Pursuant to the Reorganization, the Predecessor Company's preferred stock,
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
Predecessor Company's senior secured creditors. In addition, the Company's
President and Chief
36
<PAGE>
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. The Company recorded
$270,000 of compensation expense in the 1996 period related to the
anticipated grants to be made June 7, 1997.
CAPITAL STRUCTURE PRIOR TO THE REORGANIZATION
PREFERRED and COMMON STOCK
Preferred stock of the Predecessor Company consisted of 2 million
authorized shares, of which none were issued. Common stock of the Predecessor
Company consisted of 50 million authorized shares. All common stock was
canceled under the Reorganization (Note 1). In addition, warrants to purchase a
total of 7,130,359 shares of common stock were outstanding and were canceled
pursuant to the Reorganization.
The Predecessor Company had adopted an Omnibus Stock and Incentive Plan and
a Non-Employee Director Stock Option Plan (the "Option Plans"). The Predecessor
Company recognized compensation expense of $169,000 in 1995 related to the
Option Plans. No additional compensation expense was recognized after November
7, 1995 and all outstanding options were canceled pursuant to the
Reorganization.
(7) INCOME TAXES
The Company has no provision for income taxes in 1994 and 1995, due to the
Company's significant loss position. In 1996, although the Company had a
nominal level of pre-tax income, no income tax provision was recorded due to the
Company's significant tax losses generated in previous years.
Effective January 1, 1997, as a result of the Company's Chapter 11
proceedings, the Company recorded significant tax changes. Such changes are
reflected in the December 31, 1996 tax assets amounts set forth below.
Substantial net operating loss carryforwards("NOL's") generated in previous
years totaling approximately $46.5 million were eliminated, leaving the Company
with remaining NOL's totaling approximately $6.2 million, Additionally, the
parent Company's basis in subsidiary stock and certain other tax assets of the
parent Company were reduced or eliminated. Such tax asset reductions were a
result of cancellation of indebtedness income effected by the Reorganization.
The net deferred tax asset as of December 31, 1995 and 1996 is comprised of the
following (in thousands):
December 31,
-----------------
1995 1996
------- ------
CURRENT:
Accrued vacation, gaming liabilities
and incentive compensation.................. $ 184 $ 458
NON-CURRENT:
Difference in asset basis................... 3,053 458
Recognition of legal settlement............. -- 740
Impairment of assets........................ 5,832 3,860
Reorganization items........................ 4,287 --
Deferred interest for tax................... 404 --
Book tax difference of River Project........ 8,646 --
Net operating loss carryforwards............ 41,148 2,343
-------- -------
Gross deferred tax asset.................... 63,554 7,859
Valuation allowance......................... (63,554) (7,859)
-------- -------
$ -- $ --
-------- -------
-------- -------
37
<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 NOL's totaling approximately $6.2 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
(8) LEASES
CAPITAL LEASES
On March 1, 1993, the Predecessor Company entered into a Master Lease
Agreement with CAI for lease financing totaling $2.2 million to provide working
capital. Certain of the Predecessor Company 's equipment was pledged as
security for the borrowings. The Predecessor Company, and certain of it's
stockholders also guaranteed repayment of the borrowings. In 1995, the Master
Lease Agreement was amended to provide $2.8 million in additional lease
financing to be used for the Riverboat Project and to be repaid by GPRI.
As a result of the termination of Riverboat Project operations, GPRI was
unable to make its required payments under the lease. Accordingly, CAI initiated
a lawsuit against the Predecessor Company (Note 12) to recover all amounts owing
under the Master Lease, as amended ("Lawsuit #1"). The finance company
initiated a second lawsuit against the Predecessor Company and certain of its
officers alleging that the finance company was misled into entering into the
amendment to the Master Lease Agreement ("Lawsuit #2"). In September 1995, a
judgment was entered against the Predecessor Company in Lawsuit #1 for $4.6
million. This amount is reflected as a liability subject to compromise in the
accompanying December 31, 1995 consolidated balance sheet. In February 1996,
the parties to the two lawsuits entered into a settlement agreement. Pursuant
to the settlement agreement, both lawsuits were dismissed and the Predecessor
Company issued two notes payable to CAI (see Note 5).
