<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant (X)
Filed by a Party other than the Registrant ( )
Check the appropriate box:
( ) Preliminary Proxy Statement
( ) Confidential, For Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
(X) Definitive Proxy Statement
( ) Definitive Additional Materials
( ) Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
COLORADO GAMING & ENTERTAINMENT CO.
(Name of Registrant as Specified in Its Charter)
N/A
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
( ) No fee required.
( ) Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies: N/A
(2) Aggregate number of securities to which transaction applies: N/A
(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined): N/A
(4) Proposed maximum aggregate value of transaction: N/A
(5) Total fee paid: N/A
(X) Fee paid previously with preliminary materials.
( ) Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount previously paid: N/A
(2) Form, Schedule or Registration Statement no.: N/A
(3) Filing Party: N/A
(4) Date Filed: N/A
<PAGE>
COLORADO GAMING & ENTERTAINMENT CO.
12596 WEST BAYAUD AVENUE, SUITE 450
LAKEWOOD, COLORADO 80228
(303) 716-5600
Dear Fellow Stockholder:
You are cordially invited to attend a Special Meeting of stockholders of
Colorado Gaming & Entertainment Co. (the "Company") which will be held on
December 12, 1997, at the offices of LeBoeuf, Lamb, Greene & MacRae, L.L.P.,
Suite 2000, 633 17th Street, Denver, Colorado 80202. The meeting will start at
10:00 a.m., local time.
At this important meeting, the holders of the Company's common stock, $0.01
par value (the "Company Common Stock"), will be asked to consider and vote upon
a proposal to approve and adopt an Agreement and Plan of Merger dated as of
August 22, 1997, as amended as of October 21, 1997 (the "Merger Agreement"), by
and among Ladbroke Racing Corporation, a Delaware corporation ("LRC"), CG&E
Acquisition Corp., a Delaware corporation (the "Acquisition Sub"), and the
Company, pursuant to which the Acquisition Sub will be merged with and into the
Company (the "Merger"). Prior to the Merger and pursuant to the terms of the
Merger Agreement, LRC will assign all of its rights and obligations under the
Merger Agreement, including its interest in the Acquisition Sub, to Ladbroke
Gaming Corporation, a Delaware corporation ("Ladbroke"), a wholly owned
subsidiary of Ladbroke Group plc, the ultimate parent of LRC. As a result of
the assignment and the Merger, the Company will become a wholly owned subsidiary
of Ladbroke. Pursuant to the Merger Agreement, holders of Company Common Stock
will be entitled to receive $6.25 in cash for each share of Company Common Stock
held by them. Following the Merger, former holders of Company Common Stock will
have no further interest in the Company.
The accompanying Proxy Statement and the Annexes thereto contain a summary
of the principal terms of the Merger (beginning on page 1) followed by a more
detailed discussion of the Merger, including the reasons for, and the benefits
of, the Merger. Because a summary is not, by its nature, complete, stockholders
are urged to read the Proxy Statement and Annexes in their entirety.
The Board of Directors believes that this Merger is advisable, is in the
best interests of the Company and its stockholders and offers the Company's
stockholders a greater return than would be available if the Company were to
remain a stand-alone entity.
The Board of Directors has received the opinion of its financial advisor,
CIBC Wood Gundy Securities Corp., dated September 5, 1997, that as of the date
of the Merger Agreement and based on the factors and assumptions described in
such opinion, the Merger is fair, from a financial point of view, to the holders
of Company Common Stock. A copy of this opinion is set forth in Annex III of
the Proxy Statement and stockholders should read it in its entirety.
Approval and adoption of the Merger Agreement by the holders of a majority
of the outstanding Company Common Stock is a condition to the consummation of
the Merger. It is presently anticipated that the Merger will be consummated
late in the first quarter or in the second quarter of 1998.
YOUR BOARD OF DIRECTORS HAS CAREFULLY REVIEWED AND CONSIDERED THE TERMS AND
CONDITIONS OF THE MERGER AGREEMENT, BELIEVES THAT THE MERGER AND THE MERGER
AGREEMENT ARE IN THE BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS, HAS
UNANIMOUSLY APPROVED AND ADOPTED THE MERGER AGREEMENT AND RECOMMENDS A VOTE FOR
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
Even if you plan to attend the meeting, we urge you to mark, sign and date
the enclosed proxy and return it promptly. You have the option to revoke it at
any time or to vote your shares personally on request if you attend the meeting.
<PAGE>
IF YOU DO NOT RETURN THE PROXY CARD AND DO NOT VOTE AT THE MEETING, IT WILL
HAVE THE SAME EFFECT AS IF YOU VOTED AGAINST THE MERGER AGREEMENT.
Holders of record of Company Common Stock at the close of business on
November 14, 1997 will be entitled to one vote for each share of Company Common
Stock they hold. YOUR VOTE IS IMPORTANT NO MATTER HOW MANY SHARES YOU HOLD.
PLEASE DO NOT SEND YOUR COMPANY COMMON STOCK CERTIFICATES WITH THE ENCLOSED
PROXY CARD. PROMPTLY AFTER THE MERGER, YOU WILL RECEIVE A LETTER OF TRANSMITTAL
WHICH WILL INCLUDE INSTRUCTIONS AS TO THE PROCEDURE TO BE USED IN EXCHANGING
YOUR COMPANY COMMON STOCK CERTIFICATES FOR $6.25 IN CASH PER SHARE OF COMPANY
COMMON STOCK.
Sincerely,
Stephen J. Szapor, Jr.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
November 21, 1997
<PAGE>
COLORADO GAMING & ENTERTAINMENT CO.
12596 WEST BAYAUD AVENUE, SUITE 450
LAKEWOOD, COLORADO 80228
(303) 716-5600
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD DECEMBER 12, 1997
TO THE STOCKHOLDERS OF COLORADO GAMING & ENTERTAINMENT CO.:
A Special Meeting of stockholders (the "Special Meeting") of Colorado
Gaming & Entertainment Co., a Delaware corporation (the "Company"), will be held
on December 12, 1997, at 10:00 a.m. local time, at the offices of LeBoeuf, Lamb,
Greene & MacRae, L.L.P., Suite 2000, 633 17th Street, Denver, Colorado 80202,
for the following purposes:
1. To consider and vote upon an Agreement and Plan of Merger, dated as of
August 22, 1997, as amended as of October 21, 1997 (the "Merger
Agreement"), by and among Ladbroke Racing Corporation, a Delaware
corporation ("LRC"), CG&E Acquisition Corp., a Delaware corporation
(the "Acquisition Sub"), and the Company, pursuant to which, among
other things, (i) the Acquisition Sub will merge with and into the
Company (the "Merger"), with the Company continuing as the surviving
corporation and becoming a wholly owned subsidiary of Ladbroke Gaming
Corporation, a Delaware corporation and affiliate of LRC ("Ladbroke"),
and, (ii) upon effectiveness of the Merger, each then outstanding
share of Company common stock, $0.01 par value (the "Company Common
Stock") (other than any shares of Company Comon Stock held by
Ladbroke, LRC, the Acquisition Sub, or any of their subsidiaries, or
in the treasury of the Company, all of which will be canceled, and
shares of Company Common Stock held by stockholders who perfect their
appraisal rights under Section 262 of the Delaware General Corporation
Law), will be converted into the right to receive $6.25 in cash,
without interest; and
2. To transact such other business as may properly come before the
Special Meeting or any adjournment(s) thereof.
Stockholders of record at the close of business on November 14, 1997, will
be entitled to notice of and to vote at the Special Meeting or at any
adjournment(s) thereof.
By Order of the Board of
Directors,
Alan L. Mayer
SECRETARY
Lakewood, Colorado
November 21, 1997
<PAGE>
COLORADO GAMING & ENTERTAINMENT CO.
PROXY STATEMENT
November 21, 1997
This Proxy Statement is being furnished by the Board of Directors of
Colorado Gaming & Entertainment Co., a Delaware corporation (the "Company"), in
connection with a special meeting of holders (the "Stockholders") of the
Company's common stock, $0.01 par value (the "Company Common Stock"), to be held
on December 12, 1997 at 10:00 a.m., local time, at the offices of LeBoeuf, Lamb,
Greene & MacRae, L.L.P., Suite 2000, 633 17th Street, Denver, Colorado, 80202,
and any and all adjournments or postponements thereof (the "Special Meeting").
At the Special Meeting, Stockholders will be asked to consider and vote
upon the approval and adoption of the Agreement and Plan of Merger, dated as of
August 22, 1997, as amended as of October 21, 1997 (the "Merger Agreement"), by
and among Ladbroke Racing Corporation, a Delaware corporation ("LRC"), CG&E
Acquisition Corp., a Delaware corporation (the "Acquisition Sub"), and the
Company, and any other matters as may properly come before the Special Meeting
and any postponements or adjournments thereof. Pursuant to the Merger
Agreement, LRC will assign all of its rights and obligations under the Merger
Agreement, including its interest in the Acquisition Sub, to Ladbroke Gaming
Corporation, a Delaware corporation ("Ladbroke"), and the Acquisition Sub will
merge with and into the Company, with the Company continuing as the surviving
corporation and becoming a wholly owned subsidiary of Ladbroke (the "Merger").
Upon effectiveness of the Merger, each share of Company Common Stock outstanding
at the effective time of the Merger (other than any shares of Company Common
Stock held by Ladbroke, LRC, the Acquisition Sub, or any of their subsidiaries,
or the Company, all of which will be canceled, and shares of Company Common
Stock held by Stockholders who perfect their rights of appraisal under Section
262 of the Delaware General Corporation Law ("DGCL")) will be converted into the
right to receive $6.25 in cash, without interest.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE BY STOCKHOLDERS FOR APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT.
This Proxy Statement and the accompanying form of proxy are being mailed to
all holders of Company Common Stock of record as of November 14, 1997 (the
"Record Date"), and are first being sent or delivered to such stockholders on or
about November 21, 1997. ONLY STOCKHOLDERS OF RECORD ON THE RECORD DATE ARE
ENTITLED TO VOTE AT THE SPECIAL MEETING.
The affirmative vote of the holders of a majority of outstanding shares of
Company Common Stock is required to approve and adopt the Merger Agreement. Any
proxy given pursuant to this solicitation may be revoked by the person giving it
at any time before its use by delivering to the Company a written notice of
revocation or a duly executed proxy bearing a later date or by attending the
Special Meeting and voting in person. An officer of the Company or other person
designated by the Board of Directors will be authorized to tabulate votes.
The Company's principal executive offices are located at 12596 West Bayaud
Avenue, Suite 450, Lakewood, Colorado 80228, and its telephone number is (303)
716-5600. The cost of solicitation of proxies will be borne by the Company.
The date of this Proxy Statement is November 21, 1997.
<PAGE>
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . 1
SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The Special Meeting. . . . . . . . . . . . . . . . . . . . . . . . . . 2
The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Background of the Merger . . . . . . . . . . . . . . . . . . . . . . . 3
The Company's Reasons for the Merger; Recommendations of the
Company's Board of Directors . . . . . . . . . . . . . . . . . . . . . 3
Opinion of the Financial Advisor . . . . . . . . . . . . . . . . . . . 3
Certain Federal Income Tax Consequences. . . . . . . . . . . . . . . . 4
Stock Option Agreement . . . . . . . . . . . . . . . . . . . . . . . . 4
Interests of Certain Persons in Merger . . . . . . . . . . . . . . . . 4
Appraisal Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Sources and Amount of Funds. . . . . . . . . . . . . . . . . . . . . . 5
Termination; Payments Upon Termination . . . . . . . . . . . . . . . . 5
Business of the Company. . . . . . . . . . . . . . . . . . . . . . . . 5
Business of LRC, Ladbroke and the Acquisition Sub. . . . . . . . . . . 5
Summary Historical Consolidated Financial Data of the Company. . . . . 6
THE SPECIAL MEETING. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Date, Time, and Place. . . . . . . . . . . . . . . . . . . . . . . . . 8
Purpose of the Special Meeting . . . . . . . . . . . . . . . . . . . . 8
Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Record Date; Stockholders Entitled to Vote . . . . . . . . . . . . . . 8
Voting Requirements. . . . . . . . . . . . . . . . . . . . . . . . . . 8
THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Effective Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Principal Effects of the Merger. . . . . . . . . . . . . . . . . . . . 10
Payment of the Merger Consideration. . . . . . . . . . . . . . . . . . 10
Background of the Merger . . . . . . . . . . . . . . . . . . . . . . . 11
The Company's Reasons for the Merger; Recommendations of the
Company's Board of Directors . . . . . . . . . . . . . . . . . . . . . 13
Opinion of the Financial Advisor . . . . . . . . . . . . . . . . . . . 14
Source and Amount of Funds . . . . . . . . . . . . . . . . . . . . . . 19
Certain Federal Income Tax Consequences. . . . . . . . . . . . . . . . 19
Stock Option Agreement . . . . . . . . . . . . . . . . . . . . . . . . 20
Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . . . 22
Interests of Certain Persons in the Merger . . . . . . . . . . . . . . 22
Regulatory Matters . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Effect of Merger on the Notes. . . . . . . . . . . . . . . . . . . . . 24
Effect of Merger on the Credit Facility. . . . . . . . . . . . . . . . 25
THE MERGER AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Representations and Warranties of the Company. . . . . . . . . . . . . 26
Representations and Warranties of Ladbroke and the Acquisition Sub . . 26
Certain Covenants of the Company . . . . . . . . . . . . . . . . . . . 27
Additional Agreements. . . . . . . . . . . . . . . . . . . . . . . . . 28
Conditions to Obligations of Each Party. . . . . . . . . . . . . . . . 29
Conditions to Obligations of the Company . . . . . . . . . . . . . . . 29
Conditions to Obligations of Ladbroke and the Acquisition Sub. . . . . 29
<PAGE>
Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
APPRAISAL RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
PRICE RANGE OF COMPANY COMMON STOCK AND DIVIDENDS. . . . . . . . . . . . . 34
BENEFICIAL OWNERSHIP OF SECURITIES . . . . . . . . . . . . . . . . . . . . 35
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF THE COMPANY . . . . . . 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION . . . . . . . . . . . . . . . . . . . . . . . . . 40
BUSINESS OF THE COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . 47
Reorganization . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
The Colorado Casinos . . . . . . . . . . . . . . . . . . . . . . . . . 47
Growth Strategy. . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
The Colorado Gaming Market . . . . . . . . . . . . . . . . . . . . . . 50
Competition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Federal and State Gaming Regulations . . . . . . . . . . . . . . . . . 53
Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Seasonality and Inclement Weather. . . . . . . . . . . . . . . . . . . 56
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . 57
INFORMATION CONCERNING LADBROKE AND THE ACQUISITION SUB. . . . . . . . . . 58
INDEPENDENT ACCOUNTANTS. . . . . . . . . . . . . . . . . . . . . . . . . . 58
AVAILABLE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 58
CONSOLIDATED FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . F-1
ANNEX I--Agreement and Plan of Merger dated as of August 22, 1997, among
Ladbroke Racing Corporation,
CG&E Acquisition Corp., and Colorado Gaming & Entertainment Co.. . . . I-1
ANNEX II--First Amendment to Agreement and Plan of Merger dated as of October
21, 1997, among Ladbroke
Racing Corporation, CG&E Acquisition Corp., and Colorado Gaming
& Entertainment Co.. . . . . . . . . . . . . . . . . . . . . . . . . . II-1
ANNEX III--Fairness Opinion of CIBC Wood Gundy Securities Corp.. . . . . .III-1
ANNEX IV--Text of Section 262 of the General Corporation Law of the State of
Delaware . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-1
ii
<PAGE>
FORWARD-LOOKING STATEMENTS
Certain information contained in this Proxy Statement, including certain
information set forth under the captions "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources," "Business of the Company" and other statements as to the future
financial or operating performance of the Company, may constitute
"forward-looking statements." The Private Securities Litigation Reform Act of
1995 provides certain "safe harbor" protections for forward-looking statements
in order to encourage companies to provide prospective information about their
businesses. Forward-looking statements include statements concerning plans,
objectives, goals, strategies, future events or performance, competition, growth
opportunities, sources and uses of capital, future development or expansion
activities, and underlying assumptions and other statements which are other than
statements of historical facts. Such statements may be identified by the use of
forward-looking terminology such as "might," "may," "will," "would," "could,"
"expect," "anticipate," "estimate," "likely," "believe," or "continue" or the
negative thereof or other variations thereon or comparable terminology. Such
forward-looking statements involve a number of risks and uncertainties that may
significantly affect the Company's liquidity and results of operations in the
future and, accordingly, actual results may differ materially from those
expressed in any forward-looking statements.
The forward-looking statements set forth in this Proxy Statement are based
upon various assumptions, many of which are based, in turn, upon further
assumptions, including without limitation, management's examination of
historical operating trends, data contained in the Company's records, and other
data available from third parties. Although the Company believes that such
assumptions were reasonable when made, because such assumptions are inherently
subject to significant uncertainties and contingencies which are difficult or
impossible to predict and are beyond the Company's control, there can be no
assurance, and no representation or warranty is made, that management's
expectations, beliefs, or projections will result or be achieved or
accomplished. In addition to the other factors and matters discussed elsewhere
herein, factors that, in the view of the Company, could cause actual results to
differ materially from those discussed in the forward-looking statements
include: (i) leverage and debt service, (ii) financing and refinancing efforts,
(iii) competition, (iv) inclement weather, (v) changes in general economic
conditions in the Denver metropolitan area, (vi) changes in state and local
gaming laws, regulations, or tax rates, (vii) risks related to development and
construction activities, (viii) changes in management or control of the Company,
(ix) significant changes in competitive factors affecting the Company, (x)
significant changes from expectations in actual capital expenditures and
operating expenses, and (xi) occurrences affecting the Company's ability to
obtain funds from operations, debt, or equity to finance needed capital
expenditures and other investments.
None of the Company, Ladbroke, LRC, the Acquisition Sub or any of their
respective agents, employees or advisors intend or have any duty or obligation
to supplement, amend, update, or revise any of the forward-looking statements
contained in this Proxy Statement.
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROXY STATEMENT AND DOES NOT PURPORT TO BE COMPLETE. ALL STATEMENTS IN THE
FOLLOWING SUMMARY ARE QUALIFIED BY AND ARE MADE SUBJECT TO THE MORE DETAILED
INFORMATION CONTAINED ELSEWHERE IN THIS PROXY STATEMENT AND THE ANNEXES HERETO.
THE ANNEXES ATTACHED TO THIS PROXY STATEMENT CONSTITUTE A PART OF THIS PROXY
STATEMENT AND SHOULD BE CONSIDERED AS SUCH. STOCKHOLDERS ARE URGED TO READ THIS
PROXY STATEMENT, INCLUDING THE ANNEXES, IN ITS ENTIRETY. THE FULL TEXT OF THE
MERGER AGREEMENT IS ATTACHED HERETO AS ANNEX I AND ANNEX II AND SHOULD BE READ
IN ITS ENTIRETY.
THE SPECIAL MEETING
DATE, TIME, AND PLACE
The Special Meeting of the Stockholders of the Company will be held on
December 12, 1997, at 10:00 a.m., local time, at the offices of LeBoeuf, Lamb,
Greene & MacRae L.L.P., Suite 2000, 633 17th Street, Denver, Colorado 80202.
PURPOSE OF THE SPECIAL MEETING
At the Special Meeting, Stockholders will be asked to consider and vote
upon a proposal to approve and adopt the Merger Agreement and any other matters
as may properly come before the Special Meeting and any postponements or
adjournments thereof. Pursuant to the Merger Agreement, the Acquisition Sub
will merge with and into the Company, with the Company continuing as the
surviving corporation and becoming a wholly owned subsidiary of Ladbroke. Also,
pursuant to the Merger Agreement, upon effectiveness of the Merger, each share
of Company Common Stock outstanding at the effective time of the Merger (other
than Company Common Stock held by Ladbroke, LRC, the Acquisition Sub or any of
their subsidiaries, or the Company, all of which will be canceled, and Company
Common Stock held by Stockholders who perfect their rights of appraisal under
Section 262 of the DGCL) will be converted into the right to receive $6.25 in
cash, without interest.
QUORUM
A majority of shares of Company Common Stock, represented in person or by
proxy, will constitute a quorum at the Special Meeting. Abstentions, broker
non-votes and proxies returned without instructions will be counted for purposes
of determining whether a quorum is present at the Special Meeting.
RECORD DATE; STOCKHOLDERS ENTITLED TO VOTE
The Company Common Stock is the only class of voting securities of the
Company. Holders of record of Company Common Stock on the books of the Company
on November 14, 1997, are entitled to notice of and to vote at the Special
Meeting. On the Record Date, there were 5,236,091 shares of Company Common
Stock outstanding, which were held of record by thirteen persons.
VOTING REQUIREMENTS
Approval and adoption of the Merger Agreement requires the affirmative vote
of the holders of a majority of the outstanding shares of Company Common Stock.
Each holder of record of Company Common Stock will be entitled to one vote per
share of Company Common Stock at the Special Meeting or any and all adjournments
or postponements thereof. A SIGNED PROXY RETURNED WITHOUT INSTRUCTIONS WILL BE
VOTED FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY. Abstentions and broker non-votes will have the effect of
a vote against approval and adoption of the Merger Agreement and the
transactions contemplated thereby. Any proxy given may be revoked either by a
written notice duly signed and
2
<PAGE>
delivered to the Secretary of the Company prior to the exercise of the proxy, by
execution of a subsequent proxy, or by voting in person at the Special Meeting.
Each of the Company's directors is obligated to vote or cause to be voted
all shares of Company Common Stock over which he exercises voting control in
favor of approval and adoption of the Merger pursuant to agreements entered into
with LRC. LRC required such agreements as a condition to entering into the
Merger Agreement. The number of such shares aggregates 167,036, or
approximately 3.2% of the shares of Company Common Stock entitled to vote at the
Special Meeting. See "Interests of Certain Persons in the Merger" and
"Beneficial Ownership of Securities."
THE MERGER
PRINCIPAL EFFECTS OF THE MERGER
As a result of the Merger, each outstanding share of Company Common Stock
(other than shares of Company Common Stock held by Ladbroke, LRC, the
Acquisition Sub or any of their subsidiaries, or in the treasury of the Company,
all of which will be canceled, and shares of Company Common Stock held by
Stockholders who perfect their appraisal rights under Section 262 of the DGCL)
will be converted into the right to receive $6.25 in cash for each share of
Company Common Stock held, and the Company will become a wholly owned subsidiary
of Ladbroke. See "The Merger--Principal Effects of the Merger." No established
trading market for the Company Common Stock exists. There are only limited,
sporadic, and infrequent trades of Company Common Stock. From January 1, 1997
through September 30, 1997, Company Common Stock traded on the OTC Bulletin
Board only eight times at prices ranging from $2.50 to $5.30 per share. The
book value of a share of Company Common Stock is $0.97 as of September 30, 1997.
EFFECTIVE TIME
The Merger will become effective (the "Effective Time of the Merger") upon
the filing of the certificate of merger with the Secretary of State of the State
of Delaware. It is anticipated that, subject to the satisfaction or waiver, if
permissible, of the conditions set forth in the Merger Agreement, such filing
will be made promptly after all of the conditions precedent to the consummation
of the Merger have been satisfied or waived. See "The Merger."
BACKGROUND OF THE MERGER
For a description of the background of the Merger, see "The
Merger--Background of the Merger."
THE COMPANY'S REASONS FOR THE MERGER; RECOMMENDATIONS OF THE COMPANY'S BOARD OF
DIRECTORS
The Board of Directors has approved and adopted the Merger Agreement and
recommends that the Stockholders vote for the approval and adoption of the
Merger Agreement.
The Company's Board provided its approval and adoption of the Merger
Agreement and recommendation after consideration of a number of factors, which
are described under the heading "The Merger--Recommendations of the Board." In
considering the recommendations of the Company's Board, the Stockholders should
be aware that certain members of the Company's management and Board have certain
interests in the Merger that are in addition to the interests of the
Stockholders generally. The Company's Board was aware of these interests and
considered them, among other matters, in approving and adopting the Merger
Agreement and the Merger and the other transactions contemplated by the Merger
Agreement. See "The Merger--Related Transactions" and "Interests of Certain
Persons in the Merger."
OPINION OF THE FINANCIAL ADVISOR
The Company engaged CIBC Wood Gundy Securities Corp. ("CIBC") to act as its
financial advisor in connection with the Merger and related matters. On
September 5, 1997, CIBC delivered to the Company's Board its
3
<PAGE>
opinion (the "CIBC Opinion") that the amount in cash equal to $6.25 per share of
Company Common Stock to be received by Stockholders pursuant to the Merger (the
"Merger Consideration") is fair to such holders from a financial point of view.
The full text of the CIBC Opinion, which sets forth the procedures
followed, matters considered, and assumptions made in connection with rendering
such opinion, as well as certain interests and relationships of CIBC with the
Company, is attached as Annex III to this Proxy Statement. The CIBC Opinion
will not be updated and is limited to the facts and circumstances in existence
on September 5, 1997, the date on which the opinion was delivered to the
Company's Board. See "The Merger--Opinion of the Financial Advisor."
STOCKHOLDERS ARE URGED TO READ THE CIBC OPINION IN ITS ENTIRETY.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Stockholders' receipt of cash for Company Common Stock pursuant to the
Merger will be a taxable transaction for federal income tax purposes and may
also be a taxable transaction under applicable state, local, and other tax laws.
See "The Merger--Certain Federal Income Tax Consequences."
STOCK OPTION AGREEMENT
In connection with the Merger Agreement and the Merger, LRC and the Company
entered into the Stock Option Agreement, pursuant to which the Company granted
to LRC an option (the "Option") to purchase up to 1,022,638 shares of Company
Common Stock under certain circumstances at an initial cash price per share of
Company Common Stock equal to $6.25. The Stock Option Agreement provides that
in no event will the number of shares of Company Common Stock for which the
Option is exercisable exceed 19.9% of Company Common Stock issued and
outstanding at the time of exercise.
LRC may exercise its Option, in whole or in part, if, but only if, a
Triggering Event (as defined under the caption "The Merger--Stock Option
Agreement") has occurred prior to the occurrence of an Exercise Termination
Event (as defined under the caption "The Merger--Stock Option Agreement"),
provided that Ladbroke notifies the Company in writing of such exercise within
180 days following the first such Triggering Event.
The Stock Option Agreement also provides that LRC may require the Company
to repurchase the Option from Ladbroke in certain circumstances. The Stock
Option Agreement further provides that the Total Profit (as defined under the
caption "The Merger--Stock Option Agreement") of Ladbroke in such repurchase
will not exceed the lesser of $3,000,000 or, when added to any Termination Fee,
$4,500,000. See "The Merger--Stock Option Agreement."
INTERESTS OF CERTAIN PERSONS IN MERGER
Certain officers and directors of the Company have interests in the Merger
that are in addition to their interests as Stockholders and have participated in
the negotiations of the terms of the Merger Agreement and the transactions
contemplated thereby. The Company's Board was aware of those interests and
considered them along with the other matters described below. See "The
Merger--Recommendations of the Board of Directors" and "--Interests of Certain
Persons in the Merger."
Pursuant to the Company's Management Incentive and Non-Employee Director
Stock Plan, as proposed to be amended, as a result of the Merger, 259,630 shares
of Company Common Stock issued or issuable to the Company's directors and
officers will vest and become nonforfeitable at the Effective Time of the
Merger. The number of such shares, and the value of such shares (based on the
$6.25 per share Merger Consideration) to be received by each of the Company's
officers and directors as a group is 259,630 shares ($1,622,687.50) and to be
received by each such person individually is as follows: Stephen J.
Szapor, Jr., Chief Executive Officer, President, and Director -- 120,000
($750,000); Alan L. Mayer, Senior Vice President, Chief Legal Officer, and
Secretary -- 46,296 ($289,350); Richard Rabin, Senior
4
<PAGE>
Vice President of Operations -- 46,296 ($289,350); Robert Stephens, Vice
President of Finance and Treasurer -- 18,518 ($115,737.50); Jack Breslin, Vice
President of Marketing -- 10,000 ($62,500); Philip J. DiBerardino, Director --
4,630 ($28,937.50); Steve Leonard, Director -- 4,630 ($28,937.50); Mark van
Hartesvelt, Director -- 4,630 ($28,937.50); and Franklin S. Wimer, Director --
4,630 ($28,937.50). See "The Merger--Interests of Certain Persons in the
Merger."
APPRAISAL RIGHTS
Stockholders on the Record Date who do not vote in favor of approving and
adopting the Merger Agreement and who otherwise comply with Section 262 of the
DGCL will be entitled to appraisal rights under Section 262 of the DGCL. A
summary of the provisions of Section 262 of the DGCL, including a summary of the
requirements with which holders of Company Common Stock desiring to assert
appraisal rights must comply, is contained herein under the heading "The
Merger--Appraisal Rights." The entire text of Section 262 of the DGCL is
attached hereto as Annex IV.
SOURCES AND AMOUNT OF FUNDS
The total amount of funds required by Ladbroke for the payment of the
Merger Consideration is expected to be approximately $34.4 million. Ladbroke
has advised the Company that it will pay for such obligations primarily from
cash on hand or from the proceeds of borrowings under existing lines of credit.
TERMINATION; PAYMENTS UPON TERMINATION
The Merger Agreement may be terminated by the mutual consent of the parties
or upon the happening of certain events, including the failure of the
representations or warranties of either party to be true, the failure of either
party to comply with its obligations under the Merger Agreement, or the failure
of the Stockholders to approve and adopt the Merger Agreement.
If the Merger Agreement is terminated, the Merger Agreement will become
void and there will be no liability on the part of any party to the Merger
Agreement, except payment of a termination fee by the Company under certain
circumstances. However, termination of the Merger Agreement will not relieve
any party thereto from liability for any breach of the Merger Agreement or
affect the validity, enforceability, or effectiveness of the Stock Option
Agreement. See "The Merger--Certain Terms of the Merger
Agreement--Termination."
BUSINESS OF THE COMPANY
The Company develops, owns, and operates gaming and related entertainment
facilities in Colorado and elsewhere. The Company owns and operates, through
wholly owned subsidiaries, two of the largest casinos in terms of number of slot
machines in the historic mining towns of Black Hawk and Central City, Colorado.
The Company also owns and operates, through a wholly owned subsidiary, a third
gaming facility in Black Hawk. In addition, through a wholly owned subsidiary,
the Company owns a parking lot with a capacity of approximately 500 cars, which
is located directly between, and is used by, the Company's Black Hawk casinos.
See "Business of the Company."
BUSINESS OF LRC, LADBROKE AND THE ACQUISITION SUB
LRC is an indirect wholly owned subsidiary of, and Ladbroke is a direct
wholly owned subsidiary of Ladbroke Group plc ("Ladbroke Group"), a U.K. public
company whose shares are traded on the London Stock Exchange. Ladbroke Group is
a leading hospitality and leisure company which had over $6.5 billion in sales
for its fiscal year ended December 31, 1996. Ladbroke Group has two core
businesses, ownership and management of 161 Hilton International hotels in 47
countries and betting and gaming operations, including casinos and betting shops
in the U.K. and U.S. operations which include three horse race tracks in
California, Michigan, and Pennsylvania. The principal executive offices of
Ladbroke are located at Plaza Two, Suite 500, 3260 Blume Drive, Richmond,
California 94806, telephone (510) 243-1600. See "Information Concerning
Ladbroke and the Acquisition Sub."
5
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA OF THE COMPANY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Years Ended December 31,
-----------------------------------------------------------------
Nine Months
June 7, 1996 Ended
January 1, through September
1996 through December 31, 30, 1997
1992(b) 1993 1994(c) 1995(c) June 6, 1996 1996 (unaudited)
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue $ 17,045 $ 38,468 $ 45,474 $ 47,428 $ 19,982 $30,680 $40,454
Operating Expenses:
Impairment of assets -- -- 6,875 10,945 -- -- --
Reorganization items -- -- -- 17,910 2,290 308 10
Depreciation and amortization 2,086 3,931 4,307 4,771 1,882 4,044 4,035
Other operating expenses 23,263 31,379 47,253 40,438 15,248 22,358 30,776
Income (loss) from operations (8,304) 3,158 (12,961) (26,636) 562 3,970 5,633
Interest expense (3,000) (6,987) (18,822) (18,664) (579) (3,867) (5,090)
Extraordinary gain from
reorganization N/A N/A N/A N/A 164,358 N/A N/A
Equity loss in unconsolidated
subsidiary -- -- (2,323) (70,277) -- -- --
--------- -------- --------- ---------- -------- ------- -------
Net income (loss) $ (11,241) $ (3,829) $ (32,131) $ (115,216) $164,407 $ 192 $ 93
--------- -------- --------- ---------- -------- ------- -------
--------- -------- --------- ---------- -------- ------- -------
Net income per common
share (a) N/A N/A N/A N/A N/A $ 0.04 $ 0.02
--------- -------- --------- ---------- -------- ------- -------
--------- -------- --------- ---------- -------- ------- -------
Weighted average common
shares (a) N/A N/A N/A N/A N/A 5,138,888 5,179,569
Book value per common share N/A N/A N/A N/A N/A 0.95 0.97
-------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
As of December 31,
-------------------------------------------------------------
As of
September
30, 1997
1992 1993 1994(c) 1995(c) 1996 (unaudited)
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash $ 1,676 $ 12,944 $ 7,977 $3,623 $5,758 $5,503
equivalents
Total assets 35,181 143,622 141,093 37,680 67,048 66,031
Long-term debt
(excluding current 35,064 139,595 155,675 -- 55,391 53,776
portion)
Liabilities subject to -- -- -- 186,460 -- --
compromise
Total stockholders' equity (10,002) (4,693) (36,824) (153,137) 4,869 5,043
(deficit)
</TABLE>
- ----------------------
(a) The weighted average number of common shares outstanding and net income per
common share for the Company prior to June 7, 1996 (the "Predecessor
Company"), the effective date (the "Effective Date") of the Company's
reorganization under chapter 11 of the Federal Bankruptcy Code (the
"Reorganization") have not been presented because, due to the
Reorganization and implementation of fresh start reporting, they are not
comparable to subsequent periods.
(b) Reflects operating results for the period from June 15, 1992 to
December 31, 1992 for Bullwhackers Central City and for the period from
July 17, 1992 to December 31, 1992 for Bullwhackers Black Hawk.
(c) Grand Palais Riverboat, Inc. ("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 following the
commencement of the GPRI's bankruptcy case. See Consolidated Financial
Statements and Notes thereto.
- --------------------------------------------------------------------------------
7
<PAGE>
THE SPECIAL MEETING
DATE, TIME, AND PLACE
The Special Meeting of the Stockholders of the Company will be held on
December 12, 1997, at 10:00 a.m., local time, at the offices of LeBoeuf, Lamb,
Greene & MacRae L.L.P., Suite 2000, 633 17th Street, Denver, Colorado 80202.
PURPOSE OF THE SPECIAL MEETING
At the Special Meeting, Stockholders will be asked to consider and vote
upon a proposal to approve and adopt the Merger Agreement and any other matters
as may properly come before the Special Meeting and any postponements or
adjournments thereof. Pursuant to the Merger Agreement, the Acquisition Sub
will merge with and into the Company, with the Company continuing as the
surviving corporation and becoming a wholly owned subsidiary of Ladbroke. Also,
pursuant to the Merger Agreement, upon effectiveness of the Merger, each share
of Company Common Stock outstanding at the Effective Time of the Merger (other
than Company Common Stock held by Ladbroke, LRC, the Acquisition Sub or any of
their subsidiaries, or the Company, all of which will be canceled, and Company
Common Stock held by Stockholders who perfect their rights of appraisal under
Section 262 of the DGCL) will be converted into the right to receive $6.25 in
cash, without interest.
QUORUM
A majority of shares of Company Common Stock, represented in person or by
proxy, will constitute a quorum at the Special Meeting. Abstentions, broker
non-votes and proxies returned without instructions will be counted for purposes
of determining whether a quorum is present at the Special Meeting.
RECORD DATE; STOCKHOLDERS ENTITLED TO VOTE
The Company Common Stock is the only class of voting securities of the
Company. Holders of record of Company Common Stock on the books of the Company
on November 14, 1997, are entitled to notice of and to vote at the Special
Meeting. On the Record Date, there were 5,236,091 shares of Company Common
Stock outstanding, which were held of record by thirteen persons.
