<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-------------
FORM 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ___________ to ____________.
Commission file number 0-28068
COLORADO GAMING & ENTERTAINMENT CO.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1242693
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
12596 WEST BAYAUD AVE, SUITE 450, LAKEWOOD, COLORADO 80228
(Address of principal executive offices)
(Zip Code)
(303) 716-5600
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes __X__ No ___
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes __X__ No ___
Number of shares of common stock outstanding at November 12, 1999: 100
<PAGE>
Colorado Gaming & Entertainment Co.
Form 10-Q
Index
<TABLE>
<CAPTION>
PAGE
<S> <C>
Part I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets - as of September 30, 1999 and 1
December 31, 1998
Consolidated Statements of Operations - for the three and nine 2
months ended September 30, 1999 and 1998.
Consolidated Statements of Cash Flows - for the nine months 3
ended September 30, 1999 and 1998.
Notes to Consolidated Financial Statements 4-5
Item 2. Management's Discussion and Analysis 6-11
PART II OTHER INFORMATION 12-13
SIGNATURES 14
</TABLE>
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Colorado Gaming & Entertainment Co.
Consolidated Balance Sheets
(In thousands, except share amounts)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
-------------------------- -------------------------
(unaudited)
<S> <C> <C>
ASSETS
Cash $ 6,255 $ 4,022
Accounts receivable, net 203 607
Inventories 38 188
Prepaid expenses 351 765
-------------------------- -------------------------
Total current assets 6,847 5,582
Property, equipment and leasehold improvements, net 37,679 38,950
Excess reorganization value and goodwill, net 18,834 19,699
Other assets, net 544 641
-------------------------- -------------------------
Total assets $ 63,904 $ 64,872
========================== =========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of credit facility $ 1,000 $ 1,000
Senior secured notes payable (in default) 52,738 --
Accounts payable 187 718
Accrued interest 2,411 662
Accrued expenses 2,727 3,883
-------------------------- -------------------------
Total current liabilities 59,063 6,263
-------------------------- -------------------------
Senior secured notes payable -- 52,738
Related party notes payable and credit facility, net of
current portion 8,503 5,142
-------------------------- -------------------------
Total non-current liabilities 8,503 57,880
-------------------------- -------------------------
Total liabilities 67,566 64,143
-------------------------- -------------------------
Common stock, $.01 par value, 20 million shares
authorized, 100 issued and outstanding, respectively -- --
Additional paid-in capital 5,583 5,583
Retained deficit (9,245) (4,854)
-------------------------- -------------------------
Total stockholders' equity (deficit) (3,662) 729
-------------------------- -------------------------
Total liabilities and stockholders' equity (deficit) $ 63,904 $ 64,872
========================== =========================
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of
these consolidated financial statements.
1
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Colorado Gaming & Entertainment Co.
Consolidated Statements of Operations
(In thousands)
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, 1999 September 30, 1998 September 30, 1999 September 30, 1998
------------------ ------------------ ------------------ ------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue:
Casino $ 9,822 $ 12,842 $ 29,493 $ 40,572
Food and beverage 551 954 1,691 2,914
Other 89 79 131 167
----------- ------------ ------------- ------------
Gross revenue 10,462 13,875 31,315 43,653
Less: promotional allowances (282) (350) (873) (1,176)
----------- ------------ ------------- ------------
Net revenue 10,180 13,525 30,442 42,477
Operating Expenses:
Casino 3,512 3,993 10,610 11,252
Gaming taxes 384 1,584 4,384 6,923
Food and beverage 721 1,340 2,312 3,569
General and administrative:
Casino 859 605 2,589 1,919
Corporate 95 1,801 848 3,138
Marketing 1,865 2,076 5,440 5,688
Depreciation and amortization 1,107 1,121 3,352 3,154
Pre-opening -- -- -- 299
----------- ------------ ------------- ------------
Total operating expenses 8,543 12,520 29,535 35,942
Income from operations 1,637 1,005 907 6,535
Interest expense, net (1,757) (2,018) (5,298) (5,445)
----------- ------------ ------------- ------------
Income (loss) before income tax (120) (1,013) (4,391) 1,090
provision
Income tax provision -- 288 -- (668)
----------- ------------ ------------- ------------
Net income (loss) $ (120) $ (725) $ (4,391) $ 422
=========== ============ ============= ============
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of
these consolidated financial statements.