The Predecessor Company also had capital lease obligations related to
gaming devices and certain other equipment totaling $1.6 million as of December
31, 1995. The interest rate for the various leases range from 12% to 15%. As a
result of the bankruptcy proceedings, all capital lease obligations were
reclassified as "liabilities subject to compromise" in the accompanying December
31, 1995 consolidated balance sheet. In fiscal year 1996, an agreement was
reached with such lessors to retire the remaining lease obligation for
approximately $1.2 million.
OPERATING LEASES
The Company leases real property, on which the Bullwhackers Casino in Black
Hawk, Colorado, was constructed. The lease is for a period through 2014 and
requires an annual base rent as specified below, payable quarterly.
The land lease also requires monthly payments of additional rent equal to
1.9% of gross revenues, as defined. Total base rent plus additional rent
pursuant to the lease agreement for the years ended December 31, 1994, 1995 and
1996 was $1.1 million, $1.1 million and $1.1 million, respectively. In addition
to the specified rental payments, the Company is also responsible for any and
all costs associated with the leased property, including but not limited to
taxes and assessments, utilities, insurance, maintenance and repairs. The
Company has an option to purchase the leased land, beginning November 1, 2001,
for an amount equal to nine times the annual base minimum rent payment then in
effect, or $5.9 million.
38
<PAGE>
Future annual base rental payments for the land lease as of December 31,
1996 are as follows:
Year ending December 31 (in thousands):
1997......................... $ 600
1998......................... 600
1999......................... 600
2000......................... 660
2001......................... 660
Thereafter................... 9,350
-------
Total...................... $12,470
-------
-------
During Bankruptcy, the Company entered into an amended sublease for
approximately 19,500 square feet of office space located in Denver, Colorado and
provided for interim rent of approximately $7,500 per month which the Company
occupied as its corporate offices through February 1997. In March, the Company
relocated its corporate offices to Lakewood, Colorado pursuant to a new $10,000
a month lease, which expires April 2002 and the amended sublease was terminated
upon execution of this new lease.
(9) OTHER RELATED PARTY TRANSACTIONS
DUE FROM AFFILIATES
The Company has outstanding advances to the following affiliates (in
thousands):
December 31,
-----------------
1995 1996
------ ------
Canadian Pavillon Limited
Partnership........................... $1,573 $1,573
Outlaws Casino, Ltd. .................. 1,072 1,072
RCH Investments, NV.................... 259 259
Hemmeter Partners...................... 335 335
Grand Palais Casino, Inc. ............. 587 587
Former officers........................ 867 867
Other.................................. 78 78
------ ------
$4,771 $4,771
------ ------
------ ------
Canadian Pavilion Limited Partnership ("CPLP"), Outlaws Casino, Ltd.
("Outlaws"), RCH Investments, NV ("RCH") and Hemmeter Partners are majority
owned by certain of the Predecessor Company's controlling shareholders and
officers. Grand Palais Casino, Inc. ("GPCI") is a wholly owned subsidiary of
Grand Palais Enterprises, Inc. ("GPEI"), of which certain stockholders were also
stockholders of Predecessor Company. In 1994, two former officers were advanced
funds totaling $500,000, accruing interest at prime plus 2%, and due on demand.
In 1995, an additional $373,000 was advanced to an officer on an interest free
basis, of which $110,000 was repaid. All advances to affiliates were made on an
unsecured basis. No repayments were made on any affiliate receivable in the
1996 period.
Due to the continued deterioration in 1995 of the financial condition of
the affiliates and certain officers to which the Predecessor Company had
advanced funds, the Predecessor Company determined that it is unlikely that it
will collect any of the advances to affiliates and, accordingly, has provided a
reserve for the entire $4.8 million amounts owed the Company as of December 31,
1995. These amounts are reflected as impairment of assets in the accompanying
consolidated statements of operations.
39
<PAGE>
OTHER
The Predecessor Company paid $1.3 million, $624,000 and $ 70,000 to the law
firm of Shefsky Froelich & Devine Ltd. for legal services rendered to the
Predecessor Company in 1994, 1995 and 1996, respectively. Cezar M. Froelich, a
former director, owned 1.4% of the Predecessor Company's common stock on a fully
diluted basis, and is a managing partner of that firm. Shefsky Froelich &
Devine Ltd. provided legal services to the Company until February 9, 1996.