VOTING REQUIREMENTS
Approval and adoption of the Merger Agreement requires the affirmative vote
of the holders of a majority of the outstanding shares of Company Common Stock.
Each holder of record of Company Common Stock will be entitled to one vote per
share of Company Common Stock at the Special Meeting or any and all adjournments
or postponements thereof. A SIGNED PROXY RETURNED WITHOUT INSTRUCTIONS WILL BE
VOTED FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY. Abstentions and broker non-votes will have the effect of
a vote against approval and adoption of the Merger Agreement and the
transactions contemplated thereby. Any proxy given may be revoked either by a
written notice duly signed and delivered to the Secretary of the Company prior
to the exercise of the proxy, by execution of a subsequent proxy, or by voting
in person at the Special Meeting.
The proxy solicitation to which this Proxy Statement relates is made by the
Company's Board of Directors. The Company will bear the cost of such
solicitation.
Each of the Company's directors is obligated to vote or cause to be voted
all shares of Company Common Stock over which he exercises voting control in
favor of approval and adoption of the Merger pursuant to agreements entered into
with LRC. LRC required such agreements as a condition to entering into the
Merger Agreement. The number of
8
<PAGE>
such shares aggregates 167,037, or approximately 3.2% of the shares of Company
Common Stock entitled to vote at the Special Meeting. See "Interests of Certain
Persons in the Merger" and "Beneficial Ownership of Securities."
9
<PAGE>
THE MERGER
The information contained in this Proxy Statement with respect to the
Merger is qualified in its entirety by reference to the complete text of the
Merger Agreement, which is attached to this Proxy Statement as Annex I and Annex
II and incorporated by reference herein. STOCKHOLDERS ARE URGED TO READ THE
MERGER AGREEMENT IN ITS ENTIRETY FOR A MORE COMPLETE DESCRIPTION OF THE MERGER
AGREEMENT.
EFFECTIVE TIME
The Effective Time of the Merger will occur upon the filing of a
certificate of merger with the Secretary of the State of Delaware. It is
anticipated that such filing will be made promptly after all of the conditions
precedent to the Effective Time set forth in the Merger Agreement have been
satisfied or, if permissible, waived. The Company anticipates that it may take
four to six months to obtain the necessary regulatory approvals for the Merger,
and, as a result, the Effective Time is expected to occur late in the first
quarter or in the second quarter of 1998.
PRINCIPAL EFFECTS OF THE MERGER
Upon consummation of the Merger at the Effective Time of the Merger, the
Acquisition Sub will be merged with and into the Company, with the Company
continuing as the surviving corporation (as such, the "Surviving Corporation")
and becoming a wholly owned subsidiary of Ladbroke. Upon consummation of the
Merger, the Stockholders will no longer have an equity interest in the Company
and will not share in its future earnings or growth, if any. Instead, each such
Stockholder (other than those who perfect appraisal rights under Section 262 of
the DGCL) will have the right to receive the Merger Consideration of $6.25 in
cash, without interest, for each share of Company Common Stock held by such
Stockholder immediately prior to the Merger.
PAYMENT OF THE MERGER CONSIDERATION
At or prior to the Effective Time of the Merger, Ladbroke will designate a
third party to act as paying agent with respect to the Merger (the "Paying
Agent") and Ladbroke or the Surviving Corporation will make available to the
Paying Agent sufficient funds to make all payments for shares of Company Common
Stock pursuant to the Merger Agreement. Pending payment of such funds to the
Stockholders, such funds shall be held and invested by the Paying Agent as
Ladbroke directs. Any net profit resulting from, or interest or income produced
by, such investments will be payable to Ladbroke.
Each holder (other than Ladbroke, LRC, the Acquisition Sub or any of their
subsidiaries, the Company, and Stockholders who perfect their appraisal rights
under Section 262 of the DGCL) of a certificate or certificates which prior to
the Effective Time of the Merger represented Company Common Stock (a "Stock
Certificate") will be entitled to receive, upon surrender to the Paying Agent of
such Stock Certificates for cancellation and subject to any required withholding
of taxes, the aggregate Merger Consideration into which the shares of Company
Common Stock previously represented by such Stock Certificates were converted in
the Merger. Until surrendered to the Paying Agent, each such Stock Certificate
will be deemed for all purposes to evidence only the right to receive upon such
surrender the aggregate Merger Consideration into which the shares of Company
Common Stock theretofore represented thereby will have been converted, subject
to any required withholding taxes. No interest will be paid or accrue on the
cash payable upon the surrender of any Stock Certificate.
Instructions with regard to the surrender of Stock Certificates, together
with a letter of transmittal (a "Letter of Transmittal") to be used for this
purpose, will be forwarded to Stockholders as promptly as practicable following
the Effective Time of the Merger. Stockholders should surrender their Stock
Certificates only after receiving a Letter of Transmittal. STOCKHOLDERS SHOULD
NOT SEND ANY STOCK CERTIFICATES AT THIS TIME.
10
<PAGE>
Any cash delivered or made available to the Paying Agent and not exchanged
for Company Common Stock within twelve months after the Effective Time of the
Merger will be returned by the Paying Agent to the Surviving Corporation which
thereafter will act as paying agent, and any former Stockholders who have not
theretofore complied with the instructions for exchanging their Stock
Certificates will thereafter look only to the Surviving Corporation for payment
of the Merger Consideration set forth in the Merger Agreement, without any
interest thereon, but will have no greater rights against the Surviving
Corporation than may be accorded to general creditors thereof under applicable
law. Notwithstanding the foregoing, none of the Paying Agent, Ladbroke, the
Acquisition Sub, or the Surviving Corporation will be liable to a Stockholder
for any cash or interest thereon delivered to a public official pursuant to
applicable abandoned property, escheat, and similar laws.
As soon as reasonably practicable after the Effective Time, the Paying
Agent will mail to each record holder of Stock Certificates a form of Letter of
Transmittal and instructions for use thereof in surrendering such Stock
Certificates which will specify that delivery will be effected and risk of loss
and title to the Stock Certificates will pass to the Paying Agent only upon
proper delivery of the Stock Certificates to the Paying Agent in accordance with
the terms of delivery specified in the Letter of Transmittal and instructions
for use in effecting the surrender of such Stock Certificates in exchange for
the Merger Consideration. The Paying Agent will send the Merger Consideration
to which each Stockholder is respectively entitled promptly after such delivery
by the Stockholder. The Effective Time is currently expected to occur late in
the first quarter or in the second quarter of 1998. The Company anticipates
that the Paying Agent will mail the forms of the Letter of Transmittal within
two weeks after the Effective Time and that the Merger Consideration will be
sent within two to four weeks after proper delivery of a Stockholder's Stock
Certificates. See "--Effective Time".
As of the Effective Time of the Merger, all Company Common Stock will cease
to be outstanding and will automatically be canceled and all Stockholders will
cease to have any rights with respect to Company Common Stock, except the right
to receive upon surrender of a Stock Certificate the Merger Consideration
without interest, into which the shares of Company Common Stock theretofore
represented by such Stock Certificate shall have been converted. From and after
the Effective Time of the Merger, there will be no further registrations of
transfers on the stock transfer books of the Surviving Corporation of the shares
of Company Common Stock which were outstanding immediately prior to the
Effective Time of the Merger.
Following the Effective Time of the Merger, the separate corporate
existence of the Acquisition Sub will cease and the Company, as the Surviving
Corporation, will continue its corporate existence under the laws of the State
of Delaware.
BACKGROUND OF THE MERGER
Beginning in the fall of 1995 and continuing sporadically in 1996, Donald
Kornstein, President and Chief Executive Officer of Jackpot Enterprises, Inc.
("Jackpot Enterprises"), a New York Stock Exchange listed gaming company, and
Stephen J. Szapor, Jr., the Company's President and Chief Executive Officer,
informally discussed, in general, strategic transactions between the two
companies, although no formal offers were made.
At its regularly scheduled quarterly Board meeting in December 1996, the
Board of Directors of the Company began a discussion of the Company's strategic
growth opportunities. Given the Company's limited financial resources, the
Board directed the Company's management to pursue simultaneously efforts to find
a strategic partner for the Company, to develop specific growth opportunities on
a stand-alone basis, and to investigate the potential sale of the Company.
In early 1997, Mr. Kornstein expressed interest in formalizing an offer for
the possible acquisition of the Company by Jackpot Enterprises. Mr. Szapor
reported this conversation to the Company's Board at its regularly scheduled
meeting in March 1997. The Board authorized Mr. Szapor to investigate further
whether a transaction with Jackpot Enterprises would be in the best interests of
the Stockholders. At that Board meeting, the Company's management made a
presentation suggesting a target value range for the Company. This target value
range was determined based on analyses that included the trading pattern and
price of the Company Common Stock, discounted
11
<PAGE>
cash flow multiples, and EBITDA multiples compared to companies that management
deemed comparable, as well as transactions involving the acquisitions of
companies which the Company's management deemed comparable. The Company's
management did not assign relative weight to any particular analysis but,
rather, evaluated all of the information and developed a target value range
based on its business judgment. From time to time, throughout discussions of
proposed transactions with Jackpot Enterprises and Ladbroke, the Board, in part,
used this target value range as a benchmark as to the Board's view regarding the
fairness of the particular merger consideration being offered.
Mr. Szapor had additional conversations with Mr. Kornstein in late March
and early April 1997. As a result of these preliminary discussions, Mr. Szapor
recommended to the Board at a special meeting held on April 29, 1997 that a
possible transaction with Jackpot Enterprises should be pursued. At that
meeting, the Board authorized formal discussions with Jackpot Enterprises and
agreed to retain UniRock Management Corporation to represent the Company in
those discussions. (Franklin S. Wimer, President of UniRock Management
Corporation, is the chairman of the Board of Directors of the Company.
Mr. Wimer did not participate in the decision to retain UniRock Management
Corporation). The Company also retained CIBC to advise it on the fairness of
any transaction resulting in the acquisition of the Company.
During the period from April 1997 through the end of June 1997,
Messrs. Szapor and Wimer and other Company personnel had numerous conversations
and meetings with representatives of Jackpot Enterprises concerning the terms
and structure of a possible transaction. In early May 1997, Jackpot Enterprises
made a preliminary offer to acquire the Company for $5.75 per share of Company
Common Stock, 25% of which would be paid in cash and 75% of which would be paid
in Jackpot Enterprises common stock. Throughout May and June, the Company and
Jackpot Enterprises continued to negotiate several significant issues, including
price and structure of consideration, without resolution. On June 30, 1997,
Jackpot Enterprises presented a formal offer to acquire the Company either in an
all-cash transaction for $5.25 per share of Company Common Stock or for a
combination of cash (33.3%) and common stock (66.7%) of Jackpot Enterprises
valued at approximately $5.75 per share of Company Common Stock. Throughout the
negotiations with Jackpot Enterprises, the Company's Board was kept informed
about the progress of the negotiations, including the status of several
significant unresolved issues, at special meetings held on March 24th,
April 29th, June 9th, and July 8th and through telephonic conference calls on
April 16th, May 7th, May 9th, May 16th, June 13th, June 26th, and July 3rd.
In March 1997, John Long, President and Chief Operating Officer of LRC,
contacted Mr. Szapor and expressed an interest in exploring a possible strategic
relationship between the Company and LRC whereby the Company would provide
consulting services to LRC and its affiliates on a project-by-project basis.
These discussions continued informally through the spring of 1997. In early
June 1997, while the Company was negotiating with Jackpot Enterprises,
Mr. Szapor informed Mr. Long that the Company was involved in negotiating a
potential acquisition by a third party which might affect the Company's ability
to enter into a consulting relationship with LRC. Mr. Long responded that LRC
might be interested in a transaction in which LRC or an affiliate would acquire
the Company and that he would discuss this issue with Mr. Szapor more
definitively as promptly as possible. In mid-June 1997, Mr. Long informed
Mr. Szapor that LRC would in fact be interested in exploring the possibility of
LRC or an affiliate acquiring the Company.
On June 24, 1997, Mr. Wimer, Mr. Szapor, and other members of the Company's
management met with Mr. Long, John Ford, General Counsel of LRC, and George
Harbison, Chief Financial Officer of LRC, in Pittsburgh to discuss the possible
terms of Ladbroke's acquisition of the Company. During this meeting, the
parties discussed certain operating and financial information, including certain
of the projections provided to CIBC and referred to under "Opinion of the
Financial Advisor" below, related to the Company. The financial information
included the Company's budgeted revenues, net income and earnings per share of
$57.8 million, $2.13 million and $0.39, respectively, for its 1997 fiscal year.
The information also contained a preliminary estimate of revenues, net income
and earnings per share of $59.68 million, $4.4 million and $0.80, respectively,
for the twelve months ending June 30, 1998, based on the same assumptions as
used in the preparation of the 1997 budget but adding additional revenues
anticipated as a result of the Company's expanded parking facility, reducing
depreciation expenses to reflect the run-off of fully depreciated assets and
eliminating the material expenses of operating as a stand-alone public company
which would not be incurred following the consummation of the Merger, and
provided preliminary estimates of the significant increases in revenues,
12
<PAGE>
net income and earnings per share which the Company might experience if four
transactions then under consideration by the Company were closed in the period
on terms favorable to the Company. As a result of adverse weather conditions in
the fourth quarter of 1997, Merger-related expenses and delays in achieving the
Merger-related savings, the Company may not meet the revenue and profitability
levels budgeted in its 1997 budget or the levels of performance reflected in its
budget for the twelve months ending June 30, 1998. In addition, the Company
does not currently believe that any of the four transactions which were under
consideration in June 1997 will be consummated, if they are consummated at all,
within the time frame or on the terms anticipated at the time the June 30, 1998
estimates were provided to LRC. At the conclusion of these discussions, the
Company requested that LRC provide the Company with a preliminary expression of
interest and price by the following week.
During the first week of July 1997, Mr. Long informed Mr. Szapor that LRC
was preliminarily interested in acquiring the Company for a cash purchase price
of $6.25 per share.
At a special meeting of the Company's Board held on July 8, 1997, the Board
considered the Jackpot Enterprises offers and the preliminary expression of
interest from LRC. The Board discussed the fact that several significant issues
remained unresolved regarding the Jackpot Enterprises offers despite several
months of negotiations. It analyzed the value to Stockholders which would
result from the two Jackpot Enterprises offers and the preliminary proposal from
LRC, the likelihood that a transaction could be consummated on the basis of the
offers or the proposal, and the likelihood that higher offers could be obtained
from other potential bidders for the Company. The Board also considered the
views of CIBC concerning the fairness of the offers. Based on the information
presented and the discussions held at this meeting, the Board of Directors of
the Company determined to reject the two Jackpot Enterprises offers and to
pursue further discussions with LRC.
During the week of July 14, 1997, representatives of LRC met with Company
representatives in Denver, Colorado to negotiate the terms of an acquisition of
the Company by LRC. These discussions culminated in the signing of a letter of
intent on July 21, 1997, which provided for the acquisition of the Company by
LRC for $6.25 per share, payable in cash.
During the period from July 22, 1997 to August 25, 1997, LRC and the
Company negotiated the terms of a definitive agreement concerning the
transaction contemplated by the letter of intent. The Merger Agreement was
signed on August 25, 1997, with an effective date of August 22, 1997.
The Company's obligations under the Merger Agreement were expressly
conditioned upon receipt of a fairness opinion from CIBC on or before
September 5, 1997. The fairness opinion was delivered by CIBC to the Board of
Directors of the Company on September 5, 1997.
LRC's obligations under the definitive agreement were expressly conditioned
upon, among other things, satisfactory conclusion of its due diligence of the
Company. On October 21, 1997, LRC's condition relating to its due diligence of
the Company expired. Concurrently, the Company and LRC entered into an
amendment to the Merger Agreement, which provided, among other things, for the
assignment by LRC to any direct or indirect wholly owned subsidiary of Ladbroke
Group of all of LRC's rights and obligations under the Merger Agreement. Prior
to the Merger, LRC will assign all of those rights and obligations to Ladbroke.
THE COMPANY'S REASONS FOR THE MERGER; RECOMMENDATIONS OF THE COMPANY'S BOARD OF
DIRECTORS
The Company's Board of Directors has determined that the Merger Agreement
and the Merger are advisable and are fair to and in the best interests of the
Company and the Stockholders. In reaching its determination that the Merger is
in the best interests of the Company and its Stockholders, the Company's Board
of Directors determined that it would be unlikely the Company would be able to
develop additional gaming facilities in Colorado because of state regulatory
restrictions. Further, the Company lacks sufficient capital resources to
compete effectively with larger, better capitalized competitors in gaming
jurisdictions outside of Colorado. In addition, restrictions on acquisitions,
investments, and certain other transactions contained in the Indenture governing
the Company's 12% Senior Secured Pay-In-Kind Notes Due 2003 limit the Company's
ability to expand its operations through acquisition or development of new
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gaming operations. Because of such restrictions, combined with the financial
inability to expand successfully outside of Colorado and the state regulatory
restrictions on expanding in Colorado, the Board concluded that if the Company
was not acquired by a third party, the Company might not be able to increase
significantly revenue levels and operating results. Based on its analysis of
the market for the Company, the Board also determined that it was unlikely that
another bidder for the Company would offer to acquire the Company on terms
significantly more favorable than the terms of the Merger.
In its deliberations with respect to the Merger, the Company's Board
considered a number of factors including, without limitation, the following,
which supported the Board's approval and adoption of the Merger Agreement and
the Merger and its recommendations to the Stockholders: (i) the sporadic,
illiquid market for Company Common Stock which effectively restricts the ability
of Stockholders to sell more than nominal amounts of Company Common Stock in the
market, and which results in the few shares of Company Common Stock which do
trade being traded at depressed prices; (ii) the Company's current businesses,
operations, and prospects and the possibility that the Company's operating
results from its current operations could stagnate without raising and expending
significant amounts of capital; (iii) the competitive environment in the
Colorado gaming market; (iv) restrictions placed on growth in the industry by
state regulations and tax rates, which effectively limit the Company's growth
opportunities in Colorado; (v) the Company's limited financial resources and
restrictive indenture terms, which restrict its ability to expand outside of
Colorado; (vi) the opinion of the Company's financial advisor that the Merger
Consideration to be received by the Stockholders in the Merger is fair to the
Stockholders from a financial point of view; (vii) the ability successfully to
consummate the Merger in light of the terms of the Merger Agreement and the high
likelihood that the Company would be able to satisfy the conditions precedent to
consummating the Merger; (viii) the amount of the Merger Consideration relative
to management's target value range previously presented to the Board by the
Company's management; and (ix) a comparison of the benefits of the Merger to
Stockholders with the likely return from remaining a stand-alone gaming company
or entering into a business transaction with other possible purchasers or
strategic merger partners. The Board also considered as a factor against such
approval and adoption that the Merger will be a taxable transaction to most
Stockholders, thereby reducing the actual amount of the Merger Consideration to
which most Stockholders will be ultimately entitled. See "Background of the
Merger." The Board did not consider the potential effect of the proposed
transaction with Gold Coin, Inc., described under "Business--Growth
Strategy--Memorandum of Understanding," because of the uncertainty that such
transaction would be consummated.
The foregoing discussion of the information and factors considered by the
Company's Board of Directors is not intended to be exhaustive, but includes the
material factors considered by the Company's Board. In voting to approve and
adopt the Merger Agreement and to recommend the approval and adoption of the
Merger Agreement by the Stockholders, the members of the Company's Board did not
indicate the relative or specific weight they assigned to the foregoing factors,
and individual directors may have given different weight to different factors.
Throughout its deliberations, the Company's Board received the advice of
counsel.
THE COMPANY'S BOARD HAS APPROVED AND ADOPTED THE MERGER AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY, BELIEVES THAT THE MERGER AND THE TERMS OF THE
MERGER AGREEMENT ARE IN THE BEST INTERESTS OF THE STOCKHOLDERS, AND RECOMMENDS
THAT THE STOCKHOLDERS VOTE TO APPROVE AND ADOPT THE MERGER AGREEMENT.
In considering the recommendations of the Company's Board with respect to
the Merger, Stockholders should be aware that the Company's management and
certain members of the Company's Board have certain interests in the Merger
which are in addition to the interests of Stockholders generally. The Company's
Board was aware of these interests and considered them, among other matters, in
approving and adopting the Merger and the transactions contemplated by the
Merger Agreement. See "--Interests of Certain Persons in the Merger."
OPINION OF THE FINANCIAL ADVISOR
The Company retained CIBC to render an opinion to the Company's Board of
Directors as to the fairness, from a financial point of view, to the
Stockholders of the Merger Consideration. On September 5, 1997, pursuant to the
Company s request, CIBC delivered its opinion (the "CIBC Opinion") to the Board
to the effect that, as of August 22,
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1997, the effective date of the Merger Agreement, the Merger Consideration was
fair, from a financial point of view, to the Stockholders.
A COPY OF THE CIBC OPINION IS ATTACHED HERETO AS ANNEX III OF THIS PROXY
STATEMENT. THE SUMMARY OF THE CIBC OPINION SET FORTH IN THIS PROXY STATEMENT IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
STOCKHOLDERS ARE URGED TO READ THE CIBC OPINION IN ITS ENTIRETY FOR ASSUMPTIONS
MADE, PROCEDURES FOLLOWED, OTHER MATTERS CONSIDERED, AND LIMITS OF CIBC'S
REVIEW. CIBC WAS NOT REQUESTED TO, AND DID NOT, MAKE ANY RECOMMENDATIONS TO THE
BOARD AS TO THE FORM AND AMOUNT OF THE MERGER CONSIDERATION TO BE RECEIVED BY
THE STOCKHOLDERS IN THE MERGER, WHICH WAS DETERMINED THROUGH ARM'S LENGTH
NEGOTIATIONS AMONG THE PARTIES. IN ARRIVING AT ITS OPINION, CIBC DID NOT
ASCRIBE A SPECIFIC RANGE OF FAIR VALUE TO THE COMPANY, BUT MADE ITS
DETERMINATIONS AS TO THE FAIRNESS OF THE MERGER CONSIDERATION ON THE BASIS OF
THE FINANCIAL AND COMPARATIVE ANALYSIS DESCRIBED BELOW.
THE CIBC OPINION WAS PREPARED FOR THE BOARD OF DIRECTORS, AND IS DIRECTED
ONLY TO THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW, AS OF AUGUST 22, 1997, OF
THE MERGER CONSIDERATION TO BE RECEIVED BY THE STOCKHOLDERS PURSUANT TO THE
MERGER AGREEMENT. THE CIBC OPINION DOES NOT CONSTITUTE A RECOMMENDATION TO ANY
STOCKHOLDERS AS TO HOW TO VOTE AT THE SPECIAL MEETING. IN ADDITION, CIBC WAS
NOT ASKED TO OPINE AS TO, AND ITS OPINION DOES NOT ADDRESS, THE UNDERLYING
BUSINESS DECISION OF THE BOARD TO PROCEED WITH OR TO EFFECT THE MERGER.
In connection with rendering the CIBC Opinion, CIBC, among other things:
(i) reviewed the Merger Agreement in substantially final form; (ii) reviewed the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1996, and its Quarterly Reports on Form 10-Q setting forth its financial results
for the periods ended March 31, 1997 and June 30, 1997; (iii) reviewed certain
operating and financial information, including projections for the Company's
five fiscal years ending December 31, 2001, provided to CIBC by the management
of the Company relating to the Company's business and prospects (the
"Projections") which were prepared by the Company's management and were not
reviewed or approved by the Company's Board of Directors; (iv) met with certain
members of the Company's senior management to discuss its operations, historical
financial statements, and future prospects; (v) visited the Company's facilities
in Black Hawk and Central City, Colorado; (vi) reviewed Ladbroke Group's Annual
Report to Shareholders for the fiscal year ended December 31, 1996; (vii)
reviewed the historical prices and trading volumes of Company Common Stock for
the six month period prior to August 22, 1997; (viii) reviewed publicly
available financial data and stock market performance data of companies that it
deemed generally comparable to the Company; (ix) reviewed the terms of recent
acquisitions of companies that it deemed generally comparable to the Company;
and (x) conducted such other studies, analyses, inquiries, and investigations as
it deemed appropriate.
With respect to the Projections, CIBC assumed that they were reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the management of the Company as to the expected future performance
of the Company. CIBC did not assume any responsibility for the information or
Projections provided to it and CIBC further relied upon the assurances of the
management of the Company that they have no actual knowledge of any facts that
would make the information or Projections provided to CIBC incomplete or
misleading. Stockholders are cautioned, however, that the Projections are based
on numerous variables and assumptions that are inherently uncertain, including,
without limitation, general economic conditions and competitive conditions
within the industry, and that the inclusion of such information should not be
regarded as an indication that the Company or any persons who received such
information consider it other than an estimate of future events. The Projections
reflect the current best judgment of management of the Company as to the future
financial performance of the Company and are not necessarily indicative of
future results of the Company, which may be significantly more or less favorable
than suggested by such Projections. The material assumptions upon which the
Projections were based relate to various matters, including: (i) levels of
industry growth in the Company's markets; (ii) the competitive environment in
the Colorado gaming market; (iii) the degree of the Company's success in
competing against the new entrants in its markets; (iv) restrictions placed on
growth in the industry by state regulations and tax rates; and (v) levels of
indebtedness and debt service requirements of the Company. The Projections are
not publicly available and have not been disseminated to any party other than
CIBC and LRC. In arriving at its opinion, CIBC did not perform or obtain any
independent appraisal of the assets of the Company. The CIBC Opinion does not
address the Company's underlying decision to effect the Merger.
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<PAGE>
In rendering its opinion, CIBC assumed, without independent verification,
the accuracy, completeness, and fairness of all of the financial and other
information that was available to it from public sources or that was provided to
it by the Company or its representatives. CIBC did not make any independent
evaluation of the Company's assets, nor did CIBC verify any of the information
reviewed by it. The CIBC Opinion is necessarily based on economic, market,
financial, and other conditions as they existed on, and on the information made
available to it as of, the date of such opinion. It should be understood that,
although subsequent developments may affect its opinion, except as agreed by
CIBC, CIBC does not have any obligation to update, revise, or reaffirm its
opinions.
In arriving at its opinion, CIBC was not authorized to solicit, and did not
solicit any indication of, interest from any party with respect to the
acquisition, business combination, or other extraordinary transaction involving
the Company or any of its assets.
The following is a summary of the material factors considered and the
principal financial analyses performed by CIBC to arrive at its opinion dated
September 5, 1997. In preparing its opinion, CIBC performed a variety of
financial and comparative analyses, including those described below. The
summary of such analyses does not purport to be a complete description of the
analyses underlying the CIBC Opinion. In arriving at its opinion, CIBC did not
quantify or attempt to assign relative weights to the specific factors
considered and financial analyses performed.
1. ANALYSIS OF CERTAIN OTHER PUBLICLY TRADED COMPANIES. CIBC compared
selected historical share price, earnings, operating and financial ratios for
the Company to the corresponding data and mean ratios for selected emerging
market gaming companies and non-emerging market gaming companies whose
securities are publicly traded. Such data and ratios included the ratio of
market capitalization of common stock plus long-term debt less cash on hand
("Total Enterprise Value") to (x) latest twelve-month revenues, (y) latest
twelve-month operating earnings before depreciation, amortization, interest, and
taxes ("EBITDA") and (z) latest twelve-month operating earnings before interest
and taxes ("EBIT"). The emerging market gaming companies selected for this
comparison were Argosy Gaming, Casino Magic, Century Casinos, Grand Casinos,
Harvey's Casino Resorts, Hollywood Casino Corp., and Lady Luck Gaming Corp. The
non-emerging market gaming companies selected for this comparison were Anchor
Gaming, Aztar Corporation, Primadonna Resorts, Inc., Rio Hotel & Casino, Inc.,
Showboat, Inc., and Station Casinos, Inc.
An analysis of Total Enterprise Value to latest twelve-month revenue for
the above-selected emerging market gaming companies yielded a range of multiples
from 1.0x to 2.2x and a mean multiple of 1.5x and for the above-selected
non-emerging market gaming companies yielded a range of multiples from 1.0x to
7.1x with a mean of 2.8x. This analysis compares to 1.6x for the Company at the
Merger Consideration price of $6.25 per share of Company Common Stock set forth
in the Merger Agreement. An analysis of Total Enterprise Value to latest
twelve-month EBITDA for emerging market gaming companies yielded a range of
multiples from 5.2x to 8.8x and a mean multiple of 7.0x and for the
above-selected non-emerging market gaming companies yielded a range of multiples
from 6.7x to 18.0x with a mean of 10.2x. This analysis compares to 6.0x for the
Company at the Merger Consideration price. An analysis of Total Enterprise
Value to latest twelve-month EBIT for the selected emerging market gaming
companies yielded a range of multiples from 7.8x to 24.7x and a mean multiple of
13.7x and for the above-selected non-emerging market gaming companies yielded a
range of multiples from 11.5x to 20.8x with a mean of 15.1x. This analysis
compares to 11.4x for the Company at the Merger Consideration price.
In arriving at its opinion, CIBC took into account that, in general, the
multiples available to the Company at the Merger Consideration price compared
favorably to the multiples derived for the selected emerging market gaming
companies in that they are within the range of multiples for such companies.
CIBC was of the view that non-emerging market gaming companies are not
necessarily comparable to the Company because non-emerging companies in general
are much larger and more established than the Company and operate in larger and
more established gaming markets, and, accordingly, the multiples for
non-emerging companies typically would be higher. No company utilized in the
above comparable company analysis is identical to the Company. Accordingly, an
analysis of the foregoing is not purely mathematical and involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the comparable companies and other factors that could affect
their public trading value.
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<PAGE>
2. COMPARABLE PRECEDENT TRANSACTION ANALYSIS. CIBC conducted a review of
selected gaming transactions since 1995 in which a majority ownership position
was purchased. The transactions selected were Trump's Castle Casinos/Trump
Hotel & Casino Resorts Holdings L.P., Boomtown, Inc./Hollywood Park Inc.,
Par-a-Dice Gaming Corp./Boyd Gaming; Bally International/Hilton Hotels Corp.,
Louisiana Riverboat Gaming Partnership/Casino America Inc., Griffin Gaming &
Entertainment/Sun International Hotels, Caesar's World/ITT Corp., Gold Strike
Resorts/Circus Circus Enterprises, Inc., and Bally's Gaming International,
Inc./Alliance Gaming. These transactions were analyzed to provide a reference
point as to the "enterprise" valuation multiples for the Company. From the
universe of transactions selected, there was a wide disparity in the multiples,
which was directly related to the quality and size of the gaming markets where
the target company operated. Therefore, the transactions were also separated
into a small peer group consisting of transactions where the target company
operated in emerging gaming markets. The small peer group consists of the Boyd
Gaming/Par-a-Dice transaction, the Casino America, Inc./Louisiana Riverboat and
Gaming Partnership transaction, and the Hollywood Park, Inc./Boomtown, Inc.
transaction. CIBC calculated multiples for each transaction based on the ratios
of enterprise value to each company's pre-acquisition latest twelve-month
revenues, EBITDA, and EBIT. An analysis of enterprise value to latest
twelve-month revenues for the entire universe of transactions selected yielded a
range of multiples from 0.6x to 3.7x and a mean multiple of 1.8x, and for the
small peer group yielded a range of multiples from 0.6x to 1.6x and a mean
multiple of 1.3x. This analysis compares to 1.6x for the Company at the Merger
Consideration price. An analysis of enterprise value to latest twelve-month
EBITDA for the entire universe of transactions selected yielded a range of
multiples from 5.2x to 13.8x and a mean multiple of 9.3x, and for the small peer
group yielded a range of multiples from 5.2x to 5.7x and a mean multiple of
5.5x. This analysis compares to 6.0x for the Company at the Merger
Consideration price. An analysis of enterprise value to latest twelve-month
EBIT for the entire universe of transactions selected yielded a range of
multiples from 6.0x to 46.3x and a mean multiple of 16.1x, and for the small
peer group yielded a range of multiples from 6.0x to 10.2x and a mean multiple
of 7.5x. This compares to 11.4x for the Company at the Merger Consideration
price.
In arriving at its opinion, CIBC took into account that, in general, the
multiples available to the Company at the Merger Consideration compared
favorably to the mean multiples derived for the selected transactions. CIBC
noted that no transaction utilized in the above selected acquisition transaction
analysis is identical to the Merger. Accordingly, an analysis of the foregoing
is not purely mathematical and involves complex considerations and judgments
concerning differences in financial and operating characteristics of the
acquired companies in such transactions and other factors that could affect
their acquisition and public trading values.
CIBC also reviewed the premiums paid for all mergers in which a control
position was obtained from January 1, 1996 to August 12, 1997 and applied the
mean premiums paid for all mergers one day, one week and one month prior to the
announcement date of such mergers to the Company's share price on such dates
prior to the announcement date of the Merger (July 21, 1997). Although this
analysis showed that at the Merger Consideration price the premium over the
Company's per share market price compares favorably with the mean premiums paid
in other merger transactions, this premiums analysis is not particularly
meaningful for this transaction due to the Company Common Stock's lack of
liquidity.
CIBC's analysis also indicated a mean percentage premium of offer price to
trading price one month prior to July 21, 1997, the first trading date following
the announcement of the parties' intent to enter into the Merger Agreement (the
"Announcement Date"), which significantly increased speculation that the Company
would be sold, of 41.1% for all merger and acquisition transactions completed
between January 1, 1996 and August 12, 1997, compared to a premium of 47.1% for
the Company at the Merger Consideration (based on the market closing price for
Company Common Stock of $4.25 on June 14, 1997); the percentage premium of offer
price to trading price one week prior to the Announcement Date of 34.3% for the
transactions described in the preceding clause compared to a premium of 25.0%
for the Company at the Merger Consideration price (based on the market closing
price for Common Stock on July 14, 1997 of $5.00); and the percentage premium of
offer price to trading price one day prior to the Announcement Date of 28.6% for
the transactions described in the preceding clause compared to a premium of 25%
for the Company at the Merger Consideration (based on the market closing price
for Common Stock on July 20, 1997). Although the mean percentage premiums over
the Company's per share market price in general compare favorably with the
percentage premiums paid in other merger transactions, CIBC did not believe that
the percentage premiums analysis was particularly meaningful for the Merger
because of the Company Common Stock's lack of liquidity.
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3. DISCOUNTED CASH FLOW ANALYSIS. CIBC performed a discounted cash flow
analysis for the Company on a stand-alone basis, based upon the Projections
prepared by the Company for its five fiscal years ending December 31, 2001. The
discounted cash flow analysis estimated the theoretical present value of the
Company based on the sum of (i) the discounted cash flows which the Company
could generate over a four-year period and (ii) a terminal value for the Company
assuming the Company performs in accordance with the Projections.
In arriving at its opinion, CIBC took into account that, in general, the
Merger Consideration was within the range of present values of Company Common
Stock derived from the discounted cash flow analysis based upon the Projections.
CIBC's calculation of a theoretical terminal value of the Company was based
upon a multiple of EBITDA in the fourth year. This terminal value and the cash
flows generated by the Company were discounted using a discount rate to derive
the enterprise value of the Company. The value of the equity was calculated by
taking the enterprise value and subtracting long-term debt and adding cash on
hand. Using discount rates of 12% to 16% and exit multiples of EBITDA of 5.0x
to 6.0x, CIBC estimated that, based on a discounted cash flow analysis of the
Projections, the present value of Company Common Stock would be in the range of
$4.63 to $8.41 per share of Company Common Stock, or $6.41 per share using a 14%
discount rate and a 5.5x exit multiple of EBITDA as compared to the Merger
Consideration.
4. STOCK TRADING HISTORY. CIBC examined the history of the trading prices and
volume for Company Common Stock and the relationship between movements in the
prices of Company Common Stock. Although Company Common Stock has traded on the
OTC Bulletin Board under the symbol "CGME" since October 1996, no established
public trading market for Company Common Stock exists. As a result, Company
Common Stock is fairly illiquid, having only traded on six days in the six month
period prior to August 22, 1997. This illiquidity results in the quoted market
price per share of Company Common Stock not being determinative of its fair
value. In addition, the quoted market price per share of Company Common Stock
at any particular time is not indicative of the sale price Stockholders may be
able to currently obtain in the market for shares of Company Common Stock,
especially if the market for Company Common Stock was more liquid. Accordingly,
CIBC considered that Stockholders are unlikely to be able to sell more than
minimal amounts of Company Common Stock at prices as high as any of the recently
quoted market prices and that, therefore, this examination supports the CIBC
Opinion.