2
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Colorado Gaming & Entertainment Co.
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, 1999 September 30, 1998
------------------ ------------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (4,391) $ 422
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 3,352 3,154
Deferred income tax expense -- 668
Noncash compensation expense -- 739
Gain on disposition of assets (22) (53)
Change in working capital and other 1,358 1,832
--------- ------------
Net cash provided by operating activities 297 6,762
CASH FLOWS USED IN INVESTING ACTIVITIES:
Expenditures for acquisitions and
capital improvements (1,426) (8,486)
Net change in restricted funds -- 100
--------- ------------
Net cash used in investing activities (1,426) (8,386)
CASH FLOWS USED IN FINANCING ACTIVITIES:
Proceeds from credit facility 3,500 5,766
Repayments of other notes payable and credit
facility (138) (1,758)
--------- ------------
Net cash provided by financing activities 3,362 4,008
INCREASE IN CASH 2,233 2,384
CASH, at beginning of period 4,022 4,228
--------- ------------
CASH, at end of period $ 6,255 $ 6,612
========= ============
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of
these consolidated financial statements.
3
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Colorado Gaming & Entertainment Co.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(1) ORGANIZATION AND BASIS OF PRESENTATION
Colorado Gaming & Entertainment Co. and its subsidiaries
(collectively referred to as "CG&E" or the "Company"), a wholly-owned
subsidiary of Ladbroke Group plc, was incorporated in August 1993 to develop,
own and operate gaming and related entertainment facilities. The Company owns
and operates, through wholly-owned subsidiaries, BWBH, Inc. ("Bullwhackers
Black Hawk") and Silver Hawk Casino, Inc. (the " Silver Hawk Casino") in the
historic mining town of Black Hawk, Colorado. On February 13, 1998, the
Company purchased the assets comprising Bullwhackers' Bullpen Sports Casino
(the "Bullpen"), a 260 slot machine expansion to Bullwhackers Black Hawk, and
commenced operations on May 1, 1998. Millsite 27, Inc., also a wholly-owned
subsidiary, owns a parking lot, with a capacity of approximately 500 cars,
directly between, and is used by, Bullwhackers Black Hawk and the Silver Hawk
Casino. Until March 1999, through another wholly-owned subsidiary, BWCC, Inc.
("Bullwhackers Central City"), the Company operated a casino in the adjacent
historical mining town of Central City. On March 10, 1999, the Company closed
Bullwhackers Central City due to declining business volumes and a lack of
profitability. On May 1, 1999, the Company spun the Bullpen off to its own
separate gaming license, which is providing approximately $700,000 in gaming
tax savings annually.
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, 1999 are not necessarily indicative of the results that may be expected
for the year ending December 31, 1999. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with
the 1999 presentation. Such reclassifications had no impact on the Company's
net income.
(2) NOTES PAYABLE
SENIOR SECURED PAY-IN-KIND NOTES
The Company's Senior Secured Pay-In-Kind Notes (the "Notes") have an
outstanding principal amount of $52.7 million as of September 30, 1999.
Interest on the Notes accrues at a rate of 12% per annum, and is payable
semi-annually. The Notes are secured by substantially all the assets of the
Company. In addition, the Notes Indenture includes certain restrictive
covenants. As of September 30, 1999, the Company was not in compliance with
the fixed charge coverage ratio under the Indenture, pursuant to which the
Notes were issued (the "Indenture"). The Indenture requires the Company to
maintain a ratio of 1.25 to 1. As of September 30, 1999 the Company's ratio
was .71 to 1. The Company has requested a waiver of this default. However,
until such waiver is granted, the Notes are payable upon demand and therefore
are classified as a current liability in the balance sheet.
4
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CREDIT FACILITY
On June 7, 1996, the Company entered into a $12.5 million revolving
credit facility (the "Credit Facility") with Foothill Capital Corporation.
Under terms of the Credit Facility, borrowings accrue interest at prime plus
2.375% (10.125% as of September 30, 1999). The Credit Facility matures on
June 7, 2001. On February 1, 1999, Ladstock Holding Corporation ("Ladstock"),
an affiliate of the Company's parent, purchased the outstanding balances of
the Credit Facility and the senior lender assigned the Credit Facility to
Ladstock. Accordingly, Ladstock is now the Company's senior lender on terms
that are at this time identical to the Credit Facility. On June 7, 1999, the
Company borrowed an additional $3.0 million on the Credit Facility to pay the
debt service on the Senior Secured Pay-In-Kind Notes (the "Notes"). As of
September 30, 1999, the Company had an outstanding balance of approximately
$8.9 million on the Credit Facility.