(10) COMMITMENTS AND CONTINGENCIES
GAMING LICENSES
The Colorado Casinos are required to comply with laws and regulations
promulgated by the Colorado Gaming Commission in order to maintain continued
operations. The Bullwhackers Casinos operate under separate current annual
gaming licenses which expire in December 1997, whereas Silver Hawk Casino
license expires in June 1997. Management anticipates that such gaming licenses
will be renewed.
GAMING TAXES AND FEES
The Colorado Casinos operate as licensed gaming establishments pursuant to
the Colorado Limited Gaming Act and, accordingly, are required to make monthly
gaming tax payments to the State of Colorado which are subject to annual
revisions with a maximum rate of 40%. The latest annual revision, which became
effective October 1, 1996, is calculated as a percentage of adjusted gross
proceeds (casino net win). The gaming tax rates for the previous three gaming
years are set forth in the following table:
Annual Tax Rate from Annual Tax Rate
Annual Gross Proceeds 10/94 to 9/96 Effective 10/96
--------------------- -------------------- ---------------
First $2 million............. 2% 2%
Next $2 million.............. 8% 4%
Next $1 million.............. 15% 14%
Next $5 million.............. 18% 18%
Proceeds over $10 million.... 18% 20%
Additionally, the city and state levy device fees ranging from $75 to
$1,265 per device per annum. For the years ended December 31, 1994, 1995 and
1996 the Company recorded $8.2 million, $8.3 million and $8.2 million,
respectively, in total gaming taxes and device fees.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain senior
executives of the Company. These employment agreements are each for initial
term of three years, and renew thereafter for successive one year terms unless
terminated by each of the respective parties.
CONSULTING AGREEMENTS
Pursuant to the Reorganization, the Company entered into a consulting
agreement with a former executive. These consulting services provided to the
Company include advice and services related to gaming regulatory issues and help
in identifying potential new business opportunities. The agreement requires the
Company to pay $29,167 per month from the Effective Date through August 1997.
OTHER COMMITMENTS
In July, 1996, 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 that
40
<PAGE>
intends to meet or exceed all relevant license standards. Kids Quest will be
solely responsible for the day-to-day operations of the day care facility.
The Company will receive 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. The day-care facility will be for the exclusive use of the
patrons of the Colorado Casinos. 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. The Company has entered into a guaranteed
maximum price contract with the general contractor. The opening of the day
care facility is currently scheduled for the Summer of 1997. The Company
pursued this project, in part, as a result of a new law in Colorado which
prohibits children from lingering in the gaming areas of a casino. The
Company believes the day care facility will give it a competitive advantage
with other casinos that do not have such a facility, although there can be no
assurance that the day care facility will result in a matter that produces
increased visitation and revenues at its casinos. No other casinos in the
Black Hawk-Central City market currently have, or have announced plans to
build a day care facility.
Prior to December 31, 1996, the Company evaluated whether it could cost-
effectively excavate the remaining portion of the parking lot to its property
line to expand the capacity of the parking lot. The Company concluded that the
additional excavation would cost approximately $1.3 million and would add
approximately 120 additional parking spaces. Therefore, the Company elected to
undertake the parking expansion project. As part of this project, the Company
also elected to construct a new valet facility to increase customer convenience
at the parking lot and enhance accessibility to Kids Quest. The valet facility
is expected to cost approximately $300,000. The overall parking expansion
project is expected to be completed by June 1997. During construction, the
Company expects to experience some business disruption.
The Company has also entered into an agreement with another company in
business of providing gaming consulting / management services to Native American
Indian tribes. The companies will use their joint resources to pursue obtaining
contractual arrangements with various Native American tribes to provide
consulting services for new and existing Native American gaming projects. As of
December 31, 1996, the Company has contributed $120,000, which has been expensed
in the accompanying statement of operations, and has committed $220,000 in
additional funding over the next twelve months, based on the initial term and /
or the extension of this agreement. The Company expects to fund this commitment
through available working capital.
LEGAL PROCEEDINGS
Pursuant to the Reorganization, certain claims by the Predecessor Company
against third parties are assigned to the Litigation Trust. All legal
proceedings pending against the Predecessor Company prior to the Effective Date
were settled pursuant to the Reorganization. As a result, there was no
litigation pending against the Company on the Effective Date. The determination
by the Litigation Trust whether or not to pursue any causes of action assigned
to it will have no material impact on the Company or the Colorado subsidiaries.