In addition to the financial analyses set forth above, CIBC considered a
number of qualitative factors in arriving at the CIBC Opinion, including,
without limitation, the following: (i) the sporadic, illiquid market for the
Company Common Stock which effectively restricts the ability of holders of
Company Common Stock to sell more than nominal amounts of such stock in the
market and which results in the few shares which do trade being traded at
depressed prices; (ii) the Company's current businesses, operations, and
prospects and the possibility that the Company's operating results from its
current operations could stagnate without raising and expending significant
amounts of capital; (iii) the competitive environment in the Colorado gaming
market; (iv) restrictions placed on growth in the industry by state regulations
and tax rates, which effectively limit the Company's growth opportunities in
Colorado; (v) the geographic concentration of the Company's operations in
Colorado, which subjects the Company to greater risk in the event of a downturn
in the Colorado gaming market; (vi) the Company's lack of a proven operating
record; (vii) the lack of institutional research analyst coverage, which
decreases the visibility of the Company in the financial markets; and (viii) the
recent emergence of the Company from chapter 11 bankruptcy, which creates a
negative perception of the Company.
The summary set forth above is not a complete description of the analyses
performed by CIBC. The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of these methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to summary
description. Accordingly, notwithstanding the separate factors summarized
above, CIBC believes that its analyses must be considered as a whole and that
selecting portions of its analyses and the factors considered by it, without
considering all analyses and factors, creates an incomplete view of the
evaluation process underlying the CIBC Opinion. In performing its analyses,
CIBC made numerous assumptions with respect to industry performance, business
and economic conditions, and other matters. The analyses performed by CIBC are
not necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses.
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The Board of Directors selected CIBC as its financial advisor because CIBC
is a nationally recognized investment banking firm with substantial experience
in transactions similar to the Merger. As part of its investment banking
business, CIBC is regularly engaged in the valuation of businesses and
securities in connection with mergers, acquisitions, underwritings, sales and
distributions of listed and unlisted securities, private placements, and
valuations for corporate and other purposes.
Pursuant to an engagement letter, dated September 5, 1997, CIBC has been
paid a fee of $300,000 for rendering the CIBC Opinion. The Company has also
agreed to reimburse CIBC for its out-of-pocket expenses, including the
reasonable fees and expenses of its legal counsel, and to indemnify CIBC against
certain liabilities arising out of or in connection with the services rendered
by CIBC under the engagement, including liabilities under federal securities
laws. The terms of the fee arrangement with CIBC, which are customary in
transactions of this nature, were negotiated at arm's length between the Company
and CIBC and, at the time it received the CIBC Opinion, the Board of Directors
of the Company was aware of such arrangements.
CIBC acted as financial advisor to the unofficial and official committee of
the holders of 11 1/2% Senior Secured Paid-In-Kind Notes due 2000 in the
restructuring and chapter 11 proceedings, respectively, of the Company's
predecessor, Hemmeter Enterprises, Inc., from June 15, 1995 to June 7, 1996.
CIBC also acted as exclusive sale agent for the M/V Grand Palais Riverboat which
was owned by GPRI, one of the subsidiaries of the Predecessor Company, which was
sold to Casino America, Inc. for in excess of $60 million in May 3, 1996.
SOURCE AND AMOUNT OF FUNDS
The total amount of funds required for the payment of the Merger
Consideration is expected to be approximately $34.4 million. LRC has advised
the Company that Ladbroke will pay for such obligations primarily from cash on
hand or from the proceeds of borrowings under existing lines of credit. LRC has
informed the Company that on the date of this Proxy Statement, Ladbroke or its
parent corporation had cash resources and availability under existing lines of
credit in excess of $800 million.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain United States federal income tax
consequences of the Merger to holders whose shares of Company Common Stock are
converted to cash in the Merger. This discussion does not purport to consider
all aspects of federal income taxation that may be relevant to holders of
Company Common Stock. The discussion is based on current provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), existing, proposed, and
temporary regulations promulgated thereunder and administrative and judicial
interpretations thereof, all of which are subject to change. No assurance can
be given that future legislation, regulations, administrative interpretations,
and court decisions will not significantly change these authorities, possibly
with a retroactive effect.
This discussion applies only to holders of Company Common Stock in whose
hands shares of Company Common Stock are capital assets within the meaning of
Section 1221 of the Code, and may not apply to Company Common Stock received
pursuant to the exercise of employee stock options or otherwise as compensation,
or to holders of Company Common Stock subject to special tax provisions
(including, but not limited to, insurance companies, banks, regulated investment
companies, tax-exempt organizations, and broker-dealers) who may be subject to
special rules under the Code. This discussion does not discuss the federal
income tax consequences to a holder of Company Common Stock who, for United
States federal income tax purposes, is a non-resident alien individual, a
foreign corporation, a foreign partnership, or a foreign estate or trust, nor
does it consider the effect of any foreign, state, or local tax laws.
The receipt of cash for Company Common Stock pursuant to the Merger will be
a taxable transaction for federal income tax purposes and may also be a taxable
transaction under applicable state, local, or foreign tax laws. The tax
consequences of such receipt pursuant to the Merger may vary depending upon,
among other things, the particular circumstances of the Stockholder. In
general, for federal income tax purposes, a Stockholder will recognize gain or
loss equal to the difference between the Stockholder's adjusted tax basis in
Company Common Stock and the amount of cash received in exchange for such
Company Common Stock. Gain or loss must be determined separately for each block
of
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Company Common Stock (I.E., Company Common Stock acquired at the same cost in a
single transaction) converted into cash in the Merger. For non-corporate
Stockholders who hold Company Common Stock as a capital asset, gain or loss
recognized as a result of the Merger will be treated as a capital gain or loss,
provided that the Company is not treated for federal income purposes as a
"collapsible corporation." In the opinion of the Company's management, the
Company is not a collapsible corporation for federal income tax purposes. Under
the Tax Payer Relief Act of 1997 (the "TRA"), which became law on August 5,
1997, the long-term capital gain holding period was increased from 12 months to
18 months and the maximum long-term capital gain tax rate was reduced from 28%
to 20%. Under the TRA, a gain or loss will be a long-term capital gain or loss
with respect to Company Common Stock held for more than 18 months at the
Effective Time of the Merger. Any gain on Company Common Stock held for less
than 18 months but more than 12 months at the Effective Time will be taxable at
the maximum capital gains tax rate of 28%. Any gain on Company Common Stock
held for less than 12 months at the Effective Time will be taxable as ordinary
income, which is taxed at rates up to 39.6%.
In the case of a corporate Stockholder, capital losses are allowed only to
the extent of capital gains. In the case of a non-corporate Stockholder,
capital losses are allowed only to the extent of capital gains plus the lesser
of (i) $3,000 ($1,500 in the case of a married individual filing a separate
return) or (ii) the excess of losses over such gains. Generally, a corporation
may carry its excess capital loss back three years or forward five years,
subject to certain provisions of the Code. Generally, in the case of a
non-corporate taxpayer, excess capital losses may be carried forward
indefinitely and used each year, subject to the $3,000 limitation ($1,500 in the
case of a married individual filing a separate return), until the loss is
exhausted.
Payments to a Stockholder in connection with the Merger may be subject to
"backup withholding" at a rate of 31%, unless the Stockholder (i) is a
corporation or comes within certain exempt categories and, when required,
demonstrates this fact or (ii) provides a correct tax identification number
("TIN") to the payor, certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. A Stockholder who does not provide a correct TIN may be
subject to penalties imposed by the Internal Revenue Service. Any amount paid
as backup withholding does not constitute an additional tax and will be
creditable against the holder's federal income tax liability. Each Stockholder
should consult with his or her own tax advisor as to his or her qualification
for exemption from backup withholding and the procedure for obtaining such
exemption. Stockholders whose Company Common Stock is converted into cash in
the Merger may prevent backup withholding by completing a Substitute Form W-9
or, in the case of foreign Stockholders, a Form W-8 and submitting it to the
Paying Agent.
BECAUSE INDIVIDUAL CIRCUMSTANCES MAY DIFFER, EACH STOCKHOLDER SHOULD
CONSULT SUCH STOCKHOLDER'S OWN TAX ADVISOR TO DETERMINE THE APPLICABILITY OF THE
RULES DISCUSSED ABOVE TO SUCH STOCKHOLDER AND THE PARTICULAR TAX EFFECTS TO SUCH
STOCKHOLDER OF THE MERGER, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL,
FOREIGN, AND OTHER INCOME TAX LAWS.
STOCK OPTION AGREEMENT
In connection with the Merger Agreement and the Merger, LRC and the Company
entered into the Stock Option Agreement, pursuant to which the Company granted
to LRC the Option entitling LRC to purchase up to 1,022,638 shares of Company
Common Stock (the "Option Shares") under the circumstances described below at an
initial cash price per share of Company Common Stock equal to $6.25 (such price
as adjusted as provided in the Stock Option Agreement, the "Option Price"). The
Stock Option Agreement provides that in no event will the number of shares of
Company Common Stock for which the Option is exercisable exceed 19.9% of the
Company Common Stock issued and outstanding at the time of exercise.
LRC may exercise its Option, in whole or in part, if, but only if, a
Triggering Event (as defined below) has occurred prior to the occurrence of an
Exercise Termination Event (as defined below), provided that Ladbroke notifies
the Company in writing of such exercise within 180 days following the first such
Triggering Event.
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As defined in the Stock Option Agreement, a "Triggering Event" means the
occurrence of any event which would cause the Merger Agreement to become
terminable: (i) by Ladbroke, if any of the conditions to obligations of any
party or conditions to obligations of Ladbroke and the Acquisition Sub under the
Merger Agreement have not been met or waived, but only at and after such time as
such condition can no longer be satisfied and only if at the time of such
termination there is an outstanding Acquisition Proposal (as defined in the
Merger Agreement) which has not been withdrawn; (ii) by the Company in
connection with entering into a definitive agreement constituting a Superior
Proposal (as defined in the Merger Agreement), subject to compliance with
applicable provisions in the Merger Agreement relating thereto; or (iii) by
either Ladbroke or the Company, if the Stockholders fail to approve and adopt
the Merger Agreement.
As defined in the Stock Option Agreement, an "Exercise Termination Event"
means (i) the Effective Time of the Merger; (ii) the termination of the Merger
Agreement pursuant to the terms thereof if such termination precedes the
occurrence of a Triggering Event; or (iii) the passage of eighteen months after
the termination of the Merger Agreement if such termination follows or occurs at
the same time as a Triggering Event.
The Stock Option Agreement provides that in the event that any additional
shares of Company Common Stock are issued or otherwise become outstanding after
the date of the Stock Option Agreement, the aggregate number of shares of
Company Common Stock purchasable upon exercise of the Option will automatically
be increased so that, after such issuance, such number equals 19.9% of the
number of shares of Company Common Stock then issued and outstanding without
giving effect to any shares subject or issued pursuant to the Option. Any such
increase shall not affect the Option Price. In the event of any change in the
outstanding shares of Company Common Stock by reason of stock dividends,
split-ups, mergers, recapitalizations, combination, subdivisions, conversions,
exchanges of shares or the like, the type and number of shares of Company Common
Stock purchasable pursuant to the Option will be appropriately adjusted.
Whenever the number of shares of Company Common Stock purchasable upon exercise
of the Option is adjusted as described above, the Option Price will be adjusted
by multiplying the Option Price by a fraction, the numerator of which is equal
to the number of shares of Company Common Stock purchasable prior to the
adjustment and the denominator of which is equal to the number of shares of
Company Common Stock purchasable after the adjustment.
Under the Stock Option Agreement, upon the occurrence of a Triggering Event
that occurs prior to an Exercise Termination Event, at the request of LRC
delivered within twelve months of such Triggering Event, the Company will
prepare, file, and keep current a registration statement under the Securities
Act of 1933 covering any shares issued or issuable pursuant to the Option, and
to use its reasonable best efforts to cause such registration statement to
become effective and remain current (for a period not to exceed 180 days) in
order to permit the sale or other disposition of Option Shares in accordance
with any plan of disposition requested by LRC. Under the Stock Option
Agreement, LRC may demand two registrations and the Company will bear the costs
of each registration.
The Stock Option Agreement also provides that LRC may require that the
Company repurchase the Option from LRC. At any time after the occurrence of a
Repurchase Event (as defined below), (i) at the request of LRC, delivered prior
to an Exercise Termination Event, the Company will repurchase the Option at a
price (the "Option Repurchase Price") equal to the amount by which (A) the
market/offer price (as defined below) exceeds (B) the Option Price, multiplied
by the number of shares for which the Option may then be exercised and (ii) at
the request of the owner of Option Shares from time to time (the "Owner"),
delivered prior to an Exercise Termination Event, the Company will repurchase
such number of the Option Shares from the Owner as the Owner designates at a
price (the "Option Share Repurchase Price") equal to the market/offer price
multiplied by the number of Option Shares so designated. Under the Stock Option
Agreement, the term "market/offer price" means the highest of (i) the price per
share of Company Common Stock at which a tender or exchange offer has been made;
(ii) the price per share of Company Common Stock to be paid by any third party
pursuant to an agreement with the Company; (iii) the highest closing price for
shares of Company Common Stock within the six-month period immediately preceding
the date Ladbroke gives notice of the required repurchase of the Option or the
Owner gives notice of the required repurchase of Option Shares; or (iv) in the
event of a sale of all or substantially all of the Company's assets, the sum of
the net price paid in such sale for such assets and the current market value of
the Company's remaining net assets, divided by the number of shares of Company
Common Stock outstanding at the time of such sale. In the event that an offer
is made for Company Common Stock involving
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consideration other than cash, the value of the securities or other property
issuable or deliverable in exchange for Company Common Stock will be determined
by a nationally recognized investment banking firm. A "Repurchase Event" will
be deemed to have occurred upon: (i) the acquisition by any entity, other than
LRC or a subsidiary of LRC, of beneficial ownership of 50% or more of the then
outstanding Company Common Stock; or (ii) the consummation of any Acquisition
Proposal.
The time periods for the exercise of certain rights under the Stock Option
Agreement will be extended: (i) to the extent necessary to obtain all
regulatory approvals for the exercise of such rights (including required
Colorado gaming and liquor regulatory approvals) and for the expiration of all
statutory waiting periods; and (ii) to the extent necessary to avoid liability
under Section 16(b) of the Securities Exchange Act of 1934 (the "Exchange Act")
by reason of such exercise.
The Stock Option Agreement provides that the Total Profit of LRC (as
defined below) may not exceed the lesser of $3,000,000 or, when added to any
Termination Fee, $4,500,000 and, if it otherwise would exceed such amount, LRC,
at its sole election, will either (i) reduce the number of shares of Company
Common Stock subject to the Option, (ii) deliver to the Company for cancellation
Option Shares previously purchased by LRC, (iii) pay cash to the Company, or
(iv) any combination thereof, so that LRC's actually realized Total Profit does
not exceed such amount after taking into account the foregoing actions.
As defined in the Stock Option Agreement, the term "Total Profit" means the
aggregate amount (before taxes) of the following: (i)(A) the amount received by
Ladbroke pursuant to the Company's repurchase of the Option (or any portion
thereof) or any Option Shares pursuant to the Stock Option Agreement, less, in
the case of any repurchase of Option Shares, (B) LRC's purchase price for such
Option Shares, as the case may be, (ii)(A) the net cash amounts received by LRC
pursuant to the sale of Option Shares (or any other securities into which such
Option Shares are converted or exchanged) to any unaffiliated party, less (B)
LRC's purchase price of such Option Shares, and (iii) any Notional Total Profit
(as defined below).
The term "Notional Total Profit" with respect to any number of shares as to
which LRC may propose to exercise the Option shall be the Total Profit
determined as of the date of such proposal assuming that the Option was
exercised on such date for such number of shares and assuming that such shares,
together with all other Option Shares held by LRC and its affiliates as of such
date were sold for cash at the closing market price for Company Common Stock as
of the close of business on the preceding trading day (less customary brokerage
commissions).
ACCOUNTING TREATMENT
The Merger will be accounted for under the "purchase" method of accounting.
As a result, Ladbroke's consolidated financial statements will include the
Company's operations only for periods after the Effective Time of the Merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain officers and directors of the Company have interests in the Merger
that are in addition to their interests as Stockholders and have participated in
the negotiations of the terms of the Merger Agreement and the transactions
contemplated thereby. The Company's Board was aware of theses interests and
considered them along with the other matters described above. See
"Recommendation of the Board of Directors."
ACCELERATED VESTING OF MANAGEMENT AND DIRECTOR STOCK
Pursuant to the Management Incentive and Non-Employee Director Stock Plan
(the "Stock Plan"), upon a Change of Control (as defined in the Stock Plan) of
the Company, all restrictions on shares of restricted Company Common Stock
issued pursuant to the Stock Plan or issuable to participating key employees and
non-employee directors lapse and such shares fully vest and become
nonforfeitable. Under the Stock Plan, the Merger constitutes a Change of
Control. In addition, the Stock Plan will be amended effective immediately
prior to the Effective Time of the Merger
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to provide that each non-employee director will receive an additional 2,315
shares of Company Common Stock, which represents the number of shares of Company
Common Stock each director would have been awarded upon re-election under the
Stock Plan at the Company's 1998 annual meeting of Stockholders. Because the
directors had the expectation, upon initially agreeing to serve on the Company's
Board of Directors, that their tenure on the Board would have continued at least
through such annual meeting, the Company believes that such amendment is
appropriate. Accordingly, 259,630 shares of restricted Company Common Stock
issued or issuable to key employees and non-employee directors under the Stock
Plan as proposed to be amended will vest and become nonforfeitable at the
Effective Time of the Merger. The number of such shares, and the value of such
shares (based on the $6.25 per share Merger Consideration) to be received by
each of the Company's officers and directors as a group is 259,630 shares
($1,622,687.50) and to be received by each such person individually is as
follows: Stephen J. Szapor, Jr., Chief Executive Officer, President, and
Director -- 120,000 ($750,000); Alan L. Mayer, Senior Vice President, Chief
Legal Officer, and Secretary -- 46,296 ($289,350); Richard Rabin, Senior Vice
President of Operations -- 46,296 ($289,350); Robert Stephens, Vice President of
Finance and Treasurer -- 18,518 ($115,737.50); Jack Breslin, Vice President of
Marketing -- 10,000 ($62,500); Philip J. DiBerardino, Director -- 4,630
($28,937.50); Steve Leonard, Director -- 4,630 ($28,937.50); Mark van
Hartesvelt, Director -- 4,630 ($28,937.50); and Franklin S. Wimer, Director --
4,630 ($28,937.50).
EMPLOYMENT CONTRACTS
Under the Merger Agreement, Mr. Szapor, Mr. Mayer, Mr. Rabin, Mr. Stephens,
and Mr. Breslin will continue to be employed by the Company under the terms of
their current employment agreements.
UNIROCK MANAGEMENT
The Company has agreed to pay UniRock Management Corporation, an investment
banking firm, a fee of $250,000 for services rendered in connection with
structuring and negotiating the Merger and the Merger Agreement.
Mr. Franklin S. Wimer, Chairman of the Board of Directors of the Company, is the
President of UniRock Management Corporation.
AGREEMENT CONCERNING TRANSFER AND VOTING OF SHARES
As a condition to LRC entering into the Merger Agreement, each Company
director was required to enter into an agreement with LRC regarding the transfer
and voting of Company Common Stock (the "Director Agreements"). Pursuant to the
Director Agreements, each director has agreed, among other things, to vote or
cause to be voted all shares of Company Common Stock over which he exercises
voting control ("Shares") in favor of approval and adoption of the Merger
Agreement. The number of such Shares aggregates 167,036, or approximately 3.2%
of the shares of Company Common Stock entitled to vote on approval and adoption
of the Merger Agreement. In addition, under the Director Agreements each
director has agreed that, until September 30,1998 or, if the Merger Agreement is
extended in accordance with its terms, such extended date, he will not sell,
transfer, pledge, or otherwise dispose of any Shares without LRC's written
consent. The Director Agreements will terminate upon the Merger Agreement
terminating in accordance with its terms. See "Beneficial Ownership of
Securities."
REGULATORY MATTERS
ANTITRUST MATTERS
Title II of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), provides that certain acquisition transactions may not
be consummated until certain information has been furnished to the Antitrust
Division of the Department of Justice (the "Antitrust Division") and the Federal
Trade Commission (the "FTC") and the waiting period under the HSR Act has
terminated. The Company and Ladbroke expect to file the required information
with the Antitrust Division and the FTC with respect to the Merger in late
November or early December, 1997. The Company and Ladbroke will request early
termination of the waiting period under the HSR Act with respect to the Merger.
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Transactions such as the Merger may be investigated by the Antitrust
Division or the FTC notwithstanding the termination of the waiting period
applicable to the Merger under the HSR Act. Before or after the consummation of
the Merger, the Antitrust Division or the FTC could take such action under the
antitrust laws as it deems necessary or desirable in the public interest,
including seeking to enjoin the transaction or seeking divestiture of all
Company Common Stock or of substantial assets of Ladbroke and/or the Company.
Private parties may also bring legal action under antitrust laws under certain
circumstances.
STATE GAMING AND LIQUOR REGULATIONS
COLORADO GAMING REGULATIONS. The Colorado Division of Gaming (the
"Division") within the Colorado Department of Revenue, under the supervision of
the Colorado Limited Gaming Control Commission (the "Gaming Commission"),
regulates the conduct of limited stakes gaming in Colorado. It is illegal to
operate a gaming facility without a license issued by the Gaming Commission.
Under Colorado gaming regulations, a person or entity may not sell, lease,
purchase, convey, acquire, or pledge a direct or indirect interest in an entity
licensed to conduct limited stakes gaming in Colorado without the prior approval
of the Gaming Commission, with certain limited exceptions. Because the Merger
will result in such an acquisition by Ladbroke, the Merger requires approval of
the Gaming Commission. Accordingly, the Merger Agreement provides that
consummation of the Merger is subject to, among other things, the Gaming
Commission's prior approval. The Division or the Gaming Commission will require
Ladbroke and the Company and various key employees, officers, and directors of
Ladbroke, the Company, and certain parent, subsidiary, and affiliated companies
of Ladbroke and the Company, to provide extensive information in its review of
the Merger and grant or deny such approval based on whether it determines
Ladbroke to be a "suitable" purchaser. Any failure or refusal of such entities
or persons to provide the requested information may detrimentally impact the
ability of Ladbroke to obtain the necessary approval of the Gaming Commission.
There can be no assurance that the Gaming Commission will approve the Merger.
See "Business of the Company -- Colorado 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"). All liquor licenses are renewable, revocable, and
non-transferable. The Liquor Agencies have full powers to limit, condition,
suspend, or revoke any liquor license. The Company's liquor licenses will be
deemed to have been transferred as a result of the Merger. This deemed transfer
must be approved by the Liquor Agencies. There can be no assurance that such
approval will be obtained. See "Business of the Company--Non-Gaming
Regulation."
OTHER GOVERNMENTAL APPROVALS
Other than the issuance of a certificate of merger by the Secretary of
State of Delaware, and those described above, the Company is aware of no other
federal or state regulatory requirements that must be complied with or approvals
that must be obtained prior to the consummation of the Merger.
EFFECT OF MERGER ON THE NOTES
As of September 30, 1997, the Company had outstanding $52.9 million
aggregate principal amount of its 12% Senior Secured Pay-In-Kind Notes due 2003
(the "Notes"). The Notes were issued under an Indenture, dated as of June 7,
1996 (the "Indenture"), among the Company, as issuer, and certain of its
subsidiaries, as guarantors, and State Street Bank and Trust Company, as
successor in interest to Fleet National Bank, as trustee. Pursuant to the
Indenture, the Company may not consolidate or merge with or into another entity
without the consent of the holders of the Notes unless, among other things, (i)
the Company is the surviving corporation or the surviving corporation expressly
assumes all of the Company's obligations under the Indenture; (ii) certain
financial tests are met; and (iii) the transaction will not result in the loss
of any license necessary for continued operation. Upon consummation of the
Merger, the Company will be the surviving corporation, the relevant financial
tests will be met, and all necessary licenses for operation will be maintained.
Accordingly, consummation of the Merger as contemplated by the Merger Agreement
will not require the consent of the holders of the Notes under the terms of the
Indenture.
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The Indenture provides that, in the event of a Change of Control (as
defined in the Indenture), each holder of Notes will have the right to require
the Company to purchase all or any part of such holder's Notes at a cash
purchase price equal to 101% of the principal amount thereof plus accrued and
unpaid interest to the date of purchase. Consummation of the Merger will result
in a Change of Control under the Indenture. As a result, the holders of Notes
will be entitled to tender their Notes for repurchase following consummation of
the Merger. Ladbroke has assured the Company that it has sufficient cash on
hand or available under existing lines of credit and other financial resources
to repurchase any tendered Notes.
EFFECT OF MERGER ON THE CREDIT FACILITY
On June 7, 1996, the Company entered into a $12.5 million revolving credit
facility (the "Credit Facility") with Foothill Capital Corporation. On
September 30, 1997, the outstanding principal balance of the Credit Facility was
$435,000. Pursuant to the Credit Facility, the Company will be in default if it
merges with or into another entity. Accordingly, the Merger would constitute a
default under the Credit Facility. In connection with the Merger, the Company
intends to seek a waiver of such default under or amend the Credit Facility to
avoid such default, or terminate the Credit Facility.
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THE MERGER AGREEMENT
The following is a brief summary of all material terms and certain other
provisions of the Merger Agreement, which is attached as Annex I and Annex II
and is incorporated herein by reference. See also "The Merger--Payment of the
Merger Consideration," and "--Interests of Certain Persons in the Merger" for
summaries of certain other provisions of the Merger Agreement. All such
summaries are qualified in their entirety by reference to the Merger Agreement.
GENERAL
At the Effective Time of the Merger, pursuant to the Merger Agreement as
assigned by LRC to Ladbroke, the Acquisition Sub will merge with and into the
Company. The Company will be the Surviving Corporation and become a wholly
owned subsidiary of Ladbroke. At the Effective Time of the Merger, the separate
existence and corporate organization of the Acquisition Sub will cease. The
Company, as the Surviving Corporation, will succeed, insofar as permitted by
law, to all of the rights, assets, liabilities, and obligations of the
Acquisition Sub in accordance with the DGCL.
ASSIGNMENT
The amendment to the Merger Agreement, dated as of October 21, 1997,
provides that the Merger Agreement, and any of the rights, interests, or
obligations under the Merger Agreement, may not be assigned, except that (i) LRC
may assign its rights, interests, and obligations to any direct or indirect
wholly owned subsidiary of Ladbroke Group and (ii) Acquisition Sub may assign
its rights, interests, and obligations to LRC or to any direct or indirect
wholly owned subsidiary of Ladbroke Group. Pursuant to the Merger Agreement, no
such assignment by Acquisition Sub will relieve Acquisition Sub of any of its
obligations under the Merger Agreement.
Upon assignment by LRC to Ladbroke, all references in the Merger Agreement
to LRC will be deemed to be references to Ladbroke. LRC has advised the Company
that it intends to make such an assignment to Ladbroke prior to the Effective
Time of the Merger. The following description of the Merger Agreement assumes
that such assignment and assumption has been completed and therefore references
in the original Merger Agreement to LRC have been changed to reflect the
obligations as assumed by Ladbroke.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Merger Agreement contains representations and warranties by the
Company, subject to certain exceptions, relating to, among other things: (a)
its and its subsidiaries' due organization, good standing, power and authority,
and qualification or licensing to do business, and similar corporate matters;
(b) its and its subsidiaries' capital structure; (c) authorization, execution,
delivery, performance, and enforceability of the Merger Agreement and related
agreements; (d) (i) no contraventions, violations, breaches, or defaults which
would result from the Company's execution of and compliance with the Merger
Agreement and related transactions and (ii) no required consents or approvals
necessary for the Company's execution of and compliance with the Merger
Agreement and related transactions; (e) its filings with the Securities and
Exchange Commission ("SEC") and the accuracy and adequacy of the financial
statements and other information contained therein; (f) absence of certain
changes or events; (g) no undisclosed liabilities; (h) accuracy and adequacy of
information supplied in this Proxy Statement; (i) litigation; (j) labor matters;
(k) employee benefits and ERISA; (l) taxes; (m) compliance with applicable laws;
(n) environmental matters; (o) owned and leased real property; (p) intellectual
property; (q) insurance; (r) state takeover statutes; (s) brokers' fees; and (t)
effectiveness of the order confirming the First Amended Joint Plan of
Reorganization of Hemmeter Enterprises Inc., BWBH, Inc., BWCC, Inc., and
Millsite 27, Inc.
REPRESENTATIONS AND WARRANTIES OF LADBROKE AND THE ACQUISITION SUB
The Merger Agreement contains representations and warranties by Ladbroke
and the Acquisition Sub, subject to certain exceptions, relating to, among other
things: (a) their due organization; (b) authorization, execution, delivery,
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performance, and enforceability of the Merger Agreement and related agreements;
(c) (i) no contraventions, violations, breaches, or defaults which would result
from their execution of and compliance with the Merger Agreement and related
transactions and (ii) no required consents or approvals necessary for their
execution of and compliance with the Merger Agreement and related transactions;
(d) accuracy of information supplied; (e) availability of funds sufficient to
consummate the Merger; (f) interim operations of the Acquisition Sub; (g)
litigation; and (h) brokers' fees.
CERTAIN COVENANTS OF THE COMPANY
Pursuant to the Merger Agreement, the Company has agreed that, during the
period from the date of the Merger Agreement until the Effective Time of the
Merger, except as permitted under the Merger Agreement or any other agreement
executed by Ladbroke or as otherwise consented to in writing by Ladbroke, the
Company will, and will cause its subsidiaries to, among other things, carry on
their respective businesses in the ordinary course and use reasonable efforts to
preserve their present business organizations, keep available the services of
their present officers and employees, and preserve their relationships with
persons having business dealings with them. In addition, the Company has agreed
that, prior to the Effective Time of the Merger, it will not, and will cause its
subsidiaries not to, do any of the following, among other things, except as
permitted under the Merger Agreement or any other agreement executed by Ladbroke
or as otherwise consented to in writing by Ladbroke: (a) (i) declare or pay any
dividend or other distribution in respect of any of the Company Common Stock,
except dividends by a subsidiary to the Company, (ii) split, combine, or
reclassify any of the Company's capital stock or issue or authorize or propose
the issuance of any other securities in respect of, in lieu of, or in
substitution for shares of its capital stock, or (iii) repurchase, redeem, or
otherwise acquire any shares of capital stock of the Company or any subsidiary
of the Company or any rights, warrants, or options to acquire any such shares;
(b) issue, deliver, sell, pledge, or encumber any shares of its or its
subsidiaries' capital stock or any securities convertible into, or any rights,
warrants, calls, subscriptions, or options to acquire, any such shares or
convertible securities; (c) amend or propose to amend its or its subsidiaries'
respective Certificate of Incorporation or By-laws; (d) acquire or agree to
acquire (i) any business or business organization or (ii) any assets which,
individually or in the aggregate, are material to the Company or any of its
subsidiaries, except the purchase of inventory and supplies in the ordinary
course of business, subject to certain exceptions set forth in the Merger
Agreement; (e) sell, lease, license, encumber, or otherwise dispose of any of
the Company's or its subsidiaries' assets or agree to do so, other than in the
ordinary course of business; (f) make or agree to make any capital expenditures
in excess of $2,000,000 in the aggregate during the period from the date the
Merger Agreement was executed through the end of the Company's current fiscal
year and $1,000,000 per fiscal quarter thereafter; (g) incur any indebtedness
for borrowed money or guarantee any such indebtedness or issue or sell any debt
securities or warrants or rights to acquire or guarantee any such securities,
other than in the ordinary course under existing credit facilities; (h) make any
tax election that would have a material effect on the tax liability of the
Company or compromise any income tax liability of the Company or any subsidiary
that would materially affect their respective aggregate tax liabilities; (i)
pay, settle, or otherwise satisfy any claims, liabilities, or obligations, or
waive the benefits of or modify any confidentiality, standstill, or similar
agreement to which the Company or any of its subsidiaries is a party, other than
payment in the ordinary course of liabilities recognized or disclosed in the
Company's financial statements; (j) enter into, modify, or terminate any
material agreement to which the Company or any of its subsidiaries is a party
subject to certain exceptions; (k) (i) grant any increase in compensation to any
director, officer, or employee, except for increases for employees (other than
officers) in the ordinary course of business, (ii) pay or agree to pay any
employee benefit not required or contemplated by any of the existing Benefit
Plans (as defined in the Merger Agreement) in effect on the date the Merger
Agreement was executed, (iii) enter into any new employment, severance, or
termination agreement with any director, officer, or employee, or (iv) except as
may be required to comply with applicable law, become obligated under any
Benefit Plan not in existence on the date the Merger Agreement was executed; and
(l) other than in the ordinary course of business, take any action with respect
to accounting policies and procedures.
In addition, the Company has covenanted that it will not, and will not
permit any of its subsidiaries to, take any action that would, or would
reasonably be expected to, result in: (a) any of the Company's representations
and warranties that are qualified as to materiality being untrue; (b) any of
such representations and warranties that are not qualified as to materiality
being materially untrue; (c) any condition to the Merger set forth in the Merger
Agreement not being satisfied; or (d) a Material Adverse Effect (as defined in
the Merger Agreement).
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The Merger Agreement further provides that: (a) the Company and certain
associated persons and agents will not discuss, solicit, encourage, or
participate in any negotiations regarding an Acquisition Proposal (as defined in
the Merger Agreement) or furnish any information with respect thereto, subject
to certain exceptions in connection with the exercise of applicable fiduciary
duties; (b) neither the Board of Directors nor any committee thereof will (i)
withdraw or modify its approval or recommendation regarding the Merger, (ii)
approve or recommend, or propose to approve or recommend, any Acquisition
Proposal, or (ii) enter into any agreement with respect to any Acquisition
Proposal, subject to certain exceptions in connection with the exercise of
applicable fiduciary duties; (c) the Company will inform Ladbroke of the receipt
and material terms and conditions of any Acquisition Proposal; and (d) Ladbroke
has the right to amend the Merger Agreement to meet or exceed the terms and
conditions of any Superior Proposal (as defined in the Merger Agreement) and
thereby require the Company to reject the Superior Proposal.
The Merger Agreement also provides that the Company will cooperate with
Ladbroke and the Acquisition Sub and use its best efforts to obtain, prior to
the Effective Time of the Merger: (a) certain consents required to be obtained
as a result of the Merger; (b) acceptance by the United States Environmental
Protection Agency of certain real property interests conveyed to it; and (c)
acceptance, without reservation of rights, by insurance carriers whose policies
cover such liability, of any Company liability with respect to the litigation
disclosed in the Disclosure Schedule to the Merger Agreement.