OTHER NOTES
As of December 31, 1998 the Company had an outstanding unsecured
promissory note to Capital Associates International, Inc. ("CAI") in
principal amount of $670,000, accruing interest at the rate of 9% per annum.
In February 1999, Ladstock purchased the outstanding note from CAI,
accordingly, this note is currently an obligation to an affiliate company,
Ladstock.
(3) TAXES
The net deferred tax assets is comprised of the following (in
thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- -------------
<S> <C> <C>
(unaudited)
Current:
Accrued vacation & gaming liabilities $ 203 $ 230
Non-Current:
Difference in depreciable asset basis 1,140 626
Recognition of legal settlement 246 246
Impairment of assets 2,827 2,827
Net operating loss carryforwards 5,776 4,813
-------------- -------------
Net deferred tax assets 10,192 8,742
Valuation allowance (10,192) (8,742)
-------------- ------------
$ -- $ --
============== ============
</TABLE>
The net deferred tax asset valuation allowance is equal to the full
amount of the gross deferred tax asset because the realization of such asset
is dependent upon future taxable income, which is uncertain. The Company
currently has net operating losses ("NOL's") totaling approximately $15.4
million, which expire beginning in 2008.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
The discussion below and under Item 5 of Part II of this Report on
Form 10-Q and elsewhere herein contain forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
Such Section 21E provides certain "safe harbor" protections for
forward-looking statements in order to encourage companies to provide
prospective information about their businesses. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance, competition, growth opportunities, source and uses of
capital, future development or expansion activities, and underlying
assumptions and other statements which are other than statements of
historical facts. Such statements may be identified by the use of
forward-looking terminology such as "might," "may," "would," "could,"
"expect," "anticipate," "estimate," "likely," "believe," or "continue" or the
negative thereof or other variations thereon or comparable terminology. Such
forward-looking statements involve a number of risks, uncertainties and other
factors that may significantly affect the Company`s liquidity and results of
operations in the future and, accordingly, actual results may differ
materially from those expressed in any forward-looking statements.
The forward-looking statements set forth in this Report on Form 10-Q
are based upon various assumptions, many of which are based, in turn, upon
further assumptions, including, without limitation, management's examination
of historical operating trends, data contained in the Company's records, and
other data available from third parties. Although the Company believes that
such assumptions were reasonable when made, because such assumptions are
inherently subject to significant uncertainties and contingencies which are
difficult or impossible to predict and are beyond the Company's control,
there can be no assurance, and no representation or warranty is made, that
management's expectations, beliefs, or projections will result or be achieved
or accomplished. In addition to the other factors and matters discussed
elsewhere herein, factors that, in the view of the Company, could cause
actual results to differ materially from those discussed in the
forward-looking statements include: (i) leverage and debt service, (ii)
financing and refinancing efforts, (iii) competition, (iv) inclement weather,
(v) changes in general economic conditions in the Denver metropolitan area,
(vi) changes in state and local gaming laws, regulations or tax rates, (vii)
risks related to development and construction activities, (viii) changes in
management or control of the Company, (ix) significant changes in competitive
factors affecting the Company, (x) significant changes from expectations in
actual capital expenditures and operating expenses, and (xi) occurrences
affecting the Company's ability to obtain funds from operations, debt or
equity to finance needed capital expenditures and other investments.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AS COMPARED TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1998
The Company's net revenue decreased $3.3 million or 25%, from $13.5
million for the third quarter of 1998 to $10.2 million for the third quarter
of 1999. The negative results were largely affected by the addition of a
large competitor that entered the Black Hawk market in the fourth quarter of
1998. The new competitor provides an additional 15% increase in gaming device
capacity in the Black Hawk market. Bullwhackers Black Hawk's net revenues,
including the Bullpen, were $1.4 million, or 14%, less than the third quarter
of 1998. Additionally, management believes that the increased competition
will continue to negatively affect Bullwhackers Black Hawk's net revenues.