The Company is or may become a defendant in a number of pending or
threatened legal proceedings in the ordinary course of business. The Company's
management believes that the ultimate resolution of currently pending legal
proceedings will not have a material adverse impact on the Company's financial
position or results of operations.
(11) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of unaudited quarterly information excluding any
reorganization or other impairment changes related to the Reorganization and
dispostion of assets.
1996 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
---- ----------- ----------- ----------- -----------
Net Revenues $11,023 $12,204 $14,625 $12,810
Operating Expenses 7,789 8,446 9,780 8,008
------- ------- ------- -------
Casino Operating Profit 3,234 3,758 4,845 4,802
Corporate Expenses 514 534 955 825
Pre-opening (Silver Hawk) -- 388 (26) --
------- ------- ------- -------
EBITDA 2,720 2,836 3,916 3,977
------- ------- ------- -------
------- ------- ------- -------
1995 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
---- ----------- ----------- ----------- -----------
Net Revenues $11,817 $11,850 $12,440 $11,321
Operating Expenses 8,384 8,808 8,828 7,418
------- ------- ------- -------
Casino Operating Profit 3,433 3,042 3,612 3,903
Corporate Expenses 3,038 1,567 1,523 744
------- ------- ------- -------
EBITDA 797 1,475 2,089 3,159
------- ------- ------- -------
------- ------- ------- -------
In the fourth quarter of 1996, the Company benefited from the revised
gaming tax rates which became effective October 1, 1996 by approximately
$110,000. However, this amount was offset by approximately $233,000 relating
to incentive compensation expense for senior management based upon
implementation of the Company's new Cash Bonus Plan and Stock Incentive Plan
subsequent to the Reorganization.
41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
COLORADO GAMING & ENTERTAINMENT CO.
-----------------------------------
By: /s/ Stephen J. Szapor, Jr.
--------------------------------
Stephen J. Szapor, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the registrant
and in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ Stephen J. Szapor, Jr. President and Chief March 26, 1997
- ------------------------------ Executive Officer
Stephen J. Szapor, Jr. (Principal Executive
Officer)
/s/ Robert J. Stephens Vice President of Finance March 26, 1997
- ------------------------------ (Principal Financial and
Robert J. Stephens Accounting Officer)
/s/ Philip J. DiBerardino
- ------------------------------ Director March 26, 1997
Philip J. DiBerardino
/s/ Steve Leonard
- ------------------------------ Director March 26, 1997
Steve Leonard
/s/ Franklin S. Wimer
- ------------------------------ Director March 26, 1997
Franklin S. Wimer
/s/ Mark Van Hartesvelt
- ------------------------------ Director March 26, 1997
Mark Van Hartesvelt
42
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
- ---------- -----------
2.1 Disclosure Statement for First Amended Joint Plan of
Reorganization of the Company, BWBH, Inc., BWCC, Inc.