ADDITIONAL AGREEMENTS
Pursuant to the Merger Agreement, the Company has agreed to duly call, give
notice of, and convene the Special Meeting and to recommend approval and
adoption of the Merger Agreement. The Company has further agreed to prepare and
file this Proxy Statement and respond to SEC comments with respect hereto in
cooperation with, and with the approval of, Ladbroke. Also under the Merger
Agreement, the Company agreed to provide Ladbroke access to information
regarding the Company and its subsidiaries, subject to certain restrictions on
Ladbroke's disclosure of such information. The Company and Ladbroke have agreed
to comply promptly with all legal requirements imposed with respect to the
Merger and to use their commercially reasonable efforts to obtain any consent,
approval, order, or authorization of, or any exemption by or waiver from, the
Colorado Division of Gaming, the State of Colorado Limited Gaming Control
Commission, or any other public or private third party required to be obtained
or made in connection with the Merger or the taking of any action contemplated
thereby or by the Merger Agreement or related thereto. The Merger Agreement
also provides that each party shall pay its own fees and expenses whether or not
the Merger is consummated. The Company has agreed to pay Ladbroke the sum of
$3,000,000, if (i) Ladbroke terminates the Merger Agreement because the Company
has failed to satisfy certain conditions precedent to Ladbroke's and the
Acquisition Sub's obligations to effect the Merger and comply in all material
respects with each covenant and agreement required by the Merger Agreement and
Stock Option Agreement to be performed or complied with by the Company prior to
or at the Effective Time of the Merger, and, at the time of such termination, an
Acquisition Proposal is outstanding and has not been withdrawn; (ii) the Company
terminates the Merger Agreement in connection with entering into a definitive
agreement constituting a Superior Proposal (as defined in the Merger Agreement);
or (iii) either party terminates the Merger Agreement because the Stockholders
fail to approve and adopt the Merger Agreement and, within twenty-four months of
such termination, the Company consummates an Acquisition Proposal with a third
party. In addition, if the Company is required to pay the Termination Fee, the
Company has agreed to pay the documented out-of-pocket fees and expenses of
Ladbroke and the Acquisition Sub incurred in connection with the Merger, the
preparation and negotiation of the Merger Agreement and the Stock Option
Agreement and the consummation of any transactions contemplated thereby, up to a
maximum of $500,000. The Company and Ladbroke have agreed to consult with each
other and to obtain each other's written approval before issuing press releases
or any public statements regarding the Merger, except to the extent required by
applicable law. The Company has agreed to give Ladbroke prompt notice of (a)
any representation or warranty which is qualified as to materiality becoming
untrue, (b) any representation or warranty that is not so qualified becoming
untrue or inaccurate in any material respect, and (c) the failure to comply with
or satisfy in any material respect any covenant, condition, or agreement in the
Merger Agreement. The Company has also agreed to neither settle any litigation
by any Stockholder relating to the Merger, the Merger Agreement or the Stock
Option Agreement without prior written consent of Ladbroke, nor cooperate with
any third party in an effort to oppose the Merger, and to cooperate with
Ladbroke to resist any such effort. Ladbroke and the Acquisition Sub have
agreed that they will not, nor will they permit any subsidiaries to, take any
action that would, or would reasonably be expected
28
<PAGE>
to, result in (a) any of the representations and warranties that are qualified
as to materiality becoming untrue, (b) any representations and warranties that
are not so qualified becoming materially untrue, or (c) certain conditions to
the Merger not being satisfied.
CONDITIONS TO OBLIGATIONS OF EACH PARTY
The Merger Agreement provides that the respective obligations of each party
to consummate the Merger are subject to satisfaction of the following
conditions, among others: (a) obtaining the requisite approval and adoption of
the Merger Agreement by the Stockholders; (b) no statute, rule, regulation,
executive order, decree, ruling, injunction, or other order shall have been
enacted, entered, promulgated, or enforced by any governmental entity which
prohibits, restrains, or enjoins the consummation of the Merger; and (c) any
waiting period applicable to the Merger under the HSR Act shall have terminated
or expired.
CONDITIONS TO OBLIGATIONS OF THE COMPANY
The Merger Agreement provides that obligations of the Company to consummate
the Merger are subject to satisfaction of the following conditions, among
others: (a) Ladbroke's and the Acquisition Sub's respective performance and
compliance in all material respects with each covenant, agreement, and condition
required by the Merger Agreement to be performed or complied with by it prior to
or at the Effective Time of the Merger, the accuracy of the representations and
warranties of Ladbroke contained in the Merger Agreement, and receipt by the
Company of a certificate signed by an authorized officer of Ladbroke to the
foregoing effect; and (b) receipt by the Company of an opinion of O'Melveny &
Myers LLP, counsel for Ladbroke and the Acquisition Sub, substantially in the
form of Exhibit A to the Merger Agreement.
CONDITIONS TO OBLIGATIONS OF LADBROKE AND THE ACQUISITION SUB
The Merger Agreement provides that the respective obligations of Ladbroke
and the Acquisition Sub to consummate the Merger are subject to satisfaction of
the following conditions, among others: (a) the Company's performance and
compliance in all material respects with each covenant, agreement, and condition
required by the Merger Agreement to be performed or complied with by the Company
prior to or on the Effective Time of the Merger, the accuracy of the
representations and warranties of the Company contained in the Merger Agreement,
and receipt by Ladbroke of a certificate signed by an authorized officer of the
Company to the foregoing effect; (b) no action or proceeding pending against
Ladbroke or the Company before any governmental entity which is reasonably
likely to have a Material Adverse Effect (as defined in the Merger Agreement) or
to prohibit, restrain, enjoin, or restrict the consummation of the Merger; (c)
all consents, approvals, authorization, and permits of, actions by, filings
with, or notifications to, governmental entities and third parties required in
connection with the Merger shall have been obtained, taken, or made; (d) the
employment agreements in effect between the Company and Stephen J. Szapor, Jr.,
Alan L. Mayer, Richard Rabin, Robert J. Stephens, and Jack Breslin shall be in
effect at the Effective Time of the Merger; (e) Stockholders holding no more
than 5% of the outstanding Company Common Stock shall have demanded appraisal
rights; (f) receipt by Ladbroke and the Acquisition Sub of an opinion of
LeBoeuf, Lamb, Greene & MacRae L.L.P., counsel for the Company, substantially in
the form of Exhibit B to the Merger Agreement; (g) termination or amendment,
satisfactory to Ladbroke, of the Registration Rights Agreement, dated June 7,
1996 to which the Company is a party; and (h) receipt of all consents necessary
or appropriate, in the judgment of Ladbroke, of a certain lease and option to
purchase between BWBH, Inc. and certain other parties relating to the land on
which Bullwhackers Black Hawk is situated.
TERMINATION
The Merger Agreement may be terminated and the Merger may be abandoned
before the Effective Time of the Merger, notwithstanding approval and adoption
of the Merger by the Stockholders: (a) by mutual written consent of Ladbroke
and the Company; (b) by Ladbroke or the Company, if the Merger shall not have
been consummated on or before September 30, 1998, which date may be extended by
the mutual written consent of Ladbroke and the Company; (c) by the Company, if
any of the conditions to obligations of the Company have not been met or waived,
29
<PAGE>
but only at and after such time as such condition can no longer be satisfied;
(d) by Ladbroke, if any of the conditions to obligations of Ladbroke and the
Acquisition Sub have not been met or waived, but only at and after such time as
such condition can no longer be satisfied; (e) by the Company in connection with
entering into a definitive agreement constituting a Superior Proposal, subject
to compliance with applicable provisions in the Merger Agreement relating
thereto; (f) by either Ladbroke or the Company, if the Stockholders fail to
approve and adopt the Merger Agreement; (g) by Ladbroke, at any time prior to
October 22, 1997, if the results of Ladbroke's review and examination of the
books and records, assets, liabilities, commitments, business, and prospects of
the Company are not satisfactory to Ladbroke; and (h) by either Ladbroke or the
Company, if, by September 5, 1997, the opinion of CIBC has not been received or,
if received, is not reasonably satisfactory in form and content. The deadlines
for termination pursuant to subsections (g) and (h) above have expired.
If the Merger Agreement is terminated, the Merger Agreement will become
void and there will be no liability on the part of any party to the Merger
Agreement, except payment of the Termination Fee by the Company, if required by
the Merger Agreement. However, termination of the Merger Agreement will not
relieve any party thereto from liability for any breach of the Merger Agreement
or affect the validity, enforceability, or effectiveness of the Stock Option
Agreement.
30
<PAGE>
APPRAISAL RIGHTS
Section 262 of the DGCL ("Section 262") entitles holders of shares of
Company Common Stock who object to the Merger and who follow the procedures
prescribed by Section 262, to have the "fair value" of their shares at the
Effective Time of the Merger (exclusive of any element of value arising from
accomplishment or expectation of the Merger) judicially appraised and paid to
them in cash.
Set forth below is a summary of the procedures relating to the exercise of
the appraisal rights provided to the holders of the Company Common Stock
pursuant to Section 262. This summary does not purport to be a complete
statement of appraisal rights under Section 262 and is qualified in its entirety
by reference to Section 262, which is reproduced in full as Annex IV attached to
this Proxy Statement and to any amendments to such provisions of the DGCL as may
be adopted after the date of this Proxy Statement.
ANY HOLDER OF COMPANY COMMON STOCK CONTEMPLATING THE POSSIBILITY OF
EXERCISING APPRAISAL RIGHTS SHOULD CAREFULLY REVIEW THE TEXT OF ANNEX IV
(PARTICULARLY THE PROVISIONS RELATING TO THE SPECIFIED PROCEDURAL STEPS REQUIRED
TO PERFECT APPRAISAL RIGHTS, WHICH STEPS ARE COMPLEX) AND ALSO SHOULD CONSULT
SUCH HOLDER'S LEGAL COUNSEL. SUCH APPRAISAL RIGHTS WILL BE LOST IF THE
PROCEDURAL REQUIREMENTS OF SECTION 262 ARE NOT FULLY AND PRECISELY SATISFIED.
Holders of record of Company Common Stock who desire to exercise their
appraisal rights must fully satisfy all of the following conditions. Such
holders may neither vote in favor of the Merger nor consent to the Merger in
writing to properly exercise their appraisal rights, in addition to complying
with the other requirements of Section 262. A written demand for appraisal of
shares of Company Common Stock must be delivered to the Secretary of the Company
before the taking of the vote on the approval and adoption of the Merger
Agreement. Any holder of record of Company Common Stock seeking appraisal
rights must hold the shares for which appraisal is sought on the date of the
making of the demand, continuously hold such shares through the Effective Time
of the Merger, and otherwise comply with the provisions of Section 262.
A demand for appraisal must be executed by or for the holder of record of
Company Common Stock, fully and correctly, as such holder's name appears on the
stock certificates. If shares for which appraisal is sought are owned of record
in a fiduciary capacity, such as by a trustee, guardian or custodian, such
demand must be executed by the fiduciary. If shares for which appraisal is
sought are owned of record by more than one person, as in a joint tenancy or
tenancy in common, such demand must be executed by all joint owners. An
authorized agent, including an agent for two or more joint owners, may execute
the demand for appraisal for a holder of record of Company Common Stock;
provided that the agent must identify the record owner and expressly disclose
the fact that, in exercising the demand, he is acting as agent for the record
owner.
A record owner, such as a broker, who holds shares of Company Common Stock
as a nominee for others, may exercise appraisal rights with respect to such
shares held for all or less than all beneficial owners of such shares as to
which the holder is the record owner. In such case, the written demand must set
forth the number of shares of Company Common Stock covered by such demand.
Where the number of shares is not expressly stated, the demand will be presumed
to cover all shares of Company Common Stock outstanding in the name of such
record owner. Beneficial owners who are not record owners and who intend to
exercise appraisal rights should instruct the record owner to comply strictly
with the statutory requirements with respect to the exercise of appraisal rights
before the date of the Special Meeting.
Record holders of Company Common Stock who elect to exercise appraisal
rights must mail or deliver their written demands to: Secretary, Colorado
Gaming & Entertainment Co., 12596 West Bayaud Avenue, Suite 450, Lakewood,
Colorado 80228. The written demand for appraisal should specify the
Stockholder's name and mailing address, the number of shares of Company Common
Stock covered by the demand, and that the Stockholder is thereby
31
<PAGE>
demanding appraisal of such shares. Within ten days after the Effective Time of
the Merger, the Company must provide notice of the Effective Time of the Merger
to all holders of record of the Company Common Stock who have complied with
Section 262.
Within 120 days after the Effective Time of the Merger, either the Company
or any holder of Company Common Stock who has complied with the required
conditions of Section 262 and who is otherwise entitled to appraisal rights may
file a petition in the Delaware Court of Chancery demanding a determination of
the fair value of the shares of the dissenting Stockholders. If a petition for
an appraisal is timely filed, after a hearing on such petition, the Delaware
Court of Chancery will determine which Stockholders are entitled to appraisal
rights and thereafter will appraise the shares owned by such Stockholders,
determining the fair value of such shares, exclusive of any element of value
arising from the accomplishment or expectation of the Merger, together with a
fair rate of interest to be paid, if any, upon the amount determined to be the
fair value. Such interest may be simple or compound as determined by the
Delaware Court of Chancery. In determining fair value, the Delaware Court of
Chancery is to take into account all relevant factors. In WEINBERGER V. UOP,
INC., 457 A.2d 701 (Del. 1983), the Delaware Supreme Court discussed the factors
that could be considered in determining fair value in an appraisal proceeding,
stating that "proof of value by any techniques or methods which are generally
considered acceptable in the financial community and otherwise admissible in
Court," should be considered. The Delaware Supreme Court stated that in making
a determination of fair value, the Court of Chancery must consider "market
value, asset value, dividends, earning prospects, the nature of the enterprise
and any other facts which were known or which could be ascertained as of the
date of Merger and which throw any light on future prospects of the merged
corporation. . . ." However, the Court noted that Section 262 provides that
fair value is to be determined "exclusive of any element of value arising from
accomplishment or expectation of the merger." The cost of the appraisal
proceeding may be determined by the Delaware Court of Chancery and taxed upon
the parties as the Delaware Court of Chancery deems equitable in the
circumstances. Upon application of a dissenting Stockholder, the Delaware Court
of Chancery may order that all or a portion of the expenses incurred by any
dissenting Stockholder in connection with the appraisal proceeding, including,
without limitation, reasonable attorneys' fees and the fees and expenses of
experts, be charged pro rata against the value of all shares entitled to
appraisal. In the absence of such a determination or assessment, each party
bears its own expenses.
Any holder of Company Common Stock who has duly demanded appraisal in
compliance with Section 262 will not, after the Effective Time of the Merger, be
entitled to vote for any purpose the shares subject to such demand or to receive
payment of dividends or other distributions on such shares, except for dividends
or other distributions payable to Stockholders of record at a date prior to the
Effective Time of the Merger.
At any time within 60 days after the Effective Time of the Merger, any
holder of shares of Company Common Stock who has sought appraisal of such shares
will have the right to withdraw his or her demand for appraisal and to accept
the terms of the Merger. After this period, such holder may withdraw his or her
demand for appraisal only with the consent of the Company, as the surviving
corporation. If no petition for appraisal is filed with the Delaware Court of
Chancery within 120 days after the Effective Time, Stockholders' rights to
appraisal will cease. Inasmuch as the Company has no obligation to file such a
petition, and has no present intention to do so, any Stockholder who desires
such a petition to be filed is advised to file it on a timely basis. No
petition timely filed in the Delaware Court of Chancery demanding appraisal will
be dismissed as to any Stockholder without the approval of the Delaware Court of
Chancery, and such approval may be conditioned upon such terms as the Delaware
Court of Chancery deems just.
Failure to take any required step in connection with the exercise of
appraisal rights may result in the termination or waiver of such rights.
If Stockholders elect to exercise these rights of appraisal, the receipt of
cash for Company Common Stock will be a taxable transaction to the Stockholders
receiving such cash, as described above under "The Merger--Certain Federal
Income Tax Consequences."
STOCKHOLDERS CONSIDERING EXERCISING STATUTORY RIGHTS OF APPRAISAL SHOULD
CONSULT WITH THEIR OWN TAX ADVISORS WITH REGARD TO THE TAX CONSEQUENCES OF SUCH
ACTIONS.
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<PAGE>
To the extent there are any inconsistencies between the foregoing summary
and the DGCL, the DGCL shall control.
33
<PAGE>
PRICE RANGE OF COMPANY COMMON STOCK AND DIVIDENDS
As of the Record Date, the number of record holders of Company Common Stock
was thirteen persons.
MARKET INFORMATION
The Company Common Stock has traded on the OTC Bulletin Board system,
under the symbol "CGME," since October 1996. From June 1996 to October 1996,
the Company Common Stock traded in the "pink sheets" in the over-the-counter
market. No established public trading market for Company Common Stock exists.
There are only limited, sporadic and infrequent trades of Company Common
Stock. From January 1, 1997 through September 30, 1997, the Company Common
Stock traded on the OTC Bulletin Board only eight times. Consequently, there
are no reliable quotations of trading prices. Based upon information
supplied to Nasdaq Trading & Market Services by the reporting brokers and
information supplied to the Company by certain market makers, Nasdaq Trading
& Market Services and such brokers reported the following range of high and
low sales prices for each quarter since the Company Common Stock became
registered under the 1934 Act on the Effective Date of the Reorganization:
Year Ended December 31, 1996 High Low
- ---------------------------------------- ----- -----
Second Quarter (commencing June 7, 1996) $3.50 $2.50
Third Quarter 4.25 3.50
Fourth Quarter 5.00 4.00
Year Ending December 31, 1997 High Low
- ---------------------------------------- ----- -----
First Quarter $5.25 $4.50
Second Quarter 4.25 4.25
Third Quarter 5.30 2.50
On July 14, 1997, the last day on which the Company Common Stock traded
prior to the public announcement of the letter of intent relating to the Merger,
the transaction price per share of Company Common Stock reported to the Company
by Nasdaq Trading & Market Services was $5.00. On November 6, 1997, the last
day on which the Company Common Stock traded prior to the date of this Proxy
Statement, the transaction price per share of Company Common Stock reported to
the Company by Nasdaq Trading & Market Services was $5.625. STOCKHOLDERS ARE
URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR COMPANY COMMON STOCK.
DIVIDENDS
Since the Effective Date of the Reorganization, the Company has neither
declared nor paid dividends on Company Common Stock. The Company has agreed in
the Merger Agreement not to, and does not intend to, pay cash dividends with
respect to Company Common Stock prior to the Effective Time of the Merger.
34
<PAGE>
BENEFICIAL OWNERSHIP OF SECURITIES
The following table sets forth beneficial ownership of the Company Common
Stock as of November 1, 1997, by (i) each person known by the Company to be the
beneficial owner of more than 5% of the outstanding Company Common Stock, (ii)
each director, (iii) each executive officer, and (iv) all executive officers and
directors as a group. All ownership is sole and direct unless otherwise
indicated. Information regarding holdings of persons other than officers and
directors of the Company has been compiled from publicly filed information and
from other sources the Company believes to be reliable. However, the Company
has not independently verified such information and makes no representations as
to its accuracy. Beneficial ownership is determined in accordance with Rule
13d-3 under the 1934 Act. Under such rules, more than one person or entity may
be deemed to beneficially own the same securities. As of November 1, 1997,
there were 5,236,091 shares of Company Common Stock issued and outstanding.
Except as otherwise indicated, the address of each person listed below is 12596
West Bayaud Avenue, Suite 450, Lakewood, Colorado 80228.
SHARES BENEFICIALLY OWNED
-------------------------
NAME AND ADDRESS NUMBER PERCENT
- ---------------- -------- -------
Grace Brothers, Ltd (1). . . . . . . . . . . . . . . 490,607 9.4%
1560 Sherman Avenue
Suite 900
Evanston, IL 60201
Keystone Investment Management Company(2). . . . . . 1,207,395 23.1
200 Berkeley Street
Boston, MA 02116
MacKay-Shields Financial Corporation(3). . . . . . . 414,263 7.9
9 West 57th Street
New York, NY 10019
PaineWebber Incorporated, Mitchell Hutchins Asset
Management, Inc.(4). . . . . . . . . . . . . . . . 1,082,628 20.7
1285 Avenue of the Americas
New York, NY 10019
Putnam Advisory Funds. . . . . . . . . . . . . . . . 421,834 8.1
One Post Office Square
Boston, MA 01209
Gary N. Siegler, Peter M. Collery(5) . . . . . . . . 606,433 11.6
712 Fifth Avenue
New York, NY 10019
Stephen J. Szapor, Jr. . . . . . . . . . . . . . . . 157,776(6) 3.0
Chief Executive Officer, President, and Director
Alan L. Mayer. . . . . . . . . . . . . . . . . . . . 23,148(6) *
Senior Vice President, Chief Legal Officer, and
Secretary
Richard Rabin. . . . . . . . . . . . . . . . . . . . 2 3,148(6) *
Senior Vice President of Operations
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<PAGE>
Robert Stephens. . . . . . . . . . . . . . . . . . . 9,259(6) *
Vice President of Finance and Treasurer
Jack Breslin . . . . . . . . . . . . . . . . . . . . 5,000(6) *
Vice President of Marketing
Philip J. DiBerardino. . . . . . . . . . . . . . . . 2,315(6) *
Director
Steve Leonard. . . . . . . . . . . . . . . . . . . . 2,315(6) *
Director
Mark van Hartesvelt. . . . . . . . . . . . . . . . . 2,315(6) *
Director
Franklin S. Wimer. . . . . . . . . . . . . . . . . . 2,315(6) *
Director
All directors and officers as a group (9 persons). . 227,591(6) 4.4
- --------------------------------------------------------------------------------
* Less than 1%.
(1) Based on a Schedule 13G filed February 6, 1997.
(2) Based on information contained in a Schedule 13D filed June 18, 1996.
According to such Schedule 13D, Keystone Investment Management Company
("KIMCO") serves as investment adviser to, and has discretionary investment
authority over the shares of Company Common Stock held by, the following
funds: Keystone Small Company Growth Fund (494,015 shares), Keystone High
Income Bond Fund (477,839 shares), Keystone America Strategic Income Fund
(195,843 shares), and Keystone Fixed Income Advisers, Inc. (39,698 shares),
and the shares of Company Common Stock reported as beneficially owned by
KIMCO include the shares held by such entities. On January 10, 1997, First
Union Corporation filed a Schedule 13G reporting that it acquired Keystone
Investments, Inc., the parent of KIMCO, on December 11, 1996 and that it
beneficially owns 1,097,083 shares of Company Common Stock as a parent
holding company.
(3) MacKay-Shields Financial Corporation serves as investment adviser to The
Mainstay Funds which holds, on behalf of its High Yield Corporate Bond Fund
Series, 368,128 shares of Company Common Stock and to two other holders
that hold in the aggregate 46,115 shares of Company Common Stock.
(4) Based on a Schedule 13G filed August 15, 1996 (the "PW Schedule 13G").
According to the PW Schedule 13G, PaineWebber Incorporated ("PWI"),
Mitchell Hutchins Asset Management Inc. ("MHAM") and PaineWebber Managed
Investments Trust ("PWMIT") each disclaim beneficial ownership of the
securities of the Company reported on the PW Schedule 13G, and the filing
of the PW Schedule 13G shall not be construed as an admission that these
companies are the beneficial owners of any of the Company's securities.
MHAM is a wholly owned subsidiary of PWI. PWI is a parent holding company
as that term is defined by Rule 13d-1(b)(1)(ii)(G) of the 1934 Act. PWI
and MHAM are broker-dealers registered under Section 15 of the 1934 Act,
and investment advisers registered under Section 203 of the Investment
Advisers Act of 1940. PWMIT, which is an investment company registered
under Section 8 of the Investment Company Act, is advised by MHAM, and
reported holdings of 768,570 shares of Company Common Stock in the PW
Schedule 13G. The PW Schedule 13G states that various persons have the
right to receive, or the power to direct the receipt of, dividends or
proceeds from the sale of the reported shares of Company Common Stock.
Based on information previously provided to the Company, the Company
understands that the shares of Company Common Stock reported in the PW
Schedule 13G are held in the following funds or trusts:
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<PAGE>
PaineWebber Strategic Income Trust--102,958 shares, Managed High Yield
Fund, Inc.--105,643, PaineWebber High Income Trust--768,570, All-American
Term Trust Inc.--77,681, others--37,766.
(5) Based on a Schedule 13D filed September 12, 1996 (the "SC Schedule 13D").
the SC Schedule 13D states that Mr. Siegler is a controlling stockholder,
the president and a director of SC Fundamental Inc. ("SC") and SC
Fundamental Value BVI, Inc. ("BVI Inc.") and that Mr. Collery is a
controlling stockholder, vice president, and a director of SC and BVI Inc.
SC is the general partner of SC Fundamental Value Fund, L.P. ("Fund"),
which, according to the SC Schedule 13D, holds 416,311 shares of Company
Common Stock. BVI Inc. is the managing general partner of the investment
manager of SC Fundamental Value BVI, Ltd. ("BVI Ltd."), which, according to
the SC Schedule 13D, holds 190,122 shares of Company Common Stock. The
shares of Company Common Stock reported as beneficially owned by
Messrs. Siegler and Collery consist of the shares reported held by Fund and
BVI Ltd. According to the SC Schedule 13D, Messrs. Siegler and Collery are
in a position to directly and indirectly determine the investment and
voting decisions made by SC and BVI Inc., and, consequently, Fund and BVI
Ltd.
(6) Does not include restricted shares issued or issuable which will vest and
become nonforfeitable under the Stock Plan in connection with consummation
of the Merger, as follows: Mr. Szapor: 120,000; Mr. Mayer: 46,296;
Mr. Rabin: 46,296; Mr. Stephens: 18,518; Mr. Breslin: 10,000; Mr.
Wimer: 4,630; Mr. Leonard: 4,630; Mr. van Hartesvelt: 4,630; and
Mr. DiBerardino: 4,630. See "The Merger--Interests of Certain Persons in
the Merger--Accelerated Vesting of Management and Director Stock."
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<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF THE COMPANY
The selected consolidated financial data presented below for each year
since the Predecessor Company (as defined below) commenced operations through
the year ended December 31, 1995 and for the period from January 1, 1996 through
June 6, 1996, and, with respect to the Company, for the period from June 7, 1996
(the Effective Date) through December 31, 1996 and for and as of the nine months
ended September 30, 1997, is derived from, and should be read in conjunction
with, the Company's Consolidated Financial Statements and Notes thereto included
elsewhere in this Proxy Statement. The dollar amounts below are in thousands,
except shares and per share amounts.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------- Nine
Months
June 7, 1996 Ended
January 1, through September
1996 through December 31, 30, 1997
1992(b) 1993 1994(c) 1995(c) June 6, 1996 1996 (unaudited)
----------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues $ 17,045 $ 38,468 $ 45,474 $ 47,428 $ 19,982 $ 30,680 $ 40,454
Operating Expenses:
Impairment of assets -- -- 6,875 10,945 -- -- --
Reorganization items -- -- -- 17,910 2,290 308 10
Depreciation and
amortization 2,086 3,931 4,307 4,771 1,882 4,044 4,035
Other operating expenses 23,263 31,379 47,253 40,438 15,248 22,358 30,776
Income (loss) from operations (8,304) 3,158 (12,961) (26,636) 562 3,970 5,633
Interest expense (3,000) (6,987) (18,822) (18,664) (579) (3,867) (5,090)
Extraordinary gain from
reorganization N/A N/A N/A N/A 164,358 N/A N/A
Equity loss in unconsolidated
subsidiary -- -- (2,323) (70,277) -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) $ (11,241) $ (3,829) $ (32,131) $(115,216) $ 164,407 $ 192 $ 93
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income per common
share (a) N/A N/A N/A N/A N/A $ 0.04 $ 0.02
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Weighted average common
shares (a) N/A N/A N/A N/A N/A 5,138,888 5,179,569
Cash dividends per common
share N/A N/A N/A N/A N/A N/A N/A
Book value per common
share N/A N/A N/A N/A N/A 0.95 0.97
</TABLE>
38
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<TABLE>
<CAPTION>
As of December 31,
------------------------------------
As of
September
30, 1997
1992 1993 1994(c) 1995(c) 1996 (unaudited)
--------------------------------------------------------------------------------------
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 1,676 $ 12,944 $ 7,977 $ 3,623 $ 5,758 $ 5,503
Total assets 35,181 143,622 141,093 37,680 67,048 66,031
Long-term debt (excluding current portion) 35,064 139,595 155,675 -- 55,391 53,776
Liabilities subject to compromise -- -- -- 186,460 -- --
Total stockholders' equity (deficit) (10,002) (4,693) (36,824) (153,137) 4,869 5,043
</TABLE>
- ------------------------
(a) 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.
(b) 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.
(c) 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 following the commencement of the GPRI's
bankruptcy case. See Consolidated Financial Statements and Notes thereto.
39
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
As used below and elsewhere in this Proxy Statement, reference to the
"Predecessor Company" refers to the Company prior to the Reorganization.
The Predecessor Company was formed to develop, own, and operate the
Bullwhackers casinos in Colorado. Subsequently, the Predecessor Company,
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 "Riverboat Project"). The
Predecessor Company's riverboat gaming facility commenced operations on
March 29, 1995, but due to substantial operating losses, stopped operations on
June 6, 1995.
Prior to closing its riverboat gaming operations, GPRI had incurred
substantial obligations, including construction cost 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 Court. On May 3, 1996, the Predecessor Company's
equity interest in GPRI was sold to Casino America, Inc. ("Casino America")
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. ("BWBH" or "Bullwhackers
Black Hawk"), BWCC, Inc. ("BWCC" or "Bullwhackers Central City"), and Millsite
27, Inc. ("MS27"), 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. These chapter 11 cases
subsequently were 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 Company 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
40
<PAGE>
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.
In April 1996, the Company purchased the Silver Hawk Casino in Black Hawk
through a wholly owned subsidiary, Silver Hawk Casino, Inc. (the "Silver Hawk
Casino"). The Company completed minor interior remodeling, installed
approximately 230 slot machines and three table games, and reopened the facility
on June 26, 1996.
RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, AS COMPARED TO THE NINE
MONTHS ENDED SEPTEMBER 30, 1996
The Company's net revenue increased 7%, to $40.5 million for the first nine
months of 1997, compared to $37.9 million for the first nine months of 1996.
The increase in revenue is primarily due to the addition of the Silver Hawk
Casino, which did not commence operations until June 26, 1996 and generated an
additional $2.5 million of revenues in the 1997 period. Continued overall
growth in the Black Hawk market contributed to a 3%, or $880,000, increase in
revenues at the Company's Bullwhackers Black Hawk facility for 1997, as compared
to 1996. However, the benefit to the Company's revenue growth in Black Hawk was
negatively affected by the business disruption as a result of the construction
activities related to the Company's parking expansion, which commenced in late
January and was completed in late May 1997. Bullwhackers Black Hawk's revenue
increase was offset by a 9%, or $825,000, decrease in revenue at Bullwhackers
Central City as a result of the continued overall weakness in the Central City
market.
Expenses directly related to casino operations increased 10% to $21.1
million for the first nine months of 1997, as compared to $19.1 million for the
first nine months of 1996. The increase primarily relates to expenses incurred
by the Silver Hawk Casino operations of approximately $1.8 million, which
operated for the full nine months in the 1997 period. Additionally, gaming tax
was $1.0 million, or 15%, greater in the 1997 period than in the 1996 period due
to an increase in the highest gaming tax rate and higher revenues generated by
Bullwhackers Black Hawk and Silver Hawk Casino in the 1997 period.
Marketing expense increased 13% to $5.3 million for the first nine months
of 1997, as compared to $4.7 million for the first nine months of 1996. The
increase is primarily due to the implementation of certain cash-back promotions
in an effort to sustain business levels at Bullwhackers Central City, which cost
approximately $350,000 for the 1997 period, and a full period of marketing and
promotions for the Silver Hawk Casino, which accounted for an additional
$200,000 in the 1997 period.
Casino general and administrative expense remained constant at $2.2 million
in 1997, as compared to 1996. The Company has been able to hold administrative
costs, primarily human resources, accounting, finance, and insurance costs, at
the same level as the 1996 period even after accounting for the addition of the
Silver Hawk Casino.
Corporate expenses increased 5% to $2.1 million for the first nine months
of 1997, as compared to $2.0 million for the first nine months of 1996. The
increase primarily relates to $240,000 of legal, financial advisory, and other
professional fees related to the proposed merger with Ladbroke, partially offset
by a decrease of $120,000 for insurance premiums.
Depreciation and amortization expense decreased 2% to $4.0 million for the
first nine months of 1997, as compared to $4.1 million for the first nine months
of 1996. The decrease in depreciation and amortization charges is due to a
substantial amount of equipment at Bullwhackers Black Hawk and Bullwhackers
Central City becoming fully depreciated. This decrease was offset by increased
depreciation and amortization charges of $660,000 resulting from to the
increased basis of the Company's assets due to the adoption of "fresh-start"
accounting on June 7, 1996 and depreciation charges related to the Silver Hawk
Casino. The Company anticipates depreciation and amortization charges to be
substantially lower than the 1996 period for the remainder of 1997.
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<PAGE>
Income from operations increased 107% to $5.6 million for the first nine
months of 1997, as compared to $2.7 million for the first nine months of 1996.
The increase in operating income is primarily attributable to approximately
$300,000 of additional operating income from the Silver Hawk Casino in 1997,
which was operational for the full nine-month period in 1997, and non-recurring
expense items consisting of $362,000 of pre-opening expense relating to the
opening of the Silver Hawk Casino and $2.4 million in one-time reorganization
charges in the 1996 period.
Interest expense was $5.1 million for the first nine months of 1997, as
compared to $2.7 million for the first nine months of 1996. The increase in
interest expense is due to the fact that no interest was being charged on the
Company's pre-petition indebtedness while the Company was in bankruptcy. The
Company was in bankruptcy through June 6th of the 1996 period.
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 increase in revenue is primarily attributable to the
addition of the Silver Hawk Casino. The Silver Hawk Casino, located in Black
Hawk adjacent to the Company's expanded parking lot, opened for business on
June 26, 1996, and contributed approximately $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 net revenue 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 1st and ended June 7th. The net revenue gains in Black Hawk were offset
by significant net revenue declines at Bullwhackers Central City due to
competition and 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 more convenient parking. 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 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 announced in October 1996.
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 the
introduction of the 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 is a charge of approximately $720,000 relating to
incentive compensation expense for senior management based upon implementation
of the Company's Cash Bonus Plan and the Stock Incentive Plan subsequent to the
Reorganization. Of the $720,000, approximately $270,000 was a result of a
noncash charge related to stock compensation.
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<PAGE>
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 1996. Impairments are write-offs, primarily due to the
write-off of affiliate receivables and abandoned development projects in 1995.
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 on its debt obligations in default during the
Reorganization for the period from November 1995 through June 6, 1996. On a pro
forma basis, based on the Company 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 Company. Because of the GPRI bankruptcy proceedings
and the Predecessor Company's agreement with Casino America 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 pre-opening 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 revenue. 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 of $25.6 million for 1994.
Casino expense was 52% of net revenue at the Bullwhackers Casinos for 1995, as
compared to 56% of net revenue at the Bullwhackers Central City and Bullwhackers
Black Hawk 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 were terminated, and professional
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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
a reserve of approximately $6.4 million, 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 included a $5.9 million charge for the write-off of the Company's
investment in a gaming venture in Mexico and a $1.0 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 the Bullwhackers Central City and Bullwhackers Black Hawk equipment
financing as of 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 on December 1 and June 1 each year. Interest on the Notes accrues at a
rate of 12% per annum, and is payable semi-annually. On the first two interest
payment dates, December 1, 1996, and June 1, 1997, the Company was permitted to
pay interest on the Notes, at its option, 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. On June 1,
1997, the Company paid $3.2 million of interest on the Notes in cash. The Notes
had an outstanding aggregate principal amount of $52.9 million as of
September 30, 1997.
On the Effective Date, the Company entered into a $12.5 million revolving
credit facility (the "Credit Facility") with Foothill Capital Corporation which
replaced a $7 million debtor-in-possession facility (the "DIP Facility") which
was also provided by Foothill Capital Corporation. The Credit Facility is
segregated into several different sub-facilities, including a $3.5 million
revolving line of credit, a $5 million equipment facility, and a $5 million
construction facility. All draws on the construction portion of the facility
were required to be made before September 30, 1997. The Company did not utilize
the available proceeds under this portion of the facility and, accordingly, such
portion expired on September 30, 1997. Borrowings under the Credit Facility
accrue interest at prime plus 2.375%, have a 0.5% unused line fee and certain
service fee charges. The different sub-facilities have varying terms ranging
from three to five years from the time funds are borrowed, but in no event
beyond June 7, 2001. In March 1997 and July 1997, the Company repaid an
additional $1.0 million of principal on the equipment facility and repaid the
outstanding balance of $1.0 million
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on the revolving line of credit, respectively. The Company made $981,000 of
scheduled principal payments for the nine months ended September 30, 1997. As
of September 30, 1997, the Company had an outstanding balance of approximately
$435,000 on the equipment facility line, representing the total outstanding
indebtedness under the Credit Facility.
On May 23, 1997, the Company completed the process of expanding its parking
facility adjacent to Bullwhackers Black Hawk. The expansion provides capacity
for approximately an additional 120 cars. In total, the improved parking lot
can accommodate approximately 500 cars. The total cost of the project was
approximately $1.6 million which was primarily funded in the second quarter of
1997 through available working capital. In connection with the parking facility
expansion project, the Company also constructed a new valet facility to increase
customer convenience and to enhance access to the Kids Quest child care facility
described below.