Bullwhackers Central City was closed on March 10, 1999 due to the
continual decline of the Main Street casinos in the Central City market as a
result of further competitive pressures in Black Hawk. Bullwhackers Central
City produced approximately $2.1 million of net revenues in the third quarter
of 1998 as compared to nil for the third quarter of 1999.
6
<PAGE>
The Silver Hawk Casino net revenues increased, by $190,000, or 14%,
in the third quarter of 1999 as compared to the third quarter of 1998.
Although the Silver Hawk Casino was also affected by the increased
competition, net revenues have stabilized and even slightly increased in the
third quarter of 1999 due to the implementation of a new busing program,
which commenced operations in mid-February of 1999. In addition, the Silver
Hawk revenues have benefited from converting some of Bullwhackers Central
City customers.
For further discussion of competition in the Black Hawk market, see
the COMPETITIVE OUTLOOK discussion elsewhere in Management's Discussion and
Analysis.
Expenses directly related to casino operations, including gaming
taxes, decreased $1.2 million, or 21%, to $4.4 million for the third quarter
of 1999, as compared to $5.6 million for the third quarter of 1998. The
decrease is primarily due to the elimination of $790,000 of casino expenses
at Bullwhackers Central City due to the closing of the facility. The decrease
in casino expenses is also due to a $176,000 tax savings that Bullwhackers
Black Hawk, including the Bullpen, was able to save by spinning the Bullpen
off to its own separate gaming license. In addition, effective July 1, 1999,
the Gaming Commission changed the current gaming taxes. The changes reduced
gaming taxes for the third quarter of 1999 by approximately $ 350,000.
Food and beverage expense decreased 46% to $721,000 for the third
quarter of 1999, as compared to $1.3 million for the third quarter of 1998.
This decrease in expense is a result of the elimination of certain discounted
food offerings to entice gaming patrons, which were offered in 1998, and also
due to the closing of the restaurants at both Bullwhackers Central City and
the Bullpen in January and February of 1999, respectively.
Marketing expense decreased 10%, or $200,000, to $1.9 million for
the third quarter of 1999, as compared to $2.1 million for the third quarter
of 1998. With the closing of the property, Bullwhackers Central City
marketing expense was nil in the third quarter of 1999 as compared to
$600,000 in the third quarter of 1998. This decrease was somewhat offset by a
increase in marketing expense at both Bullwhackers Black Hawk and the Silver
Hawk due to the increased efforts to generate revenues in an increasingly
competitive market and due to costs associated with the two busing programs.
Corporate expenses decreased $1.7 million, or 95%, to $95,000 for
the third quarter of 1999, as compared to $1.8 million for the third quarter
of 1998. The higher expenses in the prior year period were due to certain
incentive compensation expenses totaling $490,000, which ceased upon the
Ladbroke merger. The decrease is also due to approximately $450,000 of
additional professional fees incurred in the 1998 period by the Company to
complete the merger. The Company also wrote off its investment in two
charitable gaming clubs in Ontario, Canada in the amount of approximately
$300,000. In addition, the decrease in corporate expense is due to the
restructuring of the corporate function, including the resignation of the
former President, Chief Legal Officer and Vice President of Finance,
resulting in approximately $200,000 less in payroll expense in the 1999
quarter.
Depreciation and amortization expense remained flat at $1.1
million for the third quarter of 1999 and for the third quarter of 1998
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AS COMPARED TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1998
The Company's net revenue decreased $12.0 million or 28%, from $42.5
million for the nine months ended September 30, 1998 to $30.4 million for the
nine months ended September 30, 1999. The negative results were largely
affected by the addition of two new large competitors that entered the Black
Hawk market in the June and December 1998, respectively. The two new
competitors provide an additional 35% increase in gaming device capacity in
the Black Hawk market. Bullwhackers Black Hawk's net revenues, including the
Bullpen, were $5.9 million, or 19%, less than the nine months ended
7
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September 30, 1998. Given the fact that Bullpen expansion provides an
additional 40% increase in gaming device capacity at Bullwhackers Black Hawk
and net revenues were still substantially lower in the 1999 period as
compared to the 1998 period, management is disappointed in the results of the
Bullpen expansion. Additionally, management believes that the increased
competition will continue to negatively affect Bullwhackers Black Hawk's net
revenues.