and Millsite 27, Inc.*
2.2 First Amended Joint Plan of Reorganization of the Company,
BWBH, Inc., BWCC, Inc. and Millsite 27, Inc. (included in
exhibit 2.1.).*
3.1 Amended and Restated Articles of Incorporation of the Company.*
3.2 Amended and Restated By laws of the Company.*
4.1 Indenture between the Company and Fleet National Bank, as
Trustee.*
4.2 Specimen Certificate of Common Stock.*
4.3 Form of Note.*
4.4 Registration Rights Agreement.*
10.1 Loan and Security Agreement, dated as of November 1, 1995 by
and between BWBH, Inc., BWCC, Inc. and Millsite 27, Inc. and
Foothill Capital Corporation.*
10.2 Amendment Number One to Loan and Security Agreement, dated as
of December 4, 1995.*
10.3 Amendment Number Two to Loan and Security Agreement, dated as
of January 24, 1996.*
10.4 Letter Agreement, dated as of December 18, 1995, from BWBH,
Inc., BWCC, Inc. and Millsite 27, Inc. to Foothill Credit
Corporation.*
10.5 Security Agreement, dated as of November 1, 1995, between the
Company and Foothill Credit Corporation.*
10.6 Trademark Security Agreement, dated as of November 1, 1995,
between the Company and Foothill Credit Corporation.*
10.7 Continuing Guaranty, dated as of November 1, 1995 by the
Company and Foothill Credit Corporation.*
10.8 Amended and Restated Loan and Security Agreement, dated as of
June 4, 1996 between Foothill Capital Corporation, BWBH, Inc.,
BWCC, Inc., Millsite 27, Inc. and Silver Hawk Casino, Inc.*
10.9 Lease Agreement, dated October 25, 1991 by and among Jerry L.
Brown and Harold Gene Reagin and HP Black Hawk, L.P.*
10.10 Option to Purchase dated October 28, 1991 by and among Jerry
L. Brown and Harold Gene Reagin and HP Black Hawk, L.P.*
10.11 Sublease Agreement by and between Marsh & McLennan,
Incorporated and the Company.*
10.12 Amendment to Sublease Agreement, dated as of January 18, 1996
by and between Marsh & McLennan, Incorporated and the Company.*
43
<PAGE>
10.13 Guaranty, dated as of January 18, 1996, by BWBH, Inc., BWCC,
Inc. and Millsite 27, Inc.*
10.14 Agreement for Sale of Real Estate, dated October 20, 1995, by
and between Millsite 20 Limited Liability Company, Iron City
Limited Liability Company and the Company.*
10.15 First Amendment to Agreement for Sale of Real Estate, dated
December 21, 1995 by and between Millsite 20 Limited Liability
Company, Iron City Limited Liability Company and the Company.*
10.16 Letter dated February 28, 1996 from the United States
Environmental Protection Agency.*
10.17 Subdivision Agreement dated February 28, 1996 by and among the
City of Black Hawk, the Black Hawk/Central City Sanitation
District, Millsite 27, Inc. and Millsite 20 Limited Liability
Company.*
10.18 State of Colorado, Department of Revenue, Limited Gaming
License issued to Bullwhackers Black Hawk Casino.*
10.19 State of Colorado, Department of Revenue, Alcoholic Beverage
License issued to BWBH, Inc.*
10.20 City of Black Hawk, Retail Liquor License with Extended Hours
issued to BWBH, Inc.*
10.21 State of Colorado, Department of Revenue, Limited Gaming
License issued to Bullwhackers Central City Casino.*
10.22 State of Colorado, Department of Revenue, Alcoholic Beverage
License issued to BWCC, Inc.*
10.23 City of Central City, Retail Liquor License issued to BWCC,
Inc.*
10.24 City of Central City, Extended Hours License issued to BWCC,
Inc.*
10.25 Colorado Gaming & Entertainment Co. Management Stock Incentive
Plan.*
10.26 Colorado Gaming & Entertainment Co. Management Cash Bonus
Plan.*
10.27 Form of Consulting Agreement between the Company and
Christopher B. Hemmeter.*
10.28 Form of Consulting Agreement between the Company and Mark M.
Hemmeter.*
10.29 Employment Agreement between the Company and Stephen J.
Szapor, Jr.*
10.30 Employment Agreement between the Company and Alan L. Mayer.*
10.31 Employment Agreement between the Company and Richard Rabin.*
21.1 List of Subsidiaries.*
23.1 Consent of Arthur Andersen LLP.
99.1 Statement of Eligibility under the Trust Indenture Act of 1939,
as amended of Fleet National Bank, as Trustee under the
Indenture.*
44
<PAGE>
* Incorporated by reference to the same exhibit number in the Company's
Registration Statement on Form 10 (File No. 0 - 28068).
45
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,758
<SECURITIES> 0
<RECEIVABLES> 217
<ALLOWANCES> 0
<INVENTORY> 106
<CURRENT-ASSETS> 6,487
<PP&E> 58,892
<DEPRECIATION> 17,570
<TOTAL-ASSETS> 67,048
<CURRENT-LIABILITIES> 6,788
<BONDS> 52,883
0
0
<COMMON> 51
<OTHER-SE> 4,818
<TOTAL-LIABILITY-AND-EQUITY> 67,048
<SALES> 3,286
<TOTAL-REVENUES> 50,662
<CGS> 3,410
<TOTAL-COSTS> 37,606
<OTHER-EXPENSES> 2,598
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,532
<INCOME-PRETAX> 241
<INCOME-TAX> 0
<INCOME-CONTINUING> 241
<DISCONTINUED> 0
<EXTRAORDINARY> 164,358
<CHANGES> 0
<NET-INCOME> 164,599
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>