In July 1996, the Company entered into an agreement with Kids Quest
pursuant to which Kids Quest would operate a day care facility adjacent to
Bullwhackers Black Hawk. The facility opened on June 26, 1997. Kids Quest is
solely responsible for the day-to-day operations of the day care facility. The
Company receives percentage rent from Kids Quest for the use of the facility.
Rent consists of 10% of the first $500,000 in revenue from the Kids Quest
operation and 15% of revenues beyond such amount. The Company completed
construction of the day care facility at an estimated cost of approximately $1.4
million. As of September 30, 1997, the Company had paid all of the total cost
of the project. See "Business of the Company--The Colorado Casinos."
In total, the construction projects described above aggregated
approximately $3.3 million of capital expenditures in 1997, of which $2.3
million was funded with cash flow from operations and $1.0 million was funded
from borrowings under the revolving portion of the Credit Facility. In July
1997, the $1.0 million borrowed under the Credit Facility was repaid with cash
flow from operations.
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. For the nine months ended September 30, 1997 and the year ended
December 31, 1996, the Company had paid and expensed $112,000 and $120,000,
respectively, in connection with these activities. The Company may terminate
the consulting agreement and its obligation to provide additional funding
thereunder at any time, although it has no current intention to do so. Under
the consulting agreement, the Company's next obligation to provide funding is in
January 1998, at which time $16,250 is due, and then $16,250 is due monthly
thereafter through April 1998. The Company expects that it would fund such
amounts through available working capital.
The Company responded to a Request for Proposal ("RFP") issued by the
government of Ontario, Canada, to develop and operate multiple charity gaming
clubs in Ontario. In responding to the RFP, the Company and its partners formed
Diamond Gaming of Ontario, Inc. ("Diamond Gaming"). Diamond Gaming's
shareholders are a newly formed subsidiary of the Company, which owns 45% of
Diamond Gaming, a subsidiary of Ogden Corporation (45% owner) and Diamond Gaming
Services Inc. (10% owner). On September 30, 1997, the Ontario Gaming Control
Commission announced that Diamond Gaming was the successful bidder to develop
and operate charitable gaming clubs in the cities of Kingston and Belleville,
Ontario. The development and opening of the Kingston and Belleville facilities
remain contingent upon a number of conditions, including entering into an
operating agreement with the Ontario Gaming Control Commission, reaching an
agreement with property owners and local municipalities on specific sites, and
obtaining zoning and other local approvals. The Company currently estimates
that the two clubs in Kingston and Belleville will require an initial investment
of approximately $3.7 million in the aggregate. The Company's share of such
investment would be approximately $1.8 million, which it intends to fund from
cash flow from operations or borrowings under the revolving portion of the
Credit Facility, or other currently undetermined financing for the projects. As
of September 30, 1997, the Company has incurred approximately $50,000 in
connection with this project, which is reflected as corporate expense in the
accompanying consolidated statements of operations. There can be no assurance
that all conditions remaining to developing and operating the Belleville and
Kingston charity gaming clubs will be met or that both or either of the
Belleville and Kingston charity gaming clubs will be developed and become
operational.
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The Company distributed a Request for Consent to the holders of the Notes
requesting that they waive and amend certain provisions of the Indenture
governing the Notes to permit the Company to participate in the development and
operations of the charity gaming clubs in Ontario and to allow the Company to
borrow money or obtain other financing from Ladbroke and its affiliates to the
same extent as the Company is permitted under the Indenture to borrow money or
obtain other financing from financial institutions and other senior lenders.
The Company has received executed consents representing approximately 95% of the
outstanding Notes, and, accordingly, the items for which consent was requested
have been approved. All holders who returned an executed consent have or will
receive a consent fee of 0.25% of the outstanding principal balance of the Notes
held by such holder.
NEGATIVE WORKING CAPITAL
As of September 30, 1997, the Company's current liabilities exceeded its
current assets, resulting in negative working capital. Since the Company
emerged from bankruptcy on June 7, 1996, the Company has used cash generated
from operations to reduce debt under the Credit Facility ahead of schedule and
to pay construction costs for its parking lot expansion and the Kids Quest
project. Management believes this strategy maximizes the return on its excess
cash. Additionally, should the Company have additional working capital needs,
it is able to borrow up to $3.5 million under the revolving portion of the
Credit Facility.
INCOME TAX CONSIDERATIONS
For the nine months ended September 30, 1997, the Company recorded a
$518,000 deferred income tax provision. While the Company posted pre-tax income
of $611,000, the Company recognized depreciation charges totaling approximately
$767,000, related to the amortization of excess reorganization value, which is
not deductible for income tax purposes. Such taxable income triggered the
utilization of certain deferred tax assets available to the Company, and,
accordingly, no income tax is currently payable. The recognition of such
deferred tax assets was offset by a like reduction in the valuation allowance,
which was recorded as a credit to excess reorganization value in the
accompanying consolidated balance sheets.
CAPITAL RESOURCES
The Company believes that its Credit Facility and its operating cash flows
will provide sufficient liquidity and capital resources for the Company's
operations. However, there is no assurance that the Company's estimate of its
need for liquidity and capital resources is accurate or that new business
developments or other unforeseen events will not occur which will increase those
needs. Although no additional financings are contemplated at this time, the
Company may seek additional debt or equity financing if necessary. There can be
no assurance that additional financings 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 Company's lender under
the Credit Facility.
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BUSINESS OF THE COMPANY
The Company develops, owns, and operates gaming and related entertainment
facilities. The Company owns and operates, through wholly owned subsidiaries,
Bullwhackers Black Hawk and 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, the Silver Hawk Casino, a
third gaming facility, in Black Hawk, which opened on June 26, 1996 (together
with Bullwhackers Black Hawk and Bullwhackers Central City, the "Colorado
Casinos"). Through a wholly owned subsidiary, MS27, the Company also owns a
parking lot with a capacity of approximately 500 cars, which is located between,
and is used by, Bullwhackers Black Hawk and the Silver Hawk Casino.
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 the Riverboat Project, the
Predecessor Company, BWBH, Inc., BWCC, Inc. and Millsite 27, Inc. sought
protection under chapter 11 of the United States Bankruptcy Code on November 7,
1995. The First Amended Joint Plan of Reorganization of the Company, BWBH,
Inc., BWCC, Inc. and Millsite 27, Inc. was confirmed on April 18, 1996, and
became effective on the Effective Date. As a result, among other things, the
Company significantly reduced its consolidated debt and no longer has any
interest in GPRI.
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 table 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 Kids Quest,
pursuant to which Kids Quest would operate a day care facility adjacent to
Bullwhackers Black Hawk. The facility opened on June 26, 1997, and meets or
exceeds all relevant license standards. Kids Quest is solely responsible for
the day-to-day operations of the day care facility. The Company receives
percentage rent from Kids Quest for the use of the facility. Rent consists of
10% of the first $500,000 in revenue from the Kids Quest operation and 15% of
revenues beyond such amount. The day care facility is used predominantly,
although not exclusively, by the patrons of the Colorado Casinos. The Company
constructed the day care facility for use by Kids Quest at a cost of
approximately $1.4 million. 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 built, 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
The 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.
PARKING LOT
The Company owns an approximately 3.25 acre parking lot located between
Bullwhackers Black Hawk and the 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.
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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. On May 23, 1997, the Company completed
the process of expanding its parking lot, which provides capacity for
approximately an additional 120 cars. In total, the improved parking lot can
accommodate approximately 500 cars. The construction activity primarily
consisted of additional excavation from the Company's current parking lot to the
Company's property line. The total cost of the project was approximately $1.6
million. The Company also constructed a new valet facility to increase customer
convenience and to enhance access to the Kids Quest child care facility. The
valet facility cost was approximately $250,000.
GROWTH STRATEGY
REQUEST FOR PROPOSAL
The Company responded to a Request for Proposal ("RFP") issued by the
government of Ontario, Canada, to develop and operate multiple charity gaming
clubs in Ontario. In responding to the RFP, the Company and its partners formed
Diamond Gaming of Ontario, Inc. ("Diamond Gaming"). Diamond Gaming's
shareholders are a newly formed subsidiary of the Company, which owns 45% of
Diamond Gaming, a subsidiary of Ogden Corporation (45% owner) and Diamond Gaming
Services Inc. (10% owner). On September 30, 1997, the Ontario Gaming Control
Commission announced that Diamond Gaming was the successful bidder to develop
and operate charitable gaming clubs in the cities of Kingston and Belleville,
Ontario. The development and opening of the Kingston and Belleville facilities
remain contingent upon a number of conditions, including entering in to an
operating agreement with the Ontario Gaming Control Commission, reaching an
agreement with property owners and local municipalities on specific sites, and
obtaining zoning and other local approvals. The Company currently estimates
that the two clubs in Kingston and Belleville will require an initial investment
of approximately $3.7 million in the aggregate. The Company's share of such
investment would be approximately $1.8 million, which it intends to fund from
cash flow from operations or borrowings under the revolving portion of the
Credit Facility, or other undetermined financing for the projects. As of
September 30, 1997, the Company has incurred approximately $50,000 in connection
with this project, which is reflected as corporate expense in the accompanying
consolidated statements of operations. There can be no assurance that all
conditions remaining to developing and operating the Belleville and Kingston
charity gaming clubs will be met or that both or either of the Belleville and
Kingston charity gaming clubs will be developed and become operational.
The Company distributed a Request for Consent to the holders of the Notes.
The Request for Consent sought to waive and amend certain provisions of the
Indenture governing the Notes necessary to permit the Company to participate in
the development and operations of the charity gaming clubs in Ontario and to
allow the Company to borrow money or obtain other financing from Ladbroke and
its affiliates to the same extent as the Company is permitted under the
Indenture to borrow money or obtain other financing from financial institutions
and other senior lenders. The Company has received executed Consents
representing approximately 95% of the outstanding Notes, and, accordingly, the
items for which consent was requested were approved. All holders who returned
an executed consent have or will receive a consent fee of 0.25% of the
outstanding principal balance of the Notes held by such holder.
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. For the nine months ended September 30, 1997 and the year ended
December 31, 1996, the Company had paid and expensed $112,000 and $120,000,
respectively.
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 physically combining Bullwhackers Central City with the Lady Luck
casino, which is next to Bullwhackers Central City. The parties spent
considerable time negotiating
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unresolved issues regarding the form of the definitive agreements. During the
course of negotiations, the Central City gaming market continued to deteriorate
and operating results of many of the casinos in Central City, including
Bullwhackers Central City and the Lady Luck casino declined, particularly after
the opening of Harvey's casinos parking garage in June 1997. In addition, a
proposed road, which would have allowed casino customers to drive directly to
Central City from Interstate 70 without going through Black Hawk, may no longer
be viable after a Colorado court ruled against Central City in a lawsuit
challenging the road. In light of these and other factors negatively affecting
the prospects for the Central City gaming market, the Company determined not to
pursue the Lady Luck transaction in its originally proposed form. Although the
parties continue to discuss alternatives in an attempt to restructure the
transaction to benefit both parties in light of Central City's current market
position, no assurances can be given that any transaction between the parties
will occur.
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 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
has increased the competitiveness of the Colorado Casinos within their markets
by increasing the convenience and therefore the usage of the slot machines.
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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 31 as of September 30, 1997, and, secondarily,
casinos operating in Cripple Creek, of which there are approximately 24 as of
September 30, 1997. 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., Harrah's, Lady Luck, Bullseye Gaming, Anchor Gaming, Fitzgerald's, and
Casino America, Inc., 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 54 gaming
facilities operating in Colorado as of August 31, 1997, with a total of 13,205
slot machines and 230 table games. Of these, 19 facilities, 5,268 slot machines
and 105 table games were located in Black Hawk; 12 facilities, 3,390 slot
machines and 63 table games were located in Central City; and 23 facilities,
4,547 slot machines and 62 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 $113.25 in Black Hawk,
$68.99 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, $204 million in
1996, and $109 million for the nine months ended September 30, 1997, compared
with the cumulative win for slot machines in Central City as a market of $86
million in 1995, $83 million in 1996, and $41 million for the nine months ended
September 30, 1997. 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 23 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 from the Denver metropolitan area, thereby
potentially reducing traffic flow and customer visits to Bullwhackers Black Hawk
and the Silver Hawk Casino.
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Currently, there are two major projects under construction in Black Hawk.
The first is a joint venture between Black Hawk Gaming & Development Co., the
50% owner and operator of the Gilpin Hotel Casino, and Jacobs Entertainment, for
a new 35,000 square foot casino, with 52 hotel rooms, 250 parking spaces and
approximately 750 to 1,000 slot machines. It is currently anticipated that this
project will be open during the summer or fall of 1998. The second significant
project on which construction has commenced is the Isle of Capri Black Hawk,
which is owned by subsidiaries of Casino America, Inc. and Nevada Gold &
Casinos, Inc. The Isle of Capri project is expected to include a 55,000 square
foot casino with 1,100 slot machines, 24 table games and 1,000 on-site parking
spaces. It is expected to open in the late 1998 or early 1999. The new gaming
capacity being developed may dilute existing operators' win per unit and
revenue, including the Company's. Accordingly, such increase in capacity may
have a material adverse effect on the Company's results of operations.
In addition, a number of other casino projects have been announced and are
in various planning stages, including a venture by Riviera Holdings, Inc. to
construct what would be the largest facility in Black Hawk. Additionally,
Bullseye Gaming has announced plans to commence construction in 1997 of the
Black Hawk Brewery, which will offer 500 slot machines and 10 table games when
open. Also, various other projects have been announced, proposed, discussed or
rumored for the Black Hawk market, including large projects known as "Country
World" and the "St. Moritz." While it is difficult to assess the likelihood and
the timing of these proposed projects being completed, it is reasonably likely
that at least some of the proposed competitive projects may be completed and
open to the public by late 1999. In addition, as the town of Black Hawk has
expanded, both in terms of gaming device capacity and market share, the Central
City market has contracted. Therefore, should several of the announced
competitive projects open, the increased competition may adversely affect the
Company's operations in both Black Hawk and, to a greater extent, in Central
City, and, accordingly, may have a material adverse effect on the Company's
consolidated results of operations and financial position.
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 1997, the Colorado state legislature passed, but the Governor vetoed, a
bill that would have permitted video lottery terminals in dog and horse race
tracks under certain terms and conditions. Video lottery terminals are games of
chance, similar to slot machines, in which the player pushes a button that
causes a random set of numbers or characters to be displayed on a video screen.
Depending on the display, the player may be awarded a ticket, which can be
exchanged for cash or playing credit. There can be no assurance that similar
legislation permitting video lottery terminals in dog and horse race tracks or
other venues will not be considered in the future.
In addition to competing with other gaming facilities in Colorado, the
Company competes to a lesser degree, both for customers and for 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,
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could have a material adverse effect on the Company's consolidated results of
operations, financial position and cash flows.
FEDERAL AND STATE GAMING REGULATIONS
COLORADO GAMING REGULATIONS
The Colorado Division of Gaming (the "Division") within the Colorado
Department of Revenue licenses, implements, regulates, and supervises the
conduct of limited stakes gaming. The Division is supervised by the five-member
Colorado Limited Gaming Control Commission (the "Gaming Commission"). The
Director of the Division 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; (v) may
bring disciplinary actions against licensees and their employees; and (vi)
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 the following
five types of gaming and gaming-related licenses: (i) slot machine manufacturer
or distributor; (ii) operator; (iii) retail gaming; (iv) support; and (v) key
employee. The first three licenses are issued for a one-year period and require
annual renewal. However, support licenses and key employee licenses are issued
for two year periods and are renewable. The licenses are revocable and
non-transferable. Detailed and extensive playing procedures, standards,
requirements, and rules of play are established for poker, blackjack, and slot
machines. Licensees must, in addition, adopt comprehensive internal control
procedures governing their gaming operations. Such procedures must be approved
in advance by the Colorado authorities and include the areas of accounting,
surveillance, security, cashier operations, key control, and fill and drop
procedures, among others. The failure or inability of the Company, the Colorado
Casinos, or 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 the 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 Casino expires on
June 24, 1998. 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
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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 suitable
to own a direct or indirect 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. Because the Merger will result in
such an acquisition by Ladbroke, the Merger requires approval of the Gaming
Commission. Accordingly, the Merger Agreement provides that consummation of the
Merger is subject to, among other things, the Gaming Commission's prior
approval. The Division or the Gaming Commission will require Ladbroke and the
Company and various key employees, officers and directors of Ladbroke, the
Company and certain parent, subsidiary and affiliated companies of Ladbroke and
the Company, to provide extensive information in its review of the Merger and
grant or deny such approval based on whether it determines Ladbroke to be a
"suitable" purchaser. Any failure or refusal of such entities or persons to
provide the requested information may detrimentally impact the ability of
Ladbroke to obtain the necessary approval of the Gaming Commission. There can
be no assurance that the Gaming Commission will approve the Merger.
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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 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. 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.
NATIONAL GAMBLING IMPACT AND POLICY COMMISSION
Federal legislation was recently enacted that established a National
Gambling Impact and Policy Commission to study the economic impact of gambling
on the United States, the individual states, and Native American tribes.
55
<PAGE>
Additional federal regulation may occur due to the initiation hearings by the
Commission. Any new Federal legislation could have a material adverse effect on
the Company.
NON-GAMING REGULATIONS
LIQUOR REGULATION. The Liquor Agencies license, control, and regulate the
sale of alcoholic beverages. The current liquor licenses for BWBH, Inc. and
BWCC, Inc. expire in January and February 1998, respectively. The current
Silver Hawk Casino, Inc. liquor license expires in June 1998.
All liquor licenses are renewable, revocable, and non-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. No assurances can be given that the
Colorado Casinos will be able to retain or renew their respective liquor
licenses.
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, 1997 and is still in effect, is
calculated as a percentage of adjusted gross proceeds (casino net win). The
current gaming tax rates and the gaming tax rates for the previous two 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%
EMPLOYEES
The Company employs approximately 570 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 site of Bullwhackers Black Hawk is located in a 100-year flood plain.
To date, the Company has not experienced any flooding resulting in damage to the
casinos. The Company believes it carries adequate flood insurance
56
<PAGE>
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.
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, which will be
approximately $5.9 million. In March 1997, the Company relocated its corporate
offices from Denver to Lakewood, Colorado, pursuant to a new $10,000 per month
lease, which expires April 2002.
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.
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
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.
57
<PAGE>
INFORMATION CONCERNING LADBROKE AND THE ACQUISITION SUB
The following information has been provided by Ladbroke.
LRC is a direct, and Ladbroke is an indirect, wholly owned subsidiary of
Ladbroke Group plc ("Ladbroke Group"), a U.K. public company whose shares are
traded on the London Stock Exchange. Ladbroke Group is a leading hospitality
and leisure company which had over $6.5 billion in sales for its fiscal year
ended December 31, 1996. Ladbroke Group has two core businesses, ownership and
management of 161 Hilton International hotels in 47 countries and betting and
gaming operations, including casinos and betting shops in the U.K. and U.S.
operations which include three horse race tracks in California, Michigan, and
Pennsylvania. The principal executive offices of Ladbroke are located at Plaza
Two, Suite 500, 3260 Blume Drive, Richmond, California 94806, telephone (510)
243-1600.
INDEPENDENT ACCOUNTANTS
Arthur Andersen LLP, the Company's independent accountants for the year
ending December 31, 1997, is expected to have a representative at the Special
Meeting to answer any relevant questions from Stockholders.
AVAILABLE INFORMATION
The Company is subject to the reporting and other requirements of the
Exchange Act, and, in accordance therewith, files reports and other information
with the Commission relating to its business, financial condition and other
matters. Such reports, proxy statements, and other information filed by the
Company may be inspected, without charge, and copies may be obtained at
prescribed rates, at the Commission's public reference facility at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission located in Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and Seven World Trade Center, 13th Floor, New York, New
York 10048 and can also be reviewed through the Commission's Electronic Data
Gathering, Analysis and Retrieval System which is publicly available through the
Commission's Web site (http://www.sec.gov).
58
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants. . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . F-8
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.
F-1
<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. Arthur Andersen LLP
F-2
<PAGE>
COLORADO GAMING & ENTERTAINMENT CO.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
Predecessor Company Reorganized Company (a)
December 31, 1995 December 31, 1996 September 30,
------------------ ----------------- --------------
1997
----
(unaudited)
ASSETS
------
CURRENT ASSETS:
<S> <C> <C> <C>
Cash and cash equivalents $ 3,623 $ 5,758 $ 5,503
Accounts receivable, net 226 217 249
Inventories 85 106 118
Prepaid expenses 638 406 666
------------ ---------- ----------
Total current assets 4,572 6,487 6,536
------------ ---------- ----------
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net 32,127 41,322 41,875
EXCESS REORGANIZATION VALUE, net (Note 2) -- 18,256 16,971
OTHER ASSETS, net of accumulated amortization of $239, $370 and $451
respectively 981 983 649
------------ ---------- ----------
$ 37,680 $ 67,048 $ 66,031
------------ ---------- ----------
------------ ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 404 $ 804 $ 558
Accrued expenses (Note 2) 3,953 4,025 5,572
Current portion of credit facility -- 1,308 435
Current portion of other notes payable and capital leases -- 651 647
------------ ---------- ----------
Total current liabilities 4,357 6,788 7,212
------------ ---------- ----------
NOTES PAYABLE, net of current portion:
Senior secured notes payable -- 52,883 52,883
Credit facility -- 1,136 --
Other notes payable and capital leases -- 1,372 893
------------ ---------- ----------
-- 55,391 53,776
------------ ---------- ----------
LIABILITIES SUBJECT TO COMPROMISE 186,460 -- --
------------ ---------- ----------
Total liabilities 190,817 62,179 60,988
------------ ---------- ----------
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
and 5,236,091 shares issued and outstanding at December 31, 1996 and
September 30, 1997 -- 51 52
Additional paid-in capital 2,162 4,626 4,706
Retained earnings (deficit) (162,417) 192 285
------------ ---------- ----------
Total stockholders' equity (deficit) (153,137) 4,869 5,043
------------ ---------- ----------
$ 37,680 $ 67,048 $ 66,031
------------ ---------- ----------
------------ ---------- ----------
</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.
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
COLORADO GAMING & ENTERTAINMENT CO.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
January 1, June 7, June 7, Nine Months
1996 through 1996 through 1996 through ended
Years Ended December 31 June 6, December 31, September 30, September 30,
1994 1995 1996 1996(a) 1996(a) 1997
---- ---- ---- -------- -------- ----
(Unaudited) (Unaudited)
REVENUES:
<S> <C> <C> <C> <C> <C> <C>
Casino $ 42,724 $ 44,854 $ 19,126 $ 29,398 $17,073 $38,833
Food and beverage 3,571 3,737 1,288 1,998 1,215 2,520
Other 389 286 32 117 47 195
--------- ----------- ----------- --------- ------- -------
Gross revenues 46,684 48,877 20,446 31,513 18,335 41,548
Less: promotional allowances (1,210) (1,449) (464) (833) (465) (1,094)
--------- ----------- ----------- --------- ------- -------
Net revenues 45,474 47,428 19,982 30,680 17,870 40,454
--------- ----------- ----------- --------- ------- -------
OPERATING EXPENSES:
Casino 14,247 13,087 5,788 7,884 4,269 10,586
Gaming taxes and device fees 8,178 8,277 3,614 4,564 3,308 7,953
Food and beverage 3,140 3,173 1,299 2,111 1,128 2,550
General and administrative:
Casino 3,281 3,223 1,249 1,557 917 2,186
Corporate 12,037 6,872 902 1,926 1,102 2,102
Marketing 3,776 5,806 2,349 4,001 2,338 5,311
Depreciation and amortization 4,307 4,771 1,882 4,044 2,209 4,035
Pre-opening 2,594 -- 47 315 315 --
Reorganization items (Note 1) -- 17,910 2,290 308 106 10
Impairment of assets 6,875 10,945 -- -- 71 88
--------- ----------- ----------- --------- ------- -------
Total operating expenses 58,435 74,064 19,420 26,710 15,763 34,821
--------- ----------- ----------- --------- ------- -------
INCOME (LOSS) FROM OPERATIONS (12,961) (26,636) 562 3,970 2,107 5,633
Interest expense (Note 5) (18,822) (18,664) (579) (3,867) (2,146) (5,090)
Interest income 1,976 361 66 89 59 68
Equity loss of unconsolidated
subsidiary (2,324) (70,277) -- -- -- --
--------- ----------- ----------- --------- ------- -------
INCOME (LOSS) BEFORE INCOME TAX PROVISION (32,131) (115,216) 49 192 20 611
Provision for income taxes -- -- -- -- -- (518)
--------- ----------- ----------- --------- ------- -------
Net income (loss) before extraordinary
gain (32,131) (115,216) 49 192 20 93
Extraordinary gain from reorganization
items -- -- 164,358 -- -- --
--------- ----------- ----------- --------- ------- -------
NET INCOME (LOSS) $ (32,131) $ (115,216) $ 164,407 $ 192 $ 20 $ 93
--------- ----------- ----------- --------- ------- -------
--------- ----------- ----------- --------- ------- -------
NET INCOME PER SHARE(b) N/A N/A N/A $ 0.04 $ 0.00 $ 0.02
--------- ----- ----- --------- ------- -------
--------- ----- ----- --------- ------- -------
WEIGHTED AVERAGE COMMON AND
EQUIVALENT SHARES OUTSTANDING N/A N/A N/A 5,138,888 5,138,888 5,179,569
--------- ----------- ----------- --------- --------- ---------
--------- ----------- ----------- --------- --------- ---------
</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.
F-4
<PAGE>
COLORADO GAMING & ENTERTAINMENT CO.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except number of shares)
<TABLE>
<CAPTION>
Common Stock
-----------------------
Additional Retained
Warrants Paid-in Earnings
Shares Amount Issued Capital (Deficit) Totals
------------------------------------------------------------------------
<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
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock grants to officers and directors . . . . . . . . 97,203 1 -- 80 -- 81
Net loss . . . . . . . . . . . . . . . . . . . . . . . -- -- -- -- 93 93
----------- -------- -------- -------- -------- --------
BALANCES, June 30, 1997 (unaudited). . . . . . . . . . 5,236,091 $ 52 $ -- $ 4,706 $ 285 $ 5,043
----------- -------- -------- -------- -------- --------
----------- -------- -------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
COLORADO GAMING & ENTERTAINMENT CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
January 1,
1996 June 7, June 7, Nine Months
through 1996 through 1996 through Ended
Years Ended December 31, June 6, December 31, September 30, September 30,
1994 1995 1996 1996(a) 1996(a) 1997
---- ---- ---- ------- ------- ----
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $ (32,131) $(115,216) $ 164,407 $ 192 $ 20 $ 93
Adjustments to reconcile net income (loss) to net
cash
provided by operating activities:
Depreciation and amortization 4,307 4,771 1,882 4,044 2,209 4,035
Deferred income tax expense -- -- -- -- -- 518
Loss on retirements of property and equipment -- 127 244 150 120 81
Equity in loss of unconsolidated subsidiaries 2,324 70,277 -- -- -- --
Noncash compensation -- 169 -- 514 71 88
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 (3,111) (1,201) 1,216
Noncash reorganization items -- 15,317 1,825 -- -- --
------ ------ ------- ----- ----- -----
Net cash provided by operating activities 2,714 6,002 5,317 5,232 1,219 6,031
------ ------ ------- ----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, equipment and
leasehold improvements (31,560) (1,508) (3,885) (3,224) (2,633) (3,950)
Investment in development projects (3,358) -- -- -- -- --
Net restricted funds (placed in) disbursed from
escrow 52,552 4,209 (507) 244 248 156
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) (2,385) (3,794)
------ ------ ------- ----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable to affiliate -- 2,000 -- -- -- --
Proceeds from debt financing 13,048 -- 5,824 2,392 2,559 1,000
Payment of debt placement costs, net of accrued
liabilities (38) (315) -- (445) -- --
Repayments of debt financing (2,540) (1,651) (3,304) (5,509) (3,646) (3,492)
------ ------ ------- ----- ----- -----
Net cash provided by (used in) financing
activities 10,470 34 2,520 (3,562) (1,807) (2,492)
------ ------ ------- ----- ----- -----
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (4,967) (2,020) 3,445 (1,310) (2,253) (255)
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 7,068 5,758
------ ------ ------- ----- ----- -----
CASH AND CASH EQUIVALENTS, at end of period $ 7,977 $ 3,623 $ 7,068 $ 5,758 $ 4,815 $ 5,503
------- -------- ------- ------- ------- -------
------- -------- ------- ------- ------- -------
(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.
F-6
<PAGE>
<CAPTION>
COLORADO GAMING & ENTERTAINMENT CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
January 1,
1996 June 7, June 7, Nine Months
through 1996 through 1996 through Ended
Years Ended December 31, June 6, December 31, September 30, September 30,
1994 1995 1996 1996(a) 1996(a) 1997
---- ---- ---- ------- ------- ----
(Unaudited) (Unaudited)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
<S> <C> <C> <C> <C> <C> <C>
Cash paid for interest, net of amounts
capitalized $ 965 $ 579 $ 19 $ 1,020 $ 233 $ 3,461
------- -------- ------- ------- ------- -------
------- -------- ------- ------- ------- -------
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Issuance of senior secured notes payable and
other notes payable pursuant to the
Reorganization (Note 1) $ -- $ -- $ -- $ 50,000 $ -- $ --
------- -------- ------- ------- ------- -------
------- -------- ------- ------- ------- -------
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.
F-7
<PAGE>
COLORADO GAMING & ENTERTAINMENT CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 and SEPTEMBER 30, 1997
(Information as of September 30, 1997 and for the nine months
ended September 30, 1996 and 1997 is unaudited)
(1) ORGANIZATION
ORGANIZATION
Colorado Gaming & Entertainment Co. ("CG&E") and its subsidiaries
(collectively referred to hereinafter 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.
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 are referred to as the "Reorganization"). The 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 were 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 in 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.
F-8
<PAGE>
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. Accordingly, this valuation resulted in a $26.6 million write up
of the Company's assets. 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 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 prepetition liabilities)
and the adjustment to record assets and liabilities at their fair values have
been reflected in the December 31, 1996 consolidated financial statements.
Specifically, the extraordinary gain from the write-down of the Company's debt
totaled approximately $129 million and retained earnings immediately prior to
adopting "fresh start" reporting totaled $123 million, which was also
written-off as an extraordinary item. 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 Casino") 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
F-9
<PAGE>
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.
INTERIM REPORTING
The accompanying unaudited consolidated financial statements and related
notes of the Company have been prepared in accordance with generally accepted
accounting principles for interim financial reporting. In the opinion of
management, all adjustments considered necessary for fair presentation of
financial position, results of operations and cash flows have been included.
Operating results for the nine month period ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report in the
Form 10-K for the year ended December 31, 1996.
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, 1996 and September 30, 1997 is restricted cash totaling $595,000, $511,000
and $626,000 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").
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 and
$1.3 million at December 31, 1996 and September 30, 1997, respectively. The
Company continually evaluates current events and circumstances in order to
determine whether the recorded balance has been impaired.
F-10
<PAGE>
ACCRUED EXPENSES
Accrued expenses consisted of the following (in thousands):
December 31, September 30,
1995 1996 1997
---- ---- ----
(unaudited)
Gaming taxes payable........ $ 537 $ 521 $ 807
Accrued payroll and related
expenses.................... 1,048 991 890
Reorganization items........ 1,202 -- --
Accrued interest............ -- 542 2,171
Incentive compensation...... -- 454 --
Accrued gaming liabilities.. 437 624 733
Other accruals.............. 729 893 971
------ ------ ------
$ 3,953 $ 4,025 $ 5,572
------- ------- -------
------- ------- -------
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, $508,000, and $437,000 for the years ended December 31,
1994, 1995 and 1996 and for the nine months ended September 30, 1997,
respectively.
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>
<CAPTION>
For the nine
January 1, 1996 June 7, 1996 months ended
For the Year Ended through through September 30,
December 31, 1995 June 6, 1996 December 31, 1996 1997
------------------ --------------- ----------------- ------------
(unaudited)
<S> <C> <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 10
------ ------ ---- ---
$ 17,910 $ 2,290 $ 308 $ 10
-------- -------- -------- -------
-------- -------- -------- -------
</TABLE>
F-11
<PAGE>
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):
December 31, September 30,
1995 1996 1997
---- ---- ----
(unaudited)
Land and improvements.......... $ 14,330 $ 12,288 $ 13,997
Building and improvements...... 5,764 5,359 7,008
Leasehold improvements......... 7,626 20,935 20,774
Gaming equipment, furniture
and fixtures................... 18,570 19,975 20,194
Construction-in-progress....... -- 335 --
------ ------ ------
46,290 58,892 61,973
Less: accumulated
depreciation................... (14,163) (17,570) (20,098)
------ ------ ------
$ 32,127 $ 41,322 $ 41,875
--------- --------- ---------
--------- --------- ---------
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.
F-12
<PAGE>
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, September 30,
1995(1) 1996 1997
------- ---- ----
(unaudited)
Senior Secured Pay-In-Kind
Notes............................. $ 174,274 $ 52,883 $ 52,883
Credit facility................... -- 2,444 435
Notes payable to gaming
equipment vendors............... 2,623 -- --
Notes payable to affiliate........ 2,122 -- --
Other............................. 4,600 2,023 1,540
------- ------ ------
183,619 57,350 54,858
Less: current portion............ -- 1,959 1,082
------- ------ ------
$ 183,619 $ 55,391 $ 53,776
---------- --------- ----------
---------- --------- ----------
(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. All draws on the
construction line must be made before September 30, 1997. The Company did not
utilize the available proceeds under this portion of the facility and,
accordingly such portion expired on September 30, 1997. Borrowings under the
Credit Facility accrue interest at prime plus 2.375% (10.625% as of December 31,
1996). In addition, the Company must pay an unused line fee of .5% annually and
is subject to certain monthly service fees. 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 and September
30, 1997, the Company had an outstanding balance of approximately $2.4 million
and $435,000, respectively, under the Credit Facility. Borrowings are secured
by a first priority lien and security interest in substantially all of the real
and personal property owned or leased by the Company. The Credit Facility
replaced a Debtor-in-Possession facility ("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. On June 1, 1997, the
Company paid $3.2 million of interest on the Notes in cash. 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 and September 30, 1997, the fair
values of the Notes was approximately $50.7 million and $57.1 million,
respectively, 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
F-13
<PAGE>
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%
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 $670,000 as of December 31, 1996 and September 30, 1997.
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 as of December 31, 1996, are
as follows (in thousands):
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 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.
F-14
<PAGE>
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) EQUITY STRUCTURE
EQUITY 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 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. For the performance period ended June 7, 1997 such performance
criteria were achieved and an aggregate 97,203 shares were granted to the
officers and directors. The Company recorded $270,000 and $81,000 of
compensation expense in the 1996 period and for the nine months ended
September 30, 1997 related to the grants made on June 7, 1997.
EQUITY 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; however, no income tax provision was recorded
due to the Company's significant tax losses generated in previous years.
For the nine months ended September 30, 1997, the Company recorded a
$518,000 deferred income tax provision. While the Company posted pre-tax income
of $611,000, the Company recognized depreciation charges totaling approximately
$767,000, related to the amortization of excess reorganization value, which is
not deductible for income tax purposes. Such taxable income triggered the
utilization of certain deferred tax assets available to the Company, and
accordingly, no income tax is currently payable. The recognition of such
deferred tax assets was offset by a like reduction in the valuation allowance,
which was recorded as a credit to excess reorganization value in the
accompanying consolidated balance sheets.
F-15
<PAGE>
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, 1996 and September 30, 1997
is comprised of the following (in thousands):
December 31, September 30,
1995 1996 1997
------- ------- -----------
(unaudited)
CURRENT:
Accrued vacation, gaming liabilities
and incentive compensation . . . . . . $ 184 $ 458 $ 291
NON-CURRENT:
Difference in asset basis. . . . . . . 3,053 458 686
Recognition of legal settlement. . . . -- 740 564
Impairment of assets . . . . . . . . . 5,832 3,860 1,208
Reorganization items . . . . . . . . . 4,287 -- --
Deferred interest for tax. . . . . . . 404 -- --
Book tax difference of Riverboat
Project. . . . . . . . . . . . . . . 8,646 -- --
Net operating loss carryforwards . . . 41,148 2,343 4,592
------- ------- -------
Gross deferred tax asset . . . . . . . 63,554 7,859 7,341
Valuation allowance. . . . . . . . . . (63,554) (7,859) (7,341)
------- ------- -------
$ -- $ -- $ --
------- ------- -------
------- ------- -------
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 and $12.2 million as of
December 31, 1996, and September 30, 1997, respectively, 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 subsequent to the Effective Date are
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 its 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"). CAI 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).