Bullwhackers Central City's net revenues decreased $5.7 million, or
86%, in the nine months ended September 30, 1999 as compared to the nine
months ended September 30, 1998. The decrease in net revenues is a result of
further competitive pressures as a result of the new competitors in Black
Hawk within the last year, and, therefore the property closed on March 10,
1999.
The Silver Hawk Casino net revenues also decreased, by $441,000, or
10%, in the nine months ended September 30, 1999 as compared to the nine
months ended September 30, 1998. The decrease in the Silver Hawk Casino's net
revenues were also affected by the increased competition, however, net
revenues have stabilized and even increased slightly in the third quarter of
1999 due to an implementation of a new busing program which commenced
operations in early 1999. In addition, the Silver Hawk revenues have
benefited from converting some of Bullwhackers Central City customers.
Expenses directly related to casino operations, including gaming
taxes, decreased $3.1 million, or 17%, to $15.0 million for the nine months
ended September 30, 1999, as compared to $18.2 million for the nine months
ended September 30, 1998. The decrease is primarily due to a reduction of
casino expenses at Bullwhackers Central City of $2.0 million due to the
closing of the facility in March of 1999. The Silver Hawk Casino expenses
also decreased by approximately $230,000 in the nine months ended September
30, 1999 as compared to the nine months ended September 30, 1998 as a result
of reduced staffing and other costs in relation to the decrease in business
volumes. Decreased casino expense at both Bullwhackers Central City and
Silver Hawk Casino were somewhat offset by a increase in casino expenses at
Bullwhackers Black Hawk due to increased staffing and other costs associated
with the Bullpen expansion and from the overall competitive environment in
the Black Hawk market, which has led to increasing labor costs. However,
Bullwhackers Black Hawk's, including the Bullpen, casino expense was somewhat
offset by a $370,000 tax savings from Bullwhackers Black Hawk spinning the
Bullpen off to its own separate license in May 1999. In addition, effective
July 1, 1999, the Gaming Commission changed the current gaming taxes. The
changes reduced gaming taxes for the third quarter of 1999 by approximately $
350,000.
Food and beverage expense decreased 35% to $2.3 million for the nine
months ended September 30, 1999, as compared to $3.6 million for the nine
months ended September 30, 1998. This decrease in expense is a result of the
elimination of certain discounted food offerings to entice gaming patrons,
which were offered in 1998, and also due to the closing of Central City and
the Bullpen 's restaurant in January and February of 1999, respectively.
Marketing expense decreased 4% to $5.4 million for the nine months
ended September 30, 1999, as compared to $5.7 million for the nine months
ended September 30, 1998. With the closing of Bullwhackers Central City in
March of 1999, marketing expense was $1.4 million lower in the nine months
ended September 30, 1999 as compared to the nine months ended September 30,
1998. This decrease is somewhat offset by a increase in marketing expense at
both Bullwhackers Black Hawk and the Silver Hawk due to increased efforts to
generate revenues in an increasingly competitive market and due to costs
associated with the two busing programs.
Corporate expenses decreased $2.3 million, or 73% to $848,000 for
the nine months ended September 30, 1999, as compared to $3.1 million for the
nine months ended September 30, 1998. The higher expenses in the prior year
period were due to certain incentive compensation expenses totaling $910,000,
which ceased upon the Ladbroke merger. The decrease is also due to
approximately $750,000 of additional professional fees incurred in the 1998
period by the Company to complete the merger. The Company also wrote off its
investment in two charitable gaming clubs in Ontario, Canada in the amount
8
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of approximately $300,000. In addition, the decrease in corporate expense is
due to the restructuring of the corporate function, including the resignation
of the former President and Chief Legal Officer, resulting in $340,000 less
in payroll expense in the 1999 period. Included in the nine months ended
September 30, 1999 corporate expense is approximately $400,000 of severance
pay related to the resignation of the current President and the Senior Vice
President of Finance. Management expects these corporate expenses to continue
to decrease.
Depreciation and amortization expense increased 6% to $3.4 million
for the nine months ended September 30, 1999, as compared to $3.2 million for
the nine months ended September 30, 1998. The increase in depreciation and
amortization charges is due to additional depreciation and amortization
charges relating to the purchase of the assets comprising the Bullpen.
LIQUIDITY AND CAPITAL RESOURCES
DEBT
The Company's Senior Secured Pay-In-Kind Notes (the "Notes") have an
outstanding principal amount of $52.7 million as of September 30, 1999.