F-16
<PAGE>
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 and for the nine months ended September 30, 1997 was $1.1 million, $1.1
million, $1.1 million and $937,000, 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.
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 1997, 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 had outstanding advances to the following affiliates at the
dates indicated (in thousands):
December 31, September 30,
1995 1996 1997
---- ---- ----
(unaudited)
Canadian Pavilion Limited
Partnership. . . . . . . . $ 1,573 $ 1,573 $ 1,573
Outlaws Casino, Ltd. . . . . 1,072 1,072 1,072
RCH Investments, NV. . . . . 259 259 259
Hemmeter Partners. . . . . . 335 335 335
Grand Palais Casino, Inc.. . 587 587 587
Former officers. . . . . . . 867 867 867
Other. . . . . . . . . . . . 78 78 78
------- ------- -------
$ 4,771 $ 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 the Predecessor Company. In 1994, two former
F-17
<PAGE>
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.
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 of the Predecessor Company, 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 the Silver Hawk Casino
license expires in June 1998. 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 and for the nine months ended September 30, 1996 and 1997, the Company
recorded $8.2 million, $8.3 million, $8.2 million, $6.9 million and $7.9
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 an 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 included advice and services related to gaming regulatory issues and
help in identifying potential new business opportunities. The agreement
required the Company to pay $29,167 per month from the Effective Date through
August 1997, when the agreement terminated.
OTHER COMMITMENTS
In July 1996, the Company entered into an agreement with Kids Quest
pursuant to which Kids Quest would operate a day care facility adjacent to
Bullwhackers Black Hawk. The facility opened on June 26, 1997. Kids Quest is
solely responsible for the day-to-day operations of the day care facility. The
Company receives percentage rent from Kids Quest for the use of the facility.
Rent consists of 10% of the first $500,000 in revenue from the Kids Quest
operation and 15% of revenues beyond such amount. The Company completed
construction of the day care facility at
F-18
<PAGE>
an estimated cost of approximately $1.4 million. As of September 30, 1997, the
Company had paid all of the total cost of the project.
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 $1.6 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 cost was approximately $250,000. On May 23, 1997, the Company
completed the process of expanding its parking lot and construction of the valet
facility.
The Company has also entered into an agreement with another company in the
business of providing gaming consulting / management services to Native American
Indian tribes. The companies will use their joint resources to pursue obtaining
contractual arrangements with various Native American tribes to provide
consulting services for new and existing Native American gaming projects. For
the year ended December 31, 1996 and the nine months ended September 30, 1997,
the Company had contributed $120,000 and $112,000, respectively, which has been
expensed in the accompanying consolidated statement of operations.
LEGAL PROCEEDINGS
Pursuant to the Reorganization, certain claims by the Predecessor Company
against third parties were 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, the only litigation
pending against the Company on the Effective Date was related to postpetition
taxes. 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) SUBSEQUENT EVENT
On August 22, 1997, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") pursuant to which it would be acquired by a U.S.
subsidiary of Ladbroke Group plc. Under the proposed terms of the transaction,
holders of the Company's common stock will be entitled to receive $6.25 in cash
for each share held. On October 21, 1997, Ladbroke's due diligence period under
the Merger Agreement expired. On that date, Ladbroke and the Company entered
into an Amendment to the Merger Agreement adding certain covenants and
conditions to the transaction. The proposed transaction remains subject to a
number of conditions, including Stockholder approval and receipt of various
regulatory approvals, none of which can be assured. Closing is anticipated to
occur late in the first quarter or in the second quarter of 1998.
(12) 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
disposition of assets:
<TABLE>
<CAPTION>
1997 1st Quarter 2nd Quarter 3rd Quarter
---- ----------- ----------- -----------
<S> <C> <C> <C>
Net Revenues $ 12,973 $ 13,392 $ 14,090
Casino Operating Profits 3,820 3,972 4,078
Operating Income 1,368 1,849 2,424
Net Income (346) 74 366
</TABLE>
<TABLE>
<CAPTION>
1996 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
---- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Revenues $ 11,023 $ 12,204 $ 14,625 $ 12,810
Casino Operating Profit 3,234 3,758 4,845 4,802
Operating Income 556 431 1,997 1,548
Net Income (672) 163,868 232 1,171
</TABLE>
F-19
<PAGE>
<TABLE>
<CAPTION>
1995 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
---- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Revenues $ 11,817 $ 11,850 $ 12,440 $ 11,321
Casino Operating Profit 3,433 3,042 3,612 3,903
Operating Income (1,776) (3,877) 469 (21,452)
Net Income (10,399) (17,201) (8,685) (78,931)
</TABLE>
<PAGE>
ANNEX I
AGREEMENT AND PLAN OF MERGER DATED AS OF AUGUST 22, 1997, AMONG LADBROKE
RACING CORPORATION, CG&E ACQUISITION CORP., AND COLORADO GAMING &
ENTERTAINMENT CO.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
Among
LADBROKE RACING CORPORATION,
CG&E ACQUISITION CORP.
and
COLORADO GAMING & ENTERTAINMENT CO.
Dated as of August 22, 1997
<PAGE>
TABLE OF CONTENTS
Section Page
- ------- ----
ARTICLE I
THE MERGER
1.1 The Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . .I-1
1.2 Effective Time; Closing . . . . . . . . . . . . . . . . . . . . . .I-1
1.3 Effects of the Merger . . . . . . . . . . . . . . . . . . . . . . .I-1
1.4 Certificate of Incorporation and By-Laws. . . . . . . . . . . . . .I-1
1.5 Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . .I-1
1.6 Officers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .I-1
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK
OF THE CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES. . . . . . . . . .I-2
2.1 Effect on Capital Stock . . . . . . . . . . . . . . . . . . . . . .I-2
2.2 Exchange of Certificates. . . . . . . . . . . . . . . . . . . . . .I-2
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY. . . . . . . . . . . . . . . .I-3
3.1 Organization. . . . . . . . . . . . . . . . . . . . . . . . . . . .I-3
3.2 Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . .I-3
3.3 Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . .I-3
3.4 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . .I-4
3.5 Noncontravention; Filings and Consents. . . . . . . . . . . . . . .I-4
3.6 SEC Documents; Financial Statements . . . . . . . . . . . . . . . .I-4
3.7 Absence of Certain Changes or Events. . . . . . . . . . . . . . . .I-5
3.8 No Undisclosed Liabilities. . . . . . . . . . . . . . . . . . . . .I-5
3.9 Information Supplied. . . . . . . . . . . . . . . . . . . . . . . .I-5
3.10 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . .I-5
3.11 Labor Matters. . . . . . . . . . . . . . . . . . . . . . . . . . .I-5
3.12 Employee Benefits; ERISA . . . . . . . . . . . . . . . . . . . . .I-5
3.13 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .I-7
3.14 Compliance with Applicable Laws. . . . . . . . . . . . . . . . . .I-7
3.15 Environmental Matters. . . . . . . . . . . . . . . . . . . . . . .I-7
3.16 Real Property. . . . . . . . . . . . . . . . . . . . . . . . . . .I-7
3.17 Intellectual Property. . . . . . . . . . . . . . . . . . . . . . .I-8
3.18 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . .I-8
3.19 State Takeover Statutes. . . . . . . . . . . . . . . . . . . . . .I-8
3.20 Brokers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .I-8
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASER . . . . . . . . . . .I-8
4.1 Organization. . . . . . . . . . . . . . . . . . . . . . . . . . . .I-8
4.2 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . .I-8
4.3 Noncontravention; Filings and Consents. . . . . . . . . . . . . . .I-8
4.4 Information Supplied. . . . . . . . . . . . . . . . . . . . . . . .I-9
4.5 Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . .I-9
4.6 Interim Operations of Purchaser . . . . . . . . . . . . . . . . . .I-9
4.7 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . .I-9
4.8 Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .I-9
ARTICLE V
COVENANTS OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . .I-9
5.1 Conduct of Business . . . . . . . . . . . . . . . . . . . . . . . .I-9
5.2 Other Actions . . . . . . . . . . . . . . . . . . . . . . . . . . I-11
5.3 No Solicitation . . . . . . . . . . . . . . . . . . . . . . . . . I-11
5.4 Opinion of Financial Advisor. . . . . . . . . . . . . . . . . . . I-12
ARTICLE VI
ADDITIONAL AGREEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . I-12
6.1 Shareholders Meeting; Preparation of the Proxy Statement. . . . . I-12
6.2 Access to Information; Confidentiality. . . . . . . . . . . . . . I-12
6.3 Reasonable Efforts. . . . . . . . . . . . . . . . . . . . . . . . I-13
6.4 Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . I-13
6.5 Public Announcements. . . . . . . . . . . . . . . . . . . . . . . I-13
6.6 Notification. . . . . . . . . . . . . . . . . . . . . . . . . . . I-13
I-i
<PAGE>
6.7 Certain Litigation. . . . . . . . . . . . . . . . . . . . . . . . I-13
6.8 Other Actions . . . . . . . . . . . . . . . . . . . . . . . . . . I-13
ARTICLE VII
CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . . . . I-14
7.1 Conditions to Obligation of Each Party to Effect the Merger . . . I-14
7.2 Conditions to Obligations of the Company to Effect the Merger . . I-14
7.3 Conditions to Obligations of Parent and Purchaser to Effect
the Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . I-14
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER. . . . . . . . . . . . . . . . . . . . . I-15
8.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . I-15
8.2 Effect of Termination . . . . . . . . . . . . . . . . . . . . . . I-15
8.3 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-15
8.4 Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-15
ARTICLE IX
GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-15
9.1 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-15
9.2 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . I-16
9.3 Interpretation. . . . . . . . . . . . . . . . . . . . . . . . . . I-16
9.4 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . I-16
9.5 Entire Agreement; Third Party Beneficiaries . . . . . . . . . . . I-16
9.6 Assignment. . . . . . . . . . . . . . . . . . . . . . . . . . . . I-17
9.7 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . I-17
9.8 Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . I-17
9.9 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . I-17
9.10 Attorneys' Fees. . . . . . . . . . . . . . . . . . . . . . . . . I-17
Exhibit A - Form of Opinion of Counsel for Parent and Purchaser
Exhibit B - Form of Opinion of Counsel for the Company
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AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER is entered into as of August 22, 1997,
among Ladbroke Racing Corporation, a Delaware corporation ("PARENT"), CG&E
Acquisition Corp., a Delaware corporation ("PURCHASER"), and Colorado Gaming &
Entertainment Co., a Delaware corporation (the "COMPANY").
WHEREAS, the respective Boards of Directors of Parent, Purchaser and the
Company have each determined that it is in the best interests of their
respective shareholders for Parent to acquire the Company upon the terms and
subject to the conditions set forth in this Agreement;
WHEREAS, in furtherance of such acquisition, the respective Boards of
Directors of Parent, Purchaser and the Company have approved the merger of
Purchaser with and into the Company (the "MERGER") upon the terms and subject to
the conditions set forth in this Agreement and in accordance with the provisions
of the Delaware General Corporation Law (the "DGCL"), whereby each share of
common stock, $.01 par value, of the Company ("COMPANY COMMON STOCK"), other
than shares owned directly or indirectly by Parent or by the Company and other
than Dissenting Shares (as defined in Section 2.1(d)), will be converted into
the right to receive cash;
WHEREAS, as an inducement to Parent to enter into this Agreement, Parent,
and the Company have entered into a Stock Option Agreement (the "STOCK OPTION
AGREEMENT") pursuant to which the Company has granted to Parent an option to
purchase newly issued shares of Company Common Stock under certain
circumstances;
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby,
Parent, Purchaser and the Company hereby agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1 THE MERGER. Upon the terms and subject to the conditions set
forth in this Agreement, and in accordance with the DGCL, Purchaser shall be
merged with and into the Company at the Effective Time (as defined in
Section 1.2). Following the Effective Time, the separate corporate existence of
Purchaser shall cease and the Company shall continue its corporate existence
under the laws of the State of Delaware as the surviving corporation (the
"SURVIVING CORPORATION").
SECTION 1.2 EFFECTIVE TIME; CLOSING. As promptly as practicable after the
satisfaction or, if permissible, waiver of the conditions set forth in
Article VII, the parties will cause the Merger to be consummated by delivering
to the Secretary of State of the State of Delaware a certificate of merger
together with the requisite officer's certificates, each in such form or forms
as may be required by, and executed and acknowledged in accordance with, the
relevant provisions of the DGCL (such documents being referred to collectively
as the "MERGER DOCUMENTS"), and shall make all other filings and recordings
required by the DGCL in connection with the Merger. The Merger shall become
effective at the time of filing of the appropriate Merger Documents with the
Secretary of State of the State of Delaware, or at such later time, which shall
be as soon as reasonably practicable, specified as the effective time in the
Merger Documents (the "EFFECTIVE TIME"). Prior to such filing, a closing shall
be held at the offices of O'Melveny & Myers LLP, 400 South Hope Street, Los
Angeles, California 90071, unless another date, time or place is agreed to in
writing by the parties hereto, for the purpose of confirming the satisfaction or
waiver, as the case may be, of the conditions set forth in Article VII.
SECTION 1.3 EFFECTS OF THE MERGER. The Merger shall have the effects set
forth in Section 259 of the DGCL.
SECTION 1.4 CERTIFICATE OF INCORPORATION AND BY-LAWS. (a) The Certificate
of Incorporation of the Company as in effect immediately prior to the Effective
Time shall be the Certificate of Incorporation of the Surviving Corporation
until thereafter amended as provided therein and as permitted by law and this
Agreement.
(b) The Bylaws of the Company as in effect immediately prior to the
Effective Time shall be the Bylaws of the Surviving Corporation upon
completion of the Merger and remain the Bylaws of the Surviving Corporation
until thereafter amended as provided therein and as permitted by law and
this Agreement.
SECTION 1.5 DIRECTORS. At the Effective Time, the directors of the
Company immediately prior to the Effective Time shall be deemed to have
resigned. At the Effective Time, the directors of Purchaser immediately prior
to the Effective Time shall become the directors of the Surviving Corporation,
until the earlier of their resignation or removal or until their respective
successors are duly elected and qualified, as the case may be.
SECTION 1.6 OFFICERS. The officers of the Company immediately prior to
the Effective Time shall be the officers of the Surviving Corporation, until the
earlier of their resignation or removal or until their respective successors are
duly elected and qualified, as the case may be, or as otherwise provided in the
Bylaws of the Company.
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ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK
OF THE CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES
SECTION 2.1 EFFECT ON CAPITAL STOCK. As of the Effective Time, by virtue
of the Merger and without any action on the part of the holder of any shares of
Company Common Stock or any shares of capital stock of Purchaser:
(a) CAPITAL STOCK OF PURCHASER. Each issued and outstanding share of
capital stock of Purchaser shall be converted into and become one fully
paid and nonassessable share of Common Stock, no par value, of the
Surviving Corporation.
(b) CANCELLATION OF PARENT OWNED STOCK. Each share of Company Common
Stock that is owned by the Company or by any subsidiary of the Company and
each share of Company Common Stock that is owned by Parent, Purchaser or
any other subsidiary of Parent shall automatically be canceled and shall
cease to exist, and no consideration shall be delivered in exchange
therefor.
(c) CONVERSION OF COMPANY COMMON STOCK. Subject to Section 3.1(d),
each share of Company Common Stock issued and outstanding (other than
shares to be canceled in accordance with Section 2.1(b)) shall be converted
into the right to receive an amount in cash equal to $6.25 per share (the
"MERGER CONSIDERATION"). As of the Effective Time, all such shares of
Company Common Stock shall no longer be outstanding and shall automatically
be canceled and shall cease to exist, and each holder of a certificate
representing any such shares of Company Common Stock shall cease to have
any rights with respect thereto, except the right to receive the Merger
Consideration.
(d) Notwithstanding anything in this Agreement to the contrary, in
the event that dissenters' rights are available in connection with the
Merger pursuant to Section 262 of the DGCL, shares of Company Common Stock
that are issued and outstanding immediately prior to the Effective Time and
that are held by shareholders who did not vote in favor of the Merger and
who comply with all of the relevant provisions of Section 262 of the DGCL
("DISSENTING SHARES") shall not be converted into or be exchangeable for
the right to receive the Merger Consideration, but instead shall be
converted into the right to receive such consideration as may be determined
to be due to such shareholders pursuant to Section 262 of the DGCL, unless
and until such holders shall have failed to perfect or shall have
effectively withdrawn or lost their rights to appraisal under the DGCL. If
any such holder shall have failed to perfect or shall have effectively
withdrawn or lost such right, such holders shares shall thereupon be deemed
to have been converted into and to have become exchangeable for the right
to receive, as of the Effective Time, the Merger Consideration without any
interest thereon. The Company shall give Parent (i) prompt notice of any
written demands for appraisal of shares received by the Company and (ii)
the opportunity to participate in all negotiations and proceedings with
respect to any such demands. The Company shall not, without the prior
written consent of the Parent, voluntarily make any payment with respect
to, or settle or offer to settle, any such demands.
SECTION 2.2 EXCHANGE OF CERTIFICATES. (a) PAYING AGENT. Prior to the
Effective Time, Parent shall designate a bank or trust company reasonably
acceptable to the Company to act as paying agent in the Merger (the "PAYING
AGENT"), and prior to or at the Effective Time, Parent shall make available, or
cause the Surviving Corporation to make available, to the Paying Agent cash in
the amount necessary for the payment of the Merger Consideration upon surrender
of certificates representing Company Common Stock as part of the Merger pursuant
to Section 2.1. The Paying Agent shall invest portions of the Merger
Consideration as Parent directs (it being understood that any and all interest
earned on funds made available to the Paying Agent pursuant to this Agreement
shall be the property of, and shall be turned over to, Parent). The Merger
Consideration shall not be used for any other purpose, except as provided in
this Agreement.
(b) EXCHANGE PROCEDURE. As soon as reasonably practicable after the
Effective Time, the Surviving Corporation shall cause the Paying Agent to
mail to each holder of record of a certificate or certificates which
immediately prior to the Effective Time represented outstanding shares of
Company Common Stock (the "CERTIFICATES") whose shares were converted into
the right to receive the Merger Consideration pursuant to Section 2.1, (i)
a letter of transmittal (which shall specify that delivery shall be
effected, and risk of loss and title to the Certificates shall pass, only
upon delivery of the Certificates to the Paying Agent and shall be in such
form and have such other provisions as Parent may specify) and (ii)
instructions for use in effecting the surrender of the Certificates in
exchange for the Merger Consideration. Upon surrender of a Certificate for
cancellation to the Paying Agent or to such other agent or agents as may be
appointed by Parent, together with such letter of transmittal, duly
executed, and such other documents as may reasonably be required pursuant
to such instructions, the holder of such Certificate shall be entitled to
receive in exchange therefor the amount of cash into which the shares of
Company Common Stock theretofore represented by such Certificate shall have
been converted pursuant to Section 2.1, and the Certificate so surrendered
shall forthwith be canceled. In the event of a transfer of ownership of
Company Common Stock which is not registered in the transfer records of the
Company, payment may be made to a person other than the person in whose
name the Certificate so surrendered is registered if such Certificate shall
be properly endorsed or otherwise be in proper form for transfer and the
person requesting such payment shall pay any transfer or other taxes
required by reason of the payment to a person other than the registered
holder of such Certificate or establish to the satisfaction of Parent that
such tax has been paid or is not applicable. Until surrendered as
contemplated by this Section 2.3, each Certificate shall be deemed at any
time after the Effective Time to represent only the right to receive upon
such surrender the Merger Consideration, without interest, into which the
shares of Company
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Common Stock theretofore represented by such Certificate shall have been
converted pursuant to Section 2.1. No interest will be paid or will accrue
on the cash payable upon the surrender of any Certificate.
(c) NO FURTHER OWNERSHIP RIGHTS IN COMPANY COMMON STOCK. All cash
paid upon the surrender of Certificates in accordance with the terms of
this Article II shall be deemed to have been paid in full satisfaction of
all rights pertaining to the shares of Company Common Stock theretofore
represented by such Certificates, and, from and after the Effective Time,
there shall be no further registration of transfers on the stock transfer
books of the Surviving Corporation of the shares of Company Common Stock
which were outstanding immediately prior to the Effective Time. If, after
the Effective Time, Certificates are presented to the Surviving Corporation
or the Paying Agent for any reason, they shall be canceled and exchanged as
provided in this Article II.
(d) NO LIABILITY. At any time following the twelfth month after the
Effective Time, the Surviving Corporation shall be entitled to require the
Paying Agent to deliver to it any funds which had been made available to
the Paying Agent and not disbursed to holders of shares of Company Common
Stock (including, without limitation, all interest and other income
received by the Paying Agent in respect of all funds made available to it),
and thereafter such holders shall be entitled to look to the Surviving
Corporation (subject to abandoned property, escheat and other similar laws)
only as general creditors thereof with respect to any Merger Consideration
that may be payable upon due surrender of the Certificates held by them.
Notwithstanding the foregoing, neither the Surviving Corporation nor the
Paying Agent shall be liable to any holder of a share of Company Common
Stock for any Merger Consideration properly delivered in respect of such
share to a public official as required pursuant to any abandoned property,
escheat or other similar law.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Parent and Purchaser as
follows (with such exceptions thereto as are set forth in the disclosure
schedule delivered by the Company to Parent (the "DISCLOSURE SCHEDULE") with
reference to the particular Sections of this Agreement referred to in the
Disclosure Schedule):
SECTION 3.1 ORGANIZATION. The Company and each of its subsidiaries is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation and has all requisite power and
authority and governmental approvals to own, lease or operate its properties and
to carry on its business as now being conducted. The Company and each of its
subsidiaries is duly qualified or licensed to do business and is in good
standing in each jurisdiction in which the properties owned, leased or operated
by it or the nature of the business conducted by it makes such qualification or
licensing necessary. The Company has delivered to Parent complete and correct
copies of its Certificate of Incorporation and By-Laws and the certificates of
incorporation and by-laws (or other comparable organizational documents) of its
subsidiaries, in each case as amended to the date of this Agreement.
SECTION 3.2 SUBSIDIARIES. Section 3.2 of the Disclosure Schedule lists
each subsidiary of the Company. All the outstanding shares of capital stock or
other ownership interest of each such subsidiary are owned by the Company (or by
another wholly owned subsidiary of the Company) free and clear of all Liens (as
defined in Section 9.2), and are duly authorized, validly issued, fully paid and
nonassessable. Except for the capital stock of its subsidiaries or as set forth
in Section 3.2 of the Disclosure Schedule, the Company does not own, directly or
indirectly, any capital stock or other ownership interest in any corporation,
partnership, limited liability company, joint venture or other entity.
SECTION 3.3 CAPITALIZATION. The authorized capital stock of the Company
consists of 20,000,000 shares of Company Common Stock. As of August 21, 1997,
5,236,091 shares of Company Common Stock were issued and outstanding. As of
August 21, 1997, 319,464 shares of Company Common Stock were reserved for
issuance under the Company's Management Incentive and Non-Employee Director
Stock Plans (the "STOCK PLANS"), of which 276,631 shares have been allocated
(including 9,260 shares to be allocated to directors) and 42,833 shares remain
unallocated. Section 3.3 of the Disclosure Schedule contains a complete list of
all persons entitled to receive shares of Company Common Stock pursuant to the
Stock Plans together with the number of shares allocated to each such person as
of the date hereof. Except as set forth above, as of the date of this
Agreement, no shares of capital stock or other voting securities of the Company
were issued, reserved for issuance or outstanding. All outstanding shares of
capital stock of the Company are, and all shares which may be issued will, when
issued, be duly authorized, validly issued, fully paid and nonassessable and not
subject to preemptive rights. There are no bonds, debentures, notes or other
indebtedness of the Company having the right to vote (or convertible into, or
exchangeable for, securities having the right to vote) on any matters on which
shareholders of the Company may vote. Except as set forth above, there are no
securities, options, warrants, calls, rights, commitments, agreements,
arrangements or undertakings of any kind to which the Company or any of its
subsidiaries is a party or by which any of them is bound obligating the Company
or any of its subsidiaries to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of capital stock or other voting securities
of the Company or of any of its subsidiaries or obligating the Company or any of
its subsidiaries to issue, grant, extend or enter into any such security,
option, warrant, call, right, commitment, agreement, arrangement or undertaking.
There are not any shareholder agreements, voting trusts or other agreements or
understandings to which the Company is a party or by which it is bound relating
to the voting, registration or disposition of any shares of the capital stock of
the Company (including any such agreements or understandings that may limit in
any way the solicitation of proxies by or on behalf of the Company from, or the
casting of votes by, the shareholders of the Company with respect to the Merger)
or granting to any person or group of persons the right to elect, or to
designate or nominate for election, a director to the Board of Directors of the
Company. There are not any outstanding contractual obligations of the Company
or any of its subsidiaries (i) to
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repurchase, redeem or otherwise acquire any shares of capital stock of the
Company or any of its subsidiaries or (ii) to vote or to dispose of any
shares of the capital stock of any of the Company's subsidiaries.
SECTION 3.4 AUTHORITY. The Company has all requisite corporate power and
authority to execute and deliver this Agreement and the Stock Option Agreement,
to perform its obligations hereunder and thereunder and to consummate the
transactions contemplated hereby and thereby, subject to, in the case of the
Merger, the approval of this Agreement by the affirmative vote of the holders of
a majority of the outstanding shares of Company Common Stock (the "COMPANY
SHAREHOLDER VOTE"). The execution and delivery of this Agreement and the Stock
Option Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby have been duly and validly
authorized by all necessary corporate action on the part of the Company, subject
to, with respect to the Merger, the Company Shareholder Vote. This Agreement
has been duly executed and delivered by the Company and, assuming the due
authorization, execution and delivery thereof by Parent and Purchaser,
constitutes the legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms.
SECTION 3.5 NONCONTRAVENTION; FILINGS AND CONSENTS. (a) The execution and
delivery of this Agreement and the Stock Option Agreement by the Company do not,
and, assuming the approval of the Merger by the Company Shareholder Vote, the
performance by the Company of its obligations hereunder and thereunder and the
consummation of the transactions contemplated hereby and thereby and compliance
with the provisions hereof and thereof will not, (i) conflict with or violate
the Certificate of Incorporation or By-laws or equivalent organizational
documents of the Company or any of its subsidiaries, (ii) assuming that all
consents, approvals, orders and authorizations described in Section 3.5(b) have
been obtained and all registrations, declarations, filings and notifications
described in Section 3.5(b) have been made, conflict with or violate any United
States federal, state or local or any foreign statute, law, rule, regulation,
ordinance, code, order, or any other requirement or rule of law (a "LAW"),
applicable to the Company or any subsidiary or by which any property or asset of
the Company or any subsidiary is bound or affected, or (iii) result in any
breach of or constitute a default (or an event which with notice or lapse of
time or both would become a default) under, or give to others any right of
termination, amendment, acceleration or cancellation of, or result in the
creation of a Lien on any property or asset of the Company or any subsidiary
pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease,
license, permit, franchise or other instrument or obligation.
(b) No consent, approval, order or authorization of, or registration,
declaration or filing with, or notice to, any United States federal, state
or local or any foreign government or any court, administrative or
regulatory agency or commission or other governmental authority or agency,
domestic or foreign (a "GOVERNMENTAL ENTITY"), is required by the Company
or any of its subsidiaries in connection with the execution and delivery of
this Agreement or the Stock Option Agreement by the Company, the
performance by the Company of its obligations hereunder and thereunder or
the consummation by the Company of the transactions contemplated hereby and
thereby, except for (i) the filing of a premerger notification and report
form by the Company under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended (the "HSR ACT"), and the expiration or termination of
the waiting period thereunder, (ii) the filing with the SEC of (x) a proxy
statement relating to the required approval by the Company's shareholders
of this Agreement (as amended or supplemented from time to time, the "PROXY
STATEMENT") and (y) such reports under Section 13(a) of the Exchange Act as
may be required in connection with this Agreement and the Stock Option
Agreement and the transactions contemplated hereby and thereby, (iii)
shareholder approval of the Merger, and the filing of the applicable Merger
Documents with the Secretary of State of the State of Delaware, and
appropriate documents with the relevant authorities of other states in
which the Company is qualified to do business, (iv) as may be required by
any applicable state securities or "blue sky" laws, (v) the filing of
reports with the U.S. Department of Commerce regarding foreign direct
investment in the United States, (vi) filings with the Colorado Division of
Gaming, and prior approval before the Effective Time by the State of
Colorado Limited Gaming Control Commission, and (vii) filings with, and
prior approval before the Effective Time by, the alcoholic beverage control
authorities of the State of Colorado.
SECTION 3.6 SEC DOCUMENTS; FINANCIAL STATEMENTS. The Company and each of
its subsidiaries has filed with the SEC, and has heretofore made available to
Parent true and complete copies of, all forms, reports, schedules, statements
and other documents required to be filed by it since June 7, 1996 under the
Exchange Act or the Securities Act of 1933, as amended (the "SECURITIES ACT")
(such forms, reports, schedules, statements and other documents, including any
financial statements or schedules included therein, are referred to as the
"COMPANY SEC DOCUMENTS"). Each of the Company SEC Documents, at the time it was
filed, (i) did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading and (ii) complied in all material respects with the
applicable requirements of the Exchange Act and the Securities Act, as the case
may be, and the applicable rules and regulations of the SEC thereunder. Except
to the extent that information contained in any Company SEC Document has been
revised or superseded by a subsequently filed Company Filed SEC Document (as
defined in Section 3.7) (a copy of which has been made available to Parent prior
to the date hereof), none of the Company SEC Documents contains an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. The financial
statements of the Company included in the Company SEC Documents comply as to
form in all material respects with applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis during the periods involved (except as may be indicated in
the notes thereto or, in the case of unaudited statements, as permitted by Form
10-Q of the SEC) and fairly present (subject, in the case of the unaudited
statements, to normal, recurring audit adjustments) the consolidated financial
position of the Company and its consolidated subsidiaries as of the dates
thereof and the consolidated results of their operations and cash flows for the
periods then ended.
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SECTION 3.7 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except for the
transactions contemplated by this Agreement and except as disclosed in the
Company SEC Documents filed and publicly available prior to the date of this
Agreement (the "COMPANY FILED SEC DOCUMENTS"), since December 31, 1996, the
Company and its subsidiaries have conducted their respective businesses only in
the ordinary course in a manner consistent with past practice, and there has not
been (i) any Material Adverse Change (as defined in Section 9.2(d)), (ii) any
declaration, setting aside or payment of any dividend or other distribution with
respect to the Company's capital stock or any redemption, purchase or other
acquisition of any of its capital stock, (iii) any split, combination or
reclassification of any of its capital stock or any issuance or the
authorization of any issuance of any other securities in respect of, in lieu of
or in substitution for, shares of its capital stock, (iv) (x) any granting by
the Company or any of its subsidiaries to any director, officer, employee or
consultant of the Company or any of its subsidiaries of any increase in
compensation or benefits, (y) any granting by the Company or any of its
subsidiaries to any such director, officer, employee or consultant of any
increase in severance or termination pay, or (z) any entry by the Company or any
of its subsidiaries into any employment, consulting, severance, termination or
indemnification agreement with any such employee or executive officer, (v) any
damage, destruction or loss, whether or not covered by insurance, that has or
reasonably could be expected to have a Material Adverse Effect (as defined in
Section 9.2(d)), (vi) any change in accounting methods, principles or practices
by the Company or (vii) any entry by the Company or any of its subsidiaries into
any commitment or transaction material to the Company and its subsidiaries taken
as a whole.
SECTION 3.8 NO UNDISCLOSED LIABILITIES. Except as and to the extent set
forth in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 filed with the SEC, as of December 31, 1996, neither the
Company nor any of its subsidiaries had any liabilities or obligations of any
nature, whether or not accrued, contingent or otherwise, that would be required
by generally accepted accounting principles to be reflected on a consolidated
balance sheet of the Company and its subsidiaries (including the notes thereto).
Since December 31, 1996 through and including the date hereof, except as and to
the extent set forth in the Company Filed SEC Documents, neither the Company nor
any of its subsidiaries has incurred any liabilities of any nature, whether or
not accrued, contingent or otherwise, other than liabilities incurred in the
ordinary course of business. The Company's outstanding liabilities, whether or
not accrued, contingent or otherwise, as of August 22, 1997, do not exceed
$61,947,506.
SECTION 3.9 INFORMATION SUPPLIED. None of the information supplied or to
be supplied by the Company for inclusion in the Proxy Statement, will, at the
time the Proxy Statement is first mailed to the Company's shareholders or at the
time of the Company Shareholders Meeting (as defined in Section 6.1), contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Proxy Statement will comply as to form in all material respects
with the requirements of the Exchange Act and the rules and regulations
thereunder, except that no representation or warranty is made by the Company
with respect to statements made therein based on information supplied by Parent
or Purchaser for inclusion therein.
SECTION 3.10 LITIGATION. Except as disclosed in the Company Filed SEC
Documents, there is no suit, claim, action, proceeding or investigation (whether
judicial, administrative, regulatory, arbitral or otherwise) pending or, to the
knowledge of the Company, threatened against the Company or any of its
subsidiaries. Except as disclosed in the Company Filed SEC Documents, neither
the Company nor any of its subsidiaries is subject to any outstanding judgment,
order, writ, injunction or decree.
SECTION 3.11 LABOR MATTERS. (i) There are no material controversies
pending or, to the knowledge of the Company, threatened between the Company or
any subsidiary and any of their respective employees, (ii) neither the Company
nor any subsidiary is a party to any collective bargaining agreement or other
labor union contract applicable to persons employed by the Company or any
subsidiary, nor, to the knowledge of the Company, are there any activities or
proceedings of any labor union to organize any such employees, (iii) there are
no unfair labor practice complaints pending against the Company or any
subsidiary before the National Labor Relations Board or any current union
representation questions involving employees of the Company or any subsidiary
and (iv) there is no strike, slowdown, work stoppage or lockout, or, to the
knowledge of the Company, any threat thereof, by or with respect to any
employees of the Company or any subsidiary. The Company and each subsidiary is
in material compliance with all applicable Laws relating to the employment of
labor, including, without limitation, those relating to wages, hours, collective
bargaining and the payment and withholding of taxes and other sums as required
by appropriate Governmental Entities and has withheld and paid to the
appropriate Governmental Entities all amounts required to be withheld from
employees of the Company and its subsidiaries and is not liable for any arrears
of wages, taxes, penalties or other sums for failure to comply with any of the
foregoing.
SECTION 3.12 EMPLOYEE BENEFITS; ERISA. (a) Section 3.12(a) of the
Disclosure Schedule contains a list of all "employee pension benefit plans" (as
defined in Section 3(2) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA")) (sometimes referred to herein as "PENSION PLANS"),
"employee welfare benefit plans" (as defined in Section 3(1) of ERISA)
(sometimes referred to herein as "WELFARE PLANS"), and each other material plan,
material arrangement or material policy (written or oral) providing for bonuses,
pensions, profit sharing, stock options, stock purchases, compensation, deferred
compensation, incentive compensation, severance, change in control benefit,
disability, retiree medical or life insurance, supplemental retirement, death
benefits, hospitalization, medical or dental benefits, fringe benefits or other
employee benefits, in each case maintained, or contributed to, by the Company or
any of its subsidiaries or any other person or entity that, together with the
Company is treated as a single employer (each, together with the Company, a
"COMMONLY CONTROLLED ENTITY") under Section 414(b), (c), (m) or (o) of the
Internal Revenue Code of 1986, as amended (the "CODE"), for the benefit of any
current or former employees, officers, consultants, agents or directors of the
Company or any of its subsidiaries (all of the foregoing being herein called
"BENEFIT PLANS"). The Company has delivered to Parent true and complete copies
of (i) each Benefit Plan (or, in the case of any unwritten Benefit Plans,
descriptions thereof), (ii) the most recent annual report on Form 5500 (and
related
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schedules and financial statements or opinions required in connection therewith)
filed with the Internal Revenue Service (the "IRS") with respect to each Benefit
Plan (if any such report was required), (iii) the most recent actuarial report
and financial statement with respect to each Benefit Plan, as applicable, (iv)
the most recent summary plan description (or similar document) for each Benefit
Plan for which a summary plan description is required or was otherwise provided
to plan participants or beneficiaries, (v) the most recent IRS determination
letter, if any, for each Benefit Plan and (vi) each trust agreement and group
annuity contract relating to any Benefit Plan.
(b) All Pension Plans and related trusts that are intended to be
tax-qualified plans have been the subject of determination letters from the
IRS to the effect that such Pension Plans and related trusts are qualified
and exempt from federal income taxes under Sections 401(a) and 501(a),
respectively, of the Code (including the Tax Reform Act of 1986), and no
such determination letter has been revoked nor, to the knowledge of the
Company, has revocation been threatened; no event has occurred and no
circumstances exist that would adversely affect or would reasonably be
likely to adversely affect the tax qualification of such Pension Plan nor
has any such Pension Plan been amended since the date of its most recent
determination letter or application therefor in any respect that would
adversely affect or would reasonably be likely to adversely affect its
qualification or materially increase its costs or require security under
Section 302 of ERISA.
(c) Each Benefit Plan has been administered in all material respects
in accordance with its terms. The Benefit Plans are, and have been
operated, in compliance in all material respects with the applicable
provisions of ERISA, the Code and all other applicable Laws. All material
contributions or payments required to be made to or in respect of the
Benefit Plans has been timely made or provided for or properly accrued.
There are no unfunded benefit obligations under the Benefit Plans which
have not been accounted for by reserves, or otherwise properly footnoted in
accordance with generally accepted accounting principles, on the
consolidated financial statements of the Company and its subsidiaries. No
Benefit Plan has incurred an "accumulated funding deficiency" (within the
meaning of Section 302 of ERISA or Section 412 of the Code), whether or not
waived. All contributions, premiums or payments required to be made with
respect to any Benefit Plan are fully deductible for income tax purposes
and no such deduction previously claimed has been challenged by any
Governmental Entity; PROVIDED, HOWEVER, that no benefits under any
nonqualified pension or deferred compensation plan are deductible until
actually paid. There are no investigations by any Governmental Entity,
termination proceedings or other claims (except claims for benefits payable
in the normal operation of the Benefit Plans), suits or proceedings against
or involving any Benefit Plan or asserting any rights to or claims for
benefits under any Benefit Plan that could give rise to any material
liability, and there are not any facts or circumstances that would
reasonably be expected to give rise to any material liability in the event
of any such investigation, claim, suit or proceeding.
(d) No Commonly Controlled Entity is required to contribute to any
"multiemployer plan" as defined in Section 4001(a)(3) of ERISA or has
withdrawn or expects to withdraw from any such multiemployer plan where
such withdrawal has resulted or would result in any material "withdrawal
liability" (within the meaning of Section 4201 of ERISA) that has not been
fully paid. None of the Company, any of its subsidiaries, any officer of
the Company or any of its subsidiaries or any of the Benefit Plans which
are subject to ERISA, including the Pension Plans, any trusts created
thereunder or any trustee or administrator thereof, has engaged in a
"prohibited transaction" (as such term is defined in Section 406 of ERISA
or Section 4975 of the Code) or any other breach of fiduciary
responsibility that could subject the Company, any of its subsidiaries or
any officer of the Company or any of its subsidiaries to any material tax
or penalty on prohibited transactions imposed by such Section 4975 of ERISA
or to any material liability under Section 502(i) or (1) of ERISA. Neither
any of such Benefit Plans nor any of such trusts has been terminated, nor
has there been, nor is there expected to be, any "reportable event" (as
that term is defined in Section 4043 of ERISA) as to which notice would be
required with the Pension Benefit Guaranty Corporation (the "PBGC") with
respect thereto, during the last five years.
(e) No Commonly Controlled Entity has or reasonably expects to incur
liability under Title IV of ERISA (other than for the payment of premiums,
none of which are overdue). Each Benefit Plan subject to Title IV of ERISA
is fully funded in accordance with the actuarial assumptions used by the
PBGC to determine the level of funding required in the event of the
termination of such plan. No Commonly Controlled Entity has completely or
partially terminated a plan subject to Title IV of ERISA within the last
five years. None of the assets of the Company or any subsidiary is the
subject of any lien arising under Section 302 of ERISA or Section 412(n) of
the Code; neither the Company nor any subsidiary has been required to post
any security under Section 307 of ERISA or Section 401(a)(29) of the Code;
and no fact or event exists which could give rise to any such lien or
requirement to post any such security.
(f) No employee of the Company or any of its subsidiaries will be
entitled to any additional benefits or any acceleration of the time of
payment or vesting of any benefits under any Benefit Plan as a result of
the transactions contemplated by this Agreement. No amount paid or payable
by the Company or any of its subsidiaries in connection with the
transactions contemplated hereby (either solely as a result thereof or as a
result of any transactions in conjunction with any other event) will be an
"excess parachute payment" within the meaning of Section 280G of the Code.
(g) The Company and its subsidiaries have not incurred any liability
under, and have complied in all respects with, the Worker Adjustment
Retraining Notification Act and the rules and regulations promulgated
thereunder ("WARN") and do not reasonably expect to incur any such
liability as a result of actions taken or not taken prior to the Effective
Time. The Company will advise Parent and Purchaser in
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writing of any material terminations, layoffs and reductions in hours from
the date hereof through the Effective Time and will provide Parent and
Purchaser with any related information that they may reasonably request.
(h) Since December 31, 1996 there has not been any adoption or
amendment in any material respect by the Company or any of its subsidiaries
of any Benefit Plan.
(i) There exist no employment, consulting, severance, termination or
indemnification agreements, arrangements or understandings between the
Company or any of its subsidiaries and any current or former employee,
officer, director or consultant of the Company or any of its subsidiaries,
and there is no oral or written understanding or arrangement to enter into
any such agreement with any such individual.
(j) The Commonly Controlled Entities have complied in all material
respects with the requirements of Part 6 of Subtitle B of Title I of ERISA
and of Code Section 4980B. Except for coverage described in the preceding
sentence or as disclosed in Section 3.12(j) of the Disclosure Schedule,
neither the Company nor any of its subsidiaries has any liability for life,
health, medical or other welfare plans to former employees or
beneficiaries.
SECTION 3.13 TAXES. The Company and each of its subsidiaries has filed
all federal, state, local and foreign tax returns and reports required to be
filed by it. All such returns and reports are complete and correct in all
material respects. The Company and each of its subsidiaries has paid (or the
Company has paid on its subsidiaries' behalf) all taxes required to be paid by
it, and the most recent financial statements contained in the Company Filed SEC
Documents reflect reserves sufficient to cover all taxes payable by the Company
and its subsidiaries for all taxable periods and portions thereof through the
date of such financial statements. No deficiencies for any taxes have been
proposed, asserted or assessed against the Company or any of its subsidiaries,
and no requests for waivers of the time to assess any such taxes are pending.
The federal income tax returns of the Company and each of its subsidiaries
consolidated in such returns have been examined by and settled with the IRS for
all years through December 31, 1993. As used in this Agreement, "TAXES" shall
include all federal, state, local and foreign income, property, sales, excise
and other taxes, tariffs or governmental charges of any nature whatsoever.
SECTION 3.14 COMPLIANCE WITH APPLICABLE LAWS. The Company and its
subsidiaries and affiliates hold all permits, licenses, variances, exemptions,
orders and approvals of all Governmental Entities, including but not limited to
the Colorado Division of Gaming and the State of Colorado Limited Gaming Control
Commission, necessary for the lawful conduct of their respective businesses (the
"COMPANY PERMITS"). The Company and its subsidiaries are in compliance in all
material respects with the terms of the Company Permits. Except as disclosed in
the Company Filed SEC Documents, to the knowledge of the Company, the businesses
of the Company and its subsidiaries are not being conducted in violation of any
Law. Except as set forth in the Company Filed SEC Documents, as of the date of
this Agreement, no investigation or review by any Governmental Entity with
respect to the Company or any of its subsidiaries or any Company Permits is
pending or, to the knowledge of the Company, threatened.
SECTION 3.15 ENVIRONMENTAL MATTERS. Neither the Company nor any of its
subsidiaries has (i) placed, held, located, released, transported or disposed of
any Hazardous Substances (as defined below) on, under, from or at any of the
Company's or any of its subsidiaries' properties or any other properties, (ii)
any knowledge or reason to know of the presence of any Hazardous Substances on,
under or at any of the Company's or any of its subsidiaries' properties, or
(iii) received any written notice (A) of any violation of or liability under any
Law relating to any matter of pollution, protection of the environment or
natural resources, environmental regulation or control or regarding Hazardous
Substances (collectively, "ENVIRONMENTAL LAWS") on, under or emanating from any
of the Company's or any of its subsidiaries' current or former properties or
operations or any other properties, (B) of the institution or pendency of any
suit, action, claim, proceeding or investigation by any Governmental Entity or
any third party in connection with any such violation or liability, (C)
requiring the response to or remediation of Hazardous Substances at or arising
from any of the Company's or any of its subsidiaries' current or former
properties or operations or any other properties, (D) alleging noncompliance by
the Company or any of its subsidiaries with the terms of any permit required
under any Environmental Law in any manner reasonably likely to require material
expenditures or to result in material liability or (E) demanding payment for
response to or remediation of Hazardous Substances at or arising from any of the
Company's or any of its subsidiaries' current or former properties or
operations. For purposes of this Agreement, the term "HAZARDOUS SUBSTANCE"
shall mean any toxic or hazardous materials or substances, including asbestos,
buried contaminants, chemicals, flammable explosives, radioactive materials,
petroleum and petroleum products, chemicals and products used in or associated
with the mining, extraction or refining of minerals and any substances defined
or regulated as a pollutant or contaminant under any Environmental Law.
SECTION 3.16 REAL PROPERTY. (a) Section 3.16(a) of the Disclosure
Schedule sets forth a true and complete list of all the real property owned by
the Company and its subsidiaries (the "OWNED REAL PROPERTY").
(b) Section 3.16(b) of the Disclosure Schedule sets forth a true and
complete list of the real property leased by the Company and the
Subsidiaries (the "LEASED REAL PROPERTY" and, together with the Owned Real
Property, the "REAL PROPERTY").
(c) The Company and its subsidiaries have sufficient title to all
their properties and assets, both real and personal, to conduct their
respective businesses as currently conducted or as contemplated to be
conducted.
(d) Each parcel of Real Property (i) is owned or leased free and
clear of all Liens, and (ii) is neither subject to any governmental decree
or order to be sold nor is being condemned, expropriated or
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otherwise taken by any public authority with or without payment of
compensation therefor, nor, to the knowledge of the Company, has any such
condemnation, expropriation or taking been proposed.
(e) All leases of real property leased for the use or benefit of the
Company or any subsidiary to which the Company or any subsidiary is a
party, and all amendments and modifications thereto, are in full force and
effect and have not been modified or amended, and there exists no default
under any such lease by the Company or any subsidiary, nor any event which
with notice or lapse of time or both would constitute a default thereunder
by the Company or any subsidiary.
SECTION 3.17 INTELLECTUAL PROPERTY. The Company and its subsidiaries own,
or are validly licensed or otherwise have the legal right to use, all patents,
patent rights, trademarks, trade names, service marks, copyrights, know-how and
other proprietary intellectual property rights and computer programs
(collectively, "INTELLECTUAL PROPERTY RIGHTS") that are material to the conduct
of the business of the Company and its subsidiaries. Section 3.17 of the
Disclosure Schedule sets forth a description of all Intellectual Property Rights
that are material to the conduct of the business of the Company and its
subsidiaries. No claims are pending or, to the knowledge of the Company,
threatened that the Company or any of its subsidiaries is infringing or
otherwise adversely affecting the rights of any person with regard to any
Intellectual Property Right, and the Company is not aware of any basis for any
such claims. To the knowledge of the Company, no person is infringing the
rights of the Company or any of its subsidiaries with respect to any material
Intellectual Property Right.
SECTION 3.18 INSURANCE. The Company and its subsidiaries have obtained
and maintained in full force and effect public liability insurance, insurance
against claims for personal injury or death or property damage occurring in
connection with the activities of the Company or its subsidiaries or any
properties owned, occupied or controlled by the Company or its subsidiaries and
other insurance, in each case, with responsible and reputable insurance
companies or associations in such amounts, on such terms and covering such risks
as is customary in the business engaged in by the Company.
SECTION 3.19 STATE TAKEOVER STATUTES. To the knowledge of the Company, no
state takeover statute or similar statute applies or purports to apply to the
Merger, this Agreement or the Stock Option Agreement or any of the transactions
contemplated by this Agreement or the Stock Option Agreement.
SECTION 3.20 BROKERS. No broker, investment banker, financial advisor or
other person, other than CIBC Wood Gundy Securities Corp. and UniRock Management
Corporation, the fees and expenses of which will be paid by the Company, is
entitled to any broker's, finder's, financial advisor's or other similar fee or
commission in connection with the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of the Company. The Company has
provided Parent true and correct copies of the agreement between the Company and
CIBC Wood Gundy Securities Corp. and UniRock Management Corporation.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASER
Parent and Purchaser hereby, jointly and severally, represent and warrant
to the Company as follows:
SECTION 4.1 ORGANIZATION. Each of Parent and Purchaser is a corporation
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation.
SECTION 4.2 AUTHORITY. Each of Parent and Purchaser has all requisite
corporate power and authority to execute and deliver this Agreement, to perform
its obligations hereunder and thereunder and to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this Agreement
by Parent and Purchaser and the consummation by Parent and Purchaser of the
transactions contemplated hereby have been duly and validly authorized by all
necessary corporate action on the part of Parent and Purchaser. This Agreement
has been duly and validly executed and delivered by Parent and Purchaser and,
assuming the due authorization, execution and delivery thereof by the Company,
constitutes the legal, valid and binding obligation of Parent and Purchaser,
enforceable against each of Parent and Purchaser in accordance with its terms.
SECTION 4.3 NONCONTRAVENTION; FILINGS AND CONSENTS. (a) The execution and
delivery of this Agreement and the Stock Option Agreement by Parent and
Purchaser as applicable do not, and the performance by Parent and Purchaser of
their respective obligations hereunder and thereunder and the consummation of
the transactions contemplated hereby and thereby and compliance with the
provisions hereof and thereof will not, (i) conflict with or violate the
certificate of incorporation or by-laws or equivalent organizational documents
of Parent or Purchaser, (ii) assuming that all consents, approvals, orders and
authorizations described in Section 4.3(b) have been obtained and all
registrations, declarations, filings and notifications described in
Section 4.3(b) have been made, conflict with or violate any Law applicable to
Parent or Purchaser or by which any property or asset of Parent or Purchaser is
bound or affected or (iii) result in any breach of or constitute a default (or
an event which with notice or lapse of time or both would become a default)
under, or give to others any right of termination, amendment, acceleration or
cancellation of, or result in the creation of a Lien on any property or asset of
Parent or Purchaser pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation,
other than, in the case of clauses (ii) and (iii), any such conflicts,
violations, breaches, defaults, rights or Liens that would not prevent or
materially delay the consummation of the transactions contemplated by this
Agreement or the Stock Option Agreement or the performance by Parent or
Purchaser of any of their respective material obligations hereunder or
thereunder.
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(b) No consent, approval, order or authorization of, or registration,
declaration or filing with, or notice to, any Governmental Entity is
required by Parent or Purchaser in connection with the execution and
delivery of this Agreement or the Stock Option Agreement by Parent and
Purchaser, the performance by Parent and Purchaser of their respective
obligations hereunder and thereunder or the consummation by Parent or
Purchaser of any of the transactions contemplated hereby and thereby,
except for (i) the filing of a premerger notification and report form under
the HSR Act, and the expiration or termination of the waiting period
thereunder, (ii) the filing with the SEC of such reports under the Exchange
Act as may be required in connection with this Agreement or the Stock
Option Agreement and the transactions contemplated hereby and thereby,
(iii) shareholder approval of the Merger and the filing of the applicable
Merger Documents with the Secretary of State of the State of Delaware, and
the filing of appropriate documents with the relevant authorities of other
states in which the Company is qualified to do business, (iv) as may be
required by any applicable state securities or "blue sky" laws, (v) the
filing of reports with the U.S. Department of Commerce regarding foreign
direct investment in the United States, (vi) filings with the Colorado
Division of Gaming and prior approval before the Effective Time by the
State of Colorado Limited Gaming Control Commission, (vii) filings with,
and prior approval before the Effective Time by, the alcoholic beverage
control authorities of the State of Colorado, and (viii) such other
consents, approvals, orders, authorizations, registrations, declaration,
filings and notices the failure of which to be obtained or made would not
prevent or materially delay the consummation of the transactions
contemplated by this Agreement or the Stock Option Agreement or the
performance by Parent or Purchaser of any of their respective material
obligations hereunder or thereunder.
SECTION 4.4 INFORMATION SUPPLIED. None of the information to be supplied
by Parent or Purchaser for inclusion in the Proxy Statement will, at the time
the Proxy Statement is first mailed to the Company's shareholders or at the time
of the Company Shareholders Meeting, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they are made, not misleading.
SECTION 4.5 FINANCING. Parent and Purchaser have funds available
sufficient to consummate the Merger on the terms contemplated by this Agreement.
SECTION 4.6 INTERIM OPERATIONS OF PURCHASER. Purchaser was formed solely
for the purpose of engaging in the transactions contemplated by this Agreement
and has not engaged in any business activities or conducted any operations other
than in connection with the transactions contemplated hereby.
SECTION 4.7 LITIGATION. There is no suit, claim, action, proceeding or
investigation (whether judicial, administrative, regulatory, arbitral or
otherwise) pending or, to the knowledge of Parent, threatened against Parent or
Purchaser that could reasonably be expected to prevent or materially delay the
consummation of the transactions contemplated by this Agreement or the Stock
Option Agreement or the performance by Parent and Purchaser of their respective
obligations hereunder and thereunder. Neither Parent nor Purchaser is subject
to any outstanding judgment, order, writ, injunction or decree that could
reasonably be expected to prevent or materially delay the consummation of the
transactions contemplated by this Agreement or the Stock Option Agreement or the
performance by Parent and Purchaser of their respective obligations hereunder
and thereunder.
SECTION 4.8 BROKERS. No broker, investment banker, financial advisor or
other person is entitled to any broker's, finder's, financial advisor's or other
similar fee or commission in connection with the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of Parent or
Purchaser.
ARTICLE V
COVENANTS OF THE COMPANY
SECTION 5.1 CONDUCT OF BUSINESS. Until the Effective Time, the Company
agrees (except as expressly permitted by this Agreement, the Stock Option
Agreement or to the extent that Parent shall otherwise consent in writing) as
follows:
(a) ORDINARY COURSE. The Company shall and shall cause its
subsidiaries to carry on their respective businesses in the usual, regular
and ordinary course in substantially the same manner as heretofore
conducted and shall use all reasonable efforts to preserve intact their
present business organizations, keep available the services of their
present officers and employees and preserve their relationships with
customers, suppliers and others having business dealings with the Company
and its subsidiaries.
(b) DIVIDENDS; CHANGES IN STOCK. The Company shall not, and shall
not permit any of its subsidiaries to, (i) declare or pay any dividends on
or make other distributions in respect of any of its capital stock, except
dividends by a direct or indirect wholly owned subsidiary of the Company to
its parent, (ii) split, combine or reclassify any of its capital stock or
issue or authorize or propose the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its capital stock
or (iii) repurchase, redeem or otherwise acquire any shares of capital
stock of the Company or its subsidiaries or any other securities thereof or
any rights, warrants or options to acquire any such shares or other
securities.
(c) ISSUANCE OF SECURITIES. The Company shall not, and shall not
permit any of its subsidiaries to, issue, deliver, sell, pledge or
encumber, or authorize or propose the issuance, delivery, sale, pledge or
encumbrance of, any shares of its capital stock of any class or any
securities convertible into, or any rights, warrants, calls, subscriptions
or options to acquire, any such shares or convertible securities, or any
other
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ownership interest other than the issuance of shares of Company Common
Stock pursuant to the Stock Plans but only with respect to allocations
outstanding on the date hereof.
(d) GOVERNING DOCUMENTS. The Company shall not, and shall not permit
any of its subsidiaries to, amend or propose to amend its Certificate of
Incorporation or By-Laws (or comparable organizational documents).
(e) NO ACQUISITIONS. The Company shall not, and shall not permit any
of its subsidiaries to, acquire or agree to acquire (i) by merging or
consolidating with, or by purchasing a substantial equity interest in all
or a substantial portion of the assets of, or by any other manner, any
business or any corporation, partnership, limited liability company,
association or other business organization or division thereof or (ii) any
assets that are material, individually or in the aggregate, to the Company
and its subsidiaries taken as a whole, except purchases of inventory and
supplies in the ordinary course of business consistent with past practice;
PROVIDED, HOWEVER, that the Company shall be permitted to engage in any or
all of the transactions identified in Section 5.1(e) of the Disclosure
Schedule but only after having received the prior written consent of Parent
to the final terms of any such transaction, which consent shall not be
unreasonably withheld or delayed.
(f) NO DISPOSITIONS. The Company shall not, and shall not permit any
of its subsidiaries to, sell, lease, license, encumber or otherwise dispose
of, or agree to sell, lease, license, encumber or otherwise dispose of, any
of its assets other than the sale or disposition of unnecessary, obsolete,
or worn-out equipment in the ordinary course of business.
(g) CAPITAL EXPENDITURES. The Company shall not, nor shall the
Company permit any of its subsidiaries to, make or agree to make any
capital expenditures or incur any obligations under capital or financing
leases in the aggregate in excess of $2 million during the remainder of the
Company's current fiscal year and $1 million per fiscal quarter thereafter.
(h) INDEBTEDNESS. The Company shall not, and shall not permit any of
its subsidiaries to, incur any indebtedness for borrowed money or guarantee
any such indebtedness or issue or sell any debt securities or warrants or
rights to acquire any debt securities of the Company or any of its
subsidiaries or guarantee any debt securities of others except in the
ordinary course and pursuant to credit agreements existing on the date
hereof or any extensions, renegotiations, renewals or replacements
therefor; PROVIDED, HOWEVER, that all such indebtedness shall be prepayable
at the option of the Company without premium or penalty but may provide for
termination fees of the type contained in the Company's credit agreements
existing on the date hereof.
(i) TAX MATTERS. The Company shall not make any tax election that
would have a material effect on the tax liability of the Company or settle
or compromise any income tax liability of the Company of any of its
subsidiaries that would materially affect the aggregate tax liability of
the Company or any of its subsidiaries. The Company shall, before filing
or causing to be filed any material tax return of the Company or any of its
subsidiaries, consult with Parent and its advisors as to the positions and
elections that may be taken or made with respect to such return.
(j) DISCHARGE OF LIABILITIES. Without the prior written consent of
Parent, which consent will not be unreasonably withheld or delayed, the
Company shall not, and shall not permit any of its subsidiaries to, pay,
discharge, settle or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other
than the payment, discharge or satisfaction, in the ordinary course of
business, consistent with past practice or in accordance with their terms,
of liabilities recognized or disclosed in the most recent consolidated
financial statements of the Company included in the Company Filed SEC
Documents or incurred since the date of such financial statements in the
ordinary course of business consistent with past practice, or waive the
benefits of, or agree to modify in any manner, any confidentiality,
standstill or similar agreement to which the Company or any of its
subsidiaries is a party.
(k) MATERIAL CONTRACTS. Except in the ordinary course of business
and consistent with past practices, the Company shall not, and shall not
permit any of its subsidiaries to, enter into, modify, amend or terminate
any lease or other agreement, instrument, permit, concession, franchise or
license which is material to the Company and its subsidiaries or waive,
release or assign any material rights or claims other than operating leases
for equipment and other agreements having a term of, or being terminable by
the Company without penalty within, one year or less; provided, however,
that the Company shall be permitted to enter into material agreements in
connection with any or all of the transactions identified in Section 5.1(e)
of the Disclosure Schedule but only after having received the prior written
consent of Parent to the final terms of any such material agreement, which
consent shall not be unreasonably withheld or delayed.
(l) EMPLOYEE BENEFITS. The Company shall not, and shall not permit
any of its subsidiaries to, (i) grant any increase in the compensation of
any of its directors, officers or employees, except for increases for
employees, other than officers, in the ordinary course of business
consistent with past practice, (ii) pay or agree to pay any pension,
retirement allowance or other employee benefit not required or contemplated
by any of the existing Benefit Plans as in effect on the date hereof to any
director, officer or employee, (iii) enter into any new employment,
severance or termination agreement with any director, officer or employee
or (iv) except as may be required to comply with applicable Law, become
obligated under any Benefit Plan which was not in existence on the date
hereof or amend any such plan in existence on the date hereof.
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(m) ACCOUNTING MATTERS. The Company shall not, and shall not permit
any of its subsidiaries to, take any action, other than reasonable and
usual actions in the ordinary course of business and consistent with past
practice, with respect to accounting policies or procedures (including,
without limitation, procedures with respect to the payment of accounts
payable and collection of accounts receivable).
SECTION 5.2 OTHER ACTIONS. (a) The Company shall not, and shall not permit
any of its subsidiaries to, take any action that would, or that would reasonably
be expected to, result in (i) any of the representations and warranties of the
Company set forth in this Agreement that are qualified as to materiality
becoming untrue, (ii) any of such representations and warranties that are not so
qualified becoming untrue in any material respect, (iii) any of the conditions
to the Merger set forth in Article VII, not being satisfied or (iv) a Material
Adverse Effect.
(b) The Company shall promptly advise Parent of any change or event
having, or which, insofar as can reasonably be foreseen, could have, a
Material Adverse Effect.
SECTION 5.3 NO SOLICITATION. (a) The Company shall, and shall cause its
subsidiaries and their respective officers, directors, employees, consultants,
investment bankers, accountants, attorneys and other advisors, representatives
and agents ("COMPANY REPRESENTATIVES") to immediately cease any discussions or
negotiations with any parties that may be ongoing with respect to any
"Acquisition Proposal" (as defined below). The Company shall not, nor shall it
permit any of its subsidiaries to, nor shall it authorize or permit any Company
Representative to, directly or indirectly, (i) solicit or initiate, or encourage
the submission of, any Acquisition Proposal or (ii) participate in any
discussions or negotiations regarding, or furnish to any person any information
with respect to any proposal that constitutes, or may reasonably be expected to
lead to, an Acquisition Proposal; PROVIDED, HOWEVER, that if, prior to the
approval of the Merger by the shareholders of the Company, the Board of
Directors of the Company determines in good faith, based upon written advice of
independent counsel who is not an employee of the Company, that not to do so
would be inconsistent with its fiduciary duties to the Company's shareholders
under applicable Law, the Company may, in response to an unsolicited Acquisition
Proposal, and subject to compliance with Section 5.3(c), (x) furnish information
with respect to the Company pursuant to a customary confidentiality agreement
and (y) participate in discussions or negotiations regarding such Acquisition
Proposal. Without limiting the foregoing, it is understood that any violation
of the restrictions set forth in the preceding sentence by any subsidiary of the
Company or any Company Representative, whether or not such person is purporting
to act on behalf of the Company or any of its subsidiaries or otherwise, shall
be deemed to be a breach of this Section 5.3(a) by the Company. For purposes of
this Agreement, "ACQUISITION PROPOSAL" means any proposal or offer from any
person relating to any direct or indirect acquisition or purchase of all or a
substantial part of the assets of the Company or any of its subsidiaries or of
over 25% of any class of equity securities of the Company or any of its
subsidiaries, any tender offer or exchange offer that if consummated would
result in any person beneficially owning 25% or more of any class of equity
securities of the Company or any of its subsidiaries, any merger, consolidation,
business combination, sale of all or substantially all the assets,
recapitalization, liquidation, dissolution or similar transaction involving the
Company or any of its subsidiaries, other than the transactions contemplated by
this Agreement.
(b) Except as set forth in this Section 5.3, neither the Board of
Directors of the Company nor any committee thereof shall (i) withdraw or
modify, or propose to withdraw or modify, in a manner adverse to Parent,
the approval or recommendation by the Board of Directors or any such
committee of this Agreement or the Merger, (ii) approve or recommend, or
propose to approve or recommend, any Acquisition Proposal or (iii) enter
into any agreement with respect to any Acquisition Proposal.
Notwithstanding the foregoing, in the event that, prior to the approval of
the Merger by the shareholders of the Company, the Board of Directors of
the Company determines in good faith, based upon advice of independent
counsel who is not an employee of the Company, that it is necessary to do
so in order to comply with its fiduciary duties to the Company's
shareholders under applicable Law, the Board of Directors of the Company
may (subject to this and the following sentences) (x) withdraw or modify
(or propose to withdraw or modify) its approval or recommendation of the
Merger and this Agreement or (y) approve or recommend (or propose to
approve or recommend) a Superior Proposal (as defined below) or terminate
(or propose to terminate) this Agreement (and concurrently with or after
such termination, if it so chooses, cause the Company to enter into an
agreement with respect to any Superior Proposal), but in any case, only at
a time that is at least [fifteen] days after Parent's receipt of written
notice (a "NOTICE OF SUPERIOR PROPOSAL") advising Parent that the Board of
Directors of the Company has received a Superior Proposal. The Notice of
Superior Proposal shall specify the amount and type of consideration to be
paid and such other terms and conditions of the Superior Proposal as the
Company determines in good faith to be material and identifying the person
making such Superior Proposal. For purposes of this Agreement, a "SUPERIOR
PROPOSAL" means any bona fide proposal made by a third party to acquire,
directly or indirectly, for consideration consisting of cash and/or
securities, all of the shares of Company Common Stock then outstanding or
all or substantially all the assets of the Company and otherwise on terms
which the Board of Directors of the Company determines in its good faith
judgment (based on the advice of a financial advisor of nationally
recognized reputation) to be more favorable to the Company's shareholders
than the Merger and for which financing, to the extent required, is then
committed.
(c) In addition to the obligations of the Company set forth in
paragraphs (a) and (b) of this Section 5.3, the Company shall promptly
advise Parent orally and in writing of the Company's receipt of any
Acquisition Proposal, specifying the amount and type of consideration
proposed to be paid and all other material terms and conditions of such
proposal, and any request for information that may reasonably be expected
to lead to or is otherwise related to any such Acquisition Proposal and the
identity of the person making such request or Acquisition Proposal. The
Company will keep Parent informed on a reasonable basis of the status and
details (including amendments) of any such request or Acquisition Proposal.
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(d) During the fifteen day period after receipt by Parent of any
notice given pursuant to Section 5.3(b) with respect to an Acquisition
Proposal which constitutes a Superior Proposal, Parent may, but shall not
be obligated to, propose in writing to the Company amendments to this
Agreement and the Merger which would meet or exceed the terms and
conditions of such Superior Proposal (a "Notice of Amendment"). Upon
receipt of any such Notice of Amendment, the Company shall enter into such
amendments to this Agreement and the Merger as shall be necessary to
reflect the terms proposed by Parent and, if and to the extent required,
shall amend or supplement the Proxy Statement to reflect any such
amendments to this Agreement and the Merger. Immediately following the
execution by the Company and Parent of the amendments to this Agreement and
the Merger contemplated by this Section 5.3(d), the Company shall notify
the person submitting the Superior Proposal that such proposal is rejected
and shall proceed to consummate the Merger and the other transactions
contemplated by this Agreement in accordance with the terms hereof as so
amended. Following the rejection of any Superior Proposal pursuant to this
Section 5.3(d), the Company and the Company Representatives shall be bound
by the provisions of this Section 5.3 with respect to any subsequent
Acquisition Proposal, including without limitation Parent's rights
hereunder to propose subsequent amendments to this Agreement and the Merger
in response to any subsequent Superior Proposal.
SECTION 5.4 OPINION OF FINANCIAL ADVISOR. The Company shall receive, by
no later than September 5, 1997, an opinion from CIBC Wood Gundy Securities
Corp. to the effect that, as of the date of this Agreement, the consideration to
be received in the Merger by the Company's shareholders is fair to the Company's
shareholders from a financial point of view, and a true and correct signed copy
of such opinion, promptly upon receipt thereof, shall be delivered to Parent.
ARTICLE VI
ADDITIONAL AGREEMENTS
SECTION 6.1 SHAREHOLDERS MEETING; PREPARATION OF THE PROXY STATEMENT.
(a) The Company shall as soon as practicable following the execution of this
Agreement, duly call, give notice of, convene and hold a meeting of its
shareholders (the "COMPANY SHAREHOLDERS MEETING") for the purpose of approving
this Agreement. Subject to the provisions of Section 5.3(b), the Company shall,
through its Board of Directors, recommend to its shareholders approval of this
Agreement.
(b) The Company shall as soon as practicable prepare and file a
preliminary Proxy Statement with the SEC. The Company and Parent will
cooperate in responding to any comments of the SEC or its staff and the
Company shall cause the Proxy Statement to be mailed to the Company's
shareholders as promptly as practicable after responding to all such
comments to the satisfaction of the staff. The Company shall notify Parent
promptly of the receipt of any comments from the SEC or its staff and of
any request by the SEC or its staff for amendments or supplements to the
Proxy Statement or for additional information and will supply Parent with
copies of all correspondence between the Company or any of the Company
Representatives, on the one hand, and the SEC or its staff, on the other
hand, with respect to the Proxy Statement or the Merger. If at any time
prior to the Company Shareholders Meeting there shall occur any event that
should be set forth in an amendment or supplement to the Proxy Statement,
the Company shall promptly prepare (and if relating to Parent, Parent will
also promptly cooperate with the Company in preparing) and mail to its
shareholders such an amendment or supplement. The Company will not file or
mail any Proxy Statement, or any amendment or supplement thereto, to which
Parent reasonably objects.
SECTION 6.2 ACCESS TO INFORMATION; CONFIDENTIALITY. The Company shall
afford to Parent, and to Parent's officers, directors, employees, consultants,
investment bankers, accountants, counsel and other advisors, representatives and
agents, reasonable access during normal business hours during the period prior
to the Effective Time to all the properties, books, contracts, commitments and
records of the Company and its subsidiaries and, during such period, the Company
shall furnish promptly to Parent (a) a copy of each report, schedule,
registration statement and other document filed by it or its subsidiaries during
such period pursuant to the requirements of federal or state securities laws and
(b) all other information concerning its or its subsidiaries' business,
properties and personnel as Parent or any of its officers, directors, employees,
consultants, investment bankers, accountants, counsel or other advisors,
representatives or agents may reasonably request. All information disclosed and
designated in writing as confidential by any party (or its representatives)
whether before or after the date hereof, in connection with the transactions
contemplated by, or the discussions and negotiations preceding, this Agreement
to any other party (or its representatives) shall be kept confidential by such
other party and its representatives and shall not be used by any such persons
other than as contemplated by this Agreement, except to the extent that such
information (i) was known by the recipient when received, (ii) is or hereafter
becomes lawfully obtainable from other sources, (iii) is necessary or
appropriate to disclose to a Governmental Entity having jurisdiction over the
disclosing party, (iv) as may otherwise be required by law or (v) to the extent
such duty as to confidentiality is waived in writing by the other party. If
this Agreement is terminated in accordance with its terms, each party shall use
all reasonable efforts to return upon written request from the other party all
documents (and reproductions thereof) received by it or its representatives from
such other party (and, in the case of reproductions, all such reproductions made
by the receiving party) that include information not within the exceptions
contained herein, unless the recipients provide assurances reasonably
satisfactory to the requesting party that such documents have been destroyed.
No investigation pursuant to this Section 6.2 shall affect any representation or
warranty in this Agreement of any party hereto or any condition to the
obligations of the parties hereto.
SECTION 6.3 REASONABLE EFFORTS. Each of the Company, Parent and Purchaser
agree to use all commercially reasonable efforts to take, or cause to be taken,
all actions necessary to comply promptly with all legal requirements that may be
imposed with respect to the Merger (which actions shall include furnishing all
information required under the
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HSR Act and in connection with approvals by the State of Colorado Limited Gaming
Control Commission or filings with the Colorado Division of Gaming or any other
Governmental Entity) and shall promptly cooperate with and furnish information
to each other in connection with any such requirements imposed upon any of them
or any of their subsidiaries in connection with the Merger. Each of the
Company, Parent and Purchaser shall, and shall cause its subsidiaries to, use
all commercially reasonable efforts to take all actions necessary to obtain (and
shall cooperate with each other in obtaining) any consent, approval, order or
authorization of, or any exemption by or waiver from, the Colorado Division of
Gaming, the State of Colorado Limited Gaming Control Commission, or any other
Governmental Entity or other public or private third party required to be
obtained or made by Parent, Purchaser, the Company or any of their respective
subsidiaries in connection with the Merger or the taking of any action
contemplated thereby or by this Agreement or the Stock Option Agreement, except
that no party need waive any substantial rights or agree to any substantial
limitation on its operations or to dispose of any assets having more than a DE
MINIMIS value.