Interest on the Notes accrues at a rate of 12% per annum, and is payable
semi-annually. The Notes are secured by substantially all the assets of the
Company. In addition, the Notes Indenture includes certain restrictive
covenants. As of September 30, 1999, the Company was not in compliance with
the fixed charge coverage ratio under the Indenture, pursuant to which the
Notes were issued (the "Indenture"). The Indenture requires the Company to
maintain a ratio of 1.25 to 1. As of September 30, 1999 the Company's ratio
was .71 to 1. The Company has requested a waiver of this default. However,
until such waiver is granted, the Notes are payable upon demand and therefore
are classified as a current liability in the balance sheet.
On June 7, 1996, the Company entered into a $12.5 million revolving
credit facility (the "Credit Facility") with Foothill Capital Corporation.
Under terms of the Credit Facility, borrowings accrue interest at prime plus
2.375% (10.125% as of September 30, 1999). The Credit Facility matures on
June 7, 2001. On February 1, 1999, Ladstock Holding Corporation ("Ladstock"),
an affiliate of the Company's parent, purchased the outstanding balances of
the Credit Facility and the senior lender assigned the Credit Facility to
Ladstock. Accordingly, Ladstock is now the Company's senior lender on terms
that are at this time identical to the Credit Facility. On June 7, 1999, the
Company borrowed an additional $3.0 million on the Credit Facility to pay the
debt service on the Senior Secured Notes Payable. As of September 30, 1999,
the Company had an outstanding balance of approximately $8.9 million on the
Credit Facility.
Y2K ISSUES
Until recently, most computer programs were written to store only
two digits of date-related information in order to more efficiently handle
and store data. Computer programs which are date-sensitive may recognize a
date using "00" as the year 1900 rather than the year 2000, which could
result in major computer system or program failures or miscalculations or
equipment malfunctions. This is referred to as the "Year 2000" issue ("Y2K").
The Company recognizes that the impact of the Y2K issue extends beyond
traditional computer hardware and software to equipment used in operations,
such as the Company's slot tracking system, as well as to third parties. The
Y2K issue is being addressed within the Company by its information technology
department and progress is reported periodically to management. Since 1997,
the Company has been reviewing all internal, external and third party
information technology ("IT") systems related to its business. The Company
has completed an internal IT evaluation with satisfactory results and is
currently reviewing external and third party IT systems for Y2K compliance.
External and third party evaluations include requiring compliance
certificates from vendors, suppliers and significant businesses related to
the Company. To date, all evaluations have uncovered minimal exposure to Y2K
problems. However, there can be no guarantee that the systems of other
companies on which the Company's systems and business rely will be timely
converted, or that a
9
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failure to convert by another company, or a conversion that is incompatible
with the Company's system, would not have a material adverse effect on the
Company. However, many of the external parties that the Company relies on
provide commodity goods or services that are widely available from a range of
vendors; therefore, third party impact on the Company is expected to be
minimal. The Company currently estimates that the cost to rectify any
internal Y2K issues will be approximately $200,000, which would include
replacing hardware systems and upgrading software. Current estimates of the
Company's expenses for addressing external or third party Y2K issues are not
expected to be material; however, the Company continues to review and monitor
compliance. The total cost of the Company's Y2K efforts are not expected to
be material with respect to the Company's operations, liquidity or capital
resources. Management does not believe the Company will have to modify or
replace any significant portions of its computer applications in order for
the computer systems to function properly with respect to the dates in the
year 2000 and thereafter. However, a "worst case" scenario may include the
temporary disruption of operations, including the inability to access the
Company's slot tracking system. A significant disruption may have a material
adverse impact upon the Company's operating results. The Company's
contingency plan includes the following:
. Regular back up of all scientific and business related electronic data;
. Archival of critical business paperwork; and,
. Upgrading security systems to be Y2K compliant (included in above dollar
amount).
The costs of the project, estimated completion dates, worst case
scenario and other forward looking statements above are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third
party modification plans and other factors. However, there can be no
guarantees that these estimates will be achieved or that events will occur as
projected and actual results and events could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel
trained in this area, the ability to locate and correct all relevant computer
codes, the success of the Company's suppliers and other external parties with
which the Company interacts in addressing their Year 2000 issues, and similar
uncertainties.