SECTION 6.4 FEES AND EXPENSES. (a) Except as provided below in this
Section 6.4, all fees and expenses incurred in connection with the Merger, this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such fees or expenses, whether or not the Merger is consummated.
(b) The Company shall pay, or cause to be paid, in immediately
available funds to Parent, and in addition to any amounts paid or payable
by the Company pursuant to the Stock Option, the sum of $3,000,000 (the
"TERMINATION FEE") plus all Expenses (as defined below) upon termination of
this Agreement (i) by Parent, pursuant to Section 8.1(d) by reason of the
failure to satisfy the condition specified in Section 7.3(a) if at the time
of such termination there is an outstanding Acquisition Proposal which has
not been withdrawn by the person making such Acquisition Proposal, (ii) by
the Company pursuant to Section 8.1(e) or (iii) by either party pursuant to
Section 8.1(f) and within twenty-four months after such termination an
Acquisition Proposal by a third party is consummated. "EXPENSES" shall
mean documented out-of-pocket fees and expenses incurred or paid by or on
behalf of Parent or Purchaser in connection with the Merger, the
preparation and negotiation of this Agreement and the Stock Option
Agreement and the consummation of any of the transactions contemplated
hereby or thereby, including without limitation all fees and expenses of
law firms, commercial banks, investment banking firms, accountants,
printing firms, information agents, proxy solicitors, experts and
consultants to Parent; PROVIDED, HOWEVER, that in no event shall such fees
and expenses exceed $500,000.
(c) In the event that the Company shall fail to pay the Termination
Fee or the Expenses when due, the amount of any such Termination Fee or the
Expenses shall be increased to include the costs and expenses actually
incurred or accrued by Parent (including, without limitation, fees and
expenses of counsel) in connection with the collection under and
enforcement of this Section 6.4, together with interest on such unpaid
Termination Fee or the Expenses, commencing on the date that such
Termination Fee or the Expenses became due, at a rate equal to the rate of
interest publicly announced by Mellon Bank N.A., from time to time, in the
City of Pittsburgh as such bank's base rate plus 3.00%.
SECTION 6.5 PUBLIC ANNOUNCEMENTS. Parent and the Company shall consult
with each other before issuing any press release or otherwise making any public
statements with respect to this Agreement or the Merger and shall not issue any
such press release or make any such public statement without the prior written
approval of the other, except to the extent required by applicable Law, in which
case the issuing party shall use its reasonable efforts to consult with the
other party before issuing any such release or making any such public statement.
SECTION 6.6 NOTIFICATION. The Company shall give prompt notice to Parent
of (i) any representation or warranty made by it contained in this Agreement
that is qualified as to materiality becoming untrue or inaccurate in any respect
or any such representation or warranty that is not so qualified becoming untrue
or inaccurate in any material respect or (ii) the failure by it to comply with
or satisfy in any material respect any covenant, condition or agreement to be
complied with or satisfied by it under this Agreement; provided, however, that
no such notification shall affect the representations, warranties, covenants or
agreements of the parties or the conditions to the obligations of the parties
under this Agreement.
SECTION 6.7 CERTAIN LITIGATION. The Company agrees that it shall not
settle any litigation commenced after the date hereof against the Company or any
of its directors by any shareholder of the Company relating to the Merger, this
Agreement or the Stock Option Agreement without the prior written consent of
Parent. In addition, subject to its rights under Section 5.3, the Company shall
not voluntarily cooperate with any third party that may hereafter seek to
restrain or prohibit or otherwise oppose the Merger and shall cooperate with
Parent and Purchaser to resist any such effort to restrain or prohibit or
otherwise oppose the Merger.
SECTION 6.8 OTHER ACTIONS. (a) Parent and Purchaser shall not, and shall
not permit any of their subsidiaries to, take any action that would, or that
would reasonably be expected to, result in (i) any of the representations and
warranties of Parent and Purchaser set forth in this Agreement that are
qualified as to materiality becoming untrue, (ii) any of such representations
and warranties that are not so qualified becoming untrue in any material respect
or (iii) any of the conditions to the Merger set forth in Article VII, not being
satisfied.
ARTICLE VII
CONDITIONS PRECEDENT
SECTION 7.1 CONDITIONS TO OBLIGATION OF EACH PARTY TO EFFECT THE MERGER.
The respective obligations of each party to effect the Merger shall be subject
to the satisfaction at or prior to the Effective Time of the following
conditions:
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(a) This Agreement shall have been approved by the affirmative vote
or written consent of the shareholders of the Company in accordance with
the Company's Certificate of Incorporation and By-Laws and the DGCL.
(b) No statute, rule, regulation, executive order, decree, ruling,
injunction or other order (whether temporary, preliminary or permanent)
shall have been enacted, entered, promulgated or enforced by any
Governmental Entity which prohibits, restrains or enjoins the consummation
of the Merger.
(c) Any waiting period applicable to the Merger under the HSR Act
shall have terminated or expired.
SECTION 7.2 CONDITIONS TO OBLIGATIONS OF THE COMPANY TO EFFECT THE MERGER.
The obligation of the Company to effect the Merger shall be subject to the
fulfillment at or prior to the Effective Time of the following additional
conditions:
(a) Parent and Purchaser shall have performed or complied with in all
material respects their agreements and covenants contained in this
Agreement required to be performed or complied with at or prior to the
Effective Time; the representations and warranties of parent and Purchaser
contained in this Agreement qualified as to materiality shall be true in
all respects, and those not so qualified shall be true in all material
respects, in each case when made and on and as of the Effective Time with
the same force and effect as if made on and as of such date, except that
those representations and warranties made as of a specific date shall be
true in all respects (or all material respects, as the case may be) on and
as of such date; and the Company shall have received a certificate signed
by an authorized officer of Parent to the foregoing effect.
(b) The Company shall have received from counsel for Parent and
Purchaser an opinion substantially in the form of Exhibit A.
SECTION 7.3 CONDITIONS TO OBLIGATIONS OF PARENT AND PURCHASER TO EFFECT
THE MERGER. The obligations of Parent and Purchaser to effect the Merger shall
be subject to the fulfillment at or prior to the Effective Time of the following
additional conditions:
(a) The Company shall have performed or complied with in all material
respects its agreements and covenants contained in this Agreement and the
Stock Option Agreement required to be performed or complied with at or
prior to the Effective Time; the representations and warranties of the
Company contained in this Agreement and the Stock Option Agreement
qualified as to materiality shall be true in all respects, and those not so
qualified shall be true in all material respects, in each case when made
and on and as of the Effective Time with the same force and effect as if
made on and as of such date, except that those representations and
warranties made as of a specific date shall be true in all respects (or all
material respects, as the case may be) on and as of such date; and Parent
shall have received a certificate signed by an authorized officer of the
Company to the foregoing effect.
(b) No action or proceeding shall be pending against the Company or
Parent before any Governmental Entity which is reasonably likely to have a
Material Adverse Effect or to prohibit, restrain, enjoin or restrict the
consummation of the Merger.
(c) All consents, approvals, authorizations and permits of, actions
by, filings with or notifications to, Governmental Entities and third
parties required in connection with the Merger, including the issuance of
all required licenses and approvals by the State of Colorado Limited Gaming
Control Commission and the Colorado Division of Gaming shall have been
obtained, taken or made.
(d) The employment agreements in effect between the Company and
Stephen J. Szapor, Jr., Alan L. Mayer, Richard Rabin, Robert J. Stephens
and Jack Breslin on the date of this Agreement shall be in effect at the
Effective Time.
(e) Dissenting Shares shall not constitute more than 5% of the
outstanding Company Common Stock.
(f) Parent and Purchaser shall have received from counsel for the
Company an opinion substantially in the form of Exhibit B.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
SECTION 8.1 TERMINATION. This Agreement may be terminated and the Merger
contemplated hereby may be abandoned at any time prior to the Effective Time,
notwithstanding approval thereof by the Shareholders of the Company:
(a) By mutual written consent of Parent and the Company;
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(b) By either Parent or the Company, if the Merger shall not have
been consummated on or before September 30, 1998, which date may be
extended by the mutual written consent of Parent and the Company;
(c) By the Company, if any of the conditions specified in Section 7.1
or 7.2 have not been met or waived by the Company, but only at and after
such time as such condition can no longer be satisfied;
(d) By Parent, if any of the conditions specified in Section 7.1 or
7.3 have not been met or waived by Parent, but only at and after such time
as such condition can no longer be satisfied;
(e) By the Company in connection with entering into a definitive
agreement in accordance with Section 5.3(b), provided that the Company has
complied with all applicable provisions thereof; or
(f) By either Parent or the Company, if the shareholders of the
Company shall have failed to adopt this Agreement and approve the Merger by
written consent or at the Shareholders Meeting.
(g) By Parent, at any time within sixty days after the date hereof,
if the results of Parent's review and examination of the materials
contained in or disclosed by the Disclosure Schedule or the books and
records, assets, liabilities, commitments, business and prospects of the
Company shall not be satisfactory to Parent, in its sole judgement.
(h) By either Parent or the Company, if, by September 5, 1997, the
opinion of the financial advisor referred to in Section 5.4, has not been
received or, if received, is not reasonably satisfactory in form and
content.
SECTION 8.2 EFFECT OF TERMINATION. In the event of the termination of
this Agreement pursuant to Section 8.1, this Agreement shall forthwith become
void and there shall be no liability on the part of any party hereto except as
set forth in Section 6.4; PROVIDED, HOWEVER, that nothing herein shall (i)
relieve any party from liability for any breach hereof or (ii) affect the
validity, enforceability or effectiveness of the Stock Option Agreement.
SECTION 8.3 AMENDMENT. This Agreement may be amended by the parties
hereto by action taken by or on behalf of their respective Boards of Directors
at any time prior to the Effective Time. This Agreement may not be amended
except by an instrument in writing signed by the parties hereto.
SECTION 8.4 WAIVER. At any time prior to the Effective Time, any party
hereto may (i) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (ii) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (iii) waive compliance with any of the agreements or
conditions contained herein. Any such extension or waiver shall be valid if set
forth in an instrument in writing signed by the party or parties to be bound
thereby.
ARTICLE IX
GENERAL PROVISIONS
SECTION 9.1 NOTICES. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally or sent by telecopy or by overnight courier
(providing proof of delivery) to the parties at the following addresses (or at
such address for a party as shall be specified by like notice):
(a) if to Parent or Purchaser, to:
Ladbroke Racing Corporation
Foster Plaza 9
750 Holiday Drive
Pittsburgh, Pennsylvania 15220
Attn: John Long
Telecopier: (412) 937-4418
with a copy to:
O'Melveny & Myers LLP
400 South Hope Street
Los Angeles, California 90071
Attn: John D. Hardy, Jr., Esq.
Telecopier: (213) 669-6407
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(b) if to the Company, to:
Colorado Gaming & Entertainment Co.
Union Terrace
12596 West Bayaud Avenue
Suite 450
Lakewood, Colorado 80228
Attn: Stephen J. Szapor, Jr.
Telecopier: (303) 716-5601
with a copy to:
LeBoeuf, Lamb, Greene & MacRae LLP
633 Seventeenth Street
Suite 2000
Denver, Colorado 80202
Attn: Thomas J. Moore, Esq.
Telecopier: (303) 297-0422
SECTION 9.2 DEFINITIONS. For purposes of this Agreement:
(a) an "AFFILIATE" of any person means another person that directly
or indirectly, through one or more intermediaries, controls, is controlled
by, or is under common control with, such first person;
(b) "control" (including the terms "CONTROLLED BY" and "UNDER COMMON
CONTROL WITH") means the possession, directly or indirectly, of the power
to direct or cause the direction of the management and policies of a
person, whether through the ownership of voting securities, by contract or
otherwise;
(c) "LIEN" means any encumbrance, hypothecation, lien, mortgage,
pledge, security interest or other encumbrance; PROVIDED, HOWEVER, that the
term "lien" does not include (i) liens for water and sewer charges and
current taxes not yet due and payable or being contested in good faith or
(ii) mechanics', carriers', workers', repairers', materialmen's,
warehousemen's and other similar liens arising or incurred in the ordinary
course of business;
(d) "MATERIAL ADVERSE CHANGE" or "MATERIAL ADVERSE EFFECT" means any
change or effect that is or is reasonably likely to be materially adverse
to the business, operations, properties, condition (financial or
otherwise), assets or liabilities (including, without limitation,
contingent liabilities) of the Company and its subsidiaries taken as a
whole;
(e) "PERSON" means an individual, corporation, partnership, limited
liability company, joint venture, association, trust, unincorporated
organization or other entity; and
(f) a "SUBSIDIARY" of any person means another person, an amount of
the voting securities, other voting ownership or voting partnership
interests of which is sufficient to elect at least a majority of its Board
of Directors or other governing body (or, if there are no such voting
interests, 50% or more of the equity interests of which) is owned directly
or indirectly by such first person.
SECTION 9.3 INTERPRETATION. When a reference is made in this Agreement to
a Section or Exhibit, such reference shall be to a Section of, or an Exhibit to,
this Agreement unless otherwise indicated. The table of contents and headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. Whenever the words
"include," "includes" or "including" are used in this Agreement, they shall be
deemed to be followed by the words "without limitation."
SECTION 9.4 COUNTERPARTS. This Agreement may be executed and delivered
(including by facsimile transmission) in one or more counterparts, all of which
shall be considered one and the same agreement and shall become effective when
one or more counterparts have been signed by each of the parties and delivered
to the other parties, it being understood that all parties need not sign the
same counterpart.
SECTION 9.5 ENTIRE AGREEMENT; THIRD PARTY BENEFICIARIES. This Agreement
constitutes the entire agreement, and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter of this Agreement and, except for the provisions of Article II
and Article IX, is not intended to confer upon any person other than the parties
any rights or remedies hereunder.
SECTION 9.6 ASSIGNMENT. Neither this Agreement nor any of the rights,
interests or obligations under this Agreement shall be assigned, in whole or in
part, by operation of law or otherwise by any of the parties without the prior
written consent of the other parties, except that Purchaser may assign, in its
sole discretion, any or all of its rights, interests and obligations under this
Agreement to Parent or to any direct or indirect wholly owned subsidiary of
Parent, but no such assignment shall relieve Purchaser of any of its obligations
under this Agreement. Subject to the preceding sentence, this Agreement will be
binding upon, inure to the benefit of, and be enforceable by, the parties hereto
and their respective successors and assigns.
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SECTION 9.7 GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware.
SECTION 9.8 ENFORCEMENT. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached.
It is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the United States
located in the States of Colorado, Delaware or California or in Colorado,
Delaware or California state court (a "SPECIFIED COURT"), this being in addition
to any other remedy to which they are entitled at law or in equity. In
addition, each of the parties hereto (i) consents to submit itself to the
personal jurisdiction of any Specified Court in the event any dispute arises out
of this Agreement or any of the transactions contemplated by this Agreement,
(ii) agrees that it will not attempt to deny or defeat such personal
jurisdiction by motion or other request for leave from any such court, (iii)
agrees that it will not bring any action relating to this Agreement or any of
the transactions contemplated by this Agreement in any court other than a
Specified Court and (iv) agrees to waive any defense based upon venue or FORUM
NON CONVENIENS grounds.
SECTION 9.9 SEVERABILITY. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of Law,
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in a mutually acceptable
manner in order that the transactions contemplated hereby be consummated as
originally contemplated to the fullest extent possible.
SECTION 9.10 ATTORNEYS' FEES. In the event of any action by any party
arising under or out of, in connection with or in respect of, this Agreement or
the transactions contemplated hereby, including any participation in bankruptcy
proceedings to enforce against a party a right or claim in such proceedings, the
prevailing party shall be entitled to reasonable attorneys' fees, costs and
expenses incurred in such action. Attorneys' fees incurred in enforcing any
judgment in respect of this Agreement are recoverable as a separate item. The
parties intend that the preceding sentence be severable from the other
provisions of this Agreement, survive any judgment and, to the maximum extent
permitted by law, not be deemed merged into such judgment.
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<PAGE>
IN WITNESS WHEREOF, Parent, Purchaser and the Company have caused this
Agreement to be signed by their respective officers thereunto duly authorized,
all as of the date first written above.
LADBROKE RACING CORPORATION
By: /s/ John Long
--------------
Name: John Long
Title: President and Chief Operating Officer
CG&E ACQUISITION CORP.
By: /s/ John Long
-------------
Name: John Long
Title: President
COLORADO GAMING & ENTERTAINMENT CO.
By: /s/ Stephen J. Szapor, Jr.
--------------------------
Name: Stephen J. Szapor, Jr.
Title: President
I-18
<PAGE>
ANNEX II
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER DATED AS OF OCTOBER 21, 1997,
AMONG LADBROKE RACING CORPORATION, CG&E ACQUISITION CORP., AND COLORADO GAMING
& ENTERTAINMENT CO.
<PAGE>
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
This First Amendment, dated as of October 21, 1997 (this "Amendment"),
to that certain Agreement and Plan of Merger dated as of August 22, 1997 (the
"Merger Agreement") is entered into by and among Ladbroke Racing Corporation, a
Delaware corporation ("Parent"), CG&E Acquisition Corp., a Delaware corporation
("Purchaser"), and Colorado Gaming & Entertainment Co., a Delaware corporation
(the "Company"). Capitalized terms used herein without definition shall have
the meanings given to such terms in the Merger Agreement.
WHEREAS, Section 8.3 of the Merger Agreement provides that it may be
amended by the parties prior to the Effective Time pursuant to an instrument in
writing signed by the parties thereto;
WHEREAS, the parties have determined that it is in their best interest
to make certain amendments to the Merger Agreement and to provide for the
assignment by Parent of all of its rights and obligations under the Merger
Agreement.
In consideration of the promises, mutual covenants and agreements set
forth herein, the parties agree as follows:
AGREEMENT
1. AMENDMENTS. The Merger Agreement is hereby amended as follows:
1.1 Article III of the Merger Agreement is hereby amended to add
a new Section 3.21 to read as follows:
"SECTION 3.21 BANKRUPTCY PROCEEDINGS. Pursuant to an order
issued by the United States Bankruptcy Court for the Eastern District of
Louisiana, the First Amended Joint Plan of Reorganization of Hemmeter
Enterprises Inc., BWBH, Inc., BWCC, Inc. and Millsite 27, Inc. (the "Plan") has
become effective; the order confirming the Plan is in full force and effect and
is not subject to any stay, motion for stay, appeal or other challenge; and
there is no default under the Plan or any obligation created or continued by the
Plan."
1.2 Article V of the Merger Agreement is hereby amended to add a
new Section 5.5 to read as follows:
"SECTION 5.5 COOPERATION AND BEST EFFORTS. The Company shall
cooperate with Parent and Purchaser in seeking, and shall use its best efforts
to obtain, prior to the Effective Time (i) any consents required to be obtained
as a result of the Merger under that certain Lease Agreement by and between
12596 Limited Partnership, as landlord, and the Company, as tenant, relating to
the Company's offices at 12596 West Bayaud Avenue, Lakewood, Colorado; (ii) the
acceptance by the United States Environmental Protection Agency on behalf of the
United States of America of (A) title to the Gregory Incline discharge
conveyance system as contemplated by that certain Special Warranty Deed dated
December 23, 1993, between the Blake Family Limited Partnership ("Blake") and
the United States of America, which is recorded in Book 556 at Page 321 in the
Office of the County Recorder for the County of Gilpin, State of Colorado (the
"Gilpin County Recorder), and (B) the Easement dated December 23, 1993 between
Blake and the United States of America, which is recorded in Book 556 at Page
324 in the Office of the Gilpin County Recorder; and (iii) acceptance, without
reservation of rights, by the insurance carriers whose policies cover any
Company liability with respect to the litigation disclosed in Section 3.10(i) of
the Disclosure Schedule."
1.3 Article VII, Section 7.3 of the Merger Agreement is hereby
amended to add new subsections (g) and (h) to read as follows:
"(g) That certain Registration Rights Agreement, dated as of June
7, 1996, by and among the Company and the Initial Holders (as defined therein)
shall have been terminated or amended to the satisfaction of Parent so that,
following the Effective Time, the Surviving Corporation shall have no obligation
to register any securities or to maintain the effectiveness of any registration
statement thereunder or to keep current any prospectus prepared in connection
therewith.
(h) All consents which are, in the judgment of Parent, necessary
or appropriate to permit the consummation of the Merger without violating the
terms of, or causing a termination under, either (i) that certain Lease
Agreement by and among Jerry L. Brown and Harold Gene Reagin, as landlord, and
BWBH, Inc. (formerly H. P. Blackhawk, L.P.), as tenant, or (ii) that certain
Option to Purchase among the same parties and relating to the same real
property, shall have been obtained and shall be in full force and effect."
1.4 Article IX, Section 9.6 of the Merger Agreement is hereby
amended to read as follows:
"SECTION 9.6 ASSIGNMENT. Neither this Agreement nor any of the
rights, interests or obligations under this Agreement shall be assigned, in
whole or in part, by operation of law or otherwise by any of the parties without
the prior written consent of the other parties, except that (i) Parent may
assign, in its sole discretion, any or all of its rights, interests and
obligations under this Agreement, including without limitation its ownership or
other rights with respect to Purchaser, to any direct or indirect wholly owned
subsidiary of Ladbroke
II-1
<PAGE>
Group plc ("Ladbroke Group"), and upon such assignment all references in this
Agreement to Parent shall be deemed to be references to such assignee, and (ii)
Purchaser may assign, in its sole discretion, any or all of its rights,
interests and obligations under this Agreement to Parent or to any direct or
indirect wholly owned subsidiary of Ladbroke Group, but no such assignment shall
relieve Purchaser of any of its obligations under this Agreement. Parent shall
give prompt written notice to the Company of any assignment by Parent or
Purchaser pursuant to this Section 9.6. Subject to the preceding sentences,
this Agreement will be binding upon, inure to the benefit of, and be enforceable
by the parties hereto and their respective successors and assigns."
1.5. Article IX, Section 9.1(a) of the Merger Agreement is
hereby amended to change the address to which notices shall be delivered to
Parent or Purchaser to read as follows:
"Ladbroke Racing Corporation
Plaza Two, Suite 500
3260 Blume Drive
Richmond, California 94806
Attention: John Long
Telecopier: (510) 243-9734"
1.6 Except as expressly provided in this Amendment, all terms
and conditions of the Merger Agreement remain in full force and effect, without
modification.
II-2
<PAGE>
2. MISCELLANEOUS
2.1 COMPLETE UNDERSTANDING; MODIFICATION. This Amendment and
the Merger Agreement constitutes the full and complete understanding and
agreement of the parties with respect to the subject matter thereof and
supersede all prior understandings and agreements.
2.2 GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware.
2.3 COUNTERPARTS. This Amendment may be executed in one or more
counterparts and by different parties in separate counterparts. All of such
counterparts, taken together, will constitute one and the same agreement and
shall become effective unless otherwise provided therein when one or more
counterparts have been signed by each party and delivered to the other parties.
IN WITNESS WHEREOF, Parent, Purchaser and the Company have caused this
Amendment to be signed by their respective officers thereunto duly authorized,
all as of the date first written above.
LADBROKE RACING CORPORATION
By: /s/ John Long
---------------------------
Name: John Long
Title: President and Chief Operating Officer
CG&E ACQUISITION CORP.
By: /s/ John Long
---------------------------
Name: John Long
Title: President
COLORADO GAMING & ENTERTAINMENT CO.
By: /s/ Stephen J. Szapor, Jr.
---------------------------
Name: Stephen J. Szapor, Jr.
Title: President
II-3
<PAGE>
ANNEX III
FAIRNESS OPINION OF CIBC WOOD GUNDY SECURITIES CORP.
<PAGE>
[LETTERHEAD]
- --------------------------------------------------------------------------------
September 5, 1997
Franklin S. Wimer
Chairman
Colorado Gaming and Entertainment Co.
1700 Lincoln
49th Floor
Denver, CO 80203
Gentlemen:
You have requested our opinion as to the fairness from a financial point of view
to the shareholders of Colorado Gaming and Entertainment Co. (the "Company") of
the consideration to be received by such shareholders pursuant to the Agreement
dated as of August 22, 1997, Ladbroke Racing Corporation, a ("Ladbroke"), CG&E
Acquisition Corp. and the Company (the "Agreement").
Under the terms of the Agreement, holders of the Company's common stock would be
entitled to receive $6.25 in cash for each share held. Upon closing, the
Company to merge with CG&E Acquisition Corp. and is expected to become a
wholly-owned subsidiary of Ladbroke (the "Merger").
In arriving at our opinion, we, among other things: (i) reviewed the Merger
Agreement in substantially final form; (ii) reviewed the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1996, and its Quarterly
Reports on Form 10-Q setting forth its financial results for the periods ended
March 31, 1997 and June 30, 1997; (iii) reviewed certain operating and financial
information, including projections, provided to CIBC by the management of the
Company relating to the Company's business and prospects (the "Projections");
(iv) met with certain members of the Company's senior management to discuss its
operations, historical financial statements and future prospects; (v) visited
the Company's facilities in Black Hawk and Central City, Colorado; (vi) reviewed
Ladbroke Group plc's Annual Report to Shareholders for the fiscal year ended
December 31, 1996; (vii) reviewed the historical prices and trading volumes of
the Company's Common Stock for the six month period prior to August 22, 1997;
(viii) reviewed publicly available financial data and stock market performance
data of companies that it deemed generally comparable to the Company; (ix)
reviewed the terms of recent acquisitions of companies that it deemed generally
comparable to the Company; and (x) conducted such other studies, analyses,
inquiries and investigations as it deemed appropriate. This opinion is made
without any reference to the tax consequences to the holders of the Common
Stock.
In rendering our opinion, we have relied upon and assumed, without independent
verification, the accuracy, completeness and fairness of all of the financial
and other information that was available to us from public sources, that was
provided to by the Company or its representatives, or that was otherwise
reviewed by us. We did not make any independent evaluation of the Company's
assets nor did we verify any of the information reviewed by us. With respect to
the Projections, we assumed that they were reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
management of the Company as to the expected future performance of the Company.
We do not assume any responsibility for the information or Projections provided
to us and we further relied upon the assurances of the management of the Company
that they have no actual knowledge of any facts that would make the information
or Projections provided to us incomplete or misleading. This opinion does not
address the Company's underlying decision to effect the Merger. We did not make
any independent evaluation of the Company's assets or liabilities nor did we
verify any of the information reviewed by us. We have relied as to all legal
matters on advice of counsel to the Company.
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as of,
the date of this letter. Although subsequent developments may affect this
opinion, we do not have any obligation to update, revise or reaffirm this
opinion.
Our engagement and the opinion expressed herein are for the benefit of the
Company's Board of Directors, and our opinion is rendered in connection with its
consideration of the Merger. This opinion is not intended to and does not
constitute a recommendation to any holder of Common Stock as to whether such
holder should tender shares pursuant to the Offer or vote to approve the
Agreement and the transactions contemplated thereby. It is understood that,
except for inclusion of this letter in its entirety in this proxy statement
relating to the Merger filed with the Securities and Exchange Commission and
distributed to stockholders of the Company, this letter may not be disclosed or
otherwise referred to or used for any other purpose without our prior written
consent, except as may otherwise be required by law or by a court of competent
jurisdiction.
III-1
<PAGE>
CIBC Wood Gundy Securities Corp., as part of its investment banking services, is
regularly engaged in the valuation of businesses and securities in connection
with mergers, acquisitions, underwritings, sales and distributions of listed and
unlisted securities, private placements and valuations for estate, corporate and
other purposes.
We acted as financial advisor to the unofficial and official committee of the
Holders of 11 1/2% Senior Secured Paid-In-Kind Notes due 2000 in the
restructuring and Chapter 11 proceedings, respectively, of the Company's
predecessor, Hemmeter Enterprises, Inc., from June 15, 1995 to June 7, 1996.
CIBC also acted as exclusive sale agent for the M/V Grand Palais riverboat which
was owned by Grand Palais Riverboat, Inc., one of the subsidiaries of the
predecessor company, which was sold to Casino America, Inc. for in excess of $60
million in May 3, 1996.
Based upon the foregoing and such other factors as we deem relevant, we are of
the opinion that the consideration to be received by the shareholders of the
Company pursuant to the Agreement is fair to the shareholders of the Company
from a financial point of view.
Very truly yours,
CIBC WOOD GUNDY SECURITIES CORP.
/s/ CIBC Wood Gundy Securities Corp.
III-2
<PAGE>
ANNEX IV
TEXT OF SECTION 262 OF THE
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
Section 262 APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to Section 228
of this title shall be entitled to an appraisal by the Court of Chancery of the
fair value the stockholder's shares of stock under the circumstances described
in subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and also
a member of record of a nonstock corporation; the words "stock" and "share" mean
and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252, Section 254, Section 257, Section
258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of to
act upon the agreement of merger or consolidation, were either (i) listed on a
national securities exchange or designed as a national market system security on
an interdealer quotation system by the National Association of Securities
Dealers, Inc. or (ii) held of record by more than 2,000 holders; and further
provided that no appraisal rights shall be available for any shares of stock of
the constituent corporation surviving a merger if the merger did not require for
its approval the vote of the stockholders of the surviving corporation as
provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal
rights under this section shall be available for the shares of any class or
series of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to Sections
251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting
from such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock (or depository
receipts in respect thereof) or depository receipts at the effective
date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by more than
2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts
and cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a., b. and c. of
this paragraph.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under Section 253 of this title is not
owned by the parent corporation immediately prior to the merger, appraisal
rights shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to
IV-1
<PAGE>
shares for which appraisal rights are available pursuant to subsections (b) or
(c) hereof that appraisal rights are available for any or all of the shares of
the constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of his shares shall
deliver to the corporation, before the taking of the vote on the merger or
consolidation, a written demand for appraisal of his shares. Such demand will
be sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the appraisal of
his shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must do so
by a separate written demand as herein provided. Within 10 days after the
effective date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent corporation who
has complied with this subsection and has not voted in favor of or consented to
the merger or consolidation of the date that the merger or consolidation has
become effective; or
(2) If the merger or consolidation was approved pursuant to Section
228 or Section 253 of this title, each constituent corporation, either before
the effective date of the merger or consolidation or within ten days thereafter,
shall notify each of the holders of any class or series of stock of such
constituent corporation who are entitled to appraisal rights of the approval of
the merger or consolidation and that appraisal rights are available for any or
all shares of such class or series of stock of such constituent corporation, and
shall include in such notice a copy of this section; provided that, if the
notice is given on or after the effective date of the merger or consolidation,
such notice shall be given by the surviving or resulting corporation to all such
holders of any class or series of stock of a constituent corporation that are
entitled to appraisal rights. Such notice may, and, if given on or after the
effective date of the merger or consolidation, shall, also notify such
stockholders of the effective date of the merger or consolidation. Any
stockholder entitled to appraisal rights may, within 20 days after the date of
mailing of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation the appraisal of such
holder's shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the stockholder intends
thereby to demand the appraisal of such holder's shares. If such notice did not
notify stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders of
any class or series of stock of such constituent corporation that are entitled
to appraisal rights of the effective date of the merger or consolidation or (ii)
the surviving or resulting corporation shall send such a second notice to all
such holders on or within 10 days after such effective date; provided, however,
that if such second notice is sent more than 20 days following the sending of
the first notice, such second notice need only be sent to each stockholder who
is entitled to appraisal rights and who has demanded appraisal of such holder's
shares in accordance with this subsection. An affidavit of the secretary or
assistant secretary or of the transfer agent of the corporation that is required
to give either notice that such notice has been given shall, in the absence of
fraud, be prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each constituent
corporation may fix, in advance, a record date that shall be not more than 10
days prior to the date the notice is given, provided, that if the notice is
given on or after the effective date of the merger or consolidation, the record
date shall be such effective date. If no record date is fixed and the notice is
given prior to the effective date, the record date shall be the close of
business on the day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings;
IV-2
<PAGE>
and if any stockholder fails to comply with such direction, the Court may
dismiss the proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair
rate of interest, the Court may consider all relevant factors, including the
rate of interest which the surviving or resulting corporation would have had to
pay to borrow money during the pendency of the proceeding. Upon application by
the surviving or resulting corporation or by any stockholder entitled to
participate in the appraisal proceeding, the Court may, in its discretion,
permit discovery or other pretrial proceedings and may proceed to trial upon the
appraisal prior to the final determination of the stockholder entitled to an
appraisal. Any stockholder whose name appears on the list filed by the
surviving or resulting corporation pursuant to subsection (f) of this section
and who has submitted his certificates of stock to the Register in Chancery, if
such is required, may participate fully in all proceedings until it is finally
determined that he is not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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<PAGE>
COLORADO GAMING & ENTERTAINMENT CO.
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD DECEMBER 12, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE
BOARD OF DIRECTORS OF
COLORADO GAMING & ENTERTAINMENT CO.
The undersigned stockholder of Colorado Gaming & Entertainment Co. hereby
appoints Stephen J. Szapor, Jr., Alan L. Mayer, and Franklin S. Wimer, and each
of them, as proxy or proxies for the undersigned (the "Proxies"), each with full
power of substitution, to represent the undersigned and to vote all the shares
of common stock, $0.01 par value, of Colorado Gaming & Entertainment Co., a
corporation organized under the laws of the State of Delaware (the "Company"),
which the undersigned is entitled in any capacity to vote if personally present
at the special meeting (the "Special Meeting") of stockholders of the Company to
be held at the offices of LeBoeuf, Lamb, Greene & MacRae, L.L.P., Suite 2000,
633 17th Street, Denver, Colorado 80202, at 10:00 a.m local time, on December
12, 1997, and at any and all adjournments or postponements thereof, with respect
to all matters set forth in the Proxy Statement dated November 21, 1997, and all
supplements and amendments thereto and, in their discretion, upon all matters
incident to the conduct of such Special Meeting and all matters presented at the
Special Meeting but which are not known to the Board of Directors of the Company
at the time of the solicitation of this proxy. The undersigned hereby revokes
any proxy or proxies heretofore given by the undersigned to vote at the Special
Meeting or any adjournment or postponement thereof.
THE BOARD RECOMMENDS A VOTE FOR PROPOSAL 1.
1. Proposal to approve and adopt an Agreement and Plan of Merger, dated as of
August 22, 1997, as amended, by and among Ladbroke Racing Corporation, a
Delaware corporation, CG&E Acquisition Corp., a Delaware corporation, and
the Company.
[ ] FOR [ ] ABSTAIN [ ] AGAINST
(TO BE CONTINUED AND SIGNED ON THE OTHER SIDE)
<PAGE>
If properly executed, this proxy will be voted in accordance with instructions
appearing hereon and, at the discretion of the Proxies, as to any other matter
that may properly come before the Special Meeting. IF NO INSTRUCTIONS ARE
SPECIFIED, THIS PROXY WILL BE VOTED "FOR" THE APPROVAL AND ADOPTION OF THE
AGREEMENT AND PLAN OF MERGER.
The undersigned hereby acknowledges receipt of the Notice of Special Meeting of
Stockholders and Proxy Statement (with all enclosures and attachments) dated
November 21, 1997, relating to the Special Meeting.
PLEASE MARK, SIGN, DATE, AND RETURN THIS PROXY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE AS SOON AS POSSIBLE, EVEN IF YOU PLAN TO ATTEND THE SPECIAL MEETING.
Date: _____________________________________, 1997
__________________________________________________
__________________________________________________
(Signature(s) of Holder(s))
(By:)_____________________________________________
(Please Print)
(Title:)___________________________________________
Please sign this proxy exactly as your name(s) appears on this card. Joint
owners should each sign personally. An attorney, administrator, trustee,
executor, guardian, or other person signing in a representative capacity should
indicate such capacity. An authorized officer signing on behalf of a
corporation should indicate the name of the corporation and such officer's
capacity. An authorized signatory for a partnership should sign in partnership
name and indicate the authorized person's name and title.
I PLAN TO ATTEND THE SPECIAL MEETING: [ ] YES [ ] NO