COMPETITIVE OUTLOOK
For the nine months ended September 30, 1999, the Company's
operating income was $907,000 compared to operating income of $6.5 million in
the nine months ended September 30, 1998. Cash flow from operations for the
nine months ended September 30, 1999, was $297,000 compared to $6.8 million
in the prior year period. These results illustrate the deterioration in the
Company's operating results and cash flows which have been occurring since
the third quarter of 1998. The opening of two major competitors in the Black
Hawk market in June and December 1998 has significantly impacted the
Company's operating results for the rolling twelve months ended September 30,
1999 and will likely continue to negatively impact the operating results for
the fourth quarter of 1999 and the year 2000. The Company's operating margins
have deteriorated due to declining revenue levels and increasing operating
and marketing costs. Additionally, in early 2000, two additional competitors
are scheduled to open casinos in Black Hawk. It is likely that this
additional capacity will continue to dilute the Company's market share of
revenues and, accordingly, may adversely impact the Company's operating
profits in 2000 and beyond. Furthermore, should the operating trends and
results experienced continue or worsen, the Company will not be able to
generate enough cash flow from operations to meet minimum debt service
requirements in 2000. Accordingly, the Company would be reliant on its Credit
Facility to meet such debt service requirements. However pursuant to the
Credit Facility, only $3.6 million of the unused balance remains on the
Credit Facility exists as of September 30,1999.
Given the deteriorating financial results, management has devised
various plans and operating strategies intended to improve the Company's
performance, some of which were implemented during 1999. The operating plan
includes a) closing Bullwhackers Central City, and focusing all of its
efforts
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and managerial resources on its Black Hawk properties, b) reconfiguring the
Bullpen expansion to improve the overall layout and efficiency of
Bullwhackers Black Hawk, c) eliminating discounted food offerings as an
enticement for gaming patrons, d) implementing training programs to position
the property on the basis of service excellence, and e) substantially
reducing the Company's corporate expense. While management believes this is a
viable operating plan, there is no assurance that such initiatives will be
effective in improving the Company's financial performance. Additionally, the
competitive environment in Black Hawk may become increasingly severe,
particularly if two new projects currently under construction commence
operations in early 2000, as scheduled. However, the initial steps of the
plan that have been completed or that are in place, have helped the Company
increase its operating income $1.8 million in the third quarter of 1999 as
compared to the second quarter of 1999 and $2.1 million as compared to the
first quarter of 1999.
11
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In October 1996, BWCC, Inc. signed a non-binding memorandum of
understanding ("MOU") with Gold Coin, Inc., a wholly-owned subsidiary of Lady
Luck Gaming Corporation, to explore the possibility of physically combining
Bullwhackers Central City with the adjacent casino operated as Lady Luck Gold
Coin Gambling Hall & Saloon and owned by Gold Coin, Inc. The prospective
transaction was subject to a number of contingencies, including the execution
and delivery of definitive agreements setting forth the final agreed upon
terms and conditions of the transaction. While the parties continued to
negotiate over unresolved issues contained in the drafts of the definitive
agreements, market conditions and other events affecting the Central City
market continued to change and decline significantly. Despite continued
efforts to satisfactorily resolve the open issues in light of the foregoing,
no final, definitive agreements were executed and delivered, and the
prospective transaction was never consummated.
Subsequent to the failure to finalize a definite agreement, on March
1998, Lady Luck Central City, Inc., formerly known as Gold Coin, Inc., filed
a complaint in the District Court for the County of Jefferson, State of
Colorado, Case No. 98 CV 672, captioned as LADY LUCK CENTRAL CITY, INC. V.
BWCC, INC., D/B/A BULLWHACKERS CENTRAL CITY, COLORADO GAMING & ENTERTAINMENT,
CO., AND LADBROKE GROUP PLC. In 1999, the Company negotiated and paid a
Settlement Agreement in order to avoid further expenses, inconvenience, and
other distraction of litigation. Both parties agreed to fully dismiss and
release each other from all claims.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
A. COMPETITION. Competition in the Black Hawk and Central City
gaming market, which forms the primary gaming market in Colorado, is intense.
The Company believes that its primary competition are other casinos operating
in Black Hawk and Central City. 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,
Isle of Capri, Riviera Holdings, Inc., Hyatt, Anchor Gaming and Fitzgerald's,
many of which have substantially greater financial and marketing resources
than the Company. Because Colorado does not limit the total number of gaming
licenses available for issuance in Colorado and there are no minimum facility
size requirements, the Company expects the number of gaming facilities and
gaming devices to continue to increase in Black Hawk.
In June 1998, a joint venture between Black Hawk Gaming &
Development Co., the owner and operator of the Gilpin Hotel Casino, and
Jacobs Entertainment commenced casino operations of a property named "The
Lodge", which is a 35,000 square foot casino, 500 covered parking spaces and
approximately 800 slot machines. In December 1998, the Isle of Capri Black
Hawk, which is owned by subsidiaries of Isle of Capri, Inc. and Nevada Gold &
Casinos, Inc., commenced operations. The Isle of Capri Black Hawk is a 55,000
square foot casino with 1,100 slot machines, 14 table games, three restaurant
offerings and 1,000 on-site covered parking spaces. The new gaming capacity
(a 35% increase over prior year) that entered the Black Hawk market in the
second half of 1998 has diluted certain existing operators' win per unit and
revenue, including the Company's. Such increase in capacity has had a
material adverse
12
<PAGE>
affect on the Company's results of operations and management believes the new
properties will continue to adversely affect the Company's performance in
2000 and thereafter.
In addition, a number of other casino projects have begun
construction in Black Hawk. Riviera Holdings, Inc. commenced construction of
a casino scheduled to open in early 2000, which is expected to include 1,000
slot machines and a 500 space covered parking garage. Additionally, Bullseye
Gaming has commenced construction of the Black Hawk Brewery Casino and is
scheduled to open in early 2000, which will offer 600 slot machines and 500
parking spaces. Fitzgeralds has also announced an expected expansion of
approximately 50% of their current gaming area as well as 70-80 hotel rooms.
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 - Hyatt". The new capacity, actual and proposed, have all
been announced for the town of Black Hawk. The majority of these projects are
along the southern end of Black Hawk at the first two major intersections of
State Highway 119, providing these projects with the initial opportunity to
capture visitors to Black Hawk from the Denver metropolitan area. In
contrast, Bullwhackers Black Hawk and the Silver Hawk Casino are located at
the northern end of Black Hawk at the third major intersection off State
Highway 119. The projects currently under construction and, or the announced
projects may have a material adverse impact of the Company's results from
operations.
B. MANAGEMENT. On July 8, 1999, in connection with a restructuring
of the Colorado operations of Colorado Gaming & Entertainment Co., Mr.
Richard Rabin, President, Chief Operating Officer and a member of the Board
of Directors of the Company, and Mr. Robert Stephens, Senior Vice President
of Finance and a member of the Board of Directors of the Company, each
submitted his resignation from all such positions to be effective as of
August 6, 1999. The Company considers their resignations to be amicable.
As a result of the restructuring, the positions of President and
Senior Vice President of Finance will be eliminated. Mr. George Harbison has
become the Company's President, Chief Financial Officer and a member of the
Board of Directors effective August 6, 1999. Mr. David Aker, Treasurer and
General Manager, and Connor McLaughlin, Vice President of Human Resources,
have been appointed as the new directors to replace Messrs. Rabin and
Stephens.
C. SENIOR SECURED PAY-IN-KIND NOTES. The Company's Senior Secured
Pay-In-Kind Notes (the "Notes") have an outstanding principal amount of $52.7
million as of September 30, 1999. Interest on the Notes accrues at a rate of
12% per annum, and is payable semi-annually. The Notes are secured by
substantially all the assets of the Company. In addition, the Notes Indenture
includes certain restrictive covenants. As of September 30, 1999, the Company
was not in compliance with the fixed charge coverage ratio under the
Indenture, pursuant to which the Notes were issued (the "Indenture"). The
Indenture requires the Company to maintain a ratio of 1.25 to 1. As of
September 30, 1999 the Company's ratio was .71 to 1. The Company has
requested a waiver of this default. However, until such waiver is granted,
the Notes are payable upon demand and therefore are classified as a current
liability in the balance sheet.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K.
None.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Colorado Gaming & Entertainment Co. has duly caused this report to be signed
by the undersigned thereunto duly authorized.
COLORADO GAMING & ENTERTAINMENT CO.
/s/ George Harbison
----------------------------------------
George Harbison
President and Chief Financial Officer
(Principal Financial Officer)
Date: November 12 1999
14
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